Investments By Railroads And Trucking Constraints Drive Railroad Intermodal Volumes
Intermodal is a lucrative business for the U.S. railroads given its strong growth and opportunity. It helps generate a significant portion of revenues for railroads. In 2013, CSX (NYSE:CSX), Norfolk Southern (NYSE:NSC) and Union Pacific (NYSE:UNP) generated 14%, 21% and 19% respectively of their overall revenues from their intermodal business.
From 2009 to 2013, the intermodal carload traffic has increased 30% in the U.S. [1] In the first 5 months of 2014, intermodal traffic increased 5.8%. In this article, we take a look at the factors responsible for driving growth in intermodal volumes.
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Constraints on the trucking industry
An increasing number of carloads are shifting from trucks to railroads leading to an increase in intermodal volumes. The main reasons for the shift from trucks to railroads are price difference between trucks and railroads and capacity constraint of trucks.
Price difference – Transporting freight by trucks is ten times expensive compared to railroads and is a less preferable means of long haul transport. [2] The price difference is expected to increase in the future driven by the price increase by trucks to counter the rising fuel prices and the declining trucking capacity.
Capacity constraints – The trucking industry has seen a 10%-15% decline in its average fleet size. [3] Though this reduction does not deter the trucking industry’s ability to support the present freight transport requirement, it may lead to a large supply demand gap in the future if the U.S. industrial output continues to grow. In the first quarter of 2014, U.S. industrial production grew 4.5% and in May 2014 it grew 0.6%. [4]
Moreover, the Hours-of-Service safety regulation for commercial vehicle drivers has put a cap on the number of working hours for truck drivers leading to additional capacity constraints for the trucking industry, which is already suffering from 30,000 unfilled driver jobs. [3]
Railroads are investing heavily to enhance and expand their intermodal network
In order to capitalize on the opportunity created by the lack of capacity in the trucking industry, railroad companies have been investing heavily to enhance and expand their intermodal network.
– CSX had recently announced that it will open an intermodal terminal in Montreal later in the year 2014. [5] It has made investments in its northwest Ohio Hub, opened new terminals in Winter Haven and Quebec, and a tunnel clearance project in Virginia Avenue, Washington DC. These terminals have helped in significantly increasing CSX’s intermodal capacity.
– Norfolk Southern opened the South Carolina Inland Port in the fourth quarter of 2013 and its Charlotte terminal officially opened in December 2013. [6] Norfolk Southern’s strategic investments such as the Crescent and Heartland corridors, provide greater capacity and improved service for customers.
– Union Pacific inaugurated its Santa Teresa intermodal facility in May 2014. [7] This terminal adds to its capacity cater to the intermodal traffic to and from Mexico.
Given the additional capacity and price advantage in long haul over trucks, railroad intermodal will remain a preferred mode of freight transport and railroads will continue to benefit from growth in intermodal traffic over the coming years.
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Notes:- Weekly Rail Traffic Summary, www.aar.org [↩]
- Cost Per Ton Mile for Four Shipping Modes, January 6 2012, richardtorian.blogspot.in [↩]
- 2014 Trucking Outlook – Q2 Update, April 30 2014, www.spendmatters.com [↩] [↩]
- Statistics for Industrial Production, Capacity, and Utilization: Total Industry, www.federalreserve.gov [↩]
- CSX’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, April 16 2014, www.seekingalpha.com [↩]
- Norfolk Southern’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, April 23 2014, www.seekingalpha.com [↩]
- Union Pacific’s Santa Teresa facility has grand opening, May 28 2014, www.kvia.com [↩]