In a recent report presented by the U.S. Senate Commerce Committee it is stated that the discretionary pricing power enjoyed by the Class I freight rail transport companies are putting excessive pressure on freight customers. The freight railroad operators are enjoying this pricing power since 1980 when the U.S. government adopted the Staggers Rail Act. The idea was to allow rail transporters to hike price on captive shippers like electric utilities, chemical and agricultural companies in order to improve profitability of the struggling railroad industry.
The Senate Commerce Committee headed Sen. John D. Rockefeller has expressed his opinion that the railroads have become financially stable. An improving U.S. economy, massive surge in automotive shipments, and a sharp rebound in many end markets are expected to fuel the future growth of this industry. However, because of the Staggers Rail Act, the railroads are hiking their freight rates nearly 5% per annum and maintaining a double digit profit margin. On the other hand, a higher transportation rate is actually trickling down to the end users resulting in higher household expenditures.
If the U.S. Surface Transportation Board, the federal agency that regulates railroads, decides to scrap this act, the major freight rail carriers that may be affected are Union Pacific Corp. (UNP), CSX Corp. (CSX), Norfolk Southern Corp. (NSC), Kansas City Southern (KSU), and Burlington Northern Santa Fe Corp.
Meanwhile, the Association of American Railroads, the main industry trade group, has argued that the allegation of exorbitant price charge is uncalled for in view of massive capital expenditure that these companies need to undertake for building and upgrading railroad tracks. The industry body alleged that freight rail transporters together invested a significant amount of $42 billion in the previous two years for railroad track expansion and maintenance.
The U.S. freight railroad industry is witnessing gradual improvement since early 2010. As the U.S. economy continues to grow, demand for carriage also becomes robust and the momentum is expected to sustain in the long run. However, it remains to be seen how the industry maintains its steady-state growth if any adverse change occurs related to its discretionary pricing policy, which had helped the industry.
CSX CORP (CSX): Free Stock Analysis Report
KANSAS CITY SOU (KSU): Free Stock Analysis Report
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
UNION PAC CORP (UNP): Free Stock Analysis Report
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