2004 canadian gas price year

2003 has been a tough year for the industry, one in which, during a stagnant economy, railroads dealt with mostly-flat traffic levels (except for intermodal, the year's one bright spot) and higher costs and operating ratios, not to mention a few service problems. Suppliers are still hurting, though freight car deliveries are much healthier, following a painful down cycle.

2004 looks to be a better year. As the economy recovers, railroad traffic levels are expected to rise with it. Following modest increases in capital spending in the latter half of this year, some Class I's plan to follow through for 2004 with capital programs that are, at worst, flat compared to 2003, or slightly higher. Suppliers are anticipating an improved business climate, though they're far from being ready to declare a celebration (sidebar, p. 26). Everything hinges upon the degree to which the economy and railroad traffic levels improve.

When posed a question by Railway Age about what opportunities lie ahead in 2004, and what railroads must do to take advantage of them, independent Wall Street analyst Tony Hatch had this to say:

"The first challenge for the major railroads will be to correct the service glitches that appear to have affected the North American system so that they can take advantage of what could be a breakthrough year. 2004 could be a year when intermodal and merchandise carload takes its performance and share to the next level. The truckers Face hours of service rules, consistently high operating expenses, and tight capacity. Their rates have to go up, widening the price gap to rail. Rail intermodal and merchandise traffic has grown pretty, well over the period of service recovery and alliance building, and it should really explode in 2004. And what really could be exciting is that it should be a very good year for bulk commodities, especially grain. So, after the railroad service metrics pick up, the real challenge for the major carriers will be to take advantage of the situation they have painstakingly placed themselves in, and profitably (returns on capital never stray far from investor's concerns) take the share the market wants to give them."

Financial health? First Call, a data gathering service that collects estimates from all the major Wall Street firms, offers these estimates of" "long term" (two to five years, a long time for the financial community) railroad earnings-per share growth: Union Pacific (which recently increased its common stock dividend by 30%, to 30 cents per share), 13%; BNSF, 9%; Norfolk Southern, 10%; CSX, 12%; CN, 12%; Canadian Pacific, 10%; and Kansas CW Southern, 15%, for an industry average of 11%.

The railroad outlook tends to be more conservative. "This is not a simple economic recovery," Norfolk Southern's David Goode recently told Wall Street analysts. "It is not like somebody turning on a light switch. There are pluses and minuses, and our strategy is not to think that we can necessarily influence the course of the business. Our strategy is to be nimble enough to try to be available. We're not looking for a snap-your-fingers and the economy is dramatically better in the fourth quarter or any time next year. What we think we are seeing are signs of a steady improvement. But for every pins, you've got to work through a minus."

If 2004 does offer growth opportunities as expected, it will be a breakthrough year only if the railroads are able to cope with the business. They'll have to put enough equipment and enough crews on their networks to avoid the embarrassing traffic jams and service disruptions that occurred in 2003. There's been movement in this direction. For example, freight car deliveries are currently running nearly double the pace of 2002. And Union Pacific plans to hire as many as 3,000 operating workers in 2004, building on the 2,000 it has already added.

How do the Class I's see 2004? What do their spending plans look like? Here's what they told Railway Age:

Dick Davidson, CEO, Union Pacific Railroad: "It's certainly encouraging to see the economy pick up steam after many months of sluggishness. Yet we at UP still remain cautious as we look ahead to 2004. The worst is behind us, and we want to believe that across-the board economic growth lies ahead. There's already plenty, of cause for optimism. On our railroad, housing and highway construction materials are on the upswing, intermodal traffic is strengthening, and there is strong demand for coal and agricultural products. But at the same time, we still await consistent growth in economically sensitive sectors, such as chemicals--particularly plastics--and motor vehicles, among others.

"On the expense side, we continue to keep close watch on unpredictable diesel fuel prices, which have sharply boosted our costs over the past two years. While not final, our capital program for 2004 involves spending about $2 billion, the same general level as in the past few years. We believe that consistent investment in our railroad, no matter the economic climate, makes the best business sense."

Matt Rose, Chairman, President, and CEO, BNSF: "As the U.S. economy continues to strengthen, we expect our grouch in 2004 to parallel 2003 patterns. First, we expect to continue to see strength in our modal partnering initiative. This growth is primarily driven by truckload carriers accelerating their use of rail services. Significant growth opportunities include the truckload and perishables sectors. We will continue working to form modal partnerships with more truckload carriers to help them address driver, insurance, and other issues.

"Second, the ongoing trend that is moving manufacturing from North America to the Pacific Rim, especially China, will provide continuing strong demand for international intermodal transportation. One of our challenges will be to work with our steamship service partners to provide improved supply chain visibility to our customers and to optimize the flow of containers to West Coast ports.

"Acquisition of about 350 locomotives in 2004, about twice our normal rate, will push projected capital spending to $1.95 billion from $1.725 billion in 2003. We will continue to focus on achieving productivity improvements to cover inflation as well as most of our volume increases."

E. Hunter Harrison, President and CEO, CN: "CN expects to spend well over C$1 billion on capital projects in 2004, in line with 2003. We will maintain a major focus on plant infrastructure spending. Funds also will be expended on rolling stock and information technology.

"The North American economy is definitely showing signs of pick-up as a result of the stimulative monetary and fiscal policies of the U.S. The continuing impact of policies should be widespread across large segments of the industrial economy. We anticipate strength in carload markets, including automotive, pulp and paper, and metals and minerals. Petroleum and chemicals traffic also should be solid if natural gas prices continue to stabilize. Housing markets may weaken if mortgage rates increase and exacerbate already high levels of consumer debt. Intermodal traffic should continue to improve with a strengthening continental economy, although this segment is subject to pressures from global currency realignments."

Rob Ritchie, President and CEO, Canadian Pacific Railway: "2004 will be notable for the return of bulk on CPR. A near-normal grain crop has come off the Canadian prairies and has begun moving to market after two consecutive years of drought that shrunk crop yield to the lowest levels in memory. We have added 2,800 cars to our grain fleet, brought on 35 additional high capacity locomotives in September, four mouths ahead of schedule, and trained more crews to prepare for a strong upsurge in grain traffic. In addition to Canadian grain volumes that are expected to remain strong through the first half of 2004, we expect to see a recovery of coal volumes.

"CPR's intermodal service in the Vancouver-Chicago corridor has attracted new shippers. With China's strengthening trade position, we expect imports through the Port of Vancouver to continue to increase into 2004. Export volumes and paid empties have begun to grow faster than imports.

"The Canadian dollar's gain against the U.S. dollar is a wildcard for 2004. CPR feels the pinch when U.S. dollar-denominated revenues are translated to Canadian dollars. However, this is partially offset by the significant amount of expenses that are paid in U.S. dollars. Expense management remains a high priority, going into 2004. In May 2003, CPR announced a program to eliminate 820 job positions by the end of 2005. We are on target. However, CPR will hire where and when required to handle growth in the business."