We hosted a call with Farrukh Bezar, Chairman of the Board at STG Logistics, the fourth-largest asset-based intermodal marketing company (IMC), on the state of the rail network, intermodal into 2025, and macro events affecting the Class I’s. IMC earnings growth is challenged in 2025, flat pricing is forecasted, and the current peak season isn’t moving the needle to finish the year, he said. Regulatory relief is welcomed with the new Administration, though Class I mergers are unlikely in the next 5-10 years.
Bezar emphasized that the intermodal industry would generally not likely see notable profit improvement in 2025 despite a modestly positive volume outlook. The bid season, which is going on now and will conclude in mid-February, has proven understandably tough, given that trough TL (truckload) rates and renewals are seeing rates largely flat overall (from a slight decline to a slight increase). TL rates would have to recover to 2019 levels (which was not a strong freight year) to see a more positive pricing environment for IMCs. His commentary is in line with our currently held and likely consensus view that intermodal recovery is a 2H25 story at best. IM pricing is at the whim of the TL market, and IM volume is correlated with how the Class I’s manage rail service. The IM players (except J.B. Hunt) struggle to control their own destiny on the top line, and 2025 should prove challenging for the group.
Implications of potential new tariffs remain difficult to assess, though Bezar expressed optimism on nearshoring trends and sees clearer benefits to the metals business. Industrial development pipelines at the Class I’s are at record levels, and he emphasized that even short lines seeing projects speaks to underlying strength in this trend.
While regulatory relief is a positive for the rails, Bezar does not see an environment supportive of additional Class I mergers, leaving the idea that transformative M&A is unlikely in the next 5-10 years. Rail industry leaders are focused on network service and unlikely to take on the uphill task of selling merger ideas to regulators and customers at this stage. Additionally, Bezar emphasized that the standard for merger green lights has increased notably as well with acquirers now required to prove that deals would be pro-competitive instead of simply proving that they would not be anti-competitive.
Bezar sees rail employment being viewed much differently than pre-COVID. Attracting and retaining talent has been much more difficult, as we’ve seen with Class I hiring struggles over the past several years. Creating a stable workforce will hinge on figuring out work content (exact hours for employees to the extent they can) that will ultimately enable steady, consistent service in the rail network. To return to growth, credible service is a nonstarter, which has been choppy during the past several years. Early settlements for labor negotiations are promising for employees by offering strong wage proposals. Bezar sees CSX leading the pack on service, Union Pacific slotted in second place among U.S. carriers, and noted improvements at Norfolk Southern since John Orr took over as EVP and COO.
