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Taking stock


  • pg 1

Taking stock
West coast railroads continue
to fend off the challenge from
all-water services and steal
market share from trucking
operators. Martin Dixon met
with the Union Pacific Railroad
and reports on the latest
developments and implications
                                                   Union Pacific grew its domestic intermodal traffic by 8% in 2009
for the containerised trade.

       ast year was not an easy one for North    UP has spent USD23 billion on infrastructural             Its central corridor is now almost all

L      American railroads as the slump in
       both international trade and domestic
consumption severely impacted volumes.
                                                 improvements since 2002.
                                                     Most of this has been focused on two
                                                 key arteries: the Sunset Corridor which links
                                                                                                       double or triple tracked. In November last
                                                                                                       year it completed work on raising clearance
                                                                                                       on the Donner pass through the Sierra
    However, buoyed by strong pricing power      southern California with the Mid-West, east           Nevada mountain range, enabling the
and a longer term perspective, train operators   coast and Gulf coast via El Paso in Texas;            movement of double-stack trains to/from the
have been investing heavily in infrastructural   and its Central Corridor linking northern             port of Oakland.
upgrades to make their services more             California and the Pacific northwest with                  It also served to shorten the route between
competitive with highway trucking.               Chicago and the Mid-West.                             the northern Californian port and Chicago by
    Hopes that the sector could profit from the       Reducing bottlenecks on these arterial            75 miles, so reducing transit time.
upturn in trade prompted Warren Buffett’s        routes has been central to improving overall              Since 2002, UP has invested USD1
Berkshire Hathaway to snap up North              track capacity and service transit times.             billion in upgrading its intermodal terminal
America’s largest intermodal rail operator       For instance, UP recently completed the               network. It has added five new terminals in
Burlington Northern Santa Fe (BNSF) in a         installation of 250 miles of double-track             Dallas, San Antonio, Salt Lake City, Tacoma
USD27 billion ‘all-in wager’ on the economic     between (LA) and El Paso.                             and Chicago with a sixth planned on newly-
future of the US.                                    ‘This has taken capacity on this high             acquired land, while four existing sites have
    However, while all attention has been        density stretch of line up by 40% and                 been expanded. ‘No one is investing in
focused on BNSF, its smaller west coast rival    improved transit time by two days,’ pointed           terminals like UP,’ claimed Kaiser.
Union Pacific (UP) has been making waves          out Kaiser. By the end of last year the railroad          Its new USD370 million Joliet international
of its own.                                      had double-tracked 62% of the line between            terminal just 50 miles southwest of Chicago
    Against a backdrop of tumbling demand,       LA and El Paso.                                       is a case in point, situated in real estate
UP managed to buck the trend. Its domestic           Together with a new intermodal ramp in            developer Centrepoint’s massive 3,900-acre
intermodal traffic rose by 8% in 2009. In         San Antonio, (TX), these investments have             logistics park.
the three months to March 2010, volumes          enabled a two-day reduction in transit time               When it opens in the summer, the new
surged 33%. Meanwhile, the railroad’s            for services between southern Texas/northern          terminal will act as the railroad’s primary
international traffic had recovered 12%, fully    Mexico and LA.                                        interchange point and serve the five key
in line with the market.                                                                               Pacific ports of Los Angeles (LA), Long
    North America’s largest intermodal              EXECUTIVE SUMMARY                                  Beach, Oakland, Tacoma and Seattle.
marketing company (IMC) the Hub Group                                                                      The Illinois-based real estate company has
switched its west coast domestic box traffic            Railroad investment has focused on              made quite a name for itself, capitalising on
to UP from BNSF in the second half of 2009,            improving both service choice and               the trend for retailers to locate warehouses
which accounted for much of this gain.                 transit time to take a greater share            close to marine and intermodal terminals.
    Talking to CI last year, Hub’s chairman            of highway trucking traffic                          West coast rival BNSF has established its
and ceo Dave Yeager, reckoned that UP’s                Transloading now accounts for 28%               main intermodal terminal in neighbouring
transit times had greatly improved.                    of west coast discretionary box                 Elwood, part of Centrepoint’s 2,500-acre
                                                       import traffic
    He elaborated: ‘They have made some                                                                intermodal centre where several major
tremendous investments in physical plant and           The growth in all-water services                retailers, including Wal-Mart have established
                                                       may be checked by rate hikes
their service levels are extraordinary now. A          as the Panama Canal, ports and                  large-scale distribution centres.
lot of their investment has really paid off.’          railroads seek to recover their                     This year the railroad has pegged capital
    According to UP’s vice president of                investment outlays                              investment to the same level as 2009 at
intermodal marketing and sales John Kaiser,                                                            USD2.5 billion, a nudge ahead of BNSF

