Highway Freight vs. Rail Transport: The Battle of Advantages Amid Surging Spot Rates

The old saying "things turn into their opposites when they reach the extreme" applies widely, from a baseball thrown into the air to many aspects of market operations.

Current trucking rates are in an "upward" phase, with no signs of a downturn yet. Meanwhile, shippers are seeking alternatives—looking toward rail yards.

Rail has long been a competitor to trucks and once carried most of America's long-haul freight. But according to the Association of American Railroads (AAR), by 1978, rail's share of intercity freight had fallen to 35%. Today, trucks dominate, carrying about 80% of freight volume, says Tim Denoyer, vice president and senior analyst at ACT Research.

However, when truckload (TL) capacity is tight and spot rates are high—as is currently the case—shippers reconsider rail and intermodal options.

Denoyer points out that a surge in imports from Asia arriving via California ports is part of the driver behind current market dynamics. U.S. imports are up 34% from May, driven by factors including continued consumer demand growth after the initial COVID-19 outbreak in spring, and retailers' need to replenish inventory.

Typically, trucks handle most of the long-haul transportation of imported goods from ports to inland U.S. points. But trucking faces numerous obstacles in meeting stronger demand, including factors such as the pandemic and driver shortages.

A mix of positive and negative factors is driving up truckload spot rates, leaving shippers facing higher prices.

Truck advantages: speed and visibility

Higher prices are helping intermodal companies and railroads gain more freight business. But Dean Croke, principal analyst at DAT, says such freight typically isn't the kind that needs to be delivered quickly.

"If your freight isn't urgent, put it on a train," Croke says. Rail freight is therefore also cheaper.

But not all freight can easily shift between road and rail. Dry goods in containers are usually best suited for trucking and are also easy for trains to handle. Such goods include consumer products like clothing, electronics, sporting goods, and toys—almost anything that fits in a container can be shipped in a dry van.

Liquid and refrigerated goods can also be transported via intermodal, says Jim Blaze, a rail analyst and former Conrail employee.

Croke says intermodal is a reasonable choice if delivery lead times are longer. Shippers are already considering spring demand and want to stock up early "because the pandemic isn't over yet." Pulling inventory forward is an ideal scenario for intermodal.

"You can let freight sit in the rail system longer," Croke says.

Blaze notes that highly regulated goods, such as industrial chemicals and hazardous materials, are generally not suitable for intermodal, though some exceptions exist. Large wide-body freight is typically handled only by flatbed trucks, though some railroads can make exceptions.

Shifting to rail also involves other trade-offs. Visibility provided by rail transport is lower, at least from the shipper's perspective.

"The railroad knows exactly where your freight is," Nick Little, director of Michigan State University's Center for Railway Research and Education, told a roomful of shippers at the APICS conference in Chicago in October 2018. "But they won't tell you."

Visibility is indeed an issue, Blaze says. Automatic identification tags attached to rail freight help railroads speed up data entry, but these tags rely on being captured by radio frequency beams as freight passes fixed scanning points, a process Blaze calls "interrogation." Because freight must pass a scanning point to be tagged, delays often occur.

Most trucks, in contrast, are equipped with GPS devices that transmit signals almost continuously in real time.

"With trucks, it's immediate, continuous communication," Blaze says. "With rail, it's only occasional communication."

A tale of two tight markets

Many shippers have already chosen intermodal, and spot rates have risen along with demand. According to Croke's data, intermodal spot rates in early October were $1.74 per mile, compared to a monthly average of $1.31 in May.

Overall, U.S. railroads shipped about 1.4 million intermodal containers in September, up more than 7% year over year, according to the latest statistics from the Association of American Railroads (AAR). The AAR called September the fourth-best intermodal month in history.

"Railroads are hauling as much as they can," Croke says. "Just like trucking, there are imbalances in volume."

Part of the imbalance stems from the fact that railroads have a harder time adding freight cars. Blaze says ordering and receiving a freight car takes 12 to 18 months. Truck fleets, on the other hand, can walk onto a sales lot and immediately buy nearly new or used trucks.

"Railroads aren't going to take 10% market share from trucking because they simply don't have enough equipment capacity," Blaze says.

Blaze also notes that railroads sometimes don't even quote rates because shrinking capacity overwhelms them.

"Both markets are tight right now," Denoyer says of trucking and rail. "What's happening is just a massive inventory restocking."

For rail, this is a major reversal. Denoyer says rail volumes declined for seven consecutive quarters until turning positive in the first week of October. Intermodal spot rates in the first week of October were 61% higher than the same period in 2019.

Denoyer says part of the reason for the jump in spot prices is that Union Pacific imposed a $5,000 peak surcharge on August 30 for freight exceeding contracted volumes. The surcharge was designed to manage demand.

But weeks later, consumer demand still dominates. Denoyer says the number of loaded containers (TEUs) entering U.S. ports since September 1 is up 6% year over year. These goods typically end up being carried by trucks or trains. The question facing shippers is: in a freight market where truck capacity is tight and intermodal takes longer, which mode is better?

Blaze says selling truckload services to shippers against rail competitors is a relatively easy task. Intermodal and rail can take longer. Trucks aren't constrained by fixed rail lines and offer better visibility.

Croke believes trucks have the advantage—especially when lead times are tight.

"Shippers value service and price," Croke says. "A driver can reach a destination faster than the fastest train."