Economist not aboard railroad expectations

NEW YORK — At an investor dinner hosted by Dahlman Rose, freight economist and transportation industry Noel Perry, served up a contrarian view of the rail industry.

Contrary to the view that the railroads, and many in the investor community, have expressed regarding high incremental margins emerging in the industry along with economic recovery, Perry suggests railroads’ ability to keep cost down will diminish significantly as the ongoing upturn in the market shifts into high gear.

Perry’s traffic forecast for rail calls for 2010 carloading growth reaching the 6- to 7-percent range, with growth accelerating in 2011.

While a vigorous return of traffic, along with solid pricing, should lead to strong revenue growth over the next few years, top line improvement will not necessarily be accompanied by equally robust operating profits, according to Perry.

While he believes the companies are likely to grow their top lines at impressive rates in the next couple of years, he cautions that a deterioration of service metrics is likely to accompany growth in carloadings.

The deterioration of service levels, according to Perry, is a reflection of the traffic congestion which should ultimately translate into higher operating expenses. Labor is one example of congestion related costs that could increase significantly.

As for the trucking industry, Perry is optimistic about both tonnage growth and pricing.

He believes that as the recovery solidifies, truckers who had been forced by many shippers to renegotiate contracts to lower prices during the prolonged freight recession will begin to re-examine existing contracts to cancel or renegotiate the ones with unfavorable pricing.

Perry believes that, based on a modest recovery, the active fleet of trucks is currently reaching equilibrium. However there will be a few short-term obstacles in the industry to meet ramped up demand like hiring mechanics, drivers and getting access to equipment.

Despite the short term challenges associated with the transitional revamping for a strengthening recovery, Perry projects an overall positive outlook for the trucking industry, especially in 2011.
 


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