Railroads have turned the corner on service and resiliency, analysts say

NEW YORK – America’s Class I railroads have turned the corner on service and resiliency and are poised for volume growth for the first time in years.

That’s the view of a trio of analysts – Anthony B. Hatch, Rick Paterson and Larry Gross – who spoke at the RailTrends conference last week.

Paterson, an analyst at Loop Capital Markets who closely follows railroads’ performance metrics, says the railroads have passed significant operational stress tests this year thanks to keeping enough train crews and locomotives in reserve.

In the West, BNSF Railway and Union Pacific have both bent but not broken under the pressure of the surge in international container imports at the ports of Los Angeles and Long Beach. In the east, CSX and Norfolk Southern both recovered quickly from hurricane strikes.

BNSF has been under intermodal volume pressure for a year, Paterson said, and average intermodal train speeds have suffered. But train speeds held steady as intermodal traffic reached record levels in October.

Over the summer, BNSF’s focus on improving dwell time on the areas with bumps and flat transitions was successful. “Time will tell, but this seems to me to be a structural and sustainable improvement of about 15%,” says Paterson.

Although UP’s intermodal rail speeds hit a six-year low in October, car miles per day increased, indicating the rail line remained fluid, Paterson said. “What you see is UP’s buffer strategy at work, where they are finally expecting the unexpected and maintaining reserves of strength and crew,” he says.

CSX has delivered industry-leading operating performance over the past year, Paterson said, and the railroad was able to quickly recover from the collapse of the Baltimore Bridge in March, a series of hurricanes and the impact of the East Coast port strike. “You can see the recent decline in speed as a result, but in absolute terms the operation has gone from an A to a B-plus,” he says.

Norfolk Southern has suffered more meltdowns than any other railroad in recent years: after Hurricane Harvey in 2018, during the workforce shortage that plagued America’s Class I railroads in 2022, and the freight network congestion that followed the February 2023 derailment in East Palestine, Ohio, on the Chicago-New Jersey main line of the railroad.

“There’s a redemption story unfolding here,” Paterson says.

“Speeds are now above historical norms, despite 7% more intermodal freight and 1% higher car loads this year. The real sign was Hurricane Helene, which was essentially a massive stress test for resilience and recoverability,” says Paterson. “Previously, a weather event like this would have taken weeks or months for crews at key locations to recover, sending the network into a meltdown state. In contrast, we saw an immediate snapback from Helene.”

“Norfolk Southern is back,” says Paterson.

Intermodal analyst Gross says all railroads have delivered consistent service despite overall intermodal volume growth of 10% in the U.S. this year, led by a 20% increase in international volume. “We have a good story here about how well the intermodal market has performed from a service perspective given the disruptions we’ve seen so far this year,” he says.

In a separate panel, Surface Transportation Board Vice Chair Karen Hedlund and board member Michelle Schultz agreed that service and resiliency have improved.

“Carriers have actually become more resilient in dealing with both expected and unexpected disruptions. This is not the same rail sector as it was after the pandemic,” said STB member Schultz. “Carriers have taken active steps to improve their operations and thereby strengthen the supply chain.”

Schultz also praised the railroads for placing more emphasis on service, working with customers and introducing new partnerships and services.

The improvements should help the railroads capture more freight volume, analysts said.

America’s Class I railroads have struggled to grow in recent years. Coal volumes are declining rapidly, car traffic continues to decline, and intermodal transportation has lost market share to trucks since 2017.

The railways have been talking about growth for years, but have seen little of it. But Hatch says this could be a pivotal year for railroad growth. “When I started my career on Wall Street, I was told never to say this, but… this year I think it’s different. I think we are in a different time,” he says.

Gross says a slight 0.1% increase in domestic market share in the third quarter could be the start of a trend. But he adds that there have been similar increases that amounted to “head fakes” amid flat volumes.

Paterson says he’s not concerned about BNSF’s ability to grow. “The recent STB hearing on the lack of growth in the sector makes BNSF at least the tallest dwarf,” he says. “It is the only one of the Big Four that has seen volumes grow over the past 20 years, is investing more capital in growth, expects to grow and has plans for growth.”

He says it would be a wild card if BNSF’s efforts to reduce its lagging operating ratio sacrifice long-term growth for short-term profit margin improvements.

At the other end of the spectrum, Union Pacific is carrying 16% less freight today than it did a decade ago, Paterson says. “We don’t care what, it doesn’t matter where, it doesn’t matter how, but the total freight has been declining for decades and that has to stop,” he says.

The analysts spoke at the RailTrends conference, which is sponsored by independent analyst Anthony B. Hatch and trade publication Progressive Railroading.