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Railroads Are Back in Style for Freight Transportation

July 11, 2012
As trucking gets bogged down by regulations and labor challenges, railroads are resurgent.

In this highly digitized world of same-day deliveries, multi-channel global distribution networks and cargo deliveries to outer space, it's somewhat ironic that the best transportation option for manufacturers in 2012 is to adopt a strategy that dates back to the '50s … the 1850s. Out of all the transportation modes that serve the manufacturing industry, the mode that looks most attractive right now is rail.

If you've been tracking the steady rise in rail-freight pricing, this won't be much of a surprise to you. Over the past year, rail-freight transportation rose by 15.3%, which is only good news if you consider that in 2010 it rose by 21.8%.

"The railroads are in very good shape from an infrastructure, equipment and personnel basis," says Rosalyn Wilson, senior business analyst with consulting firm Delcan. Compared with the other major transportation modes (trucking, water, air), railroads have gained market share, especially in intermodal, which combines rail with another mode, usually trucking. "More medium-sized trucking companies began to use intermodal for the first time [in 2011] to combat driver shortages and the high cost of adding to their fleet," Wilson explains.

According to Wilson, author of the "2012 State of Logistics Report," released by the Council of Supply Chain Management Professionals (CSCMP) and sponsored by Penske, U.S. transportation costs as a whole rose 6.2% in 2011, due almost entirely to higher rates rather than increased volume. Despite the gains in the rail sector, nearly 80% of all domestic freight is transported on a truck, where rates climbed by 6.2%.

"Capacity in the trucking industry is in a tenuous equilibrium state," Wilson points out. "True shortages are rare, but available capacity is not abundant."

Manufacturers should be aware, though, that trucking companies aren't necessarily just pocketing the additional revenues from rate hikes. Most of the challenges facing the motor-carrier industry aren't that much different from what manufacturing companies face: talent recruitment (i.e., drivers) and salary increases, rising insurance premiums, commodity prices (e.g., diesel fuel), capital equipment (tractors and trailers) and various government regulations, such as impending new hours-of-service rules that will reduce the maximum number of hours a driver can be on the road during the week from 82 to 70.

With the recovery still sputtering and GDP expected to stay below 3% again in 2012, Wilson believes companies should begin making contingency plans for the day they cannot hire a truck to carry their freight. "The railroads," she points out, "have the capacity to take up the slack."

Chart head
The State of the U.S. Logistics Market, 2012

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