When U.S. railroad executives released their fourth quarter 2012 earnings late last month, they couldn’t help but talk about their trucking archrivals — and with good reason.
The major railroads are betting an array of federal regulations will bite into trucking capacity in the second half of the year, giving shippers an added incentive to shift more loads onto the rails. Tighter trucking capacity also means the rail industry can flex its pricing power. That will make intermodal business, the fastest-growing piece of rail business, a bigger profit generator as sluggish coal and grain volume contribute less to earnings.
“Truckload capacity is not expanding. The hours-of-service law will probably go into effect in July that will cost the motor carrier industry 3 percent to 5 percent of productivity,” Donald Seale, Norfolk Southern’s executive vice president of marketing, told investors Jan. 22. “And drivers are not becoming more plentiful. They’re getting shorter. So a lot of things, a lot of the drivers are set in the environment to support better pricing.”
In addition, if the construction industry rebounds, as some economists expect, it will be even harder for the trucking industry to find drivers, Eric Butler, Union Pacific Railroad’s executive vice president of marketing and sales, said during a Jan. 24 earnings call. Truckload capacity hit a four-year low in the third quarter, with only two of the seven truckload carriers tracked increasing their fleets in the period, according to The Journal of Commerce Truckload Capacity Index.
The shift from truck assets to intermodal service and equipment by Swift Transportation, the largest U.S. truckload carrier, further reinforces the give-and-take in the surface transportation industry. Swift reduced its total tractor capacity by 4.2 percent year-over-year in the fourth quarter, and the average number of trucks available in its truckload division fell 6.5 percent. The carrier’s capacity is 15 percent less than it was at the end of 2006. Swift increased capacity in its dedicated and intermodal divisions in the fourth quarter of 2012, and added 2,500 intermodal containers to its fleet during the year.
Higher operating costs are spurring trucking companies to focus on shorter lengths of haul — those less than 700 miles — versus lane segments above 1,000 miles as they cede those markets to railroads, Mark Davis, a senior analyst and partner at Cleveland Research, said at the Midwest Association of Rail Shippers conference in Oak Brook. Ill., last month.
“Trucking companies are rapidly adopting regional full truckload business models that are focused on dedicated relationships with shippers versus scattering trucks across the country,” Davis said. “With many markets being very directional, truckers are looking for both head-haul and backhaul loads to enhance profitability and gain pricing leverage.”
Like last year, domestic intermodal growth is expected to outpace international intermodal traffic in 2013. Tepid consumer demand for foreign goods likely will equate to moderate gains in the latter, but higher fuel prices and steadily expanding domestic factory production will keep the former in high gear. The five U.S. Class I railroads — BNSF Railway, Kansas City Southern Railway, CSX Transportation, NS and UP — saw intermodal volume on a year-over-year basis rise 1.9 percent in the fourth quarter and
4.3 percent for all of 2012, according to an analysis of earnings reports and volume data.
Kansas City Southern Railway saw the sharpest intermodal volume growth in the fourth quarter, 6.2 percent, and for the full year, 14.6 percent, largely because of a jump in Mexico-U.S. traffic. CSX and NS’s full-year intermodal volume expanded 7 percent and 4.6 percent, respectively, as network improvements attracted shorter hauls.
CSX expects domestic intermodal volume to rise 5 to 6 percent this year, and international intermodal traffic to expand 3 to 4 percent. The Jacksonville, Fla.-based railroad said intermodal pricing gains this year will stay in the 2 to 3 percent range.
NS didn’t give volume growth projections, but Seale agreed with one investor that intermodal pricing for the railroad looks better for the next two to four years than in the last two to four years. The more modest intermodal gains at UP and BNSF in 2012 reflect a moderate peak shipping season on the West Coast.
But international intermodal traffic growth might be healthier than statistics show, and vice-versa with domestic intermodal, because of transloading, said Tony Hatch, senior transportation analyst for ABH Consulting. The process allows the contents of 20- and 40-foot ocean containers to be shifted into a 53-foot container for domestic transport, helping container lines reposition equipment. “I think that has a real power,” Hatch told MARS attendees. “When you have (transloading proficiency) and a real core competency, you retain your power as a port by the fact you are efficient in many ways.”
Ultimately, the potential market for domestic intermodal services longer than 550 miles is roughly 45 million loads year, Davis said. This estimate is roughly double what CSX, NS, UP and BNSF have stated is available, but he sees an even greater opportunity for intermodal conversion as rail infrastructure expands and railroads eventually capture some multistop business they currently can’t serve.
Washington, D.C.’s pro-intermodal attitude — with a mantra that about 10 percent more of the nation’s trucking freight can be moved onto the rails — bodes well for a favorable regulatory atmosphere, Hatch said.
Major shippers such as Wal-Mart and Target Stores “desperately want to see this happen,” Hatch said. “The question is, ‘Why don’t (the shippers) do it right now?’ What you need to see is the introduction of new lanes, new actual city pairs with new services on it … and on a regular basis.”