High Diesel Prices Convert Some Shippers to Railroad Freight Companies

Because of record-breaking diesel prices and tight trucking capacity, some shippers have now shifted away from shipping via semi-trucks to shipping with railway companies. In fact, the volume for this year alone has risen 6% to 8%. Shippers want cheaper ways to move goods across the country.

When you take a look at the earnings report of the three biggest railroad companies, CSX, Union Pacific, and Norfolk Southern, all reported a jump in earnings. Railroad executives said that the new jump had a lot to do with the rising prices on diesel fuel and how it impacted trucking.

The biggest gains when it comes to this conversion to railroad freight companies is the intermodal transportation over long distances. Generally, toward the end of the journey, a local truck will take it for the last leg of its journey.

Will the Customers Stay with Railroad Companies?

One of the biggest challenges that railroad companies will face is that after the fuel prices go back to normal how they keep their newly won customers. The higher cost of diesel raises shipping costs for railroad companies as well, but the fuel surcharges keep some of the pressure off them. Still, it blunts some of their advantages of winning customers in this market.

Higher fuel prices aren’t exactly ideal for them either, but they haven’t seen the same slowdown that the trucking industry has seen.

When the market conditions return to normal, at least some of the freight will likely return back to trucking companies. One of the biggest reasons shippers choose trucking companies over the railroads has to do with consistent, smooth, and reliable service.

Railroad executives acknowledged that they likely wouldn’t keep all of the new business coming to them now. However, they believed that maintaining a high quality of service will make a big difference in retaining as many as possible.

Some believe the current gains will last for maybe a year or two before diesel prices return to normal and customers return to shipping with semi-trucks. Customers don’t care about the method of transport. They care about consistency and quality of service.

This is where trucking tends to have an edge. You get faster transit times, greater flexibility, and door-to-door delivery.

Trains have always been the cheaper option, and that may be why shippers have turned to them when facing these high diesel prices, but they lack flexibility and there's a potential for delays. Naturally, whenever diesel prices go up, the railroads benefit from it.

Attempts to Convert through Consultation

CSX, Norfolk Southern, and Union Pacific have even gone so far as to offer a consultation program to shippers. The program looks at the shippers and their current use of semi-trucks to see what their needs look like. After it looks at their needs, they highlight how the shipper could benefit from using railway transportation. Everything is done on a confidential level.

All of this could impact the trucking industry by forcing them to lower their rates even further to compete. Local trucking jobs may also seen more of a boom because trains cannot provide door-to-door delivery, creating a greater need for those types of jobs.

Railroad Companies Have Tried to Convert Shippers Before

Railroad companies have tried to convert shippers before even in recent history. For example, Union Pacific said it had plans that it would launch a freight service running from Chicago all the way to the southern part of California last year.

Norfolk Southern and Union Pacific have also proposed a coast-to-coast merger with the intention of merging to eliminate the Midwest transfer delay and reduce the amount of handoffs needed for customers to get their goods.

What are Your Thoughts?

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