Rail Pricing Power seen as Strong; Trucks Weak

Trains Magazine General Discussion
1

Rail pricing remains solid, trucking demand soft

(The following article by Desiree J. Hanford was posted on the MarketWatch website on November 7.)

CHICAGO – A survey of more than 350 railroad, trucking and intermodal freight shippers found that pricing remains solid for railroads but the fundamentals for the trucking industry are deteriorating on increasing capacity and softer demand.

The survey, conducted by Morgan Stanley, the National Industrial Transportation League and Logistics Today magazine, found that railroads have varying degrees of pricing upside left. Shippers expect the largest price increases to come from Norfolk Southern Corp. (NSC) and the smallest from Kansas City Southern Industries Inc. (KSU).

The majority of contracts signed prior to 2004 between freight shippers and the railroads are 10% to 30% below market value, according to the survey. As more and more contracts are renewed, an increasing amount of the upward pricing will come from renewing the longest-term contracts, mainly coal and international intermodal. Contracts for the pair are longer-term, generally more underpriced and represent some of the industry’s largest customers, the survey said.

Intermodal is the movement of freight by two more modes of transportation.

As for the trucking industry, ample capacity and soft demand are showing up in lackluster pricing, particularly for less-than-truckload carriers, or trucking companies that consolidate and move small shipments of freight for different customers using a network of terminals. Respondents to the survey said they expect less-than-truckload volumes to remain stable, but that excess capacity continues to pressure pricing.

Union carriers, such as Arkansas Best Corp. (ABFS) and YRC Worldwide Inc. (YRCW) will likely continue losing market share to their non-union competitors, but the gains made in the regional market could provide a temporary offset, the survey said.

Truckl

2

Shhh, you’re going to upset FM. :slight_smile:

3

Nah.

Between 1 November to about 5 Januaury it’s hard to stay loaded and rolling with half the USA going home for the holidays. Sometimes it’s worth it for the line haul driver to take three months off and go home and rest up for the new year.

Trucking companies that provide intermodal support has no worries.

Pure LTL or those with that service will always have the problem of finding loads to run.

Winter has a way of slowing things down with what the chain laws out west versus the eastern ice and sleet that always seem to snarl traffic at the worst times of the week. Old man winter can stop trucking before the trains have to stop.

Finally I think it has to be cheaper to put 40,000 pounds into a domestic box or a trailer (Preferably a one way rental) and ship it to the other side of the USA paying only to take it to and from the train.

Good drivers are hard to come by and winter freight even more challenging this time of the year.

4

Let’s see…

Railroads, aka the NA transport mode with very little intramodal competition, aka monopolies…have pricing power?!

Trucks, aka the NA transport mode with complete intramodal competition, aka perfect competition…have very little pricing power!

And that’s supposed to be “news”?

And here all this time you guys were telling us that trucks are competition for railroads.

Here’s your news byline, and I’ll put it in 5 inch (well, at least the #6 size we have available) headlines since the MSM seemingly missed it:

IF TRUCKS WERE COMPETITION FOR RAILROADS, RAILROADS WOULD NOT HAVE THAT PRICING POWER!

(Shhhhh…you’re going to upset greyhounds!)[}:)]

5

Well, that’s a blatant error in logic.

6

“As for the trucking industry, ample capacity and soft demand are showing up in lackluster pricing”

Sounds to me like there is too much cut-throat competition in the trucking industry to make enough money to stay in business. Could “Soft Demand” be related to competition…from the railroads?

7

Not necessarily cut throat. The starving o/o or company will be happy to take 500 dollars for a haul if only to fill the tanks a little bit and eat until the next payday.

There is a certain cost (@$1.10/mile?) that is required when loaded and rolling (Or empty for that matter) to operate a big truck, pay the driver, keep the insurance etc etc etc…

Shippers know this and tend to pay just enough to cover the costs with very little profit for the trucker or motor carrier.

You may have 4 carriers turn down that .80 a mile haul only to find a truck willing to take that load at a loss. As long that continues, trucking rates will be soft. Has been this way since Deregulation.

When a railroad box car shows up, the shipper is either Pre-paid or collect on the bills of lading. And they have a time limit before Demurrage kicks in payable on demand. Shippers are not so worried about the truck sitting at the dock for 3 days waiting on a load with 50 others in some areas of the USA.

That boxcar will be gone by lunchtime while the trailers will be left to the next shift at least before it is loaded.

