The news
Union Pacific is starting to see customers move freight from trucks to trains because of the price of diesel, CFO Jennifer Hamann told a Morgan Stanley investor conference last week.
She tied the shift to rail’s fuel efficiency, since a train moves a ton of freight nearly 500 miles on a gallon of fuel, which the Association of American Railroads puts at three to four times what a truck gets. As a result, each increase in diesel adds more cost to a truckload than to the same load on a train.
Her comments came in the same week that on-highway diesel averaged a record $6.285 a gallon in the Energy Information Administration’s weekly print, which is 68% above a year ago and well past the previous record of $5.81 from June 2022.
The record costs Union Pacific too, because its locomotives burn the same fuel. The railroad is paying $5.25 to $5.30 a gallon against the roughly $4.25 it expected for the quarter, although CEO Jim Vena said it has not seen shipments slow.
Know more
According to J.B. Hunt, much of the shift is happening on lanes that a shipper already runs partly by rail. “There’s a lot of shippers out there that may use intermodal for 75% of the lane, and they use highway for 25%, and maybe they tweak that to 90/10 or even 100% intermodal,” intermodal president Darren Field said at the same conference, according to Sourcing Journal.
Shippers are making that change because intermodal contract rates are running about 30% below truckload on FreightWaves’ SONAR index, while J.B. Hunt says savings of 10% to 15% are usually enough to convert a lane. The gap is that wide partly because truckload has become more expensive even before fuel is counted, since Cass’s truckload linehaul index, which excludes fuel, rose 11.3% in August from a year earlier.
The freight coming over is mostly long-haul, with C.H. Robinson reporting in its July market update that loads were returning to intermodal on lanes of 550 to 1,500 miles. J.B. Hunt’s own growth has been strongest in the East, where its loads rose 16% in the second quarter against 10% across its network.
All of that shows up in the rail data as a steady gain, with US railroads averaging nearly 297,000 intermodal units a week in August, which was a monthly record, and 4.4% above last August, according to AAR. For the year, volume is up 4.0% through the second week of September.
The pattern
Union Pacific is only the latest company to say this, since two other railroads, three trucking companies that sell intermodal, and one lumber producer have described the same shift since April.
CSX: Chief commercial officer Maryclare Kenney said in April that “tighter trucking supply and higher diesel prices” were helping freight convert to intermodal.
Norfolk Southern: Chief commercial officer Ed Elkins said this week that the railroad is gaining share in both intermodal and merchandise. “It’s just pulling freight off the road,” he said, according to Sourcing Journal.
J.B. Hunt: Field said in March that fuel “price spikes haven’t begun to shape customer decisions yet,” but by July he was describing conversion “at levels we have not seen in more than a decade.”
Knight-Swift: Intermodal loads rose 19.6% in the second quarter, which was enough to return the segment to a small operating profit.
Schneider: CEO Jim Filter called intermodal conditions “the trifecta, because you have high fuel, improving truckload rates, and really good rail service.”
Weyerhaeuser: The lumber producer ran short of flatbed trucks in the US South in the second quarter, which CEO Devin Stockfish blamed on “higher fuel costs from the Iran situation” along with regulatory changes that cut the number of available drivers. It responded by “moving a little bit more volume to rail versus truck” and by adding loading days at its mills, after the trucking shortage cost it about $10 million in the quarter.
The counter
Even so, fuel on its own was not enough earlier this year, because when diesel had already risen about 30% by April, intermodal volume through March was still 0.2% below a year earlier, Logistics Management reported at the time. Shippers then still remembered the rail service failures of 2020 to 2022, which led InTek Intermodal Logistics CEO Rick LaGore to tell the magazine, “If we don’t see increased market share, something is wrong.” The shift showed up only after truckload rates and driver supply tightened as well, which is the combination Filter described.
The weekly numbers also still swing, since US intermodal units fell 4.1% in the second week of September after rising 18% the week before.
Meanwhile, diesel is raising costs on the rail side too, where the average fuel surcharge on grain cars reached a record 48 cents a mile this month, up 153% from a year ago, according to USDA. Intermodal carriers are feeling it as well, with J.B. Hunt warning this week that fuel will add about $10 million to its third-quarter costs while it spends $25 million more on drivers. Hub Group, for its part, expects an operating loss for the first half, which it tied in part to higher fuel, rail and drayage costs in its intermodal segment.
What’s next
Those higher costs now head into bid season, because about 10% of J.B. Hunt’s contracts reprice in the fourth quarter while the rest renew across the first three quarters of next year. That timing is why CFO Brad Delco said he was “really glad” the higher costs arrived before those bids.
Once the new rates are in, shippers will see how much of the 30% discount is left. Those that moved a lane to 90/10 did so with intermodal about 30% cheaper, whereas J.B. Hunt puts the point where conversion starts at 10% to 15%.
