Strategy for Capacity

A growing array of economy-watchers is looking toward freight rail transportation as a leading indicator of U.S. economic activity — it’s good enough for Warren Buffett — but the most telling rail indicator may not be what’s on the tracks but what is not.

There were fewer carloads of some key commodities in May, but railcar owners also parked 2,855 more cars in May, according to the Association of American Railroads, and that important measure is significant beyond merely as an outlook for the coming months of economic activity.

The slight increase in idled railcars came after owners pulled more than 7,000 railcars from storage in April and almost in stride with a general softening in rail traffic.

How soft? Carload traffic for U.S. railroads actually grew in May over the same month last year, but only by 0.5 percent, and that was off a whopping 1.5 percent from April to May. Among the more than 1.1 million or so railcars the U.S. Class I railroads move each month, that seems a miniscule amount, but it’s large enough to kick in the sort of financial and operating discipline that has made the large railroads such reliable profit engines in recent years.

And that’s where the railroads may be an indicator of far more than basic industrial production. The disciplined way owners of key rail transport equipment are managing that capacity is a stark sign of how operators are managing not only their capacity but also, it seems to us, their relationships with the buyers of capacity.

At the simplest level, tighter capacity will mean higher rates, but from what we’re seeing among participants in the supply chain this year, there is far more than that involved in the questions over capacity.

A fundamental development over the past two years among trade and transportation businesses has been the sharper clarity capacity providers have brought to the distinction between customers they describe as tactical and those they consider strategic. In a sense, that’s a reflection of the same sort of structure many shippers bring to their supply chains as they label some providers core carriers and others, well, others.

The railroads gave a clear picture of that strategy last year at a meeting of the Transportation Intermediaries Association, where they pitched directly for business from freight brokers more traditionally attuned to trucking, while making plain they’re interested in the business that’s steady, predictable and, of course, heavy.

They have the capacity, in other words, if the brokers have the right kind of demand.

That’s why this month’s seemingly incongruous acquisitions in the U.S. shipping market make sense. When Deutsche Post DHL acquired small less-than-truckload carrier Standard Forwarding and Geodis Wilson bought freight broker One Source Logistics, the international forwarders were setting up stronger stakes in the U.S. market, creating the capacity to handle business strategically rather than tactically.

Neither acquisition is that big, but anyone looking at how carriers are managing their capacity these days should assume those international forwarders aren’t interested in being only tactical providers, or buyers.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.

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