More of a 'bump' than a 'peak'

The weak U.S. economy, lingering concerns about consumer spending and a slumping housing market continue to keep intermodal traffic lagging and are adding up to a fall peak that’s somewhat un-fall-peak-like for North America’s Class Is.

“Growth in intermodal business ... will be modest, at best,” as Norfolk Southern Railway put it in a letter last month to the Surface Transportation Board (STB).

Not that “modest” would be all that bad, given the O.K.-but-not-great traffic levels. It also should mean that there won’t be any peak-related capacity issues this fall, railroads say.

Even so, Class I execs would prefer to be riding a faster growth track. Railroads typically see an increase in intermodal traffic beginning in late August and extending into

October. It’s when the toys, clothes and other items that Asian exporters ship in containers arrive at U.S. ports, where the products then continue their journey by rail, truck or a combination of the two.

Stocking up, traffic down
Following healthy peak seasons in 2004 and 2005, last year’s season was flat in part because retailers began building inventories earlier than usual in response to consumers’ changing buying habits. Retailers also were careful not to stockpile too much merchandise, concerned they’d have a lot of it to mark down after the holidays.

During the year’s first half, Wall Streeters were guardedly optimistic that this peak season would be better, traffic-wise, than last year’s, but that optimism has waned, says Fitch Ratings Ltd. analyst Steve Brown. The meltdown in sub-prime lending has had an impact on access to home equity lines of credit, which consumers have tapped in the past for holiday purchases — and, in turn, could curtail consumer spending. And retailers may pull back on inventory as result, Brown says.

In the meantime, railroads’ intermodal traffic totals remain strong — just not as strong as they were in 2006.

For the week ending Sept. 15, U.S. railroads moved 252,283 containers and trailers — their highest total this year and seventh-highest weekly volume ever, according to the Association of American Railroads. But the total represented a 2 percent decrease compared with volume from the same week in 2006, when U.S. railroads set the current one-week record. However, Canadian Class Is’ intermodal volume totaled 50,816 containers and trailers, up 6.3 percent compared with volume from the same week in 2006.

No pick-up from peak
Bottom line: Class Is don’t expect to see much of a pick up in intermodal traffic this fall, and they’re planning accordingly, as they told the STB, which asked the rails to supply in writing the steps they’re taking to estimate demand, and prepare for this year’s peak holiday and agricultural shipping seasons.

In their letter, Union Pacific Railroad officials said the peak season pre-shipping that powered last year’s records didn’t materialize this year because retailers had inventories to work off.

“We expect some strengthening in volumes in the second half, with a more traditional peak season shipping pattern driven by an increase in international intermodal volumes and agricultural products, but we see only some signs of that pattern so far,” UP wrote.

CSX Corp. executives expressed similarly muted optimism during the Class I’s Sept. 6 “analyst day” meeting: “The volumes tend to be flat to down going forward, so I think the peak will be more of a bump than a traditional peak,” said Executive Vice President-Sales and Marketing and Chief Commercial Officer Clarence Gooden.

Moreover, shifts in shipping patterns will continue to affect rails’ intermodal traffic totals — and not always for the better. For example, there’s more intermodal traffic coming into East Coast ports. And even though railroads have a “natural monopoly” on goods moving 2,000 miles from west to east, it often makes more sense for trucks to move items a few hundred miles westward from East Coast ports, says UBS analyst Rick Paterson.

Trucks in similar boat
Not that that’s manifesting itself in much more business to date for the trucking industry, whose peak season typically begins in late September. YRC Worldwide Inc. Chief Executive William Zollars told attendees at the Sept. 10 Wachovia Global Transportation and Packaging Conference that the less-than-truckload carrier hadn’t seen any signs of the beginning of a peak season.

“It’s going to be a muddle-through type of peak season for the trucks,” Standard & Poor’s analyst Kevin Kirkeby says.
For all modes, then.

Desiree J. Hanford — who worked for Dow Jones & Co. the past 10 years covering the equities market, including transportation — is a Chicago-based free-lance writer.