Railroads push Green benefits to make the most of high fuel costs

Rail freight providers target trucking volumes, but still face congestion concerns

By Dave Hannon -- Purchasing, 5/30/2008 9:39:00 AM

While the ever-increasing cost of diesel and gasoline have many shippers and freight buyers up in arms, freight railroads view the current environment as a chance to emphasize their fuel efficiency and gain volume from shippers frustrated with trucker’s fuel costs and surcharges.

In a somewhat ironic turn of events, railroads today are now marketing themselves as a more fuel-efficient and Green shipping option. Norfolk Southern’s web site prominently features an image of a locomotive with the words: “This train is actually green” as well as a new tool called “The Green Machine” which helps shippers reduce emissions by making rail a larger component of their supply chains.

Union Pacific has a similar Green section on its site, which shows images of trains in natural locations and touts that “Freight trains are three times more fuel-efficient than over-the-road trucks and have less of an impact on air emissions than trucks.”

A recent article in the Wall Street Journal points out that a new radio ad for rail provider CSX says out that “even the most fuel-efficient hybrid car can't compete with a train, which can move a ton of freight 423 miles on a single gallon of fuel."

“In general, train transportation is much more fuel efficient than trucking, and we should be doing more of it," says Colin Peppard, transportation policy coordinator for Friends of the Earth, an environmental advocacy group, in the Journal story.

In a recent report, analyst John Larkin of Stifel Nicolaus suggests that rail industry’s potential will be played out as rails begin to be viewed as a fuel efficient and environmentally friendly alternative to trucks. Also, he notes the sector will continue to benefit from booming demand for commodities and ongoing productivity improvements.

Recently, in a move targeted directly at gaining more trucking volumes, Norfolk Southern negotiated a deal with 10 short-line railroads in New York under which the short-lines can market their excess rail freight capacity on Norfolk Southern’s lines. The goal of the program is to “offer rail transportation services that are truck-competitive in lanes that are less than 500 miles" according to company officials. The move comes after a similar arrangement in the Massachusetts market to streamline the line between Albany and Boston.

In a recent Reuters interview, Matthew Rose, CEO of Burlington Northern Santa Fe Corp., says the perception that railroads are stealing volume from truckers, is not entirely accurate because long-term, the railroad's biggest growth should come from its trucking company customers if fuel prices remain high. Rose tells Reuters that JB Hunt is BNSF’s largest customer, in fact.

But while the railroads use fuel cost as a way to gain business, they admittedly still have some major service-related and infrastructure hurdles to overcome. In a recent presentation, Rose said congestion on the rails could become so severe that by 2035, trains could literally get stuck in traffic jams with nowhere to go.

"We do not have a transport crisis today, but there will be one tomorrow," Rose tells Reuters. "It will be a tragedy if we don't continue to renew our infrastructure."

A recent U.S. Chamber of Commerce report predicts that demand for freight transportation is expected to double over the next 25 years. The report goes on to say that “The projected growth in both international and domestic traffic also raises concerns about rail congestion and reliability along the most heavily traveled rail corridors and at major rail hubs such as Chicago…The excess rail capacity that was available 20 years ago has been absorbed by increasing freight and passenger rail demand. The railroads are adding new capacity, using longer trains, and introducing more reliable scheduled services, but the cost of adding new tracks, signal systems, tunnels, and bridges is high, and many rail corridors and hubs are at or nearing capacity.”

“Even if the estimates are half wrong, we can't put even 25% more freight in the system right now without serious implications,” says Randy Mullett, an analyst for the nonprofit Transportation Research Board in a recent Associated Press report. In fact, the AP report suggests that rails are already so crowded that the trucking industry could be gaining volume from the rails in a “who’s on first?” scenario.

For shippers, increased volume on the rails is a double-whammy, because it means their shipments are slowed, but often more expensive. As Rose points out in the Reuters interview, “As long as the railroad remains a very busy place—and it is a very busy place right now—we will be aggressive on price. And when rail volumes fall, we will be less aggressive with price...but when you look at the spreads between our prices and what the truckers are doing in terms of costs, we're still well below that.”