Rail Feeling the Pinch Too
February 09, 2000
Like trucking, rail is feeling the pinch of rising fuel prices and other fixed costs. So railroads are striking while the iron is hot and raising rates this year by as much as 4%. A continuing strong economy, shortages of track and equipment, and trucking rate increases of around 5% this year all make this one of the best times in a while for railroads to ask for a raise.
"Temporarily at least, railroads have some pricing power that they haven't had in a decade," David Wyss, chief economist at Standard & Poor's told the Wall Street Journal
Norfolk Southern Corp., Norfolk, VA, said it recently implemented rate increases of between 2% and 4% to rail customers shipping scrap metal, paper, lumber and "intermodal," which refers to freight in containers or highway trailers hauled on rail cars. A top official of Union Pacific Corp., Omaha, NE, said recently the company plans to seek "aggressive price increases" this year.
CSX Corp., Richmond, VA., plans to capitalize on shortages of freight cars and freight yards to boost rates this year and shift pricing strategy to more spot rates from long-term contracts, which helped add freight when the railroad had overcapacity.
"I am convinced there are lots of opportunities to improve the bottom line through intelligent and appropriate pricing action that reflect the new demand-supply situation," John Snow, CSX's chairman, president and chief executive officer, told securities analysts recently.
This is a departure for railroads, whose rates have failed to keep up with inflation since the industry was partly deregulated in 1980, according to the Wall Street Journal
But railroads were able to cut costs even faster by streamlining their track and labor and switching to more efficient unit trains that carry one product, such as coal or grain.
After a record spending spree in the past few years to integrate a recent round of mergers and upgrade their locomotive fleet, railroads are being more cautious about adding new capacity. They are facing higher labor costs because their most recent union contract ended with a 5% wage increase effective this year, compared with about 3% a year in its earlier years. Fuel costs have also doubled to about 90 cents a gallon from 45 cents a year ago.
Economists don't believe higher rail rates will have a big effect on inflation since an extra one or two percent on rail rates is hardly noticeable for the whole economy.
The rate increases won't happen overnight or across the board. Railroads said they will be selective in terms of customers, commodities and routes. In addition, more than 60% of railroad business is done under contracts, which may govern rate increases during the term of the contract.
Rail customers aren't happy about rate increases at any time, less so now because they complain rail service is too slow and undependable. And they say a round of rail mergers has compounded the service problems and has reduced competition in the rail industry.
"If you're getting consistent, on-time delivery from the railroads, you could live with a certain amount of freight rate increases," Dave Weisel, distribution manager of Potlatch Corp., a forest-products company in Spokane, WA told the Journal
. "But with the way it is now, service is too erratic and many times we have to switch to truck."
Others are skeptical about the railroads' plans, given problems increasing rail rates in the past. "I wish them well," said James Valentine, an analyst at Morgan Stanley Dean Witter. "But until rail service gets better, this smells like another false start."