Concern? Yes. Panic? No - 1991 railroad outlook

Railway Age, Dec, 1990 by Luther S. Miller

As railroaders pore over 1990 performance sheets, and ponder the prospects for a "what if"-fraught 1991, no one is belting out the Hallelujah Chorus." But very few are singing the blues.

War in the Persian Gulf, out-of-sight fuel prices, a deep and prolonged national recession-any of these could darken the picture. But traffic and earnings have so far this year out-performed a stagnant or declining economy. There's concern, but no panic, over prospects of a slightly deepening recession in 1991. Some capital investment budgets will be reduced for discretionary spending, but no deep cuts for car and locomotive programs are in sight. Intermodal traffic continues to grow-helped, perhaps, by the fact that fuel price increases are impacting truckers harder than railroads-and Trailer Train is pursuing its programmed plan for $1 billion in equipment acquisitions over a five-year period.

* "Some surprising trends." As the Transportation Group of investment bankers Alex. Brown & Sons noted in a report that was being circulated last month, "Despite the slowdown in the U.S. economy, rail company third quarter results showed some surprising trends-all the companies reported higher traffic volumes and four of the five we follow closely reported earnings per share gains. "

More traffic did not always mean more revenues. Conrail, for example, reported a 1.7% increase in traffic in this year's first nine months vs. the same period of 1989. But revenues dropped 2.2%, to $2.53 billion from last year's $2.59 billion. This was because the increases were in comparatively low-rated bulk traffic. "At the very least," said Conrail Chairman, President and CEO James A. Hagen, we expect to see a continuation of the unfavorable traffic mix we have experienced during the past year, with higher volumes of low-revenue freight, such as coal, and lower volumes of high-revenue freight, such as motor vehicles. Rising fuel prices will impact our performance in the fourth quarter. We also expect pricing pressure to continue to dampen revenue, despite a 4% increase effective Oct.1 for much of our non-contract traffic. "

From region to region, from railroad to railroad, the situation takes on lighter or darker hues. This was the picture as pieced together last month in a Railway Age survey:

M.R. Haverty, president and chief operating officer, Santa Fe: "Although it is not yet over, at this writing [mid-November] it appears that we will have had a relatively good year when 1990 draws to a close, considering the difficulties with which we were faced. Our operating income for the first nine months of $166.8 million compared with $161.1 million for the same period in 1989.

"Our primary difficulties in 1990 have been a 15% reduction in grain loadings, which generally account for over 10% of our total volume, and a reduction of approximately 14% in loadings of automobiles and auto parts. We have picked up a significant amount of new automobile business during the course cf the year, and currently are experiencing what would be considered a normal level of that traffic. Like everyone else, we have also been hurt by dramatic increases in fuel prices in the last few months, which have been only partially offset by fuel surcharges or rate increases.

"One particularly bright spot for us in 1990 was intermodal. Our volume has not been up appreciably, but through our marketing programs we have made excellent strides in improving the contribution from what many people think of as a marginal business.

"As we look to the balance of this year and 1991, our immediate concern is the threat of recession. We have seen only hints of this in our traffic as this is written, but if leading economists are correct a larger impact is yet to come, and we are planning and well-positioned for that contingency. In the longer range, we are vitally concerned about the threat of longer trucks, since about 40% of our business is intermodal and thus directly competitive with trucks. In my view, that threat is the most important issue facing the railroad industry today.

"Our capital expenditures in 1990 will total about $365 million. This was larger than usual, because we acquired 123 new diesel locomotive units, the largest single-year orders in our history. Other significant items in the program included installation of 104 miles of new and reconditioned welded rail and about 875,000 new ties.

For 1991 we contemplate a capital program of about $228 million. Plans include acquisition of 23 new locomotives, installation of about 200 miles of new and reconditioned welded rail and about 1.1 million new ties. "

Gerald Grinstein, president and CEO, Burlington Northern: "Coal, grain, intermodal traffic and industrial products remained strong for Burlington Northern throughout 1990. But despite aggressive cost control, increased revenues simply could not keep pace with the steady, industry-wide growth in personal-injury costs and pressure from competition and a softening economy. And then there was the explosion in fuel prices during the last five months of the year.