The Presidential Emergency Board has recommended an 18.6% raise in pay for freight rail workers over a period of six years.  Rail carriers such as CSX Corporation (NYSE:CSX), Union Pacific Corporation (NYSE:UNP), and Norfolk Southern Corporation (NYSE:NSC) were offering a 17% increase over six years compared to the 19% hike over five years demanded by the unions, which represent around 70% of rail workers. Though such a recommendation was expected, which is comparable to the earlier contract negotiations between rail companies and United Transportation Union (UTU), the increase to freight carriers’ compensation expenses will pressure earnings in a slowly recovering economy. The parties have a month to reach a consensus, and if they don’t, they will be free to exercise ‘self-help’ after the 30-day period ends December 6.
Good news for rail companies came last week in form of improved rail traffic as reported by the Association of American Railroads.  The weekly carload average in October 2011 was the highest since October 2008, and along with improved forecasts for the holiday season, we expect freight carriers to gain from the (gradual) revival in economic conditions. Motor vehicles and coal recorded the largest gains, with 11.1% and 1.1% increases compared with October 2010. Coal freight makes up 32% of the Trefis price estimate for CSX.
In another development, CSX reached an agreement to sell the 61-mile SunRail rail corridor to the Florida Department of Transportation.  The $150 million transaction will allow the state to begin construction of phase 1 of the project, which aims to tackle public transportation needs in Central Florida.  Per the arrangement, CSX will maintain sole freight rights to run on the rail corridor.
We have a price estimate of $34 for CSX, which is about 50% above the current market price.Notes:
- Railroads, Unions Weigh U.S. Settlement Plan to Avert Strike, Bloomberg [↩]
- AAR Reports Gains in October Rail Traffic, AAR Press Release [↩]
- CSX, State of Florida Close on SunRail Transaction, PR Newswire [↩]
- FDOT buys SunRail tracks for $150M, Orlando Business Journal [↩]