Railroaded
BNSF downplays role of rates in cargo diversion from U.S. West Coast ports.
By Eric Kulisch
Rail rates are only one part of the equation for West Coast ports to reverse their loss of market share to eastern counterparts, Matt Rose, chairman and chief executive of BNSF Railway, said in a mid-January interview.
The new collaboration between the region's gateway ports and the BNSF and Union Pacific railroads is off to a promising start but will require a holistic approach towards attracting shippers, the railroad executive emphasized.
Last fall the ports of Long Beach, Los Angeles, Oakland, Portland, Tacoma and Seattle began to work together, and with the railroads that haul cargo to Midwestern distribution hubs, to promote themselves as the best value for importing goods from Asia.
Pitching regional benefits and taking a common approach to freight policy in Washington is a reaction to shippers showing increased favor towards East Coast ports as a cargo destination. Among the reasons for the cargo diversion are concerns about labor stability, higher fees, and strict West Coast clean air mandates for trucks and vessels, as well as shippers' desire to directly bring cargo closer to population centers and take advantage of near-dock warehouses in several locations.
The East Coast share of container traffic from Asia has grown to about 28 percent from 20 percent seven years ago, according to most estimates. The port of Prince Rupert, Canada, also stole about 265,000 TEUs in 2009. Prince Rupert is a three-year-old facility dedicated to moving containers by rail to the Midwest.
Analysts note West Coast ports and businesses took for granted that explosive growth in container volumes would continue unabated, especially in the two Southern California ports that handle more than 40 percent of all U.S. ocean imports. Traffic is off about 21 percent at the Port of Los Angeles since container volume peaked in 2006, and down 30 percent at the Port of Long Beach since 2007. Loaded container volume for the twin ports last year was 11.7 million TEUs, compared to a high of 15.8 million TEUs in 2006.
Initial coalition talks focused on identifying problems. 'Now the heavy lifting really starts in terms of 'what are we going to do differently to reverse the market share decline.' It's going to be a combination of working with labor, making sure we have buy-in from the environmental community, (infrastructure expansion), railroads and competitive rates all across the board,' Rose told American Shipper on the sidelines of the Transportation Research Board's annual convention in Washington.
'So, we've got to make sure we've got a competitive rail product and we think we do.'
Having competitive rates also applies to port rates, fees, drayage charges and labor just as much as rail pricing, he added.
'It's all of those things together that are really important. And I think all the conversations we're having together ' nothing but good can come of it. We've got to make sure we've got the practices, policies and programs that line up and drive customers to those West Coast ports.
'Because ideally, that's where they want to go anyways. We just have to make it tenable for them to do that,' Rose said.
BNSF operating revenues fell $4 billion to $14 billion last year, including a $2 billion decline in fuel surcharges. The revenue decline was significantly offset by $3.4 billion less in operating costs, half of which was attributed to lower fuel prices. Operating income fell more than $600 million to almost $3.3 billion.
In an Aug. 4 letter inviting Rose and UP leader Jim Young to participate in the regional trade partnership, the ports expressed concern that rail rates had contributed to the flight of shippers.
'Intermodal rail economics are an increasingly influential driver of routing decisions, and while some rate changes are to be expected, recent increases are unsustainable and leading to lost cargo that will be very challenging to recoup,' the ports wrote.
An October 2008 report by Drewry Supply Chain Advisors criticized railroads serving West Coast ports for choosing to raise prices rather than invest in more capacity 'in the mistaken belief that they had a captive market.'
Railroad executives believe they've gotten a bum rap over increases in transcontinental rail rates, which began to rise as long-term legacy contracts negotiated with ocean container lines and other customers at very cheap rates began to expire in the middle of the last decade.
Stephen Branscum, group vice president for consumer products at BNSF Railway, took issue with suggestions during a major freight industry conference and expo in Anaheim in Nov. 16-17 that price gouging had caused shippers to find other transportation options for their international cargo.
'What happened over a period of time was a combination of rate increases and dramatically increased fuel prices and the implementation of fuel surcharges. In some cases, the two together resulted in double-digit changes,' he said.
Many large shippers purchase all-inclusive transportation from the ocean carriers and don't really notice the rail portion of their freight bill, he added.
Other issues, Branscum said, are playing a bigger role in East Coast diversion.
'The factors that are more important than a transport rate is fear of the unknown about new legislation, fear of the unknown about container fees, concerns about labor productivity on the West Coast, concerns about labor disruption on the West Coast.
'In an extensive amount of dialogue with the railroads and the ports, the ports admitted they really don't know (the rate situation) and said they're passing on what they hear in the marketplace. They didn't have anything to substantiate it. And after considerable dialogue, they said, 'There probably are a lot of issues here. It's complicated. So, why don't we get together and take a big collective bucket of issues instead of focusing on these single issues,' he said.
Jeff Hoy, senior transportation manager for Home Depot, testified that the home improvement retailer doesn't make transportation decisions based on the rail rate. But another executive who attended the rail panel discussion privately said rail rates were the reason his company shifted business off the West Coast.
