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Lower Diesel Prompting Short-Haul Rail Switch to Trucks?

There could be a link in the prolonged decline in diesel prices and the drop in demand for intermodal traffic moving by rail, says Donald Broughton, Avondale managing director and chief investment strategist.

As reported by DC Velocity magazine, Broughton argues that falling diesel prices have led rail users to shift some of their intermodal business back to the highway, especially in shorter-haul markets.

Broughton recently told a gathering of the Transportation Intermediaries Association (TIA) that “cheap diesel [is] driving intermodal loads off rail [and] back onto the highway, especially in shorter lengths of haul.”

Broughton’s views had not changed as of late June, when he wrote in an analysis that “intermodal rates are expected to continue declining for the remainder of 2016 as the dramatic drop in diesel prices … takes its toll on U.S. domestic demand.”

However, DC Velocity explains that other intermodal experts said declining diesel prices are just one factor influencing modal choice and conversion.

Many rail users of intermodal services have long-established relationships with their providers and tend to downplay an issue like fuel price fluctuations that is beyond their control, said John G. Larkin, lead transportation analyst for Stifel, an investment firm. “Most big shippers have a strategic commitment to intermodal and are more service-sensitive than fuel-price-sensitive,” Larkin said. “Only a few of the most price-sensitive shippers switch back and forth as fuel prices fluctuate.”

Others argue that conversion from intermodal to highway on shorter-haul corridors is mainly due to the oversupply of commercial truck drivers and tractors, which keeps more capacity on the road. The abundance of supply has helped drive down truck rates to be more competitive with intermodal prices.

“Ironically, one of the consequences of lower diesel prices is that it incents some marginal carriers to remain in business and inflate capacity,” DC Velocity points out.

“We could have fuel at this level, and if [truck] capacity was tight, prices would be higher,” said Jim Filter, senior vice president and general manager, intermodal for Schneider National Inc.

Larkin of Stifel added if a shipper wants to compress time to market it may find more value at current truck rate and surcharge levels over a railroad. To gain and keep market share, railroads must improve their transit times and deliver reliable service that’s as close to being “truck-seamless” as possible. Superior fuel efficiency will matter little if the rails’ service falls short, he explains.

Full story here.

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