Paying (for) the freight

Paying (for) the freight

Shippers of different commodities tend to think only of their immediate concerns in dealings with railroads and rarely concern themselves with the issues of shippers in other industries. Perhaps they should rethink their behavior.

Much has been written about the lack of transportation infrastructure in the U.S. and the likelihood that the situation will worsen. Failure to resolve the capacity issue will affect all rail customers because the steel rails and ties under them do not know or care what is rolling over them. Capacity constraints in coal or any other commodity will affect intermodal.

Intermodal customers will benefit from numerous projects to increase capacity. It's the utilities, chemical companies and grain dealers, after all, who are enduring sharp price increases. Shippers will pay all the traffic will bear - the right price. But those who make a greater contribution to covering fixed rail costs will get better service and will find railroads making in-vestments to serve their needs, which is what is happening to intermodal.

Charging all the traffic will bear has a negative connotation, but if a railroad charges less than the traffic will bear, it is leaving money on the table. If it charges more, the freight won't move, and it won't get anything.

Railroads are network businesses, while most of their customers operate in a different environment. Customers are interested in getting shipments from origin to destination, and network concerns rarely are seen as shipper problems. They're wrong.

Intermodal customers are the beneficiaries of record capital spending by railroads to create new capacity. That's because in recent years they have been paying rates that make a larger contribution to fixed costs than shippers of other commodities.

BNSF Railway is completing the double-tracking of its Transcon route between Chicago and Southern California. Union Pacific is accelerating double-tracking of the Sunset Route between Southern California and El Paso, Texas. Norfolk Southern invested $300 million in a joint venture with Kansas City Southern to improve capacity and service levels on the Meridian Speedway route between Shreveport, La., and Meridian, Miss., and now is developing its Heartland Corridor between Tidewater, Virginia and Columbus, Ohio. CSX is investing in new intermodal terminals and increasing capacity on several routes.

Intermodal shippers operate networks of their own and understand how capital spending affects them. Intermodal customers know that nothing in transportation is forever, and just as the railroad world changed in the last 25 years, it will change in the next quarter century.

Since deregulation, rates paid by bulk shippers include a higher portion of rail system fixed costs, as intended by the drafters of the deregulating Staggers Rail Act of 1980. Bulk shippers who have no practicable alternative like to think of themselves as captives of the railroads. The economic theory in Staggers was clear - those who needed the railroads the most should pay a higher portion of the fixed system costs that could not be identified with specific movements.

Intermodal shipments did not pay nearly as much for fixed costs in 1980 or for years after, which infuriated utilities, grain exporters and chemical producers. With excess capacity, railroads effectively were "capped" on intermodal rates by competing truckers or by other railroads with facilities within dray distance.

The advent of double-stack and the flood of imports from Asia fundamentally changed logistics and intermodal economics and pricing.

The shift to greater use of East and Gulf coast ports, Maersk's pullback to fewer inland points to which it offers service, and development of new ports in Canada and Mexico are typical of the change and flexibility that mark intermodal business.

Captive shippers seek legislation that would bring a dose of reregulation to the railroads. It also would lead to a quick reduction in railroad capital spending for expansion.

Such a development would not be good for any rail customers, intermodal or otherwise. Intermodal shippers are among the most sophisticated in our society. More than a quarter century ago, it was these sophisticated customers who lobbied Congress in support of rail deregulation. They understood that unless railroads earned a market rate of return, they would not be able to reinvest in their facilities. The economic principles are the same today. It's time for the sophisticated shippers to support continuing market freedom for railroads.