Rising fuel costs hit truck drivers harder, giving U.S. rail transport the upper hand.

Nathan Gomes/Apratim Sarkar

Reuters, October 22 - Record fuel prices are shifting freight from US roads to rail as shippers seek more economical long-distance transport, helping rail companies earn higher revenues and profits.

Union Pacific Railroad (link) UNP.N, Norfolk Southern Railroad (link) NSC.N and CSX (link) CSX.O all reported strong third-quarter profit and revenue growth this week, with company executives saying high fuel costs and insufficient trucking capacity are bringing more business to the railways.

"Rail is more efficient. Our cost of moving a ton of freight across the US is much lower. So when fuel prices go up, it's naturally an advantage for us," Union Pacific CEO Jim Vena told investors on a Thursday earnings call.

This shift is giving rail companies the opportunity to reclaim long-haul freight business from trucking, even though higher fuel prices are also raising railroads' own costs and squeezing margins — with fuel prices remaining elevated due to the war involving Iran. According to the American Automobile Association (AAA), diesel, one of the main costs for freight carriers, hit a record $6.53 per gallon in September (link).

The advantage of rail is most evident in intermodal transport: in intermodal, freight moves long distances by rail, while trucks typically handle pickup and final delivery.

Intermodal transport competes directly with long-haul trucking.

"We are seeing long-haul truckload shifting towards intermodal, and increased use of transload and rail distribution centers," said James Mourafetis, head of transport, logistics, and services at consulting firm EFESO.

In the third quarter, Union Pacific's domestic intermodal freight volume grew 13% year-on-year, while CSX reported a 7% increase and Norfolk Southern rose 3%.

Shrinking trucking capacity has also pushed some freight to rail. Ongoing freight market weakness has forced small carriers out, while high operating costs and tighter driver regulations have limited any rebound in trucking capacity.

"There really has been a reversal in the trucking market this year, but recent freight volume levels confirm that this is mainly due to reduced capacity rather than strong demand," said Bob Costello, chief economist at the American Trucking Associations.

However, higher fuel prices have also raised railroads' costs, making it harder to convert revenue gains into greater profit, even though fuel surcharges have helped ease some of the pressure.

Union Pacific said high oil prices worsened its third-quarter operating ratio by 140 basis points; Norfolk Southern reported that fuel costs accounted for about half of its year-over-year revenue and expense increases.

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