With the pending Emissions after Jan 1 2007 putting a choke chain on the engines I suspect even more soft trucking. I think alot of good engines are going out the door as fast as possible before that day comes.

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Will the new regulations effect current trucks, or just trucks purchased after Jan 1 2007? Most environmental regulations I have seen are the “New after effective date” type…

9

From what I can understand is that carriers are racing to get the engines into service before Jan 1. So that they will be grandfathered and exempt from the tighter emissions. That costs money. Alot of it.

I also hear that the new engines are really terrible. Gone are the days where engines were in emissions compliance in urban situation only to run wide up on the interstate. LOL.

If Fleets are serious about cutting emissions they need to eat the 800 pound tare weight of a good Genset and equipt the rigs with adequate hotel power to support a small amount of 110 volt appliances as well as life support in both summer and winter with the big engine off. But I think that rates are so terrible and the money so tight they cannot afford the cost or the weight penalty of the gensets.

Idle time of a 500 horse engine is expensive, costly and unnecessary. Especially for sleeper trucks staying up to days at a time in one place. Go by a truck stop in the early morning and you can see the fumes mixed in with the fog like.

Many a morning, I breathe deep to smell the pine in the cascades and then stagger around nauseated and sick from the fumes. Gotta love it eh? Or peer thru the windsheild at the Jersey Smokie writing a no-idle citation.

But with the profits so tight, they would rather put on 800 extra pounds of widgets to haul into that truck. I always advocated big horse and high torque engines that are capable of doing the same work for less effort, fuel burn and time. But no, Fleets are entrenched in thier stubbo

10

The guy with the lower costs to produce always has some pricing power over his higher cost competitor. Forget what kind of wheels the vehicles have (or don’t have). It’s irrelevant.

If stuff is worth $10 at point B and costs $1 to produce at point A, the value of moving it from A to B is $9. If carrier 1’s cost to move it is $8 and carrier 2’s cost is $4, I’d say 2 has some pricing power. Are A and B competitors? How about if the costs were 1 - $7 and 2 - $5? Or how about $6.50 and $6.25? Some competitors are just more competitive than other. It’s not carrier 2’s “fault” that he has lower costs, is it? If he’s more aggressive at reducing his costs than his competitor, then he earns more money. It should be that simple. But, it’s not. If he crossed that magic 180% R/VC mark, he’s created a “captive shipper”!

Let’s say RRs were never invented and the gov’t built roads instead - a whole big network. &nbs

11

Apparently the only hypothetical FM will do it OA. Anybody else care to take a whack at it?

12

OK…how about

  1. The government doesnt have to act. Let the market sort it out. The government is under no obligation to insure any one particular mode is profitable, or that you are guaranteed to make money at your chosen profession. The only governments that have tried that werent too successfull…

Yes, some shippers pay more than others, based more on luck of the draw 9or location0, than others. If moving to another location is not an option, and changing what you produce is not an option, perhaps a change of profession or industry is an option. Might sound hard hearted, but I prefer tothink of it more in lines of “Tough Love”. Hey, the system isnt perfect…but overall it works pretty well. [2c]

13

Or, lets try this capacity constrained hypothetical.

You have a rail line from A to C via B.

It’s 1000 miles from A to C and 100 miles from B to C.

The line has a capacity of 10 trains a day.

You earn $1000 for each train you run from A to C.

It costs $800 to move the train from A to C.

You earn $200 for each train run from B to C.

It costs $100 to move the train from B to C.

There is demand for 9 trains from A to C (at current pricing)

There is demand for 4 trains from B to C (at current pricing)

What mix of trains maximizes your profit?

Where do you have pricing power?

What should you do to your pricing to match supply and demand?

Who, in this scenario, would be defined as “captive”?

What should the RR do long term?

What would happen if this were OA?

14

Yup. If you’re the last guy left at the end of a once-busy branch, you are S.O.L.

15

Well, if you are thinking as a short term maanger, and todays income is the most important metric, then since you make $200 over direct expenses on A-C and only $100 from B-C, you run 9 x 200 and only 1 times $100.

But that doesnt addess the "Return on Equity, or effeciency of the routes. How many days does it take to go from A to C vs A to B…or more importantly, how many cars does it take to do that cycle? If the turnaround from B to C is such that it could be done with only 100 freight cars, but the ten time longer route takes even just four times as long, which would take 4 times as much hardware, so your invest cost is 4 times higher, so your return would be less than the short route.

