Truckers Again Becoming More Competitive With Rail

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Wall Street Journal / October 22, 2015

Fuel prices are low enough that truckers are again becoming more competitive with rail, executives at Union Pacific Corp. said Thursday.

For years, railroads like Union Pacific have been developing their intermodal businesses of moving containers and trailers, allowing them to compete directly with truckers on their home turf. As fuel prices skyrocketed and trucking companies faced driver and capacity crunches, railroads became a logical, cheaper choice.

But diesel prices have fallen by about 30% over the past year to $2.531 per gallon, according to the U.S. Energy Information Administration, something that has made trucking prices more competitive again.

“I think you look at what’s going on currently in the trucking environment, the lower fuel cost is allowing trucks to be more competitive vis-à-vis rail, just by virtue of that fact,” says Eric Butler, Union Pacific’s executive vice president of marketing and sales.

While Union Pacific still expects to be able to grow its domestic intermodal business to record volumes for the seventh consecutive year, it added that its international intermodal business had declined in part due to softness in China.

Railroads grew intermodal shipments to a record 13.5 million containers and trailers last year, up 5% from 2013 and comprising about 22% of revenue for major U.S. railroads, according to the Association of American Railroads. Year-to-date, U.S. intermodal traffic is up only 2.4%.

Given a similarly priced choice, many shippers will choose trucking over rail, because the shipment can go point-to-point and will likely arrive faster. In addition, after an intermodal container is railed close to its destination, it still typically needs to be trucked the so-called final mile to its destination.

Deutsche Bank analysts estimate that truckload rate increases, net of fuel, were only up 3.7% year-over-year in the third quarter, a much slower pace. “Softness coupled with weaker contractual rate increases and a 3% decline in spot pricing all weighed on both used truck volumes as well as pricing,” the analysts added in a recent note.

Still, Union Pacific said trucking companies still face the same issues going forward, including a driver shortage and issues with productivity due to sleep regulations and road congestion. The company expects to continue to see shippers switching over, something it demonstrated with a 1% increase in domestic intermodal traffic in its third quarter.

“Certainly trucks are great competitors, and there is some competitive impact that we always are cognizant of, but we’re still positive about the position that we are in as a rail and driving conversions from truck to rail,” Mr. Butler added.