Shippers have unrealistic expectations about ocean and rail rates because they are used to carriers under pricing their service, according to freight transportation consultant Theodore Prince.
Railroads simply brought their prices up to market rates and started charging for relocating empty containers back to the coast, he explained in an interview.
When excess capacity in the rail networks began to dry up with the economic and trade boom, railroads began to charge the full cost rather than only the marginal cost of service, the former railroad and shipping line executive said. That meant factoring in items like the prorated cost per box of the rail equipment, intermodal chassis and the empty relocation in addition to the normal operating cost of the move.
Prince, who heads T. Prince & Associates in Richmond, Va., noted that as railroads better covered their costs and began earning decent returns they were able to invest in proper maintenance and expansion of their infrastructure. Rates went up 10 percent to 20 percent depending on the level of the customer's original deal.
Railroads, he said, became more disciplined than the liner industry by no longer acquiescing to large shippers' demands for lower rates. The ocean carriers continued to order bigger vessels on the premise that they could make money on the economies of scale rather than appropriately pricing each box, and the railroads did not go along with commensurate price cuts for all-in rates.
'The railroads said, 'We're not here as a social organization. We're here as a very asset-intensive business,' ' Prince stated. 'It's not like they got all predatory and duopoly wise. They just said the party is over. 'We finally got our business to the point where it's in equilibrium, where supply and demand match and we're going to manage it accordingly. We want the business, but we're not going to give it away like we used to.' '
Prince said the railroads' mistake wasn't their pricing strategy but their heavy-handed style in dealing with customers.
Eventually, some liner companies such as Maersk opted to scale back their inland intermodal delivery points, concentrate on high-volume routes and walk away from unprofitable business to reduce their costs.
Other industry analysts and executives say that a certain amount of cargo diversion to the East Coast will take place for reasons independent of rail rates, and that it makes sense for other intermodal cargo to continue utilizing West Coast ports.
Economics dictate that low-value cargo, such as furniture and housing materials, take the cheaper all-water route through the Panama or Suez canals, and that 'high-value goods will always continue to use the intermodal system,' Rodolfo Sabonge, vice president of market research and analysis for the Panama Canal Authority, said last year at the Virginia Conference on World Trade in Fairfax County.
Industry experts say the cost of fuel, the impact of interest rates on inventory holding costs, vessel charter rates, truck availability and pricing, improved shipment tracking and supply chain management, emissions output, cargo value and shelf life, customer location, and other factors all weigh into shippers' decisions on how to route their cargo..
'The real battleground is going to be in the Ohio Valley, the Atlanta-to-Memphis, and Mississippi gateway markets,' said James R. Brennan, a partner and freight transportation analyst at management consulting firm Norbridge, at the conference.
'If you're Union Pacific or BNSF, are you going to cut your rates 25 percent for business that's going to Baltimore? A third or more of the haul doesn't move on your railroad, which means a third or more revenues' aren't realized, he said, referring to the practice of interchanging transcontinental traffic to the Class 1 railroads that operate in the eastern United States.
'If you cut the price, it gives CSX and Norfolk Southern potentially the umbrella to hold their price. It's not a simple 'whack the rate and get cargo' perspective,' Brennan said. 'Arguably, you could cut the rate and with the big ships coming in you might still not be able to compete in New York or Hampton Roads.'
(The widening of the Panama Canal will enable ships of more than 12,000 TEUs to cut across the Central American isthmus.)
Port of Los Angeles Executive Director Geraldine Knatz recently told the Los Angeles Times that the Southern California ports will launch a marketing blitz this year to promote their harbor and distribution advantages.
In December, the Los Angeles Harbor Commission approved a $25.7 million temporary relief package for container terminals, including a 6 percent rent credit as well as an empty container fee discount and reduced rates for transshipment within the port. Most of the savings are expected to be realized by June 2010.
The price rollbacks follow $15 million in discounts granted by the port during 2009, mostly in the form of an intermodal container discount for customers that increased their use of rail.
Harbor commissioners said during the public meeting that they will consider extending or making permanent the rate reductions for empty containers and cargo moved between vessels to remain competitive with other ports.
Knatz said in a statement that the measures would help the port protect its market share and maintain its competitiveness.
The port previously postponed a container fee to pay for infrastructure improvements.
It will take years for the Los Angeles and Long Beach ports to regain diverted cargo, said Patty Senecal, the head of California government affairs for the International Warehouse Logistics Association.
'The concern for Southern California logistics providers is that cargo volumes are not likely to return at the same rapid pace as they declined. Rather it will be a slow climb for many years.
'The ports are learning they will need to compete for cargo and become more user friendly, reduce cost and improve truck efficiency to attract shippers to their ports,' she said.
(To learn more about the West Coast ports' marketing strategy, read 'Strange bedfellows,' Web-only content from the December American Shipper, online.)