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As Canadian Pacific (NYSE: CP) and Kansas City Southern (NYSE: KSU) press the Surface Transportation Board (STB) to approve their proposed merger, the issue of rail service is going to serve as a “key flashpoint,” according to an executive with consulting firm FTR Transportation Intelligence.
“You’ve always had service impacts. You’ve always had service hiccups, in some cases dramatically to shippers, and they’ve generally been of a long duration of several years,” said Todd Tranausky, FTR vice president of rail and intermodal.
Tranausky, speaking during a recent webinar on rail and intermodal market dynamics, was referencing previous mergers, such as Burlington Northern Railway and the Atchison, Topeka and Santa Fe Railway becoming BNSF in 1995.
“How much service pain are shippers and regulators willing to tolerate? How much deviation from the five-year average or from 2020 levels are they going to allow as this carrier works through an integration with this carrier?” Tranausky continued.
“Service has always been a key thing for shippers and the rail industry, and we seem to be at a good place with service. How much pain is there a tolerance for if this merger were to go through? It’s a great question, and something we’re going to see as more filings get made at the Surface Transportation Board, just what the appetite is, what safeguards are put into place for service. What oversight is put in as it relates to service,” he said.
STB’s approval of CP’s proposed acquisition of Kansas City Southern (KCS) could happen, but other Class I railroads and shippers will also be weighing in throughout the regulatory process, Tranausky said.
The potential CP-KCS merger is occurring against a backdrop of economic and market conditions that will benefit intermodal and carload volumes in 2021, according to Tranausky.
Macroeconomic factors such as higher consumer spending and year-over-year gains for new and existing home sales point to favorable market conditions for rail-shipped commodities this year.
Indeed, North American intermodal rail traffic is benefiting from demand to move retail freight to end customers and distribution centers. Furthermore, the truck market is also tight. Together, these factors are putting upward pressure on rates, which could see increases of 10% to 15% by the middle of this year, according to Tranausky.
“You’re going to pay more to move your goods by intermodal while there’s pressure in the system,” Tranausky said.
Furthermore, market demand for intermodal rail isn’t coming only from lanes touching the West Coast but also from other regions as West Coast ports grapple with congestion.
“Even the Pacific Northwest saw a significant gain in its volumes, and the Pacific Northwest is a little unique when it comes to intermodal, in terms of its situation,” Tranausky said. “So, the fact that you’re seeing shippers even go to the Pacific Northwest and put volumes in there as we got to the latter half of 2020 and into 2021 shows just how folks were looking for capacity really anywhere they could.”
Other factors, such as lower export totals and lower manufacturing output, contribute to a slower growth rate for carloads. However, even though carload volumes have flattened out in recent weeks, they have flattened out at a level above their five-year average, Tranausky said.
“The carload market, even though it’s on pace to have a very good year this year, is not quite having the same year as intermodal is having in terms of year-over-year growth rates or absolute levels of increase,” he said. “You’re seeing things lag a little bit in the carload sector because the industrial production side of the economy really hasn’t come back yet.”
Although carloads might not have the same growth rate in 2022 as in 2021, “there’s positive strength and upward potential should economic fundamentals hold in 2021,” Tranausky said.
Metals volumes should grow in 2021 on higher scrap prices and automotive demand, while demand for lumber and pulp and corrugated cardboard should help support forest product volumes, he said.
Chemicals volumes should also strengthen this year amid higher crude oil prices and the need for Gulf Coast production plants to make up lost production due to February’s winter storms, Tranausky added. Longer term, political disinclination for pipelines could encourage more crude-by-rail, he said.
Meanwhile, rail service metrics so far this year are stable, Tranauasky said. Even though dwell time might be higher and velocity might be lower than in 2020, there is more volume on the network this year than last, he said.
“Things are not particularly that bad. Yes, we are below 2020 levels. Yes, we declined significantly from the weather events in February. But we are essentially in line with our five-year average,” Tranausky said.
This article first appeared on s29755.pcdn.co
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