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Rail News Home Rail Industry Trends

January 2008



Rail News: Rail Industry Trends

Rail rates to continue steady climb



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After slogging through 2007, the U.S. freight transportation industry will continue to face weak traffic demand and sluggish volumes through 2008’s first half, according to a Fitch Ratings report released last month.

“The hoped-for uptick in demand that many expected in the second half of [last] year never materialized,” the report states, adding that fall peak demand was as weak as 2006’s “lackluster period.”

However, railroads will fare better than trucks because relatively tight rail capacity and less exposure to cyclical shipments will continue to support rail rate increases.

Railroads’ volumes remained weak in market sectors influenced by the soft housing and automotive industries. But strong demand for less-cyclical commodities — like coal and grain — helped limit their overall traffic declines.

“The railroad industry has 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. Pricing power should continue to drive railroad margin performance and the Class Is should keep posting operating ratios in the 70s, Fitch Ratings said.

On the economic front, continued weakness in the U.S. housing industry, potential tightness in credit markets and high energy prices will restrain growth this year. Fitch Ratings projects ’08 gross domestic product growth of 1.7 percent, down slightly from 2007’s estimated 1.8 percent rise.

Global M&A activity in ’07 to outpace ’06

Mergers and acquisitions among transportation and logistics firms reached a high level last year. Through 2007’s first three quarters, global M&A volume was on pace to exceed ’06 levels, according to a quarterly M&A activity report released last month by PricewaterhouseCoopers.

The value of M&A deals totaled $39 billion, far exceeding the deals totaling $27 billion that were consummated in 2006’s first three quarters. Declining debt market liquidity and “stock market volatility felt by financial investors” helped spur dealmaking, the report states.

While total deal value associated with passenger air firms declined in favor of rail acquisition targets in 2006, passenger air M&A activity through 2007’s first three quarters declined in favor of trucking targets. Based on value, U.S. firms have been leading M&A targets for deals worth more than $50 million.

“The pace of M&A activity in the transportation and logistics industry has not abated, and we anticipate that it is going to continue,” said Ken Evans, PricewaterhouseCoopers’ U.S. transportation and logistics sector leader, in a prepared statement.



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