“We always want to market and sell intermodal when that’s the best solution,” says Darren Field, J.B. Hunt executive vice president of the company’s intermodal operations, which provide more than half of Hunt’s revenue.
J.B. Hunt in recent years has moved from being primarily a truckload carrier to being a third-party logistics company which includes freight brokerage. In that role it faces conflict in selling transportation services.
“If we’re working with a customer, and intermodal is a good solution for the route or the origin-destination that the customer is asking about, but our truckload brokerage model says that that’s the best economic value for that customer, then we’re going to leave with that [truckload] service first and maybe intermodal is a secondary option to that customer,” says Field.
Railroads, he says, have to change their philosophy: “If they wanted to participate in helping us grow intermodal, that’s going to have to show up in the form of cost changes.”
Yet, Field believes railroads recognize the problem.
“We’ve never held back in terms of communicating with the railroads that their underlying costs certainly influence our ability to help grow volumes on the railroad,” he says.
“The truckload market is going to keep pressure on the railroads’ ability to raise prices with their intermodal service, particularly in the east,” according to Fields. “And we understand that we’ve got to work together to drive out costs so that we can both be more competitive against the truck.”
Field spoke at the recent Stephens Nashville Investment Conference.
The real future is a national rail network (either private or public owned) with open access to all who can meet the operational requirements. Railroads as currently structured are past their time.
Current Class 1s have recreated “Back to the Future” Part 2, given how they were like the Phoenix to arise out of the depths of decades of failure. No longer hamstrung by the Hepburn Act of 1906 which foisted cost controls upon the railroads, the railroads seized the opportunity provided by the Staggers act-1980 to become competitive for traffic, merged to eliminate duplicate costs, and learned how to market and price traffic.
Unfortunately, the Class 1s grew fat and lazy over the decades, relying on coal and timed intermodal to finance railroad coffers. Despite problems with trucking re over capacity and fewer drivers, the railroads slept through the moment. Now, even one of their best customers, JB Hunt, offers salient advice.
But will the railroads accept such unvarnished advice, particularly when they have continued to fail to build-and maintain-viable, competitive short corridor intermodal routes? This action will only invite a demand for re-regulation; if so, who will save the Class 1s in the next round of economic hardship..? Given this retrenchment of progressive thinking, the Class 1 excuse why trucks are the preferred carrier because not every high dock has a railroad track does not hold water. Tell that to the AT&SF CEO who won over JB Hunt/Schneider as intermodal customers by showing the favorable impact of rail over Cajon Pass a few decades ago.
The railroads only customer is Wall Street. They currently run a closed shop, bereft of any common carrier responsibilities thanks to the STB. With federal interest rates in the toilet, I cannot understand, other than filling the pockets of executives and WS, why the railroads have to have rates of return north of 10% under the circumstances. I think after WWII, the rate of return on investment for the railroads was somewhere around 2 %. Truly too low even for the time. I was shocked when Conrail essentially through domestic intermodal traffic lanes on their railroad was shocking. These type of actions along with the arrogance of E. Hunter Harrison’s implementation of Precision Scheduled Railroading with CSX, the sacking of most Road Railer service on the NS and other carriers makes for an adversarial environment with the shipping community. The railroads too, have to realize that most truck carriers will not shift to containers. The majority of freight is going to move by truck trailer over the long run and with electric propulsion without drivers! Do I hear a death rattle for the railroads?
Thomas Dupee – there is not one investment community, there are many. Some are interested in short term returns and others (for example, Berkshire Hathaway) are more interested in long term returns. But all are interested in the return and will place their money with whatever companies give them the highest return that meets their investment goals.
I expect all of us have the same mindset – please speak up if you are interested in an investment with a low return as I would be pleased to take your money and give nothing back!
Bottom line – the railroads have to show they can make a competitive return or there will be no investors. If they cannot, then freight railroading is kaput.
TO accomplish this, Class I railroads need to change the mindset that they are entitled to annual increases that exceed their costs changes and that customers are cows to be milked.
The railroad transportation services industry has the potential to haul significantly more than the 8% of the domestic market that it does today. But to do so would require a multi-billion dollar investment in network capacity and expansion. The investment community is more interested in short term returns than long term growth. The highway competition, on the other hand, is growing in infrastructure capacity without the burden of ROI pressure. Railroads will continue to shrink in market share until or unless this factor changes.
I’m reminded of back when Conrail dumped a large portion of the short haul inter modal and TOFC that they had. The management said “Anything under a 20% profit margin was not worth the effort.”
Andrew Dickey,
Low return does not equal no return, I’d much rather have a constant annual return on investment of 2% than I would a 5 – 7% return for only 2 – 3 years…that’s the difference between Berkshire Hathaway and everyone else.
Is this a “shot across the bow” at BNSF? Shades of Mike Haverty!