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RBC Capital Markets releases 2014 North American Railroad Shipper survey


TORONTO, Ont.–RBC Capital Markets released its 2014 North American Railroad Shipper Survey this week, which “taps into the sentiment of the railroads’ top customers.”

Analyst Walter Spracklin, CFA, noted that key findings of the study focus on shippers’ expectations for 2014 regarding: the direction of rail rates; volume growth; and service performance.

In addition, this year a set of questions was added to get shippers’ perspective on the impact of recent management changes at Canadian National Railway (CNR) and Canadian Pacific Railway (CP).

In terms of approach, 53 customers of the six large Class 1 railroads were surveyed through telephone interviews supported by online questionnaires. Nineteen of the 53 shippers completed the survey online and RBC conducted follow-up discussions with four of the online respondents. As in previous years, this survey focused on rail customers’ views on recent trends and expectations for 2014 related to the direction of rail rates (i.e. core pricing excluding fuel surcharges); anticipated levels of business activity (i.e. volume growth); the potential to transfer freight between modes (truck and rail); the level of service provided by the Class 1 railroads; and the impact of the current regulatory environment.

New to the survey this year is discussion of the impact of management changes at Canadian Pacific Railway (CP) and Canadian National Railway (CNR) as perceived by their customers.

“In line with our objective of gauging current rail trends, we added a set of questions related to the change in the Canadian rail service following the leadership transitions at CNR and CP. In addition, we also asked shippers if they had transferred any freight between the Canadian Class 1 rails in 2013 and the reasons behind decisions to change (or maintain) their rail provider,” said the survey.

The survey also solicited Canadian shippers’ views on the provisions of the Fair Rail Freight Service Act-and whether they experienced any change in service levels from CNR or CP following the ratification of this Act in June.

In terms of key takeaways, the survey found that most shippers expect a slowdown in the pace of rail rate increases. A strong majority of respondents (71%) expect rail rates to increase in 2014 with the largest group (42%) forecasting +1% to +3% growth. For the second consecutive year, shippers’ outlook on pricing growth has moderated as the proportion of respondents that expect rates to rise in excess of +4% has more than halved over the past two years from 65% (for 2012) to 28% (for 2014).

Although pricing gains appear to be slowing, it is important to note that very few respondents (3%) expect rates to actually decline next year, which is consistent with previous survey results.

“In our view, shippers’ tempered pricing expectations reflect sector-specific headwinds (e.g. persistent weakness in global coal markets) and the slow economic recovery. That said, we continue to have strong conviction in our positive price forecasts for 2014 as very few shippers expect rail rates to decrease next year,” the survey indicated.

Another takeaway was that shippers’ volume expectations once again converged on flat to modest growth (+1%-5%) as 68% of survey responses aligned with this outlook. While survey consensus on volume growth is unchanged from last year’s survey, RBC Markets noted an upward bias in shippers’ forecasts as 26% of respondents are anticipating meaningful volume growth (5%+) next year and only 15% of survey participants shared this view for 2013. Importantly, fewer shippers are also anticipating volume declines in 2014 as the proportion of respondents with negative volume outlooks decreased from 10% to 6%.

“A distinct element of our conversations with respondents this year is that economic concerns did not permeate discussions on volume expectations for 2014. Accordingly, we believe shippers have greater conviction in their near-term volume forecasts compared to prior years,” said the survey’s analysts. 

Survey results indicated that shipper sentiment on rail service has tempered modestly this year; however, a strong majority provided positive reviews as “Good” or “Excellent” ratings accounted for 64% of total responses, down from 69% last year. Across the large Class 1 railroads, CSX Corp (CSX) excelled on service this year with positive ratings accounting for 76% of total reviews. This result aligns with CSX’s outperformance on train velocity and terminal dwell improvements in 2013. From a geographic perspective, shipper sentiment continued to favour the Eastern US carriers over their peers in the west, which coincides with Burlington Northern Santa Fe (BNSF) and Union Pacific Corporation’s (UNP) weaker performance on key operating metrics this year.

In Canada, CNR continues to set the standard on rail service as positive reviews comprised 66% of total responses, whereas “Good” or “Excellent” ratings accounted for 51% of shippers’ reviews of CP’s service, said the survey.

A majority (71%) of shippers continue to forecast rail rate increases for 2014. The largest group of respondents (42%) anticipate +1%-3% pricing growth, which is consistent with our 2014 yield assumptions of +1.4%
-3.5% for the Class 1 railroads. Importantly, very few 
respondents (3%) expect rail rates to decline. 

Shippers’ volume expectations once again converged on flat to modest growth (+1% to +5%) as 68% aligned with this view; however the proportion of respondents forecasting significant volume growth (5%+) increased to 26% for 2014 (up from 15% for 2013). Our interpretation of survey findings is that while shippers’ forecasts continue to reflect a healthy dose of caution, we see risk to the upside on anticipated freight volumes next year.

Shippers surveyed also commented on recent management changes at CNR and CP. The topic of market share gains and losses between the two competitors has become a focus of recent discussion with investors, noted the RBC survey.

“For CNR, 15% of shippers pointed to continued improvement in operations since Jim Vena was appointed COO and only 2% (one shipper) indicated that service levels have declined. For CP, findings indicate that service has taken a hit in the early stages of the Company’s transformation as 28% of CP’s customers believe service has worsened and only 10% have observed positive changes. Despite these results, we note that major corporate restructuring is often disruptive at the outset and that cost reduction initiatives that are based on increasing efficiency have the opportunity to yield service improvements in the later stages of the transformation. Accordingly, we will be monitoring CP for evidence of service improvements, but we are mindful of the negative consequences if they do not materialize,” the survey indicated.