High Fuel Costs Give Rail an Edge

AIDED by last summer's surge in the price of diesel fuel, railroads are beginning to nibble at the trucking industry's dominance of the $200 billion-per-year freight hauling business. At the same time, a national recession could reduce business for all modes of transport. But rail company perspectives vary by region. Those serving the Northeast are pessimistic, while the others are cautiously upbeat or bullish.

Both trucks and trains burn diesel, so both have been affected by the price rise that followed Iraq's Aug. 2 invasion of Kuwait. But railroads pay around half as much because they buy in bulk and the fuel is taxed differently. The pump price of diesel paid by truckers rose from July's $1.12 to about $1.50 now, with considerable fluctuation in between as the prospect of war advanced or receded. Comparable figures for railroads are $0.50 for July and $0.95 now, preserving rail's cost advantage.

Further, trucks need three times as much fuel as trains to move a ton of cargo (and therefore pollute three times as much, rail executives like to add). ``I think the truck lines are even more exposed than we are,'' says Craig Philip, vice president of Southern Pacific. Fuel is 15 to 20 percent of direct operating costs for the San Francisco-based railroad.

Burlington Northern Inc., the nation's largest user of diesel fuel after the United States Navy, burns more than 1.6 million gallons per day. If diesel prices remain high, the Ft. Worth, Texas-based company expects to pay an extra $100 million in fuel costs next year, spokesman Mike Wenninger says.

Union Pacific Corporation, which consumes 1.5 million gallons per day, projects the extra cost this year alone at $61 million. Spokesman John Bromley says fuel surcharges haven't come close to passing the full cost on to customers.

There are 13 major US railroads, earning 92 percent of all rail freight revenues. Of the half-dozen that spoke to the Monitor, only Southern Pacific is convinced that the rise in the price of diesel has already caused freight customers to switch from truck to rail. Others thought some switching might start next year, assuming diesel prices remain high.

This fall Southern was expecting single-digit growth for its intermodal service, in which cargo moves by a combination of rail and truck. Instead, the company reaped double-digit growth. Mr. Philip, who oversees Southern's intermodal business, attributes the windfall to price-sensitivity on the part of customers. Both trucks and railroads have passed on some of the higher fuel prices to customers. But ``they've raised prices faster than we have,'' he says.

Union Pacific sees trucking firms themselves taking advantage of rail's lower costs. More and more are ``piggybacking'' - putting their trailers on flatcars to be transported across the country rather than hauling the loads themselves, the railroad reports.

Philip says Southern has also seen that trend, but that for the most part, it's the shipping customer himself who is deciding to incorporate rail into his freight-moving plans.

Other railroads say that it will take many more months of high diesel prices before a significant amount of business switches to rail. Says Burlington's Mr. Wenninger: ``Truckers are keen, excellent competitors. So far we're not seeing any business coming to rail from truck on the basis of fuel cost alone.''

In fact, rail had already been luring away trucking customers, he and executives at other companies say. Union Pacific had been setting records in car loadings well before the invasion of Kuwait.

``We're making some real inroads,'' Mr. Bromley says. ``What makes the difference is not price, but service. We're working very hard to be truck-competitive.''

Trucks are adept at providing door-to-door service, consistent on-time arrival, and damage-free delivery. Customers have been willing to pay a premium for those qualities, giving the trucking industry 75 percent of freight revenues even as it moves only 25 percent of the total ton/miles.

Railroads earn a mere 15 percent of the shipping pie for moving 37 percent of the ton/miles, says Tom White, a spokesman for the Association of American Railroads. Pipeline, air, and marine transport account for the rest.

A lot of what railroads move is bulk material like grain, chemicals, and especially coal (60 percent of US production). Coal has especially low profit margins, making up 40 percent of railroad freight volume, but only 22 percent of revenue.

``It's a tough, competitive world out there in transportation,'' says Bob Libkind, a spokesman for Philadelphia-based Conrail.

To win market-share from the trucking industry, railroads have invested heavily in refurbished cars, computerized car-tracking systems, and specialized handling terminals.

The Chicago-based Atchison, Topeka, and Santa Fe Railroad has purchased articulated cars, which don't stretch out and bang together over undulating territory. That eliminates damage to cargo from that movement, says Santa Fe spokeswoman Cathy Westphal.

Mr. Libkind says that Conrail recently took away from trucking a 16-mile route for delivering coal from a mine to a barge terminal on the Ohio River. ``People don't think that trains can compete for the short haul. There are times when we can,'' he says.

Conrail also entered into competition with trucking for hauling steel products from Chicago to Detroit. The service has grown from ``virtually no traffic to a nice sized train every day,'' with a 98 percent on-time and 100 percent damage-free record. One key to the success of the new service is a specialized terminal at the Detroit end which can arrange immediate delivery, storage, or just-in-time service.

Railroads in different regions take decidedly different views of the health of the economy, and whether the industry is in recession.

``Our response to that is, `What recession?' '' Union Pacific's Bromley says. ``We're planning on 1991 as a growth year.''

``With all the talk about recession, we're really not seeing any concrete signs of it,'' Burlington Northern's Wenninger agrees. The company expects to grow 1 percent next year.

Southern Pacific is ``cautiously optimistic'' and expects a flat year. Southern, Union, and Burlington all operate in the western two-thirds of the country.

At Conrail, which operates in 14 northeastern and midwestern states, ``We're hoping for the best and preparing for the worst,'' Libkind says. His company expects real economic output to decline 1 percent next year, and industrial production to fall 2.9 percent.

Regardless of region, all the railroads have seen declines in two categories of freight: forest products, used in housing construction, and automobiles.