With the Class I railroads’ third-quarter earnings season in the rearview mirror, two themes dominated company commentary and conference calls:
Congestion in the supply chain, as well as railroad initiatives to alleviate it and improve network velocity and terminal dwell.
The requirement to attract and retain employees so that enough teams are available to manage increased volume.
These trends are expected to continue in the fourth quarter and into 2022, according to sources.
“Congestion and network fluidity difficulties have affected intermodal service standards and have also hit intermodal volume despite ample demand,” said Mike Baudendistel, a FreightWaves market expert.
The railroads took several steps in the third quarter to relieve port congestion, including reopening previously closed inland facilities for container storage and collaborating with ports to move containers inland.
“The Class I railways offered laundry lists of steps they are taking to resolve congestion on their analyst calls,” Baudendistel said. “These actions included reopening intermodal facilities and identifying alternate sources of drayage capacity.”
“It was gratifying to hear both Schneider and Hub Group acknowledge on their calls that rail network mobility had improved. This is supported by SONAR data, which reveals that domestic intermodal volume increased by 10% in the last week compared to daily averages in August and September.”
Individual railroads’ efforts to keep intermodal traffic flowing in order to reduce network congestion near the ports were also observed by Wall Street transportation analysts.
“International [intermodal] volumes will continue to be restrained because to the West Coast port bottleneck we’ve witnessed,” management said, adding that more resources have been provided (thanks to the Biden administration’s efforts), allowing UNP to move more rail containers and handle increasing volume. In an Oct. 21 research note evaluating Union Pacific’s (NYSE: UNP) third-quarter 2021 results, Cowen transportation analyst Jason Seidl noted, “UNP cited they had decreased rail container dwell at the ports back to normal levels.”
“Management alluded about some broad macro themes in terms of the supply chain,” Seidl continued, “which boils down to putting people in employment to boost capacity, particularly on the ports.” On the other hand, UNP pointed to several positive indicators (consumer cash deposits) that speak well for the goods economy, which UNP participates in; 2022 appears to be a promising year.”
Help Is Required
Another prominent concern during earnings calls was the question of employment, not just at ports but also on trains. CSX (NASDAQ: CSX), Norfolk Southern (NYSE: NSC), and UP were among the companies looking to hire more people as part of a larger drive to expand network capacity.
According to data filed to the Surface Transportation Board, personnel levels at Class I railroads in the United States declined by 0.2 percent between August and September and by 3.3 percent between September 2020 and September 2021, to 114,218. The most recent data available is from September.
“A major topic for the future is the potential to grow through hiring….” “Several rails have stated that they are seeking to hire more staff,” said Jeff Windau, a senior equity analyst at Edward Jones. “It’s not just about the rails… However, getting personnel on board, trained, and deployed in the correct regions has proved difficult.
“A portion of it [problem] is related to the vaccine obligation….” This will continue into the fourth quarter and into the first half of 2022.”
Susquehanna Financial Group transportation analyst Bascome Majors highlighted that NS reported on its third-quarter earnings call on Oct. 27 that its staff headcount declined 2% between the second and third quarters due to growing attrition rates.
NS is looking to hire people to satisfy network capacity needs and increase network fluidity, which NS’ competitor CSX highlighted during its third-quarter results call.
“When pressed on the drivers of increased attrition, [NS] management cited challenges in certain geographies with a broadly tight labor market (specifically, the Midwest), as well as abnormally high attrition within their trainee pipeline (i.e., those who start training but drop out before certification),” Majors wrote in a note about NS’ third-quarter financial results on Oct. 27.
“NS has established hiring incentives such as perfect attendance and referral bonuses, as well as a goal of increasing class size and number by the end of the year. However, the benefits of hiring new personnel tend to take time to materialize, and NS expects labor shortages to continue into the first half of 2022.”
Coal and its price
While supply chain disruptions and personnel initiatives dominated railroad commentaries, coal volumes and the effects of inflation are two other factors railways are keeping an eye on as they look to the fourth quarter of 2021 and into 2022.
Coal carloads used to be a major source of revenue for railroads, but with the systematic drop in coal usage in the United States in recent years, railroads have turned their attention to other revenue-generating commodities.
While coal carloads in the United States defied the trend in 2021, gaining 11.6 percent year-to-date to 2.7 million carloads, according to the Association of American Railroads, such growth may not be sustainable in 2022, according to a number of Wall Street transportation analysts.
Despite increased coal carloads year over year due to greater coal exports and higher natural gas prices, analysts “remain apprehensive (and model as such) for coal demand in 2022,” according to Seidl in a research note on Norfolk Southern’s third-quarter results published on Oct. 27.
Analysts also expect the Class I railways to seek to keep rail pricing ahead of inflation as everyone’s costs rise, including the railroads’.
According to Windau, increasing gasoline prices caused train fuel expenditures to jump by 50 percent to 80 percent in the third quarter, depending on the railroad.
“The quantities [in the third quarter] were more varied and constricted, but the price was extremely solid,” according to Windau, as evidenced by measures such as railroad fuel surcharges.
“The rails have done a tremendous job attempting to work on improving their efficiencies,” he continued, referring to attempts to boost productivity through precise railroading. “Volatility has been a struggle, both positive and bad, with volumes declining in 2020 and now rebounding. It’s clear that balancing the large swings is difficult. But, in general, I believe the industry has done a good job of addressing those challenges.”
