High fuel prices: a mixed blessing?

High fuel prices: a mixed blessing?

The debate over rail fuel surcharges, the subject of a public hearing by the Surface Transportation Board this month, is really quite simple: Many rail customers say railroads are over-recovering their actual increased expenses for diesel fuel, while railroads say they are not.

Another view of the escalation in fuel costs is that what the Bush ad-ministration now calls a "crisis" has been one of the best things to hit railroads and, specifically, their intermo-dal business. Because of constrained capacity, railroads - and truckers - are able to recover rising fuel costs without fear of driving business away.

Railroads are much more efficient users of diesel fuel than trucks are. On average, railroads move three to four times more freight, measured in ton-miles, per gallon of fuel, than trucks do. For many years, that was not true of intermodal, which featured lighter trains that were less fuel-efficient than other rail operations. Intermodal demand has grown so rapidly that railroads are lengthening intermodal trains to the maximum that tracks can handle - with a commensurate increase in fuel efficiency.

Another factor is that most long-haul truckers must buy fuel at retail, while railroads buy diesel fuel in bulk lots and refuel trains at highly efficient, strategically located fueling points.

Both modes are passing rising fuel costs on to customers whenever possible, but for truckers, that recovery amounts to a larger portion of total freight bills, because fuel makes up a larger part of total costs.

Railroads proved during past fuel spikes that they could absorb rising fuel costs while doing less damage to their overall cost structure than truckers could. To the extent that they are not absorbing that cost, but are recovering it, they preserve their profit margins. In the longer run, the recovery of fuel costs contributes to the ability to spend capital for capacity expansion.

Add in driver shortages, highway congestion and limitations in driver hours of service, and you have the perfect storm for truckers. Their costs are rising across-the-board, and there is precious little they can do about it.

The one advantage truckers retain in competition with railroads is their quality of service. Even with highway congestion, high-service trucking is more consistent and reliable than intermodal. Transportation purchase decisions are made on the basis of service and price. At some point, higher price will outweigh the service advantage and drive traffic at the margin toward the railroad.

Ironically, among the first shippers to recognize that truth are truckload carriers, which have become among the best customers the rail intermodal departments have. Putting trailers into intermodal service is one way of minimizing the rising cost of fuel, driver shortages and highway congestion. Another factor is critical mass. Railroading, as a high-fixed-cost network business, requires traffic density to generate decent return on investment. As truckers bring business to the in-termodal terminals, they contribute to improving intermodal economics.

Some years ago, most railroads debated internally whether intermodal could or should have dedicated trains or be offered in mixed-train service, and if it were dedicated, whether trailers and containers should be carried in separate trains. The volume of traffic is so heavy today that the debate has ended: Efficiency prevailed. Containers move in solid double-stack trains, and trailers move in solid trailer-on-flatcar trains.

There are signs that the truce is coming to an end between the Association of American Railroads and the American Trucking Associations over federal legislation to allow longer and heavier trucks on the highways. Nothing will happen for several years - until the surface transportation program is up for reauthorization in 2009. While this once was seen as a serious threat to the railroads, the situation may be shifting in large part because of the growth of intermodal.

Not all truckers would be affected the same way by a change in the maximum weight or number of trailers they could put on the road. Some operators would choose not to invest in new equipment, while others wouldn't be able to put much more freight into their trailers than they can now. Any shift in business again would be at the margin, not across-the-board, and would not be as disastrous to railroads as it would have been the last time the truckers made a push for heavier and bigger trucks.

Railroads are healthier today than they were a half century ago; growing intermodal volume is a major reason.