Not to mention the maintenance cost for that route would be 10 times higher.

Which points up one problem of using simplistic models for serious decisions…when the models are fleshed out some, the big money makers might be counter intuitive.

In the above sceanario, I would attempt to raise the rates on the long distance haul to the point where it made more than twice the short haul. If that makes the traffic drop a bit, you can handle more short haul traffic…as long as the alternative to the long distance shippers is still more expensive.&nb

16

I was thinking (but didn’t say) that the costs were long term variable, so return on assets was baked in. Simple models are always misleading in some regard and fall apart as reality nears, but the are good for illustrating certain points. This one, on line capacity. RRs, right now, have trouble determining and allocating line capacity. In an OA environment, it would be total chaos. It think I’ll do another to illustrate the problem of delays on line of road…

If demand had an elasticity of 1 and my costs were fully variable (which, of course is an over simplification), I’d make more money by raising my rates on B to C. Since I’m capacity constrained, I want to raise’em just to the point where the demand is for only the one train I can handle. The increment is free cash. (It’s why Conrail didn’t want to fill up Enola to NJ with north/south traffic to the exclusion of east/west traffic.)

Captivity is defined by the STB as 180% rev/variable cost. So B to C, the traffic I want to price higher to reduce demand, is by this definition “captive” and raising rates to reduce capacity strain would not be allowed. By the STB’s rules, I’m forced to raise rates to scare away my highest net lane to make room for my lowest net lane - which they say is already overpriced.

In the long term, I would add capacity B to C to the point where I maximized my net revenue.

17

Don:

That is an interesting problem. If I were selling the service, I would want to maximize the shorter haul movements as the margins are significantly higher.

However, that would obviously leave me with excess capacity on the A to B portion ( as only 6 trains would run). What would that do to the overall profitability of the system? I would think the profit on the segment would fall as the fixed costs were now having to be amoritized over only 6 trains, rather than 3.

I would probably invest in increasing sidings on the B to C portion in order to combine trains frm B to C and hope it all works out!

ed

18

Think about what puts money in your pocket the fastest (once you set some aside to cover the costs of your assets - that’s assumed in my “costs”)

19

I didnt read your second to the last post until after I had posted.

Without training in costing and microeconomics, I have to think about this for awhile.

In the meantime…expound on the Enola Yard situation a bit more. I would assume you are referring to the fact that the N/S traffic for Conrail was very short haul and thus divisions of revenue were smaller. Thus, they would want the E/W traffic as it resulted in a much more attractive yield and revenue mix.

So, how does NS view the N/S traffic now that it is a longer haul? Is there a reason for them to prefer one lane over another?

Thanks for the insight into corporate costing/pricing/marketing.

As a salesman with high (very high) motivations to maximize margins on each order written it is a very interesting concept. There are times I get lazy with my pricing and simply take the order, rather than attempt to maximize margins and enhance my lifestyle. Our very, very, very successful sales reps maximize margins to the highest level. It is a lesson I need to review from time to time.

ed

20

Rail intermodal is made up of a variety of traffic. It is not one homogeneous market. Some of it is very truck-competitive, some is not.

The marine container traffic coming from Asia through West Coast ports destined to points east of the Rockies (steamship lines are the RRs’ customers in this case) is an example of the latter. The steamship lines can’t afford to truck all this stuff. The competition is mainly between ports, e.g., if the RR rates from the US West Coast ports to Memphis get high enough, the steamship lines may try to bring Memphis boxes in through the Port of Houston or through the ports on the West Cost of Mexico or through the East Coast ports.

Many of the steamship lines were granted low multi-year contract rates many years ago. In retrospect, the rates the two western RRs offered were way too low and for way too long a time frame. As these contracts expire, they are being replaced by contracts entailing much, much higher rates good for only one year. One line that renewed this year saw its rates go up 40%. The line asked the other Western road for a bid, and got the answer from the other road that it was too full to accommodate them.

There are lots of types of domestic intermodal businesses that are very truck-competitive, i.e., where the RRs have nothing like this kind of pricing leverage. After all, the domestic business includes an expensive dray on either end, it includes a couple of expensive lifts, and it typically entails a lot more more mileage than the truck alternative. So it’s a lot more competitive.

Best regards,

Rob L.