Transportation Outlook: Back to the Rails

Manufacturers are finding price relief by shipping more products via the railroads.

The combination of a slowing economy and historically high fuel prices is driving many manufacturers to the railroads to deliver their products. The perception is that rail transportation is three to five times more efficient than using trucks, explains William Greene, an analyst with equity research firm Morgan Stanley.

Acknowledging that slower service and lack of rail access excludes some manufacturers from using rail, Greene notes that a sizable number of manufacturers have indicated they plan to shift some freight volumes away from truckload carriers to rail. Based on Morgan Stanley's latest Freight Pulse survey of preferred transportation modes by manufacturers, Greene sees that if companies are willing to lengthen their supply chains to keep transportation costs under control, the shift to rail will be a continuing trend.

Inevitably, with an increase in demand for rail services, manufacturers anticipate that the railroads will continue raising rates throughout the year, "with full-year 2008 rates expected to rise 4.3%," according to Greene. Coal and export grain will be the greatest drivers of rail pricing this year.

While the volume of freight expected for full truckload carriers is flat (0.0%), rates could nevertheless climb by 2.4%, a marked shift from the previous Freight Pulse study last fall, when rate increases were 0.1%. Most of that increase will be due to higher fuel costs. As Greene reports, one-third of survey respondents "have been able to negotiate lower absolute fuel surcharge rates or a more favorable scale with their primary truckload carrier. Another 25% noted that they were unable to negotiate a lower fuel surcharge but obtained price concessions."

Growing Demand and Higher Rates for the Rails

Mode Rate Increase Volume Increase
Rail 4.3% 0.8%
Truckload 2.4% 0.0%
Regional LTL* 1.2% 1.2%
National LTL* 0.9% 0.8%
*Less-than-truckload
Source: Freight Pulse 14, conducted by Morgan Stanley with Logistics Today and the National Industrial Transportation League (NITL)
For less-than-truckload (LTL) carriers, the expectation among manufacturers is for rates to remain relatively flat. As Greene observes, "LTL carriers appear to be buying volume through price as substantial discounts for large shippers are commonplace." Many manufacturers indicated in the survey that they are using the soft freight environment to lock in multi-year LTL contracts with minimal increases.

All told, although the economic outlook appears bearish, manufacturers in the survey don't expect a deep recession, Greene notes. Inventories remain historically low, but the Morgan Stanley analyst doesn't see any signs of a large restocking-led rebound. The survey, conducted prior to the earthquakes in China, also raised some concern about upcoming factory closures in Beijing this summer due to the Olympics, and how that would affect global supply chains in the short term.

See Also

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish