History suggests rail traffic won’t fully rebound after recession

Posted by Bill Stephens
on Tuesday, May 19, 2020

An eastbound Union Pacific merchandise train tries to outrun a thunderstorm in Julesburg, Colo. The coronavirus pandemic may create a storm for carload traffic. Bill Stephens photo
Class I railroad executives say their aggressive cost-cutting moves today in the face of historically steep traffic declines will pay off in the post-pandemic world, when the economy picks back up and there’s more freight to move. Railroads will emerge from the crisis stronger, more efficient, and ready to grow – or so the thinking goes. I hope they’re right.

But the lessons from the Great Recession tell a different story. Some of the traffic that stopped moving during the 2008-2009 financial crisis never returned to the rails. As the economy rebounded, carload volume stagnated after 2011 and truck traffic grew as railroads bled market share to the highway.

Let’s look at the volume trends.

Coal volume peaked in 2008, has declined ever since, and has been in freefall the past two years due to the glut of cheap natural gas that’s increasingly the fuel of choice for electricity generation. The pandemic has only accelerated the decline. Coal’s not coming back, and there’s nothing railroads can do to save it.

Intermodal volume has been the railroad industry’s growth engine. It gained share coming out of the Great Recession and kept right on growing until the freight recession of 2015-16. Since then, international intermodal volume has bobbed up and down with trade disputes. And domestic container volume has lost market share to the highway for 18 straight months leading up to the pandemic. That’s unprecedented since intermodal analyst Larry Gross began tracking container data in 2000.

This brings us to carload traffic, which provides two-thirds of the industry’s revenue. Carload volume peaked in 2006. Volume fell about 30% during the Great Recession. And despite broad economic growth, pre-pandemic carload traffic volume stabilized at around 20% below the levels of 2006.

These are not good signs for railroads as we enter another deep recession. As large sectors of the economy shut down in April, U.S. carload volume was down 25% and intermodal was off 17%.

The economy will recover sooner or later. The question is will rail volume fully participate in the recovery this time around, or will railroads lose market share to trucks as they did after the Great Recession?

There are considerable differences between 2020 and 2009. Railroads are far more profitable today due to a combination of higher rates and lower costs. Operating ratios have improved from an average of 75% in 2009 to 61.9% last year. 

Now the Class I systems say their new lower cost structures will enable them to compete for traffic that previously was considered unattractive. (Read: Traffic that previously didn’t hit their profit margin targets.) They also say recent service improvements will help lure customers back to rail.

At the same time, however, most of the Class I systems have favored profit margins over growth in carloads and containers. The predictable result has been a loss of volume to the highway.

The latest example is Union Pacific’s decision to shut down Cold Connect, its reefer service linking growers in California and the Pacific Northwest with consumers in the Northeast and New England. Despite the short-term challenges related to the pandemic – low diesel prices and plenty of truck capacity – observers say there’s no doubt the reefer traffic was profitable. UP enjoyed long hauls from California and Washington State to Chicago, where CSX Transportation then forwarded the reefers to the Cold Connect distribution center outside Albany, N.Y. It’s likely, though, that the costs of managing the loads from origins to destinations through subsidiary Loup Logistics pushed the overall profitability of this traffic below what UP was willing to accept.

It’s clear that outside of bulk commodities railroads can’t grow with the old hook-and-haul approach to carload traffic. The long-term carload volume trends tell us as much. 

Cold Connect is the type of boutique service that made railroads easier for shippers to use. In fact, growth-minded industry insiders say providing logistics services is something railroads need to do more if they want to convert highway business to rail. But adding logistics services does not help you get to an operating ratio below 60%.

You can reach Bill Stephens at and follow him on twitter @bybillstephens

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