Railroads’ new tack: Fuel levies
In recent years, railroad companies aggressively hedged their fuel costs through the use of financial derivatives, saving millions of dollars, according to this report by Steven D. Jones published by The Wall Street Journal.
The strategy has left the station. Most railroads today are instead passing higher fuel costs on to their commercial customers in the form of surcharges.
It is a workaround not without risks: The hedging techniques the railroads had employed not only protected them from a jump in the price of oil, but also did the same for the companies that transport their wares on the rail lines. And surcharges can’t completely protect the railroads against quick, sharp swings in oil prices.
“Hedging is not a long-term strategy” for containing fuel cost, says Robin Chapman, a spokesman for Norfolk Southern Corp., which put its last fuel hedges in place in May 2004. “When we thought we had reached a plateau in [oil and fuel] prices, we let the program phase out.”
Nevertheless, Norfolk shaved $148 million from its diesel bill in 2005 thanks to hedges, $140 million in 2004 and $59 million in 2003. When the Norfolk, Va., company stopped investing in new hedges, it anticipated the price of oil would ease again, Donald Seale, executive vice president, testified last month before federal regulators.
Instead, oil hovers around $75 a barrel, and Norfolk Southern and other railroads have implemented fuel surcharges. For some railroads the charges amount to as much as 16% of their base freight rates, although Norfolk Southern’s surcharge is now only about 2% of the freight rate.
One factor in the railroad operators’ favor: Fuel surcharges are even higher on many air and truck shipping routes, and surcharges have cropped up in other industries, too.
United Parcel Service Inc. and FedEx Corp. recently boosted package fees to cover rising fuel costs. Cruise operators are raising prices