Upward Trend in Rail Base Pricing May Offset Fuel Surcharges in 2006

As the upward trend in base pricing continues for the railroad industry in 2006, higher fuel surcharges may easily be absorbed.

The railroad industry can expect the upward trend in base pricing to continue in 2006, which may serve to offset higher fuel surcharges. 

Analyst Randy Cousins at BMO Nesbitt Burns in Toronto, for example, says fuel costs are no longer an issue for profit margins for such railroads as the Union Pacific, Canadian Pacific, Burlington Northern and Canadian National since new transport contracts includes such cost-adjustment mechanisms as updated fuel surcharges. The increase in base pricing and fuel surcharges implied by Union Pacific’s latest guidance would be 13%, Cousins tells Purchasing. "In the fourth quarter, base pricing increased 6% from yield and 7% from fuel. The positive trend in base pricing looks like it has continued into 2006."

Union Pacific the largest U.S. railroad, plans to target higher returns on investment ahead through a combination of higher prices, tackling choke points and improving the mix of business on its network. "We have only just turned the corner in terms of pricing," Jim Young, CEO of Union Pacific, says in a Reuters report. Young said Union Pacific is focusing on "dealing with the main choke points" (bottlenecks) on its network to deal with the company's capacity problems. Some of the biggest choke points are on lines bringing Asian goods from the West Coast eastward. "If we can deal with the main choke points on our network then most of our capacity problems will be solved," Young said. Union Pacific is investing $2.75 billion in its network this year compared with $2.7 billion in 2005. Young says the company's choke points would be a priority for additional rail capacity.

Meanwhile, Cousins at BMO Nesbitt Burns suggest coal transport, in particular, could be a significant source of growth in 2006 and into 2007 for Burlington Northern Santa Fe and the Union Pacific. He explains that last year’s coal business was adversely affected by track problems in the Southern Powder River Basin of Wyoming. Remediation work on the southern PowderRiver Basin roadbed occurred throughout the second half of the year. Cousins says growth in coal volumes will be around 10%, even though 2006 will be another year with significant maintenance work. "The long-term outlook for coal demand out of the PowderRiver Basin is quite positive," Cousins says.

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