With the third-quarter earnings season in the rearview mirror for the Class I railroads, two themes dominated companies’ commentaries and earnings calls:
- The supply chain congestion and ongoing efforts by the railroads to relieve that congestion and improve network velocity and terminal dwell.
- The need to attract and retain employees so that there are enough crews to handle volume growth.
These themes will likely persist in the fourth quarter and into 2022, sources said.
“From my perspective, the biggest issues in the rail industry in the third quarter (and so far in the fourth) are the congestion and network fluidity issues that have impaired intermodal service levels and have also hit intermodal volume despite there being plenty of demand,” said Mike Baudendistel, a FreightWaves market expert.
Among the actions that the railroads took in the third quarter to relieve port congestion were opening up previously shuttered inland facilities to park containers and working with the ports to move containers inland.
“On their analyst calls, the Class I railroads presented laundry lists of actions they are taking to address congestion that included reopening intermodal terminals and finding alternate sources of drayage capacity,” Baudendistel said.
“It was encouraging to hear both Schneider and Hub Group say that rail network fluidity has improved on their respective calls. That is consistent with SONAR data, which shows domestic intermodal volume in the past week up 10% from daily averages in August and September.”
Wall Street transportation analysts also noted the efforts by individual railroads to keep intermodal traffic flowing in order to relieve network congestion around the ports.
“International [intermodal] volumes will continue to be constrained due to the congestion on the West Coast ports we have seen, although management noted that additional resources have been added (due to the Biden administration’s efforts), which positions UNP to move more rail containers and can handle increased volume. UNP cited they have reduced rail container dwell at the ports back to normal levels,” Cowen transportation analyst Jason Seidl said in an Oct. 21 research note discussing Union Pacific’s (NYSE: UNP) third-quarter 2021 results.
Seidl continued, “Management spoke to some large macro trends in terms of the supply chain, which boils down (currently) to putting people in jobs to increase capacity, particularly on the ports. On the other side of this, UNP called out some strong indicators (cash deposits for consumers) that bodes well for the goods economy which UNP participates in; 2022 looks like a strong environment.”
Help Wanted
The employment issue, not just at the ports but also on the railroads, was another dominant theme during earnings calls. CSX (NASDAQ: CSX), Norfolk Southern (NYSE: NSC) and UP were among those seeking to add employees as a broader effort to increase network capacity.
Among the U.S. operations of the Class I railroads, employee levels fell by 0.2% between August and September and by 3.3% between September 2020 and September 2021 to 114,218 employees, according to data submitted to the Surface Transportation Board. September’s data is the latest data available.
“One big theme moving forward is the ability to expand through hiring. … Multiple rails have said they have been trying to hire more people,” Jeff Windau, a senior equity analyst for Edward Jones, told FreightWaves. “That’s not unique to the rails … but it’s been a challenge to get people on and trained and get them deployed in the right areas.
“Some of that [challenge] is tied to the vaccine mandate. … That’s going to be playing out into this quarter and into the early part of 2022.”
Transportation analyst Bascome Majors with Susquehanna Financial Group noted that NS said during its third-quarter earnings call on Oct. 27 that its employee headcount fell 2% between the second and third quarters amid rising attrition rates.
NS is seeking to hire employees to meet network capacity needs and improve network fluidity — sentiments also expressed by NS’ competitor CSX during its third-quarter earnings call.
“When pressed on the drivers of increased attrition, [NS] management pointed to challenges in certain geographies that have a broadly tight labor market (specifically mentioned Midwest), along with abnormally high attrition within their trainee pipeline (i.e., those who start training but drop out before certified),” Majors said in an Oct. 27 note about NS’ third-quarter financial results.
“NS has implemented hiring incentives such as perfect attendance and referral bonuses, while also looking to increase the size and number of classes by year-end. That said, the benefits of bringing on new employees tends to have a lag, and NS expects labor challenges to persist into the first part of 2022.”
Coal and costs
While supply chain disruptions and headcount initiatives dominated railroads’ commentiaries, other issues the railroads are keeping their eyes on as they look at the fourth quarter of 2021 and into 2022 are coal volumes and the effects of inflation.
The railroads have relied on coal carloads in the past to help support company revenues, but the systemic decline of U.S. coal consumption in recent years has caused the railroads to focus on other revenue-generating commodities.
While U.S. coal carloads bucked that trend in 2021, increasing 11.6% year-to-date to 2.7 million carloads according to the Association of American Railroads, that growth trend might not be sustainable in 2022, a number of Wall Street transportation analysts pointed out.
Although coal exports and higher natural gas prices have supported increased coal carloads year-over-year, analysts “are cautious (and model as such) for coal demand in 2022,” Seidl said in an Oct. 27 research note on Norfolk Southern’s third-quarter results.
Analysts also anticipate the Class I railroads will work to keep rail pricing ahead of inflation, with costs rising for everyone, including the railroads.
Indeed, higher fuel prices drove the railroads’ fuel costs to rise between 50% and 80% in the third quarter, depending on the railroad, Windau said.
“The volumes [in the third quarter] were more variable and constrained, but the pricing was very strong” as seen through measures such as the railroads’ fuel surcharges, Windau said.
He continued, “The rails have done a great job trying to work on improving their efficiencies” through efforts to improve productivity via precision scheduled railroading. “The volatility has been a struggle, both on the positive and negative side with the volumes falling in 2020 and now they’re rebounding. It’s really obviously challenging to offset the big swings. But I think overall the industry has done well trying to work through those issues.”
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