Shippers’ Negotiation

Leverage Increases as

Rail Carloads Decrease

In 2015 railroads were hit hard by decreases in carloads

for many commodities. Figure A shows that Coal, Sand

and Crude carloads on the big four US railroads (BNSF,

CSXT, NS and UP) decreased significantly in 2015 with

some of the largest decreases occurring between the third

and fourth quarter. These large decreases in carloads have

had a big impact on the price of railroad stock as Figure

A shows that the average price of CSXT, NS and UP

stock dropped 23% in 2015. When a company’s stock

price drops by 23%, management is under pressure to

improve results and this can have a significant impact

on shipper’s rates for moving freight.

The question is, when will the drop in carloads for major

rail commodities stop? This is an important question for

shippers to answer as the drop in rail carloads gives many

shippers greater leverage in their negotiations with rail-

roads.

April 2016 Volume 25, Number 4

RAIL PRICE ADVISOR The Rail Intelligence Newsletter

The decrease in carloads in 2015 make volumes more

important to railroads and this in turn makes rail-

roads compete more aggressively for traffic that is at

risk to other railroads or other modes. Railroads are

large capital network businesses with high fixed cost

which are amortized over carloads and the fewer the

number of carloads, the higher the cost of doing business.

Today’s market pressures railways to decrease expenses

and increase carloads in order to improve margins. This

means, that railroads may need to lower rates to capture

new traffic and maintain existing competitive traffic.

However, railroads will likely attempt to make up for

these reductions on the backs of captive shippers.

An increase in the disparity between rates for captive

versus competitive traffic will lead many shippers to

try and put more rail traffic at risk and pursue rate

decreases with their railroads. Shippers that are not

able to put traffic at risk to railroads, can be put at a dis-

advantage in the current market as the disparity in rates

for captive and competitive traffic will likely become

larger. Shippers need to prepare their strategy for how to

best take advantage of current market conditions so they

do not lag behind competitors rates in their markets. (Continued on page 2)

4Q2015 Commodity Results

Rates are Down for 12 of 13 Commodities

The fourth quarter 2015 commodity results (third to

fourth quarter 2015) for railroads in Table 1, show that

rates decreased on twelve of thirteen major commodity

groups. This combined with the fact that twelve of the

thirteen commodity groupings had decreases in the aver-

age rate per ton from the fourth quarter 2014 to the fourth

quarter 2015 show a continuing downward trend in rail

rates. Shippers that would like to look at results for spe-

cific commodities on their railroads will need to call Es-

calation Consultants or go to RailRateChecker.com and

click on Free Rate Data.

Rate decreases between the third and fourth quarters

of 2015 ranged between -7% and -2%; only Farm

Products (STCC 01) increased. Farm Products had a

4.1% increase over this time frame. Crude Petroleum

(STCC 13) had the largest decrease at 7.1%, followed by

Coal (STCC 11) at -4.9%.

Figure C shows the annual average change in rate per ton

by major commodity grouping between the fourth quar-

ters of 2014 and 2015 on US Class I railroads. Figure C

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RAIL PRICE ADVISOR

shows that over the last four quarters the average rate per

ton on all major commodity groups ranged between

-22.1% for Nonmetallic Minerals (STCC 14) and an in-

crease of 1.2% for Pulp, Paper or Allied Products (STCC

26). Figure C shows that, on average, shippers were pay-

ing lower rates at the end of 2015 than they were at the

beginning of 2015. Shippers should be aware that if they

had rate increases over this timeframe their rates in-

creased more than the average rail shipper.

Table 2, on page 3, shows the macro picture for rail rate

changes for all commodities with and without fuel sur-

charges on each of the US Class I railroads from the

fourth quarter 2014 to the fourth quarter 2015. UP and

NS rates without fuel surcharge increased 1.8% and

0.9%, respectively, while CSXT rates decreased by 2.2%.

When considering the total rate, plus fuel surcharges

Table 1

Ranking of 4Q2015 Average Rate Changes Per Ton by

Commodity on U.S. Class I Railroads

From Same Qtr. Last Yr.

4Q14 to 4Q15

From Prior Qtr.

