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U.S. freight transports to remain healthy in 2006, says Fitch Outlook

CHICAGO, Ill.– Fitch Outlook analysts are predicting another strong showing from the U.S. freight industry again in 2006, following another exceptional year in 2005, when continued heavy demand led to significant increases in freight railroad and trucking industry revenues and profits.

Although risks of slower 2006 U.S. economic growth have risen somewhat as a result of higher energy costs, demand for the goods transported by the U.S.’s railroads and trucks is expected to remain relatively strong next year.

This, combined with efficiencies and cost controls put in place after the last recession, will help to support continued strength in operating cash flows, even if they are not at the same high levels seen over the past two years.

U.S. economic growth is expected to slow somewhat in 2006, likely resulting in continued freight demand growth, but at a more moderate pace than seen in 2005. Fitch says it expects real gross domestic product (GDP) in the U.S. to grow by 2.8% in 2006, down from a full-year forecast of 3.6% for 2005 and actual growth of 4.2% in 2004.

Already, year-over-year volume growth for certain commodities appears to be moderating somewhat, with rail carload figures for many shipments showing little or no growth in the third quarter, and long-haul less-than-truckload (LTL) volumes also relatively stable.

On the railroad side, the exceptions have been intermodal and coal shipments, which have continued to show strong year-over-year growth. Intermodal strength has been fueled by continued growth in the stream of imported goods arriving into the U.S., particularly from China, while coal shipments have been driven by demand from utilities that have been struggling to rebuild low stockpiles. In the LTL trucking sector, regional short-haul demand has also shown continued growth as shippers look to trucking to help support just-in-time inventory management.

Raw material shipments will likely show the most moderation, as factory volumes stabilize. Overall shipments of automobiles and parts will likely remain flat compared with 2005; however, railroads and truckers with a greater exposure to the foreign transplant auto factories in the Southeast may continue to see some growth.

The transport of construction materials may experience some regional strength, as communities along the hurricane ravaged Gulf Coast begin to rebuild.

The heavy demand for freight shipping has given railroads and truckers alike a level of pricing power not seen for years, notes Fitch. Looking toward 2006, pricing is expected to remain strong but, like volumes, pricing growth will begin to moderate somewhat. As fuel surcharges have become a larger component of the pricing structure, shipping customers are paying more attention to the effect it is having on their overall shipping costs and will likely begin to more actively negotiate the surcharge along with the base rate. As a result, the distinction between base rates and surcharges may begin to blur. The continuation of a tight capacity environment, however, will likely mean that top line revenue growth will continue to outpace volume growth in both the trucking and rail sectors.

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