US rail – 2013’s greatest beneficiary of US growth

For the Class 1 US railroads 2013 was a year of considerable growth, both in terms of revenues and volumes. Fuelled by rising consumer demand the US economy continued its recovery over the year, all the while increasing levels of manufacturing and industrial output. This stimulated particularly strong rail volume growth in the automotive, chemical, intermodal petroleum sectors. But while increasing rail volumes and improved revenues do reflect economic growth, rail volumes far surpassed the 2.4% growth of the US economy.

Prevailing market influences have made rail the greatest beneficiary of US growth. More and more of the freight generated by the US economy has been directed onto rail, with favourable political conditions, cheaper operational costs and the nature of the goods produced by the recovery all calling for rail transport.

As a result the railroad company’s 2013 revenues, aided by increasing freight rates, grew significantly. Union Pacific saw a 5% year-on-year increase in its revenues to $21.9bn, a result that was accompanied by a 10% increase in operating income to $7.4bn. Kansas City Southern recorded similar results, reporting a 6% increase in revenues to $2.4bn and a 10% jump in its operating income to $739m. CSX Corporation and Norfolk Southern recorded less dramatic results, but still achieved 2% revenue growth, bringing their revenues up to $12bn and $11.2bn respectively. However, whilst CSX’s operating income remained flat at $3.5bn, Norfolk Southern improved its operating income by 4% to $3.3bn.

Automotive, intermodal, chemical and petroleum products were mutual sources of growth for all four companies, with railroads reporting volumes up, often by as much as 10% in each sector compared to 2012. However, another common theme was falling coal volumes; according to the Association of American Railroads US rail companies transported 5,769,626 carloads of coal in 2013, 256,751 fewer than in 2012, a decline of 4.45%. This is a consequence of the US’s burgeoning fracking trade and would have had more painful implications for the railroads, were it not for the volumes that fracking itself has contributed to the rail industries growth and its impact on diesel prices, which fell by 4% in 2013.

However, the real sources of growth were automotive and intermodal freight. With the US automotive industry producing over 15 million cars in 2013, and ever increasing production in Mexico to supply the domestic US market, the demand for automotive freight has boomed.

Intermodal freight transported by rail has seen similar growth, this time at the expense of the US trucking industry. Increasing operational costs driving up US road freight rates, the US government incentivising the more environmentally friendly rail transport option and a labour shortage in the trucking industry have caused intermodal cargo to be directed onto the railways in increasing quantities.

The influences that produced the conditions for growth in the US rail industry look set to continue in the medium term. The pace of growth in the US economy is forecast to increase to 3% in 2014; this is likely to foster enduring and increasing demand in the automotive sector and across the wider economy, which suggests that the rail companies will be the recipients of increasing volumes in the future. Similarly, the trends which have led to a shift in intermodal freight from road to rail are expected to persist. Overall US rail growth looks likely to remain on track for the foreseeable future.