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
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