Rail Vs. Road: Transportation Economics In The U.S.

Includes: FDX, IYT, UNP, UPS, XTN
by: Procyon Mukherjee


Rail is a minuscule part of the total freight transportation in the U.S. contributing to just 3% of the overall freight movement in value and 9% in weight.

Rail movement has shrunk in the last several decades and road has continued to be the dominant mode for freight movement contributing to 64% in value and 70% in weight.

Multi-modal systems, including mail order delivery, is the fastest growing segment which is slated to rise to $9.9 Trillion in value terms by 2040, contributing to 25% of all modes.

For evaluating ETFs like the iShares Transportation Average ETF (IYT) or the SPDR S&P Transportation ETF (XTN), the data projected by the U.S. Department of Transportation is very important. It is also important for operators like FedEx (NYSE:FDX), UPS (NYSE:UPS), or BNSF and Union Pacific Rail (NYSE:UNP).

Contrary to popular beliefs, rail transportation in the U.S. is a minuscule component of the freight movements by value or volume terms according to the last published report by the Department of Transportation named, "Freight Facts and Figures 2015." The rail infrastructure, including the route miles, which covered 400,000 km in the past, has now shrunk by 50%, as per this report.

But first let me share the facts and figures from this report in the following table (value in billion USD and weight in million tons):

Freight Data from the Report
2007 Value 2007 Weight 2013 Value 2013 Weight 2040 Value 2040 Weight CAGR
Truck 10780 12778 11444 13955 21465 18786 2.5%
Rail 512 1900 577 1858 898 2770 -6.4%
Multi-Mail 2884 1429 3065 1554 9925 3575 10.5%
Pipeline 716 1493 1083 1539 776 1740 -2.7%
All Modes 16651 18879 17983 20063 39265 28520 4.1%

The real good news is that the transportation economy as a whole is slated to grow at a CAGR of 4%.

Freight movement by trucks (in both value and weight terms) forms the bulk of the movements among all modes of transportation.

The value of freight moved is expected to increase faster than the weight, rising from $882 per ton in 2007 to $1,377 per ton in 2040, when controlling for inflation as per the report. This clearly is an indication of the change from commodity to more sophisticated goods in the future years.

The largest percentage of goods movement occurs close to home. Approximately 50% of the weight and 40% of the value of goods were moved less than 100 miles between origin and destination in 2007. Less than 10% of the weight and 18% of the value of goods were moved more than 1,000 miles.

Most goods are moved short distances (less than 250 miles), accounting for 55.7% of the value, 70.7% of the weight, and 16.7% of the ton-miles for all shipments within the United States in 2007. Shipments transported more than 250 miles represented less than 30% of the tonnage, but the vast majority (83.3%) of the ton-miles. Modal shares of freight vary by distance. Trucks carry the largest shares by value, tons, and ton-miles for shipments moving 750 or fewer miles, while rail is the dominant mode by tons and ton-miles for shipments moved from 750 to 2,000 miles. Air, multiple modes and mail, and other/unknown modes accounted for 51.8% of the value of shipments moved more than 2,000 miles.

The top 10 commodities by weight are comprised entirely of bulk products and accounted for 64.6% of total tons but only 16% of the value of goods moved in 2013. The top 10 commodities by value accounted for 58.0% of total value and 18.8% of all tons. The leading commodities by weight are bulk goods including gravel, cereal grains, and non-metallic mineral products. The leading commodities by value are high value-per-ton goods requiring more rapid delivery, including machinery, electronics, and motorized vehicles.

But the growth in the future is taken over by Multi-modal and mail order system in the U.S., which is projected at a CAGR of 10.5% in value terms, while the same for trucks is projected at 2.52%.

The rail mode is projected with a decline of 6.4% CAGR in value terms, which includes all Classes of Rail Road. The steady decline of rail as a mode of freight transportation in the U.S. is in sharp contrast to the growth of rail in most developing nations. This is a clear indication of the shift of manufacturing from mining, quarry and bulk commodities to equipment and other sophisticated products. It is also evident in the import data and the rise in imports of finished goods.

The statistics of transportation cannot be ignored while evaluating growth prospects of companies like BNSF, Union Pacific Rail or for ETFs like IYT or XTN. The future prospects of mail operators like FedEx or UPS is also linked to this data, which bodes well with the future of these entities as very high growth is projected in this sector.

BNSF or Union Pacific Rail (both are Class 1 rail operators carrying only freight) in recent times had shrunk in revenue terms, which is in line with the data as projected. On the other hand, they have cut costs and improved productivity to improve their bottom lines.

To compare how efficient BNSF is, let me compare Indian Railways with it, which is the single state enterprise in India that hauls all freight traffic and also passengers across India. BNSF covers 36,000 route miles, which is not very different from the coverage of 65,000 km in the case of Indian Railways. But BNSF employs just 44,000 people against the Indian counterpart employing 1.3 million and with additional pension obligations for 1.4 million people. The revenue generated by both the entities is similar, at around $24 billion, while the operating ratio of BNSF is 64% and that of Indian Railways is 92%.

Union Pacific and BNSF have identical operating ratios and very similar revenues and cost structure. They compete in a space where the overall pie could be shrinking. It remains to be seen whether further consolidation happens in Class 1 rail in the U.S.

As road would remain to be the dominant mode of transportation, it is important that congestion and delays must be reduced in the clusters where the data is available in the report provided by the Transportation department. How delays contribute to loss is evident in the recent report by Bloomberg, which highlights the travails of the European Union in the recent migrant crisis that is prompting border checks. The borderless highway travel gave the EU economy several hundred billion euros of economic advantages. The borderless road in the EU is now up for some severe restrictions due to the migrant crisis, as border checks are expected to take out about 400 billion in ten years out of the economy; such are the costs of queuing.

The same could be true for the U.S. if the work on removing infrastructural bottlenecks is not taken up in the areas of expected congestion as per the report. Higher allocation of funds in infrastructure to improve road bottlenecks is only to be expected in times to come.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.