Moore on Pricing: Keep your eyes on rail rates

The U.S. railroad industry, consisting of over 600 large and small service providers, has successfully engineered itself into a viable and largely profitable segment of the nation’s logistics marketplace.

By ·

The U.S. railroad industry, consisting of over 600 large and small service providers, has successfully engineered itself into a viable and largely profitable segment of the nation’s logistics marketplace.

This mode is a critical element for “captive” shippers who are dependent on railroads for transport such as coal and some agriculture and chemicals, and a significant player in the trailer/container transport market both domestically and internationally. However, rail shippers and those who would consider rail as an alternate mode, need to be paying attention to some forces that may have a significant effect on pricing in the coming years.

This month, the stock analysts and talking heads on financial shows are raising alarms about the large coal-carrying railroads. After a very positive first quarter and a fair second quarter, some rail carriers are lowering earnings estimates according to the current banter. 

The reason given by at least one of the Class I railroads is the transition to natural gas by the utility companies. This may be a good thing for coal shippers who want to negotiate unit train rates, but for non-coal shippers it possibly signals more than a temporary slacking of demand.

In the years ahead, the U.S. is expected to increase the use of natural gas for utilities and industry due to price and environmental pressures. Keep in mind that natural gas uses pipes, not rail, which translates into less demand for transportation of coal that represents a substantial portion of the revenue and margins of the U.S. rail carriers.

When the rails feel revenue and margin pressure they historically turn first to captive shippers—steel, heavy equipment, agriculture, and chemicals—and then to intermodal markets for additional revenues through price increases. In addition to this scenario, there is the potential competitive price pressure on transcontinental intermodal rail movements due to the widening of the Panama Canal that will increase the capacity of water carriers.

Some railroads may very well experience less than stellar improvement due to the economy, the loss of coal revenues, downward pressure on intermodal pricing, as well as the stabilization of oil-based fuel prices putting a combined pressure on the railroads’ revenues. The ones to watch are the Class I railroads who account for 90 percent of the $50 billion in annual rail spend. Shippers will need to keep an eye on their service providers to see how they’re managing these shifts in the market.

Rail shippers who are non-captive need to dust off alternate modal routing plans to counter upward price pressure. Rail-dependent shippers need to refresh the supply and distribution models with information on alternate routes, alternate production sites, and rail-water or rail-highway combinations that might introduce some competition for service providers. 

One popular option is for commodity shippers to swap rail-served customers with competitors who are closer to the customer’s plants enabling shorter highway delivery.  In this strategy, the railroads lose the freight as both companies satisfy demand by a ton-for-ton exchange in local markets. 

In short, shippers need to pay attention to the market forces affecting their service providers and realize that if they are threatened, your company’s ability to compete may be threatened as well. It’s time for rail shippers to step up and get creative when planning over the next six to eight months.


About the Author

Peter Moore
Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at [email protected]

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!

Hub Group Resources
Not Your Grandfather's Intermodal
Transportation of freight in containers was first recorded around 1780 to move coal along England’s Bridgewater Canal. However, "modern" intermodal rail service by a major U.S. railroad only dates back to 1936. Malcom McLean’s Sea-Land Service significantly advanced intermodalism, showing how freight could be loaded into a “container” and moved by two or more modes economically and conveniently. As with all new technologies, there were problems that slowed the growth, which influenced many potential customers to shy away from moving intermodal.
Click here to download
Latest Whitepaper
Just Released: Understanding Hazmat Transportation Management
The rules and regulations governing the transportation of hazardous materials (hazmat) are complex.
Download Today!
From the July 2017 Logistics Management Issue
E-commerce continues to fuel a boom that’s tempered by overcapacity, rate pressures, sluggish demand and political doubt. The result: “cognitive dissonance” that finds a $1.4 trillion market scratching its head.
2017 Truckload Brokerage Roundtable: Technology continues to connect the dots
Cloud Transportation Management Systems (TMS): Weis Markets streamlines “both sides” of the DC door
View More From this Issue
Subscribe to Our Email Newsletter
Sign up today to receive our FREE, weekly email newsletter!
Latest Webcast
Getting the most out of your 3PL relationship
Join Evan Armstrong, president of Armstrong & Associates, as he explains how creating a balanced portfolio of "Top 50" global and domestic partners can maximize efficiency and mitigate risk.
Register Today!
EDITORS' PICKS
28th Annual State of Logistics: Into the great unknown
E-commerce continues to fuel a boom that’s tempered by overcapacity, rate pressures, sluggish...
2017 Top 50 3PLs: Investment and Consolidation Maintain Traction
The trend set over the past few years for mergers and acquisitions has hardly subsided, and a fresh...

The Evolution of the Digital Supply Chain
Everyone is talking about terms like digitization, Industry 4.0 and digital supply chain management,...
2017 Salary Survey: Fresh Voices Express Optimism
Our “33rd Annual Salary Survey” reflects more diversity entering the logistics management...