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12/14/2007



Rail News: Rail Industry Trends

Railroads will fare better than trucks next year in a continuing soft economy, Fitch Ratings says



The U.S. freight transportation industry, which has slogged its way through 2007, likely will continue to face weak traffic demand and sluggish volumes through 2008's first half, according to a Fitch Ratings report. The good news for railroads: They'll fare better than their trucking peers because relatively tighter rail capacity and less exposure to cyclical shipments will continue to support price increases.

"Following three years of strong demand growth that led to higher volumes and pricing power for both the railroad and trucking industries, demand began to wane in the latter half of 2006 and weakened further over the course of 2007," the report states. "The hoped-for uptick in demand that many expected in the second half of this year never materialized, and demand in the peak season has been about as weak as the lackluster period last year."

Railroads' volumes have been weak in market sectors influenced by the soft housing and automotive industries, but strong demand for less-cyclical commodities — like coal and grain — has helped limit traffic declines overall.

"The railroad industry has also shown an ability to maintain its pricing strength, with increasing unit prices driving growth in revenue, even as volumes have been flat to down," Fitch Ratings said.

Rail pricing is expected to remain firm. However, unit revenue percentage gains most likely will fall in the low- to mid-single digits, according to the report. The continuation of pricing power should drive continued strength in railroad margin performance as seen throughout 2007, and the Class Is should continue to post operating ratios in the 70s, Fitch Ratings said.

Overall, continued weakness in the housing industry, potential tightness in credit markets and high energy prices will restrain economic growth in the United States next year. Fitch Ratings projects gross domestic product growth of 1.7 next year, down slightly from a full-year 2007 forecast of 1.8 percent and well below a long-term average projection of 3 percent.


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