Slow Train Coming: Tariffs Expected to Reduce North American Freight Activity

Tariffs and U.S. trade policy uncertainty are set to adversely weigh on North American economic activity, and subsequently, affect the demand for freight service across most end-use sectors. Consequently, we expect freight companies in both the Railways and Trucking sectors to face an increasingly difficult operating scenario. Here are the key takeaways:

-- Railways and Trucking Companies should face a progressively weaker freight-demand environment.
-- However, credit ratings should largely remain stable over the near-term, with smaller Trucking operators facing increased credit ratings pressure.
-- Credit ratings may be pressured over the medium term if the tariffs continue to escalate and/or remain in place for longer.

"We expect tariffs and policy uncertainty to progressively weaken freight demand throughout the year. However, any rating actions would be limited to smaller operators in the Trucking sector as Railways and investment-grade Trucking companies should comfortably navigate the current challenging operating scenario" said Vineet Khattar, Vice President of Corporate Ratings, Diversified Industries, at Morningstar DBRS. "We also note that relative to the Railways sector, the Trucking sector is more exposed to credit ratings pressure, owing to relatively weaker credit risk profiles, lower margins, and cash flow generation capability."