3Q15 to 4Q15

01-Farm Products -5.9% 4.1%

20-Food/Kindred Products -4.3% -0.2%

26-Pulp/Paper/Allied Products 1.2% -0.5%

29-Petroleum/Coal Products -6.3% -0.5%

32-Clay/Concrete/Glass/Stone Prod. -5.7% -0.5%

33-Primary Metal Products -3.1% -0.6%

24-Lumber/Wood Prod. -1.2% -0.7%

28-Chemicals/Allied Products -4.4% -0.7%

46-Intermodal - Misc. Mixed Shipments -5.4% -1.1%

14-Nonmetallic Minerals; Exc Fuels -22.1% -3.8%

37-Transportation Equipment -9.7% -4.2%

11-Coal -10.6% -4.9%

13-Crude Petroleum/Nat. Gas/Gas -15.1% -7.1%

Note: Commodities ranked from high to low rate of change over last quarter (3Q2015 to 4Q2015).

Source: Railroad's Quarterly Freight Commodity Statistics filings to the STB.

Shippers’ Negotiation Leverage Increases as

Rail Carloads Decrease (Continued from page 1)

The average change in stock prices of CSXT, NS and UP

through February 2016 included in Figure B indicate that

railroads will be having a difficult time for the foresee-

able future as stock prices continue to fall. Shippers

should be prepared to take advantage of the situation to

the same extent railroads did when the shoe was on the

other foot.

Railways. The bottom of Table 3 summarizes changes in

tons moved and revenue per ton by carrier e.g. CSXT

total tons moved decreased by 11.5% and average reve-

nues per car was flat at 0%, CNUS volumes are down by

22.8%, but revenue per ton is up 6.6%. NSC volumes

and revenue per ton both decreased.

The Western carriers shown on Table 4, on page 5, all

suffered decreases in the average revenue per ton for all

commodities.

Tables 3 and 4 track 13 two-digit commodity codes for

seven Class I railroads. Railroads have had double digit

percent reductions in the average dollars per ton (rates) in

a large number of commodities. At the bottom of Tables

3 and 4 the overall performance for each railroad is sum-

marized. The big four US Class I railroads all had

negative changes in volume and three of the four had

negative changes in average dollar per ton; only CSXT

avoided a drop and its change was 0.0%.

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RAIL PRICE ADVISOR

three carriers had rate decreases, while BNSF rates in-

creased 0.9%. The amount of change attributable to fuel

surcharges ranged from a 1.2% decrease on NS to a 2.3%

decrease on BNSF.

Figure D shows the largest rate increase by two-digit

commodity code for the major US Class I railroads be-

tween the third and fourth quarters of 2015. The CSXT’s

6.5% rate increase for Farm Products (STCC 01) ship-

ments is the highest average rate increase for a two-digit

commodity. Figure D shows the largest rate increases

by two-digit commodity code for the railroads yet

25% of the changes shown are negative, this gives an

indication of the market conditions faced by railroads.

Figure E shows the commodities with the lowest rate

changes for US railroads from the third to the fourth

quarters of 2015. The -11.5% change in the rate per ton

for Transportation Equipment on the BNSF is the biggest

reduction. Nonmetallic Minerals, which includes frack

sand, not unexpectedly, has rate decreases on all four of

the major US Class I carriers, Petroleum or Coal Products

and Crude Petroleum, Natural Gas or Gas (STCC 29)

also has significant reductions on CSXT and UP.

Table 3, on page 4, tracks the change in major two-digit

STCC commodity grouping volumes and revenues be-

tween the fourth quarters of 2014 and 2015 for Eastern

The Rail Price Advisor is published by Escalation Consultants, Inc. Jay Roman, Editor Shade May, Associate Editor Cathy Ferguson, Coordinator Copyright 2016. No reproduction in any form is permissible without written authorization nor shall any information herein be put into any type of retrieval system without prior written permission. Escalation Consultants makes every effort to supply accurate data, but it does not assume responsibility for the reliability of information attributed to other sources. Subscription rate $500 U.S. (via email) Escalation Consultants, Inc. (301)977-7459 4 Professional Drive, Suite 129 Fax: (301)977-9248 Gaithersburg, MD 20879

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Table 2

Average Change in Revenue Per Car With and

Without Surcharge Revenue for U.S. Railroads

(4Q2014 - 4Q2015)

With

Surcharges

Without

Surcharges

Change Attributed to

Fuel Surcharges

BNSF 0.9% 3.2% -2.3%

CSXT -3.5% -2.2% -1.3%

UP -0.3% 1.8% -2.1%

NS -0.3% 0.9% -1.2%

Source: Railroads' SEC and STB Fuel Surcharge filings.

4 No reproduction in any form is permissible without written authorization.

RAIL PRICE ADVISOR

Table 3

Fourth Quarter 2015 Tons and Revenue Per Ton for Major Commodities on Eastern Railroads

(Tons in Thousands)

Percent Change

from

Percent Change

from

Percent Change

from

Commodities CSX 4Q14 CNUS 4Q14 NSC 4Q14

Source: Data are compiled from railroads' QCS reports.

