There is Intermodal Business for Railroads to Pursue But They’ll Need to Be Smart to Get It

Railway Age magazine recently asked its experts to look into their crystal balls and predict the future of freight by rail in America.

train image2The consensus was that coal is not going to be the cash cow that it once was, crude oil might bounce back a little bit, automotive traffic will continue to cyclical and grain is profitable but seasonal.

The magazine’s experts said the railroads have done well in lowering their operating ratios through reducing costs and being more productive.

But trimming expenses will only take the industry so far and although the financial community is enthralled with the religion of cost cutting, it seldom is able to see beyond the next financial reporting period.

Comparing a railroad to a tree, the Railway Age analysis said that it may be that dead wood needs to be removed, but if a tree is to survive and thrive, it must grow.

So what will be the sources of this growth? Some analysts argue that it will be intermodal, including the type of short-haul business that railroads have traditionally ceded to trucks.

In the current intermodal market, some see short-haul business as having untapped potential if the industry keeps its pencils sharp and its costs low.

That means no $100 million terminals or expensive lifts. Trailers need to roll on and roll off as quickly as possible. It also means running short trains on precise schedules.

“In my humble opinion, short-haul intermodal (250 to 700 miles) represents the only opportunity in the near future for railroads to increase their traffic, said Steve Ditmeyer, who writes often for Railway Age. “And they only need to capture just a small fraction of the total short-haul truck traffic to experience a substantial traffic gain.”

Beyond intermodal growth, though, the railroad industry may need to learn to adapt to a challenging economy.

“My thesis beyond coal: We’re in a 2 percent-growth economy where there is less stuff moving than in a 3-4 percent economy,” said Railway Age Contributing Editor Roy Blanchard.

“Finished goods from corn pone to white goods are less in demand, so you need less raw material to meet what demand there is. Lower demand for finished goods equals fewer goods moving to market, and what goods are moving are moving by truckloads, not carloads, in amounts more fitting for smaller inventory loads. So, yes, it’s a freight recession, and the bloom is off the railroad renaissance.”

Blanchard said that pricing to what the traffic will bear has evolved into order-taking and pricing by computer model to maximize revenue and minimize cost.

Consultant Jim Blaze said the days are gone when rail intermodal growth will come at two to three times the rate of GDP growth.

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