                                                                                                    June 2010 Containerisation International    49

which has budgeted USD2.4 billion.                moving over the highways is controlled by       recent years are self-evident from the decline
    The latter has also announced transit         motor carriers so we’ve started engaging        in transcontinental intermodal volumes.
time improvements across its intermodal           with them,’ added Kaiser. Other agents UP is    According to the Intermodal Association
network, including the railroad’s premier         targeting include freight brokers and 3PLs.     of North America (IANA), traffic moving
transcontinental route between LA and                 North American railroads operate a          eastbound on this trade has declined by over
Chicago, which has been cut by between            similar sales channel model to the air cargo    30% since 2006.
seven and 10 hours.                               industry, which also sells capacity through         Furthermore, the fact that the average
    Much of this investment is focused on         third-party agents – the latter most obviously  length of haul for international traffic has
improving overall service standards as a          via freight forwarders. Tri-party relationships fallen over the same period is evidence that
means of attracting cargo from trucking           exist for big shippers where both IMCs and      east coast operators have been taking an
services.                                         railroads work together with a customer, as     increasing share of the pie.
    Kaiser reckons that the west coast rail       in airfreight forwarding.                           However, railroads are not looking to their
companies of UP and BNSF together have                These marketing initiatives will be         pricing policies to combat this impending
in excess of a 20% share of long distance         important if the company is to maximise         loss of discretionary traffic. ‘I cannot cut
domestic traffic in their home territory west      opportunities presented by the increased        my prices enough to compete with all-
of the Mississippi River. Hence there is room     practice of transloading cargo from             water services into the northeast of the US,’
for growth.                                       international boxes to                                        remarked Kaiser.
    ‘We need to match trucking for both           the domestic larger 53ft                                          The railroads said as much
service and ease of doing business,’ he           containers.                                                   to west coast ports when
explained. ‘Historically we have not always           Retailers such as the                                     they pleaded with them to cut
measured up.’                                     Home Depot, are using                                         rates in order to redress the
    Anecdotal evidence suggests that more         transhipment as a means                                       threat. The problem is that rail
companies are looking to shift their traffic.      of integrating their import                                   transport pricing is not hugely
FedEx, the Memphis-based express delivery         and domestic networks to                                      elastic.
company, recently indicated that it might         improve overall supply                                            As marine consultancy
consider intermodal routes, despite having        chain performance.                                            Moffatt & Nichol’s senior
previously always shunned the railroads as            Consolidating larger                                      economist for surface transport-
unwieldy and inefficient for moving its core       varieties of commodities                                      ation Doug Rubin, elaborated:
time-critical shipments.                          from different import                                         ‘Dropping rates will not
    Building stronger partnerships with           origins     for     onward                                    generate sufficient additional
interline partners has also been a core part      national distribution pro-                                    volume to compensate for the
of UP’s strategy, particularly in the chase       vides obvious logistics                                       loss of margin.’
for a larger share of transcontinental traffic.    benefits, in addition to John Kaiser: Expansion plans              West coast rail operators’
Recently it clubbed together with east coast      the higher cube potential                                     best card is their speed over all-
railroad CSX to pool their domestic intermodal    of domestic containers.                         water services, which will continue to be an
marketing activities.                                 Kaiser reckons that over the past 18        attractive consideration for shippers of time-
    Their newly-named UNMAX service now           months transloading’s share of discretionary    sensitive goods. Also it is possible that the
co-ordinates the transcontinental movement        import traffic moving out of west coast ports    cost differential may narrow as bunker and
of 53ft containers across both networks.          has risen from 18% to as much as 28%. ‘It’s     canal transit costs rise. Rates for the latter
‘This is about providing a national network       been a substantial shift,’ emphasised Kaiser.   are set to jump by 6% to 7% in 2010/11
that allows us to compete with highway                However, more recently the trend has        following a near-doubling over the past five
freight,’ explained Kaiser. ‘We think there are   received a boost from the shortage of           years.
between 3.1 and 3.2 million units annually        international container equipment and the           Kaiser also believes that shippers will
currently moving by truck and these are our       associated repositioning costs.                 need to take account of the cost of moving
target.’                                              Another trend that has alerted the          freight inland from east coast ports. ‘Once
    UP has similar interline arrangements with    attention of western railroads, if for less     you come round to the east coast it’s not free
CSX’s east coast competitor Norfolk Southern      cheery reasons, has been the growth in all-     to move it inland and that’s where the cost
(NS).                                             water services. When the widening of the        equation starts working in our favour.’
    ‘We cover over 85% of the east coast          Panama Canal is completed in 2014 the               ‘The demarcation line is along the
population base through these interline deals,’   movement of transpacific marine cargo to         Appalachion mountain range [i.e. within
added Kaiser. ‘This provides our customers        east and Gulf coast ports could accelerate      250 miles of the coast] beyond which all-
with more choice and service options.’            further, so adding to railroad woes.            water services are not economic.’
    The Omaha-based railroad has also                 Kaiser recognises this threat but believes      East coast trucking and rail operators may
started to review its ‘routes to market’, in      that most all-water advances have already       beg to differ but there is certainly intense
recognition that there are a multitude of         been made, with no more than a 3% to 5%         investment going into upgrading port and
agencies that sell their capacity and services    market share gain opportunity to come.          intermodal facilities in readiness for the much
to shippers. The traditional channel has been         ‘We believe that all-water services have    hoped for influx of bigger ships.
the intermodal marketing companies (IMCs)         the potential to grab about a third of the          ‘We are comfortable that we can defend
but over the years other important players        transpacific market and currently this share     that space once people recognise that
have emerged.                                     is already at 30%,’ explained Kaiser.           somebody has to get a return on all that
    ‘We’ve realised that much of the freight          All-water’s market share growth over        money they’ve spent,’ concluded Kaiser.

50     Containerisation International June 2010

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