Podcast Summary
This podcast features Jay Shabat, an analyst with Skift Airline Weekly and publisher of the Railroad Weekly Substack, discussing the state of the American railroad and airline industries. The conversation delves into the performance of major railroads and airlines, the impact of economic factors on these industries, and the challenges they face.
Key Takeaways
State of the American Railroad Industry
- Freight Demand: The first half of 2024 saw a 2% increase in volume compared to 2023, but volumes are still below 2018 levels. The decline in coal usage and weak manufacturing output have contributed to lower volumes.
- Profitability: Despite lower volumes, railroads remain highly profitable, with operating margins of 35-40%. Consolidation in the industry has given railroads strong pricing power.
Performance of Major Railroads
- BNSF and Union Pacific: These are the two biggest railroads in the US. BNSF, owned by Berkshire Hathaway, and Union Pacific, an independent company, have maintained strong financial performance.
- Norfolk Southern: This railroad faced a proxy fight from an activist investor, leading to changes in the board and management strategies.
State of the American Airline Industry
- Cost Inflation: US airlines are facing cost inflation, particularly on the labor side. Factors such as heavily unionized companies, pilot retirements, and constraints on pilot supply have led to increased labor costs.
- Profit Margins: US airline profits are down from 2019 due to increased labor costs, with some low-cost carriers struggling and even losing money.
Performance of Major Airlines
- Delta and United: These airlines are performing well due to the strong US dollar, which encourages Americans to travel abroad and benefits airlines with international business.
- Southwest Airlines: This airline has maintained an investment-grade credit rating and has been successful in servicing its debts despite the challenges faced by the industry.
Challenges in the Airline Industry
- Supply Shortages: Boeing and Airbus are facing supply chain issues, leading to an aircraft shortage and putting upward pressure on fares.
- Engine Problems: Specific engine problems, particularly with Pratt and Whitney engines, have further impacted low-cost carriers’ growth.
Sentiment Analysis
- Bullish: The podcast presents a bullish sentiment towards the profitability of the railroad industry, despite lower volumes. The strong financial performance of major railroads like BNSF and Union Pacific, and airlines like Delta and United, also contribute to this sentiment.
- Bearish: There is a bearish sentiment towards the airline industry due to increased labor costs and supply chain issues. The struggles of low-cost carriers and the decline in US airline profits from 2019 levels also contribute to this sentiment.
- Neutral: The podcast maintains a neutral sentiment towards the future of both industries, acknowledging the challenges they face but also highlighting their resilience and potential for recovery.
