Union Pacific Corp (UPC), the rail line operator, recently announced that they would likely be increasing their rates on intermodal traffic in 2009.  Despite a 19% reduction in shipping volumes, and operating at 75% capacity, the Company is targeting “only” a 5-9% increase in rates.  Rob Knight, CFO at the railroad, said that lower costs for fuel and increasing competition for available freight loads will hold down rate increases in 2009.  He went on to say that trucking companies have stepped up pricing pressure in the intermodal business as companies lower their rates just to keep truck fleets in action during the economic downturn.  However, UP remains committed to maintaining their profit margins and returns on their business.

I may have missed the day they covered this in Econ 101, but this doesn’t sound like a great strategy to me.  Basically, the company has said they would rather lose business to the trucking companies than lower their return targets.  So, a larger % of nothing is better than a smaller % of something?  That just doesn’t add up.  In fact, UP has idled 400 locomotives and furloughed about 3,000 employees already.  If your competition can move product from point A to point B for a lower rate (while still making a profit margin that is acceptable to them) then that’s the route your customers will use.  

A recent Shpping Digest article outlined some of the difficulties Charleston is having designing in a rail yard to their new North Charleston Terminal.  The issue revolves around the need to realign an access road on the terminal to allow electric lift equipment to shuttle containers to a new private intermodal yard.  By redesigning the road, they reopen the permitting and planning process.  The potential for delays could be very costly to the state.  In addition, CSX is a partner in the venture that would be building the intermodal yard and would be the only operator using it – no Norfolk Southern.  Any move to go above and beyond to accommodate the new rail yard would be frowned upon by NS and could be politically costly.

However, Charleston needs to address their rail issues.  Norfolk has on dock rail and is expanding the number of tracks available.  Savannah has near dock rail and is also expanding to accommodate both CSX and NS.  Charleston could be putting itself at a significant competitive disadvantage if it doesn’t figure this out quickly.  Shippers are making decisions today that will effect where they will locate in 2013 when the North Charleston terminal is completed.