Study: The Impact of Higher Fuel Costs on Rail Carload and Intermodal Marketshare

By Lee Clair and Steven Fox, Norbridge Inc.

Now that the global economy is in recession and overall freight transportation demand has contracted, what can railroads do to increase their marketshare? Although the business environment is challenging for railroads and others in the transportation industry, we believe there are significant opportunities for railroads to gain share — if they can overcome certain barriers.

In the first half of 2008, fuel prices skyrocketed, which should have favored the much more fuel-efficient rail mode. However, domestic intermodal growth during that stretch only equaled that of truck — and rail carload’s marketshare declined.

Why didn’t rail gain share from truck during this extremely favorable economic period? And: What would it take for rail to improve share going forward?

For answers, Norbridge Inc., a management consulting firm specializing in transportation and logistics, conducted substantive interviews with 40 major transportation buyers across bulk, industrial, and consumer products business segments in October and November 2008.

The topics discussed during he course of the study — which we’ve titled “The Impact of Higher Fuel Costs on Rail Carload and Intermodal Marketshare” — were transport modal changes and their causes, inhibitors to increasing rail carload and intermodal usage, and the potential opportunity to shift share to rail if the inhibitors could be overcome.

A Few Growth Inhibitors

For both current rail users and non-users, inferior service quality was a major growth inhibitor for both the carload and intermodal segments, we discovered.

Another major inhibitor for rail non- users — rail’s “lack of fit” (more on that later) with their supply chain processes and systems — made both carload and intermodal services difficult to buy. Existing rail customers believed that price was inhibiting their ability to shift additional share to carload and intermodal, but non-users didn’t cite price among the reasons they weren’t using intermodal or carload services.

Here’s a summation of what we learned:

Domestic Intermodal Users. Domestic intermodal volume grew 3.6 percent in first-half of 2008 compared with the same 2007 period; however, this growth rate is nearly identical to the 3.5 percent average increase in the monthly American Trucking Associations’ trucking index.

Of the transportation buyers we interviewed that used intermodal prior to the 2008 fuel-price spike, more than 75 percent increased their use of intermodal. All but one interviewee said fuel costs were a major driver of this decision. Several also mentioned that carriers were less willing to deadhead equipment to pick up loads and instead were holding the trucks for a closer load the following day. Two transportation buyers said they used less intermodal than in the prior year.

Service (mentioned by 76 percent of the respondents) and price (mentioned by 55 percent) were the primary reasons that more volume was not converted by intermodal users to intermodal.

Another inhibitor was the lack of intermodal offerings where needed by the transportation buyer (mentioned by nearly 40 percent). Issues such as damage and ease of doing business were mentioned by only about one in five respondents.

Of the 13 companies that did not use intermodal before 2008, two began using it last year, again strongly influenced by fuel-price increases.

Domestic Intermodal Non-Users. Among the 11 interviewees who did not use intermodal in 2008, the single-most significant inhibitor to intermodal usage was the lack of fit with the transportation buyer’s existing supply chain processes and systems (82 percent). “Fit” issues ranged from how customers buy, flexibility to re-route shipments, and the perceived need for larger order quantities.

The perception of inadequate intermodal service quality, which was mentioned by 73 percent of the respondents, was the second-most frequent reason for not using intermodal. Intermodal was perceived as a cost-competitive product by non-users of intermodal, as price was mentioned by only 9 percent of non-users as an inhibitor.

Carload Users. Carload volume growth was weak in 2008, particularly outside of coal. Through the first six months of 2008, major U.S. railroad carload originations were up 0.2 percent while full-year originations declined 2.2 percent.

Of the 40 transportation buyers we interviewed, only 11 (28 percent) were rail carload users. Of these 11, four shifted volume away from carload and three shifted volume to carload in the first half of 2008. Inferior service (reliability more than speed) and uncompetitive prices were the top two inhibitors of increased carload usage.

Among interviewees who shifted volume away from carload, the main reason was carload rate increases that in some cases resulted in rates that exceeded truck rates. However, more than half of the respondents did not mention price as an inhibitor.

Carload/Non-Users. Of the 40 transportation buyers we interviewed, 72 percent did not use rail carload.

For many companies, rail carload is not on their radar screen as a transportation option. In many cases, interviewees said rail carload has never been offered to them as an option by railroads or 3PLs.

For non-users of carload, no single reason stood out for more than half the respondents. Inferior service, including longer transit times and less reliability, was the primary inhibitor, mentioned by about half of them. This service inferiority overwhelmed a perceived price advantage for rail carload, as only 14 percent of non-users listed price as an inhibitor to carload use.

Almost as frequently mentioned as an inhibitor was carload products’ misalignment with buyer supply chain processes and systems. This included issues such as difficulty comparing price and service against other modes, inability of supply chain and transportation management systems to include carload price and service offerings. One interviewee indicated that in a recent analysis of more than 10 supply chain technology products, none included an analysis of rail carload options.

Potential Rail Gain

If railroads could overcome the non-price issues, they’d have an opportunity to gain carload share. Although railroads may have been content to trade growth for price on existing business a year ago when demand was high, they may need to reconsider: In the current economy, it is important to identify growth opportunities.

If carload users’ non-price issues were resolved, they said they could shift an average of 18 percent of their truckload volume to carload (median: 11 percent). Although three quarters of the non-carload users said that they would never use carload, about one quarter said they would consider shifting business to carload if the non-price issues were addressed. On average, they figured about 10 percent to 20 percent of their truckload volume could be shifted.

Railroads have an opportunity to gain intermodal share, as well. Half of the intermodal non-users suggested they could shift volume to intermodal 10 percent to 40 percent, depending on the company.

On average, the current intermodal users estimated they could shift an average of 29 percent of their truckload volume to intermodal (median: 18 percent) if the non-price barriers were overcome. Likewise, nearly all of the non-intermodal users said they would shift volume if the non-price barriers were overcome.

Although our study assessed the inhibitors to rail growth during the fuel spike in first-half 2008, the issues we identified are even more important today. If railroads are looking to boost volume in 2009, we believe these inhibitors will need to be addressed.

Click here for detailed results (pdf).

Lee Clair is a partner at Norbridge Inc. and heads up the firm’s Chicago office; Steven Fox is a principal in Norbridge’s Chicago office. They can be reached via phone at 847-405-9845 or via email.