The Virginia Commonwealth Transportation Board (CTB) recently approved a contract that will move Hampton Boulevard under the rail line that now crosses it.  The $20 million contract is small relative to some others in the state, but is one that the Port Authority has been pushing for for over 15 years.  

Once completed, the improved traffic pattern will allow the port to build longer trains carrying imported cargo containers without disrupting traffic on Hampton Blvd.  The port estimates that this could allow them to utilize rail for an additional 20% of the product that comes through the port.  Currently, that 20% leaves the port via truck and contributes to pollution, congestion and disgruntled neighbors.  The more product that can leave via rail, the better for Hampton Roads.

Now that Hampton Boulevard is being addressed, the State is considering an additional $17.8 million investment to double the on-dock rail capacity at Norfolk International Terminals.  These are all great projects for the port and will further enhance its competitive position over other East Coast ports.

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.