01-Farm Products

Tons 4,925 -3.5% 2,361 -46.1% 5,171 -7.4%

$/Ton $24.90 -6.3% $22.48 6.7% $23.03 0.2%

11-Coal

Tons 23,284 -27.9% 9,440 -17.7% 27,451 -13.0%

$/Ton $17.50 -5.9% $6.90 -10.9% $15.21 -6.9%

13-Crude Petroleum, Natural Gas or Gas

Tons 2,364 -23.7% 1,024 -31.4% 2,388 -23.3%

$/Ton $22.88 -12.6% $15.87 -15.9% $22.17 -18.7%

14-Nonmetallic Minerals; Except Fuels

Tons 11,157 1.4% 3,210 -27.6% 6,087 -8.7%

$/Ton $10.41 -9.6% $12.73 -24.0% $13.18 -23.0%

20-Food or Kindred Products

Tons 5,773 0.4% 2,619 -2.6% 6,208 0.8%

$/Ton $33.61 -3.1% $20.80 0.6% $31.68 -1.8%

24-Lumber or Wood Products Exc. Furniture

Tons 2,190 -7.5% 2,134 -2.7% 1,787 -7.0%

$/Ton $28.99 0.7% $18.67 -6.4% $29.06 -2.7%

26-Pulp, Paper or Allied Products

Tons 3,184 -8.3% 2,153 -9.5% 3,274 0.0%

$/Ton $37.61 1.0% $26.20 0.5% $35.32 1.7%

28-Chemicals or Allied Products

Tons 12,981 -5.3% 7,741 -1.5% 9,685 4.2%

$/Ton $37.46 -0.2% $18.83 -5.6% $39.80 -7.2%

29-Petroleum or Coal Products

Tons 3,409 7.6% 1,800 5.7% 3,260 14.4%

$/Ton $35.09 -9.1% $17.20 -5.3% $34.98 1.3%

32-Clay, Concrete, Glass or Stone Products

Tons 3,123 -4.2% 907 -5.2% 3,514 -4.9%

$/Ton $25.98 0.4% $18.44 -5.0% $27.73 -7.6%

33-Primary Metal Products

Tons 3,226 -19.7% 1,180 -27.1% 5,439 -19.0%

$/Ton $30.82 0.4% $23.40 -5.6% $25.52 -7.7%

37-Transportation Equipment

Tons 3,413 11.1% 994 1.8% 2,690 5.9%

$/Ton $98.82 -9.6% $65.13 -2.6% $102.80 -4.3%

46-Intermodal - Miscellaneous Mixed Shipments

Tons 6,350 0.9% 1,657 19.8% 8,106 -6.9%

$/Ton $40.55 -4.7% $27.94 -3.9% $36.11 2.5%

Total Tons 93,198 -11.5% 44,543 -22.8% 89,338 -7.8%

Average $/Ton $28.81 0.0% $16.52 6.6% $28.19 -1.8%

495 -14.5% 281 -16.4% 525 -2.6% Average Haul

5 No reproduction in any form is permissible without written authorization.

RAIL PRICE ADVISOR

Table 4

Fourth Quarter 2015 Tons and Revenue Per Ton for Major Commodities on Western Railroads

(Tons in Thousands)

Percent Change

Percent Change

Percent Change

Percent Change

Commodity BNSF 4Q14 KCS 4Q14 UP 4Q14 SOO 4Q14

Source: Data are compiled from railroads' QCS reports.

