Rails increasingly in sweet spot as trucking capacity crisis hits peak season

Railroads are capitalizing on the acute shortage of drivers in the trucking industry as capacity constraints limit truckers’ ability to compete on some long-haul deferred bulk freight.

“Railroads look like big winners in the short term,” the recent State of Logistics report concluded, noting that this year is following a trend of rising carloads that began in 2017.

Lance Fritz, CEO of Union Pacific, said there’s no question rails are capitalizing on the strong economy. But he warned that political initiatives started by the Trump administration may short-circuit the current strong economy.

“From my vantage point, it's crystal clear that the U.S. economy is quite strong,” Fritz said recently during a speech at the National Press Club. “Doubtless, some part of that, maybe a large part of that is due to the corporate and individual tax reform that was passed. Some part of it is due to the sensible regulation that our government is approaching business with right now.

“But our potential exit from the North American Free Trade Agreement, or NAFTA, along with a growing list of tariffs and escalating trade tensions with our trade partners threaten to undo much of that progress,” Fritz added.

Very tight truckload capacity, exacerbated by a truck driver shortage estimated by American Trucking Associations at around 51,000 currently, is causing some shippers to move freight to rail where existing rail service and connections make operational sense.

The current driver shortage is exacerbated by strong demand, but it is hardly a new phenomenon. Industry veterans remember the shortage began shortly after the shakeout of some 5,000 or more unionized Teamsters-covered companies following deregulation in 1980.

“It's almost comical to me that we are still talking the driver shortage as a current event,” C.H. Robinson CEO John Wiehoff said at the recent SM3 annual conference.

But all those events—great economy, tight capacity, driver shortage—have combined to create the strongest pricing environment in trucking in 20 years—perhaps ever.

“Strong demand gives Class I operators more pricing power, particularly in intermodal,” the SoL report added. “Corporate tax cuts boost cash flows, rising fuel prices drive incremental fuel surcharge revenue, and improved productivity increases profit margins.

Cheryl Capps, Corning International’s vice president of global supply chain, said her company has “no bias” in truck vs. rail on any given route. The key is usually cost, she said.

“On inbound freight, rail usually wins out,” Capps said. “On the outbound where moments and hours matter, we tend to shift toward trucking because it’s more reliable. It’s really no more complicated than that.”

Eric Hansen, Kansas City Southern’s vice president for intermodal, said his north-south railroad “has definitely” felt stressed because increasing volumes in NAFTA-related trade and other factors.

“The capacity crunch absolutely is evident in everything we see out there,” Hansen said. “The biggest growth opportunity we see right now is in export of refined petroleum products to Mexico.”

Local infrastructure around Laredo, Texas, is particularly a pain point as railroads interchange with several thousand truckloads a day crossing the border, he said.

All Class 1 railroads are “masters of our own destiny” because they can add capacity privately, even though those investments routinely cost hundreds of millions of dollars.

“Whether we’re fast enough and doing it in the right place at the right time remains to be seen,” Hansen said at a recent logistics gathering in Washington. “Railroads are working very hard to get crews in place for the peak season.”

They are also very efficient. While even the best trucking companies struggle to get operating ratios below 90, railroads routinely post ORs in the 70s, or better. CSX, for example, lowered its OR from 69.4 to 65.1 over the past 12 months.

Railroads are striving to be more efficient through technology and need the infrastructure “to cover it when things go wrong,” Hansen of KCS said. “When you get behind, it takes longer to get the backlog through the system. We need to build up the capacity to the necessary level.”

Hansen said intermodal is a solution for shippers’ line haul problems considering the driver shortage in the trucking industry.

KCS is “keeping a very close eye on” truckers’ efforts to create autonomous trucking routes in an effort to combat the driver shortage. Truckers are busy lobbying behind the scenes to quietly create a regulatory framework that is adaptable to whenever driverless trucks become widespread.

“When will the regulatory framework be there to have a truck cross state lines without a driver,” he said. “It will happen over time. But it’s not there in the short term.”

UP’s Fritz said “freight rail thrives when consumers consume things, when the industrial economy is healthy and producing,” and when international trade is healthy.

Tariffs on international trade, he said, will “impact all three of those sectors. Tariffs and disrupted trade tends to be a tax on consumption, for sure. It's going to drive up pricing.”

Sylvia Fouhy, Johnson & Johnson’s vice president of customer experience, said her company only uses rail on inbound “where there is a buffer  built in” to accommodate rail delays.

Poor service led to a 144 percent increase in rail service complaints last year to the Surface Transportation Board compared to 2016, according an A.T. Kearney analysis of STB reports.

“Disruptions increased sharply across the industry in the first quarter of 2018,” the SoL report added. “All Class I railroads reported slower train speeds and longer transit times,” noting crew downsizing and idling equipment as major culprits.

Rail executives are keenly aware of their oft-publicized service delays, which they say they are working hard to combat.

“Rail has the most variation around the mean is not a statement I like to hear,” Hansen said. “But you can move large volumes of freight over long distances in a much more cost-effective way than you can in a truck.”

That traditionally has always been rails’ bailiwick—bulk materials going long haul. But a key source of demand—coal for domestic utilities—has stabilized under the Trump administration’s coal-boosting policies.

The Energy Department recently reported that coal’s share of total generating capacity has settled at about 30 percent. Strengthening coal exports has “provided another  boost to profitability,” the SoL report concluded. But that may be short-lived for the rails.

“The long-term future of coal is uncertain,” the SoL report added. “Around the country, coal-fired power plants are closing, and bankruptcy threatens large buyers of goal.”

Another threat to rail profitability are challenges from tech-enabled over-the-road initiatives, the SoL report said. With an eye on intermodal, the trucking industry is investing heavily in electric powertrains, telematics and fully and semi-autonomous trucks.

“These technologies promise to make trucking more efficient, potentially erasing the economic advantages of rail shipping,” the SoL report added.