S&P Global: Slide deck outlines economic factors facing North American railroads in 2024

S&P Global Ratings today published a slide deck outlining its views on the economic and credit factors facing the North American freight railroad industry in 2024.

The slide deck, titled "Economic & Rating Review: Rail Equipment Finance Conference 2024", is available to subscribers of RatingsDirect on CapitalIQ. The slides were initially presented at the Rail Equipment Finance Conference on March 4, 2024.

S&P Global Ratings presented its view of a better-than-expected U.S. economy emerging in 2024 from strong labor markets and manufacturing growth, though risks still loom with inflation. Given railroads' broad merchandise mix, we expect ratings on North American Class 1 railroads to remain stable, with financial policies managed accordingly to offset earnings volatility.

We expect operating results to modestly strengthen in 2024 from improved service and abating inventory destocking. We consider railroads appropriately staffed and don't expect service to diminish when volume growth resumes. In our view, improved reliability should temper the competitive pressures that have been heightened on certain routes (notably short hauls) from trucks over the past couple of years. Railroads will need to continue to perform to convince shippers of reliability before truck conversions begin en masse. Although trucking spot rates continue to hover at trough levels since early 2023, we believe the current rates to be unsustainable, forcing capacity to exit the market. With stable service and more economical costs, railroads are poised to win back share from trucks.

Other expectations include:

• Carload recovery by commodity since the worst of the COVID-19 pandemic.
• Carload and revenue per carload growth in the low-single-digit percents.
  
• Debt issuance and share buybacks ebb and flow with earnings.
  
• Coal carloads are relatively stable near term, but ongoing secular decline remains.