The Transportation sector is widely diversified with railroad operators, trucking companies and airlines as its few key components. It is a well-known fact that the sector is dealt a huge blow by the ongoing coronavirus pandemic. Depressed freight revenues due to lackluster volumes have been one of the many headwinds afflicting the sector so far. The COVID-19 outbreak crippled the shipment of goods not only across the United States but also globally.
As a consequence, freight revenues at the railroad operator Union Pacific Corporation UNP declined 13% in the first nine months of 2020, mainly due to coronavirus-induced depressed volumes (down 10%). The story paints a dismal picture for another railroad operator Norfolk Southern Corporation NSC as well. Overall volumes fell 7% in the first nine months of 2020 with volumes declining 15%, 9% and 41% in the three reportable segments, namely merchandise, intermodal and coal, respectively. At CSX Corporation CSX, total volumes contracted 8% in the first nine months of 2020, mainly due to reduced industrial activity.
Freight Scenario on the Mend
However, with the gradual reopening of economies, the freight scenario has been improving in North America for a while now. After months of coronavirus-induced disruptions, freight volumes are gradually expanding. The recovery in freight demand following the ramp-up of economic activities as restrictions get relaxed is a boon for the concerned transportation companies.
Per the latest Cass Freight Shipments Index report, shipment volumes inched up 2.4% on a year-over-year basis. Notably, this was the first time that the metric has showed an improvement year over year since Nov 2018 when growth was merely 0.6%. In fact, the year-over-year betterment in shipment volumes during October 2020 was the best reading since 6.2% growth was registered in October 2018.
Even though the last month’s reading displayed year-over-year growth, the gradual recovery in the freight scenario can be gauged from the fact that shipment volumes have been displaying an uptick on a month-over-month basis over the past few months. Evidently, the metric improved 1.6% in May from April levels.Readings in June, July, August, September and October improved 3.5%, 4.8%, 8%, 7.1% and 0.3%, respectively, month over month.
Union Pacific’s commentary at the Stephens Annual Investment Conference earlier in the month bears testimony to the improved scenario with respect to overall volumes. Management stated that overall volumes for the December quarter are up 3% through Nov 11. Overall volumes rose on strength in the premium segment (up 11%).
This resurgence in the freight scenario can be attributed to healthy consumer spending with US retail sales on the rise. Notably, retail sales increased 5.2% year over year in October 2020. Improvement on a year-over-year basis with respect to rail volumes was also witnessed in the month. Per the Association of American Railroads’ report, total U.S. rail traffic in October this year was 2,082,646 carloads and intermodal units, up 2% from the October reading last year.
Moreover, for the third quarter of 2020, U.S. real GDP increased at an annual rate of 33.1%,