Subscribe to our free, weekly email newsletter!


2012 Rail/Intermodal Roundtable: Rail’s new golden era

Savvy shippers have found ways to put the nation’s rails back to work—and the railroads have flourished. But while current market conditions are favorable for shippers, questions remain over how the nation’s rail and intermodal network will respond when volume ratchets up past pre-recession levels.
By Jeff Berman, Group News Editor
May 01, 2012

LM: In what ways are market conditions affecting capacity and rates for rail and intermodal?
Bentz: Probably the largest single driver of pricing and capacity is the cost of fuel. An increase in the price of diesel fuel of 15 percent has a much different net effect in cost per mile of a 53-foot box being towed by a tractor getting 8 miles per gallon than 200 of them on a stack train moving each box something like 500 miles on a gallon of the same stuff.

There’s an inherent leverage there that favors rail and the leverage will continue to increase as fuel prices continue to rise. You can make something of a similar case for carload, although the market dynamics are considerably different. 

Gross: In the meantime, the market for international containerized cargo movement is in turmoil, but this is due to conditions on the water and not on the rail. The ocean carriers are introducing massive amounts of capacity in the form of new mega-sized ships. These capacity additions are far greater than would be required given even the most optimistic near-term growth forecasts. This excess capacity is putting substantial downward pressure on ocean rates. And with that, there should be plenty of capacity for intermodal movement of international cargo on the rail. The 2011 peak was still about 15 percent below the all-time peak in intermodal revenue moves that occurred in 2006. Since then, there has been substantial investment in network capacity by the rails in the form of double-tracking and new terminals. On the domestic side there may be a concern with regard to the adequacy of the supply of 53-foot domestic containers. Large acquisitions of equipment in 2011 left intermodal providers with excess boxes. Consequently, most are planning only modest additions in 2012, if any. Strong growth in domestic container movements could therefore put a squeeze on supply, with consequent upward rate pressure.

LM: Is pricing where it needs to be, given that rails are on the hook for the lion’s share of their CAPEX, which is at record levels three years running?
Hatch: Pricing must continuously beat rail inflation, for I suspect that the CAPEX story is not going away either. The rails will need to provide more and more capacity for this to work, and that comes at a greater cost that requires an investable ROI.

Gross: The railroads have demonstrated that they are highly disciplined rate makers. Rates have been moving steadily higher, and I see no reason to expect that the trend will abate.

The operating ratios of most rails have been moving steadily downward, signaling improved profitability, due to a combination of increased efficiency and higher rates. I believe that there’s still significant room for improved efficiency even given the progress that has been made to date, so rail financial results will not depend solely on rate increases for improvement. 

Bentz: I think prices are probably OK. The big challenge is that in the post-deregulation era, prices, in general, dropped considerably and consistently for more than 20 years. That’s been true for the other modes, too. As a supply chain guy, it was easy to look really smart for a very long time. Prices, largely driven by fuel, have been rising for a while at the TCO level and that’s not going to change. It’s just a harder and less pleasant story to tell the boss than when prices were falling. 
I believe we will see sustained price increases, with some temporary exceptions, in all the modes for quite some time. The recession blunted some of this, but, even in the recession, prices managed to rise a bit. So, the railroads will continue to do well, in part because of the ability to raise prices judiciously and because they did such a good job of managing cost control during the recession that they are leaner and more efficient than at the outset.

LM: Maybe it’s because it is an election year, but things have been very quiet in terms of railroad re-regulation and antitrust. Will the drum resume beating on those fronts at some point?
Hatch: I see it on the wane, but it’s like a pendulum. Shippers see the need for capacity, however, and that keeps those interested in some form of re-regulation from actively joining those who have historically been all about that as their only issue. As long as service and capacity are taken care of, re-regulation talk will remain an irritant and not a terror.

Bentz: I think this will always be on the horizon when you have limited competition and rising prices. Re-regulation is essentially re-distribution of wealth: ‘I’m going to take this money out of your pocket and put it in mine.’ The entire rail industry is smaller and less profitable than some of those entities agitating to re-regulate it, so on balance I think it will remain problematic. There are instances where it may make sense, and certainly abuse can’t be condoned. Fairness needs to rule and in some cases it takes an objective third party to pass judgment on exactly what is fair.

Gross: I agree with Tony and Brooks. At the moment we don’t expect major changes in rail regulation. This could change depending on how the elections in November turn out.  If the Democrats were to make gains then the potential for increased regulation would increase.

LM: How will the rail and intermodal markets look five years from now?
Gross: I don’t expect drastic changes. With regard to rail carload, the marketplace has already done a very good job of allocating traffic between rail and highway. We don’t expect major shifts in share between rail carload and highway barring dramatic changes in the environment or regulation. 

Bentz: I see more significant growth as fuel continues rising and highway congestion continues worsening in key markets. The caveat is that the railroads continue expanding infrastructure capacity. Network congestion has been absent over the past couple of years, mostly due to the fall-off in volume with the onset of the recession. Long-term growth forecasts still predict network congestion as capital requirements fall short of capital needs.
Hatch: My forecast is simple: Both markets will be better, bigger, and stronger and will be a larger part of the continental—and global—supply chain.

 

About the Author

Jeff Berman headshot
Jeff Berman
Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).


Subscribe to Logistics Management magazine

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your
entire logistics operation.
Start your FREE subscription today!

Recent Entries

While it feels somewhat hard to fathom, the stage is set for the Council of Supply Chain Management Professionals (CSCMP) Annual Conference in San Antonio, Texas.

Carload volumes were up 1.4 percent at 300,388, and intermodal volume for the week ending September 13 was up 5 percent at 279,052 trailers and containers.

Company says the Cloud offering allows customers to respond more quickly to new business opportunities, without significant upfront cost and implementation times.

As e-commerce continues to take a bigger piece of the holiday package delivery pie, it stands to reason that companies need to be proactive and prepared in order to deliver premium service during the busiest time of year, which is rapidly approaching. And that is exactly what transportation giants UPS and FedEx are doing this year. How are they doing it exactly? The primary step they are taking is to up their numbers of seasonal staffers.

A recent hearing of the Subcommittee on Coast Guard and Maritime Transportation suggests that the U.S. Merchant Marine industry may be poised for a major comeback.

Comments

Post a comment
Commenting is not available in this channel entry.


© Copyright 2013 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA