Analyst Says Pacer Could Exit UP-Stacktrain Service

A well-known rail and intermodal analyst, Ed Wolfe of Wolfe Research, is projecting that Pacer International could end up renegotiating its cut-rate contract with Union Pacific Railroad by getting out of its Stacktrain service altogether.

Stacktrain is a wholesale intermodal service in which Pacer buys train space on its favorable terms and then sells the space to large intermodal marketing companies that arrange shipments for final freight shippers such as major retailers.

Its long-term contract was inked in 1990, long before intermodal pricing surged earlier this decade, so Pacer markets the service at a price advantage to other large intermodal providers including the major railroads. Wolfe estimates the UP contract gives Stacktrain prices that are at least 20 percent below today’s market.

The contract’s expiration in October 2011 has long weighed on Pacer, and for a while it and UP were not even negotiating the issue. Wolfe told clients that industry sources now suggest the two firms “are once again in active discussions,” and that a Pacer “exit from the Stacktrain business is plausible.”

Wolfe estimates that Stacktrain will provide about $800 million in revenue this year or half Pacer’s total revenue, and that its business model would be undermined by having to quickly adjust to higher market pricing under a revised UP contract. Pacer officials have said they already are planning to operate without such favorable pricing with UP.

Wolfe said he expects a deal to emerge that will provide Pacer “substantial cash” from UP to exit the Stacktrain operation early, leaving Pacer still in intermodal with a sizable rail brokerage unit or retail IMC that should pull in $400 million in sales this year, plus a drayage unit generating $100 million. It also has a logistics unit.

Pacer has Stacktrain contracts as well with CSX Transportation in the East and with Kansas City Southern in Mexico, but Wolfe said those would probably continue.

Pacer’s retail IMC service, which sells directly to freight shippers, competes with Hub Group and J.B. Hunt and enjoys a 5-6 percent price advantage due to the UP contract, Wolfe estimates. He said that puts downward pressure on rates across the whole intermodal industry, so an end to UP’s Stacktrain contract could affect pricing for all major intermodal providers.

Contact John D. Boyd at jboyd@joc.com.