Reynolds Hutchins, Associate Editor | Jul 21, 2016 2:33PM EDT
Following double-digit dives in profit and revenue in the second quarter, Union Pacific Railroad said Thursday that despite shippers pulling down inventory, it doesn’t expect the soft freight economy to improve until at least 2017 now.
“I think if you look at the absolute volumes, they are not strong,” Eric Butler, UP’s executive vice president and chief marketing officer, said on an earnings conference call with analysts and investors Thursday morning.
Intermodal freight traffic was down 14 percent year-over-year in the second quarter, contributing to a 16 percent decline in related revenue, which rounded out the quarter at $909 million, the railroad reported.
It also contributed to a 19 percent year-over-year decline in profit. The railroad’s net income for the quarter was $979 million. Meanwhile, overall revenue also fell some 12 percent to $4.77 billion.
UP is not the first railroad to bemoan the incredibly soft freight economy this year — what some have called a “freight recession.” CSX Transportation, Kansas City Southern Railway and Canadian Pacific Railway have also posted declines in their intermodal business and revenue.
Trans-Pacific trade volume has been historically low this year, hurting the Western railroad considerably, Butler said.
Year-to-date, however, West Coast ports are running ahead of 2015, according to the Pacific Maritime Association. For the first five months of 2016, laden imports were up 2.8 percent year-over-year, exports up 4.1 percent and total laden containers up 3.3 percent, the group reports on its website.
Like other railroaders before him this earnings season, UP CEO Lance Fritz attributed the quarter’s poor performance to three factors: “a soft global economy, the negative impact of the strong U.S. dollar on exports and relatively weak demand for consumer goods.”
Fritz added Thursday morning that he doesn’t expect that pressure to relent until at least 2017.
“However, we see potential bright spots in certain segments of our business if key economic drivers continue to strengthen as they have in recent weeks,” Fritz said in a statement.
Those so-called “bright spots” include dropping inventories, which have been a drag on the railway’s margins forseveral consecutive quarters now. The U.S. retail inventory-to-sales ratio has been 1.5 or higher for four straight months, its highest level since May 2009, shortly before the end of the recession. And although sales increased in May, high inventory levels are likely to lengthen replenishment cycles and depress demand for freight transportation services.
But there could be some relief at last, Butler said Thursday morning.
“Inventories have gotten better, have retreated from the seven-year highs that we saw last month,” Butler said.
Additionally, Butler said that capacity does appear to be tightening across all modes from UP’s vantage point.
“You are seeing capacity tighten in many of those modes and we think that’s a positive for a competitive environment,” he said.
Overcapacity in the trucking segment, as well as historically low diesel prices, have made highway-to-rail conversions more challenging in recent months. But that looks as though it will begin to change in the year ahead, said Butler and Fritz, as new trucking regulations hit that industry and the overall freight economy improves.
“In that domestic intermodal space,” Fritz said, “there’s a lot of opportunity out there from a truck competitive perspective.”
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