U.S. railroads gain freight volume as fuel costs hit trucking harder

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US railroads gain freight volume

Highlights

Union Pacific, Norfolk Southern, and CSX each posted higher third-quarter profit and revenue as expensive diesel and tighter truck capacity drove more freight to rail.
Union Pacific's domestic intermodal volume rose 13%, CSX gained 7%, and Norfolk Southern increased 3% year-over-year in Q3, reflecting a shift from long-haul trucking to rail.
Record diesel prices of $6.53 per gallon in September squeezed railroad margins, with Union Pacific's Q3 operating ratio hurt by 140 basis points and Norfolk Southern attributing half of year-over-year revenue and expense increases to fuel.

Third-quarter gains from intermodal shift

As reported by Reuters, Union Pacific, Norfolk Southern and CSX all report higher third-quarter profit and revenue this week as expensive fuel and tighter truck availability send more freight to rail.

Rail operators say their cost advantage becomes clearer when diesel prices rise. Union Pacific CEO Jim Vena says railroads are more efficient and cost less per ton to move products across the U.S., giving the sector a natural advantage when fuel costs increase.

The change is showing up most clearly in intermodal traffic, which competes directly with long-haul trucking. Union Pacific's domestic intermodal volume rises 13% from a year earlier in the third quarter, while CSX reports a 7% increase and Norfolk Southern posts a 3% gain.

Fuel pressure reshapes freight competition

High fuel costs are also affecting trucking capacity, pushing additional freight toward rail. A prolonged freight downturn has forced smaller carriers out of the market, while high operating costs and stricter driver enforcement are limiting the return of truck capacity.

James Mourafetis, head of transportation, logistics and services at consulting firm EFESO, says the market is seeing long-haul truckload freight shift to intermodal, along with greater use of transload and rail-served distribution centers. American Trucking Associations Chief Economist Bob Costello says truck tonnage levels indicate the market's change reflects reduced capacity rather than strong demand.

Railroads are not escaping the fuel burden themselves. Diesel, a major cost for freight carriers, reaches a record $6.53 per gallon in September, according to AAA data, and carriers say higher fuel bills are squeezing margins even as fuel surcharges offset part of the pressure. Union Pacific says high fuel prices hurt its third-quarter operating ratio by 140 basis points, while Norfolk Southern says fuel costs account for about half of the year-over-year increase in both revenue and expenses.

In our earlier article on the spike in crude oil shipping costs, we explained how conflict-driven risks on key tanker routes sent freight and insurance rates sharply higher, turning transport into a much larger share of the oil price. We also noted how these elevated shipping costs can filter through to higher gasoline and consumer prices, while pushing import-dependent markets and refiners under added pressure even as tanker owners benefit from record day rates.

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