Thursday, May 18, 2006

Oil Prices, Railroad Profits, and Fuel Surcharges

All of these are related. Over the past few months, it has been possible to pull together some news items, and make some observations. Bottom line: If the Class One Railroads are not careful, their run of prosperity could be threatened. Here’s why.

Let's begin with some facts: 2004 and 2005 were the best two-years-in-a-row for the Railroads in quite some time. The First Quarter of 2006 makes a third year in a row almost a certainty. In fact, ’06 looks more and more like a record breaker.

A record breaker? The Union Pacific says so!
So does CSX.
CN says their quarter was the best ever!
The BNSF is up, too.
Don't forget Norfolk Southern.
KCS completes this story, and even the Short Lines are showing improvement.

Isn’t that OK? Yes, but combine this with what is going on with the price of oil and the resulting fuel surcharges and it may not be so OK.

Of course, the rising price of fuel has put many, many truck trailers on trains. Containers and TOFC (Trailers on Flat Cars) traffic is way up. And, of course, other traffic is up as well. But the Railroad’s record profit is not a result of this increase in traffic alone. Those Profits are due in part to their infamous Fuel Surcharges.

Some customers are now saying that these Fuel Surcharges are excessive. Customers have raised other issues as well. The rapid increase of Fuel Surcharges has already been dealt with at Rip Track. But is what CSX did indicate a railroad management attitude? CSX raised their surcharge right in the face of these customer protests.

Traffic Increases and Fuel Surcharges are all related to the price per barrel of oil. As the price goes up, the efficiency of rail transportation becomes more appealing. The Fuel Surcharge goes up as well. We have all heard the expression that a higher price for a barrel of oil is just like a tax increase. It is not a stretch to see that the resulting increase in the Fuel Surcharge looks like a windfall profit. Rail Customers are already saying such things.

If enough customers start to feel that they are being taken advantage of, and convince others in various legislative branches, some government attention is going to be paid to the record earnings and profits currently enjoyed by the Railroads. Then, sooner or later, the term “windfall profit” will be heard from the politicians. Those of us with a memory strong enough to recall events that have occurred over the past thirty or forty years regarding similar issues know immediately that this is not a good thing when politicians use these words.

Railroad Management MUST review their policy of the Fuel Surcharge. It must be made to appear to be fair. When it hovers in the twenty percent range, as it is at CSX, then Jacksonville we’ve got a problem!

To their credit, railroads are increasing spending levels for all Capital Improvements, both rolling stock and track. Specifically, spending for Ties has increased. This is good, and it reflects what we are seeing on the supply side as all of this business is pounding some tracks into the ground.

Let’s be realistic here. No one wants Railroads to return to the dark ages of the 1960’s. And profits are not a bad thing, especially when some of the money is plowed back into the property. But giving the impression that an excessive profit is happening because of an advantage is a bad thing. Railroad Management can’t let that impression prevail. Changing the paradigm of the Fuel Surcharge may be one way to dispel any of these nasty impressions. Let’s hope it happens.


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