01-Farm Products

Tons 18,773 9.5% 1,728 -6.7% 9,905 -11.4% 3,075 -18.4%

$/Ton $42.15 -10.3% $23.70 1.3% $36.33 -12.4% $20.57 -13.0%

11-Coal

Tons 65,396 -7.0% 5,959 5.2% 40,720 -23.1% 2,219 9.3%

$/Ton $15.76 -12.2% $7.35 -12.8% $17.88 -10.1% $6.54 5.4%

13-Crude Petroleum, Natural Gas or Gas

Tons 6,621 -34.3% 763 235.1% 1,965 -41.1% 320 3.9%

$/Ton $35.37 -7.8% $15.85 -26.6% $25.78 -21.0% $23.44 -6.3%

14-Nonmetallic Minerals; Except Fuels

Tons 7,995 -13.6% 978 7.2% 12,833 -21.4% 963 -55.7%

$/Ton $22.43 -15.4% $13.37 -31.6% $21.11 -25.2% $20.50 -5.4%

20-Food or Kindred Products

Tons 9,007 1.2% 1,169 11.7% 10,190 -1.2% 1,882 4.4%

$/Ton $44.14 -6.7% $24.87 2.7% $52.20 -3.7% $19.08 -8.8%

24-Lumber or Wood Products Exc. Furniture

Tons 2,016 3.4% 283 -10.7% 2,932 -0.1% 320 3.9%

$/Ton $57.20 -3.2% $21.32 8.5% $59.93 -2.2% $23.44 -6.3%

26-Pulp, Paper or Allied Products

Tons 1,916 7.6% 1,449 -7.4% 2,075 -2.4% 429 0.8%

$/Ton $50.39 -1.2% $33.11 3.9% $59.41 -1.1% $24.14 -5.9%

28-Chemicals or Allied Products

Tons 10,665 7.9% 2,821 3.6% 21,209 -1.2% 3,789 -5.9%

$/Ton $42.72 -7.6% $17.60 -1.2% $40.15 -4.9% $20.57 -3.2%

29-Petroleum or Coal Products

Tons 4,280 -0.4% 1,798 31.9% 3,808 1.0% 916 -13.4%

$/Ton $46.95 -4.7% $11.49 -8.7% $44.40 -5.6% $19.23 -3.4%

32-Clay, Concrete, Glass or Stone Products

Tons 2,865 -19.5% 368 -2.4% 3,602 -8.3% 862 -14.1%

$/Ton $34.61 -7.9% $22.47 5.0% $27.93 -3.0% $17.76 -10.6%

33-Primary Metal Products

Tons 2,150 -23.1% 624 -24.2% 2,235 -29.7% 442 -18.3%

$/Ton $47.06 0.9% $26.38 -15.6% $53.66 3.5% $26.47 -1.7%

37-Transportation Equipment

Tons 2,712 38.4% 159 12.1% 4,000 10.8% 374 -0.2%

$/Ton $105.57 -26.3% $60.54 -16.1% $152.17 -6.0% $68.28 3.8%

46-Intermodal - Miscellaneous Mixed Shipments

Tons 11,301 -2.9% 757 -13.7% 6,672 -11.6% 690 2.8%

$/Ton $88.73 -5.9% $18.47 -6.2% $85.07 -5.7% $25.11 -0.3%

Total Tons 152,839 -6.1% 19,943 4.4% 126,934 -14.1% 18,799 -13.3%

Average $/Ton $34.82 -5.9% $17.10 -7.7% $39.82 -2.2% $20.37 -7.7%

1,066 -5.2% 356 -19.3% 910 -1.1% 426 -12.5% Average Haul

Railroads’ 4Q2015

STB Fuel Surcharge Filings

The fourth quarter 2015 fuel surcharge analysis show that

between the third and fourth quarters of 2015 all four of

the major US railroads had big decreases in fuel expense

and revenue. Fuel surcharge revenue changes ranged be-

tween a -27.9% on NS to -32.5% on CSXT. Table 5

shows that the dramatic drop in fuel costs in the fourth

quarter of 2015 has had a big impact on railroad profits as

fuel expenses decreased between $21.8 million on CSXT

to $101.1 million on BNSF. Surcharge revenue decreases

ranged between $31.7 million on NS and $96.0 million

on UP.

The decrease in fuel surcharge revenue is putting greater

pressure on carriers to reduce operating expenses in order

to increase margins. It seems railroads will be under a lot

of pressure for some time to come. The Energy Informa-

tion Administration projected oil prices will remain be-

low $60 per barrel for the foreseeable future and are not

expected to increase until sometime in 2017. That

means, fuel surcharge revenue is going to remain low for

a long time and given the reduced volume, railroads are

attempting to increase margins by reducing expense.

Comparing changes over just one

quarter can skew the results. Table 6

tracks changes between the fourth

quarter of 2007 (the first time rail-

roads were required to provide their

surcharge revenue) and the fourth

quarter 2015. Table 6 shows that

over this period on a percent change

basis, US railroads’ fuel expenses

decreased more than surcharge reve-

nue on CSXT, NS and BNSF, while

on NS fuel expense decreased less

than fuel surcharge revenues over the

last eight years.

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Figure F shows the fuel surcharge revenue versus fuel

expense for the large eastern railroads. This graph shows

that NS surcharge revenue was above its total fuel ex-

pense in the fourth quarter of 2008 and then dropped be-

low its fuel expense in the second quarter 2009 and has

remained that way. Figure F shows that NS’ fuel sur-

charge revenue was larger than CSXT’s through the third

quarter of 2014, but is now very similar to CSXT’s sur-

charge revenue.

