Moody's: Transportation sector at risk in extended coronavirus outbreak

Lower container volumes could further weigh on the intermodal business of North American railroads, as the transportation sector faces increasing pressure due to the coronavirus outbreak, according to a new report by Moody's Investors Service.

Transportation companies, including freight railroads, would need to contend with lower demand as supply chains are disrupted and economic activity slows, according to the report, which was issued last week.

"As the coronavirus spreads to more countries, the likelihood of longer lasting economic and financial effects has increased, the impact of which may weigh on the North American transportation sector's financial and credit profile," said Rene Lipsch, a Moody's vice president and senior credit officer, in a press release.

Lower container vessel exports from China are affecting container volumes at ports along the U.S. West Coast. The Port of Los Angeles estimates that cargo volume in February was down about 25 percent on the year-ago number, while container shipping company A.P. Moller-Maersk has said its guidance for 2020 is now subject to significant uncertainty due to the coronavirus outbreak, according to the report.

Those lower container volumes would have an impact on North American freight railroads, which are already contending with increased competition from traditional truck carriers. Historically, however, the sector has been able to adapt its cost base fairly quickly to weakening demand for transportation services, Moody's says.

Intermodal truck carriers, such as J.B. Hunt Transport Services Inc., are likely to have greater near-term exposure to the coronavirus outbreak than other trucking companies, Moody's says. Like the freight railroads, lower container volumes would weigh on intermodal truck carriers at a time when volumes are under pressure from heightened competition from truck carriers.

In a longer-term outbreak scenario, the trucking sector would be at risk from lower demand due to more prevalent supply chain disruptions, a broader slowdown in economic activity and potential restrictions on freight routes.

Last week, the Association of American Railroads (AAR) indicated that a sharp decline in rail intermodal loadings during the week ending March 7 was more noticeable than the norm over the past year.

Railroads logged 232,561 intermodal containers and trailers during the first week of the month, a 14.1 percent decrease compared with the same week a year ago, according to AAR data.

"With the number of ships arriving at West Coast ports from Asia down sharply due to the coronavirus, it stands to reason that railroads are beginning to feel an impact too, at least in terms of intermodal. It’s impossible to quantify that impact with precision," said AAR Senior VP John Gray.