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Moody’s Downgrades Rail Industry Outlook to Negative

May 17, 2016, 07:05 AM
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Related: Moodys, Rail, Rail Finance

Underscoring the weak industry conditions which will likely continue through at least the third quarter of 2016, Moody's Investors Service changed its industry outlook to negative from stable, as deep and long-lasting declines in freight volumes continue to pressure North American railroads.

"Volumes of coal, the second-largest freight group in the North American railroad industry, plunged by an unprecedented 37% in April amid persistently low natural gas prices and high stockpiles at utilities after a warm winter," noted Moody's Vice President and Senior Analyst Rene Lipsch.

"We expect the current weakness in freight demand to persist through at least the third quarter of 2016, and for revenue growth to fall below zero -- our minimum for a stable outlook," added Lipsch.

According to Moody's newly released report, "Where Is the Bottom? Rail Freight Drops as Coal Carloads Plunge," total freight volumes declined by 11.4% in April 2016, resulting in a 7.4% decline so far in 2016. Moody's projects total freight volume to decline 3.5%-4.5% in 2016, driven in particular by an expected 20%-25% decline in coal shipments.

With the notable exception of strong growth in automotive carloads and flattish volumes in chemicals, most other freight categories declined concurrently with coal. Factors contributing to these declines include the severe drop in oil prices, high retail inventory levels amid hesitant consumer spending, weak US manufacturing activities and the adverse impact of the strong US dollar on exports.

Freight volume comps in the second and third quarter will remain high, said Moody's, making it likely for the current weakness in freight to persist through at least the third quarter of 2016. Even so, Moody's expects freight comps will retreat in the fourth quarter of 2016, not only for total carloads, but more broadly across all freight groups.

While weak near-term freight demand is thus likely to persist, Moody's expects a more moderate decline in freight volumes of 1.0%-1.5% in the 12 months through April 2017, supported by lower comps rather than an expected pick-up in sequential growth.

Combined with a 2.5%-3.0% increase in core pricing, revenue growth will be 1.0%-2.0%, excluding changes in fuel surcharges and a likely negative impact of changes in freight mix.

The negative outlook on the industry could return to stable if volume declines ease in the fourth quarter of 2016, or sooner if coal freight picks up to meet summer cooling demands, concurrent with improving intermodal shipments from reduced retail inventories.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history.

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