Rail Carriers Losing Their Pricing Power?

After years in the doldrums, rail carriers have had a strong couple of years. Union Pacific (UNP), for example, is up about 20% so far in 2006. A big reason for the gains has been a strong pricing environment as tight truck capacity and higher fuel prices led to a shift toward greater use of rail transport.

According to BusinessWeek, railroads can ride pricing power into 2007:

The nation’s six largest railroads enjoyed arguably the greatest pricing power in their history this year and analysts expect it will continue in 2007, despite forecasts for a further slowdown in the economy.”Pricing will continue to be the story next year,” said Peter Smith, a transportation equities analyst at Morningstar.

In fact, analysts are so bullish on industry pricing that they’re willing to look beyond recent softness in freight volumes. While total volumes so far this year are up 2.5 percent compared to 2005, according to the Association of American Railroads, the week ended Dec. 9 provided railroads with their first weekly volume increase after a string of double-digit declines.

However, the PPI report released yesterday shows that pricing power, too, has all but vanished. In fact, after surging into the double digits year/year, the one-year change in rail pricing for November was just 3.2%. And falling:

Not the kind of track we like to be on.

Disclosure: At the time of publication, the author holds put options on Union Pacific.