For businesses that ship by rail, understanding the intricacies of the trends that influence rail shipping costs is important to be aware of. In this blog, we’ll explore the current trends, historical influences, and future outlooks shaping rail freight pricing.
- Current Trends Influencing Rail Freight Costs
- Historical Influences on Rail Shipping and Rail Shipping Rates
- Rail Shipping Outlook and Emerging Trends
From the impact of intermodal transportation growth and precision scheduled railroading to the effects of fuel cost dynamics and sustainability initiatives, join us as we delve into the factors dictating today’s and tomorrow’s rail shipping rates.
Current Trends Influencing Rail Freight Costs
Growth of Intermodal Transportation
Though seemingly remarkable, the rapid expansion of intermodal transportation is unsurprising. Since intermodal integrates different modes of transportation (e.g., rail, truck, and ship) for the movement of freight goods, it has become a powerful tool for shippers, and one that can impact rail pricing strategies. As of the last couple of years, intermodal volumes have seen a consistent increase, and now account for a vast portion of rail shipping. According to the Association of American Railroads, “in 2022, U.S. rail intermodal volume was 13.5 million units, and intermodal accounted for approximately 27% of revenue for major U.S. railroads, more than any other single rail traffic segment”.
By leveraging the efficiency and environmental benefits of rail for long hauls combined with the flexibility of trucks for last-mile connectivity, railroads are adjusting their pricing strategies. Generally, truck rates tend to be the benchmark for pricing if a railroad wants to compete for the business. As a result, since intermodal has expanded over the last several years, the railroads not only have to substantially invest in their intermodal facilities, but they must also manage their rates accordingly.
Precision Scheduled Railroading
Precision Scheduled Railroading (PSR) is the term for the railroad’s efforts to move to a system of streamlined operations to facilitate improved service. When PSR was introduced in the 1990’s, it represented a transformative approach to optimizing railroad operations and reducing operational costs. PSR focuses on maximizing asset utilization, improving service reliability, and streamlining operational processes.
However, PSR has been criticized as being incapable of keeping up with surges in demand during critical moments. Using PSR, railroad management’s job is to drive down the “operating ratio,” or operating expenses as a percentage of revenue. But in times of crisis, running without excess capacity can cause issues, which then can be placed onto the shipper in the form of higher costs. All of that extra effort, cost, and delay from PSR means higher prices for businesses or consumers that rely on rail for transportation. Shippers or shipper trade groups interviewed said that PSR and rail service resulted in higher costs.
Seasonal Trend Effects
Seasonal trends have the potential to significantly affect rail shipping costs by influencing supply and demand patterns, thereby causing shipping rates to fluctuate at certain periods. During peak agricultural seasons, for instance, rail demand often surges due to high volumes of crop shipments. Another example is when the retail sector influences rail traffic, particularly in preparation for holiday seasons during winter months; during these periods, carriers will charge more due to high demand and inclement weather. Conversely, the first quarter of a year often sees a lull in demand, leading to lower rates.
Fuel Cost Dynamics as a Part of Rail Freight Costs
The volatility of fuel prices has a direct and significant impact on rail operational expenses and, consequently, shipping rates. As fuel represents one of the largest variable costs for railroads, accounting for approximately 15-20% of total operating expenses, fluctuations in fuel prices can alter cost structures markedly. In order to recover their expenses, the railroads use a tool called Fuel Surcharge, which passes on some of the costs of fuel to the shipper. This surcharge is published monthly and is important to understand when dealing with rail shipping costs.
Historical Influences on Rail Shipping Rail Shipping Rates
The Staggers Rail Act of 1980
The Staggers Rail Act of 1980 revolutionized the rail industry by significantly deregulating it, providing railroads with the freedom to set prices, streamline their operations, and compete with other transportation modes. According to the Federal Railroad Administration, “by 2011, freight rates adjusted for inflation had declined 0.5 percent a year since the passage of the Staggers Act, compared to an increase of nearly 3 percent per year in the 5 years prior to 1980”. It also spurred market competition and service improvements. The Staggers Act laid the vital groundwork for today’s flexible pricing strategies, which has allowed shippers to negotiate contracts directly with railroads.
Market-based pricing has led to some railroads shifting back to tariff rates for some of their commodities. The intent is to simplify their rate negotiations and ensure an even playing field for all shippers. Despite these public tariffs, private contract rates remain prevalent.
Rail Shipping Outlook and Emerging Trends
Rail Freight Technology and Efficiency
The future of rail shipping is being shaped by investments in technology, digitalization, and automation. Railroads, providers, and shippers alike are beginning to leverage a host of advanced services, including automated analytics, GPS and sensor monitoring, smart management services, and more. Technology-driven initiatives not only promise to elevate service levels but also present opportunities for more dynamic and potentially lower pricing strategies.
For instance, at RSI Logistics, our rail shipping experts have found that implementing a solution to track daily railcar movements at a facility could save up to 30% on their annual rail shipping costs. Technological advances are often directly tied to improved efficiency, and as the industry trends towards further optimization, technology becomes increasingly important.
Rail Sustainability Initiatives
Sustainability initiatives are becoming increasingly emphasized throughout all modes of transportation, with the adoption of green technologies poised to reshape long-term cost structures and pricing strategies. For rail transportation, railroads are investing in eco-friendly locomotives, such as those powered by battery-electric and hydrogen fuel-cell technologies. And for shippers, considering rail over truck for long distance movements can improve their carbon footprint. In North America, freight trains can move one ton of goods nearly 500 miles on a single gallon of fuel, compared to trucking’s 130 miles per gallon.
Implementation of energy-efficient practices not only supports environmental goals but also helps in controlling operational costs, potentially translating into more stable and competitive pricing for shippers. Consider monitoring these developments, as the industry’s push for sustainability is expected to potentially influence rail costing strategies in the future.
Modal Shift Towards Truck Freight
With the increasing consumer demand for rapid delivery and the railroad’s struggles with on time delivery, the rail industry’s competitiveness in the freight shipping landscape has been challenged. This shift towards trucking encourages anyone involved in shipping with rail to reassess their pricing strategies, service offerings, and negotiation power. With total revenue derived from primary freight shipments expected to reach over 1.5 billion dollars in the US by 2032 (an increase from 1 billion in 2021), rail providers are prompted to innovate and potentially adjust pricing to remain attractive options. This can be an opportunity to negotiate with more leverage.
While all the above industry trends affect rail pricing, one of the most important factors is the leverage that shippers have. For instance, if your facility that ships rail is dual served (more than one railroad is available to drop off and pick up your railcars), there is the opportunity to negotiate with each railroad. Or, if you can perform an analysis on alternate routes and lower rates from other rail carriers, you can negotiate with your current carrier. By presenting these competitive factors to the railroad, they tend to price to get the business.
However, even if you are captive to one railroad, you can influence your rail rates by developing more leveraged negotiation strategies, as well as considering other modal options, transloading, or alternative sourcing.
