Weighing the Outlook;
Freight Forecast Update
MONTHLY
Tonnage Set to Plunge About 7% in 2009
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We are updating our forecast for freight tonnage. Based on the inputs from
our Global Economics team, our proprietary freight forecasting model is now
calling for tonnage to decline by about 7% in 2009 vs. 2008. This marks a
serious deterioration versus our prior outlook, which had tonnage down
about 3% in 2009.
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While individual quarters have seen declines of that magnitude (4Q00, 1Q96,
4Q95) we have not seen a full year decline in freight tonnage greater than
7% since 1982 (down 12%). This is not exactly surprising, as lots of things
these days are worse than they have been since the early 1980s (auto sales
spring to mind).
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And though it may not be surprising, we do not think consensus earnings
estimates for the transportation group are low enough to reflect this kind of
potential decline in freight tonnage.
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There is another complicating factor, however: fuel. Fuel prices have
dropped about 30% since our last round of estimate revisions, which has two
important effects on the numbers: first, it will put downward pressure on the
top line; and second, it will provide a nice offset in the form of lower
operating costs.
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Thus, thanks to collapsing fuel prices, the bottom line hit associated with
much lower freight tonnage is not nearly as bad as it could have been. Our
average estimate reduction for 2009 is about 6%, on a top-line revenue cut
of about 4%.
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It is important to note that our freight tonnage forecast is equally relevant for
trucks and trains. The key inputs in our forecasting model (manufacturer’s
new orders, industrial production, real interest rates, and real exports) are
the very same things that have shown the strongest relationships with
railroad carload growth. So we think our tonnage forecast (particularly when
combined with fuel and an estimate for pricing) offers a very helpful guide
when developing railroad (as well as trucker) earnings estimates.
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To provide more flexibility in our analysis, we include in this report sensitivity
factors for each of the tonnage model inputs. This allows investors to input
their own estimates and see how the differences would impact the forecast
for freight tonnage (as calculated by our model).