High fuel costs shift US freight to rail

Record fuel prices in the United States are driving more freight off highways and onto trains, lifting third-quarter revenue and profit at major railroads. Union Pacific, Norfolk Southern and CSX all reported higher profit and revenue in the period as shippers sought cheaper ways to move goods over long distances.

Rail carriers are benefiting as elevated diesel prices make their relative fuel efficiency more attractive compared with long-haul trucking. Executives indicated that high fuel costs and fewer available trucks have been key factors behind the recent increase in rail volumes.

Railroads move freight at a lower cost per ton across the United States, giving them a competitive advantage as fuel prices rise. Union Pacific’s chief executive Jim Vena said it costs the railroad way less per ton to move products, describing higher fuel prices as a natural advantage for the rail sector.

Diesel, a key cost component for freight carriers, reached a record $6.53 per gallon in September, according to AAA.

The impact of the modal shift is most visible in intermodal shipments, where freight is moved by rail for the long-haul leg and trucks typically handle pickup and final delivery. Intermodal services compete directly with long-haul trucking for shipper demand.

Union Pacific’s domestic intermodal volume increased 13% from a year earlier in the third quarter. CSX reported a 7% rise in intermodal volume, while Norfolk Southern recorded a 3% increase, underscoring growing shipper use of rail-based options for longer hauls.

Industry observers report a shift in long-haul truckload freight toward intermodal solutions, along with greater use of transload facilities and rail-served distribution centers. These developments indicate shippers are adjusting their networks to balance cost, capacity and service under higher fuel conditions.

Shrinking trucking capacity is reinforcing the move toward rail. A prolonged freight downturn has pushed smaller truck carriers out of the market, while high operating costs and stricter driver enforcement have limited the return of trucking capacity.

The truck market has flipped this year, with recent tonnage levels reflecting reduced capacity rather than strong underlying demand. With fewer trucks available, shippers are turning more to rail, particularly for long-haul movements where intermodal can substitute for truckload service.

While railroads are winning market share and generating higher revenue, elevated fuel prices are also raising their own operating costs. This has made it more difficult to fully convert stronger revenue into proportionately higher profits.

Union Pacific said high fuel prices hurt its third-quarter operating ratio by 140 basis points. Norfolk Southern indicated that fuel costs accounted for about half of the year-over-year increase in both its revenue and expenses, highlighting how fuel is both a tailwind for demand and a headwind for margins.

Fuel surcharges have helped offset some of the cost pressure, but railroads continue to manage the balance between capturing additional freight and protecting profitability in a high-fuel environment.