Fitch Ratings says it sees a difficult 2008 for the freight transportation industry in the United States, at least for the first half, after three years of strong demand growth that led to higher volumes and pricing power for both the trucking and railroad industries.
The ratings agency says the expected rise in demand in the second half of 2007 did not materialize and the forecasted slow U.S. growth will continue to weigh on the financial performance of the trucking and railroad industries, blunting demand growth and restraining pricing.
Fitch sees railroads performing better than trucking as a tighter rail capacity and less exposure to cyclical shipments will continue to support pricing.
The ratings agency sees a greater risk of negative outlook revisions or downgrades in the trucking industry from a credit perspective than railroad. It says railroad credit profiles could weaken if issuers in that industry return cash to shareholders through debt-financed buybacks.
Fitch sees competitive pricing and a decline in capital spending in the trucking industry in 2008, which will help it rid some of its overcapacity. It sees rail pricing remaining firm and pricing power driving railroad margins as in 2007, which has been due to lower volume-related costs and unit pricing gains.
The ratings agency sees the rail industry better positioned than the trucking industry to face recession-driven sluggish demand, because railroads are financially stronger than most truckers with more liquidity and free cash flow margins.
Fitch also sees the railroad’s access to capital markets staying firm in 2008 and refinancing of most maturing debt obligations. It says the free cash flow margins of the trucking industry will be heavily pressured in 2008 despite a substantial decline expected in capital spending.