It should be remembered when reviewing this data that

fuel expenses are a normal business expense for railroads

and that fuel surcharges were initiated to cover extraordi-

nary fuel expenses, not to reimburse railroads for all of

their fuel costs. Fuel expenses are also recovered in rail-

roads’ rates.

Table 5

4th Quarter 2015 Change in Fuel Surcharge Revenue

versus Fuel Expense for Major US Railroads

(3Q2015 - 4Q2015)

Change in

Fuel Cost

%

Change

Change in Surcharge

Revenue

%

Change

BNSF -$101,104,000 -14.7% -$94,015,000 -31.0%

UP -$59,599,000 -12.3% -$95,976,000 -30.6%

CSX -$21,864,000 -10.0% -$41,448,000 -32.5%

NS -$26,334,000 -11.6% -$31,653,000 -27.9%

Table 6

7¾ Year Change in Fuel Surcharge Revenue versus Fuel Expense

for Major US Railroads

(4Q2007 - 4Q2015)

Fuel Expense Surcharges Revenue

Change in

Fuel Cost

Percent Change By

Railroad

Average Percent

Change

Change in Surcharge

Revenue

Percent Change by

Railroad

Average Percent

Change

Eastern Carriers

NS -$157,066,000 -44.0% -46.0%

-$160,004,000 -66.2% -60.5%

CSXT -$181,609,000 -48.1% -$104,816,000 -54.9%

Western Carriers

BNSF -$419,775,000 -41.7% -47.5%

-$324,723,000 -60.8% -53.8%

UP -$483,804,000 -53.3% -$191,248,000 -46.7%

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2Q2016 RCAF The Association of American Railroads (AAR) forecasts

the second quarter 2016 Rail Cost Adjustment Factor

Unadjusted for Productivity (RCAF-U) to be 0.840 rep-

resenting a 2.8% decrease from the first quarter 2016

index value.

The second quarter 2016 RCAF-U is a projected index,

which has corrections for previous forecast errors in-

cluded in its value. The All-Inclusive index (RCAF-U

before forecast error adjustment) decreased 3.4% be-

tween the first and second quarters of 2016. The correc-

tions for past forecast errors caused the RCAF-U to de-

crease only 2.8%.

Table 7 lists the components and values of the AAR

forecast of the second quarter 2016 All-Inclusive Index

(AII), the RCAF-U and the RCAF-A.

It is interesting that only Equipment Rents and Depre-

ciation had an increase and these were minimal. Labor,

Fuel, Materials and Supplies, Interest and Other all de-

creased or remained flat – when costs do not increases

there is no excuse for increasing rates.

Figure G shows the percent change in the RCAF-U and

the All-Inclusive Less Fuel Index in relation to a 3%

annual increase over the last nine and a half years (2007

through 2Q2016). When reviewing this graph keep in

mind that if a contract is escalated by the RCAF-U it

would not have a fuel surcharge, but a contract would

likely have a fuel surcharge when escalated by the All-

Inclusive Less Fuel Index (AII-LF) or a 3% increase.

Table 7

AAR Forecast For The Rail Cost Adjustment Factor

Figure H shows that for the four quarters between the sec-

ond quarters 2015 and 2016 the change in Labor had the

largest increase of all components of the RCAF (3.4%),

while Fuel Expenses decreased by 40.9%, Interest de-

creased by 18.6% and Materials and Supplies decreased

6.9%.

2014 Weight

1Q,16 Forecast

2Q,16 Forecast

Percent Change

Labor 31.7% 417.7 416.4 -0.3%

Fuel 20.9% 191.2 148.7 -22.2%

M&S 5.2% 246.9 246.9 0.0%

Equipment Rents 5.4% 214.3 215.1 0.4%

Depreciation 12.6% 226.0 227.2 0.5%

Interest 1.5% 57.5 57.5 0.0%

Other 22.7% 215.5 215.1 -0.2%

All-Inclusive 88.2 85.2 -3.4%

Preliminary RCAF 0.882 0.852 -3.4%

Forecast Error Adj. -0.018 -0.012

RCAF (Unadjusted) 0.864 0.840 -2.8%

All-Inclusive Less Fuel 104.1 103.5 -0.6%

Productivity Adj. Factor 2.3502 2.3584

RCAF (Adjusted) 0.368 0.356 -3.3%

PAF-5 2.4932 2.4974

RCAF-5 0.347 0.336 -3.2%

Wage Index 72.1% 360.1 358.8 -0.4%

Supplements 27.9% 626.1 624.8 -0.2%

Labor Index 434.3 433.0

417.7 416.4 -0.3% Labor Index (Linked)

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