OAK BROOK, Ill. — The addressable market for domestic intermodal services with lengths of haul above 550 miles is estimated to be approximately 45 million loads annually for the major U.S. Class I railroads as fuel costs rise on a secular basis, intermodal infrastructure improves, and trucking industry capacity continues to tighten, a Cleveland Research senior analyst and partner said Wednesday.
This estimate is roughly double what CSX, Norfolk Southern, Union Pacific, and BNSF have publicly stated is available, but Mark Davis said he sees an even greater opportunity for intermodal conversion as rail infrastructure is expanded and railroads eventually capture some multi-stop business they currently cannot service. Intermodal growth in 2012 and the fourth quarter was key to helping the major U.S. railroads offset weak coal and grain traffic. Intermodal traffic last year rose 3.2 percent year-over-year, while carload volume fell 3.1 percent in the same period, according to the Association of American Railroads.
The wave of proposed federal trucking regulations, including potential changes to rules governing hours of service and greater scrutiny of trucker’s driving records, is part of a U.S. government push to encourage intermodal rail at the expense of trucking, Davis said. Although the headline goal is highway safety, Davis believes the proposed new regulations are really designed to reduce the consumption of diesel fuel, which makes up approximately 90 percent of U.S. transportation fuel consumption, and lessen the impact on aging U.S. infrastructure.
The railroads also stand to pick up business as the trucking industry focuses on profitability, instead of fighting for market share, Davis told attendees at the Midwest Association of Rail Shippers conference in Oak Brook, Ill. Also, higher operating costs are spurring trucking companies to focus on shorter lengths of haul (below 700 miles) versus lane segments above one thousand miles as they cede those markets to railroads.
“Trucking companies are rapidly adopting regional full truckload business models that are focused on dedicated relationships with shippers versus scattering trucks across the country. With many markets being very directional, truckers are looking for both head-haul and back-haul loads to enhance profitability and gain pricing leverage”, Davis said.
He expects the rail industry’s success in tapping the booming domestic energy business to continue, partly because shippers like the flexibility rail networks provide. Because oil wells in places like the Bakken and Eagle Ford shale formations are rapidly depleted, energy companies have to change sourcing sites, making pipelines a less viable mode of transport
BNSF Railway is one of the U.S. railroads to see the most dramatic impact of the growth of the domestic oil and natural gas sectors and the coinciding decrease of coal traffic. BNSF CEO and Chairman Matt Rose said petroleum products accounted for 1 percent of the Western railroad’s volume in 2006 and last year made up 4 percent of its mix. Coal traffic accounted for about 22 percent of BNSF volume last year; it made up 23 percent of 2006 volume.
Rose told attendees that he expects the most growth of shale energy production in the Bakken formation in North Dakota and Montana, but he also expects to see more shipments out of Texas’ Eagle Ford and Permian Basin, and from Colorado and Mississippi. The railroad currently ships about 500,000 barrels a day and expects traffic to rise to 700,000 barrels by the end of 2013. The growth of the U.S. shale sector not only provides BNSF with tank car shipments from production sites but also business hauling supporting commodities, such as sand, pipe, bentonite and cement.
Correction: An earlier version of this story mistated the estimated intermodal conversion market.