A rail strike could benefit the trucking market in the short term because it could provide a significant lift to spot prices.
But if a strike drags on, congestion, undetermined higher costs and potential service deterioration will outweigh any benefits, sources told FreightWaves.
“There isn’t enough capacity in the world available to switch from rail to alternative means and keep a stable economy,” said Glenn Koepke, general manager of network collaboration for FourKites, a supply chain visibility platform provider.
A rail strike could happen as early as Dec. 9 because four unions and the freight railroads are at an impasse over a new collective bargaining agreement. The unions, which represent over 56% of unionized rail workers at the table, rejected ratifying their contracts, which had initially been negotiated in September. The unions felt that the agreement didn’t adequately address paid sick leave policies, but freight railroads have been reluctant to offer that provision, pointing instead to historic pay increases and beneficial changes to health care provisions.
Both parties are back at the bargaining table, but stakeholders — including hundreds of shippers — have pushed Congress to intervene to prevent a strike that could happen if no agreement is reached by Dec. 8.
The House of Representatives did vote Wednesday to pass legislation that would avoid a rail strike by requiring the unions and the railroads to adhere to the labor contract agreed to in September. A resolution also voted on Wednesday tacks on seven days of paid sick leave to the agreement.
A vote in the Senate is expected soon.
Some volumes are already moving to truck
Already trucking companies are starting to see some movement of rail volumes to trucks as shippers seek to stockpile ahead of a potential strike.
That activity — that modal preparation to a greater dependency on truckload, as Koepke calls it — will only accelerate over the weekend.
Jeff Flowers, chief operating officer for OneRail, a last-mile delivery provider, agreed. “If we do not see a clear direction as soon as Friday … I expect more shippers to implement contingency plans as a risk-mitigation strategy. In this event, a natural shift of delivery opportunities to trucking should occur.”
Freight railroads could also begin curtailing the movement of certain hazardous materials around Sunday to ensure that no trains get stranded en route. The railroads had taken similar actions in September, ahead of a potential rail strike that could have occurred had not a tentative agreement been reached by the railroads and the two largest unions representing train conductors and locomotive engineers.
Besides hazardous materials, shippers will be seeking to quickly send out other commodities, such as packaging material, finished vehicles and perishable goods.
“What we’re starting to see is that there’s some diversion of freight happening now, particularly like hazmat or food — a lot of foodstuff that is at risk of hitting spoilage while it’s on the rail if it were to get locked up,” said Spencer Shute, principal consultant at Proxima, a supply chain consultancy firm.
Koepke said shippers are trying to ship forward as much product as they can.
“That way, if a blip does happen for a short period, whether it’s hours or a couple of days, then they have some slack in their order window. So really, what it’s going to cause is more chaos in the labor market and the planning market, less on the physical side,” he said.
“So if [a strike] happens for a few hours or a day, it’s more of, you’re taking a finite level of resources and stretching them thin. At that point, there’s only so much you can do in the moment. So a lot of that preparation right now is how do I push orders out so that if something does happen for a few days we’re not exposed. But it’s just very volatile. It’s hard to predict what will go on.”
The spot truck market will benefit from the volume diversion — at the beginning
At first, a rail strike could benefit the trucking market because it has become soft, which benefits shippers.
“A rail strike would be a net positive for trucks and given that there is excess capacity right now, it would be a pleasant boost for them,” said Todd Spencer, president of the Owner-Operator Independent Drivers Association. “Trucks couldn’t haul everything moved on rails, but they would move those items that are most in demand.”
A rail strike could also jolt spot truckload prices higher, Koepke said. “Coming into the end of next week, it will be a spigot at that point. Chaos would ensue. When I say chaos, what I mean is we’re going to see truckload spot pricing go to pricing levels we’ve never seen before.”
Trucking capacity could also tighten in certain areas, which would also support higher prices.
Those who could benefit from the volume diversion from rail to truck and the resulting significantly higher margins include trucking carriers and service providers, 3PLs and broker firms.
“A company like ours stands to gain a little bit in terms of activity at our warehouses and possibly even margins if demand spikes the prices upward,” said Joe Monaghan, CEO and founder of Worldwide Logistics Group, a global freight forwarder. “But overall, the negatives [of a strike] far outweigh any short-term gain that we might enjoy in that kind of a scenario.”
If a strike continues, expect congestion and uncertainty with Q1 costs
In environments where there are high spot prices for truckload as well as limited capacity, negative impacts might be felt for on-time pickup, on-time delivery and general transit times, according to Koepke.
As a result, trucking companies, as well as shippers and manufacturers that heavily rely on rail, could experience unbudgeted higher costs as they head into the first quarter of 2023.
“There is a significant concern that they will start the year off with costs being out of whack relative to what they budgeted and forecasted for Q1,” Koepke said. “When you think of companies that are on a calendar year fiscal year, they don’t want to start Q1 out lopsided.”
Besides costs, another downside for the trucking market is the potential congestion that could arise, particularly at the ports.
“Ultimately, what’s going to happen is that we’re going to start seeing backlogs at ports more rapidly as a lot of freight comes through the ports, goes onto the rail and moves to another final destination,” Shute said.
Currently, cargo comes off the ship and moves straight to rail or intermodal movements, thus clearing off a significant percentage of the cargo that’s being discharged from the vessel, Monaghan said. But if that freight will need to be handled locally by trucks, it would cause a bottleneck. That bottleneck would subsequently lead to a shortage of equipment as well, driving prices upward.
“From our personal standpoint, we would expect that our portside warehouses would get really, really busy because people would no longer be able to move intermodal into the interior so they’d have to find an alternative, which would mean transloading the cargo out of the ocean containers at the port and moving over the road,” Monaghan said.
But if there is not enough capacity for transloading, containers also could get left on the dock for longer than they otherwise would, he said.
“That has a mushroom effect. Because once you have a day or two of problems, it usually causes a week or two to get out from under those blooms. So that’s the biggest concern,” Monaghan said.
While Monaghan hasn’t heard of anyone preemptively starting to do more transloads, more people have been asking his company for quotes, including those who don’t traditionally do transloading.
“Overseas, people are asking us all the time. People that are importing into the United States are asking us what’s happening,” Monaghan said. “For the most part, we tell them that we don’t think a strike is going to happen, but that doesn’t keep them from being nervous.”
A more dire situation that could arise would be similar to what happened two years ago during the height of the COVID-19 pandemic: Larger shippers would be able to access the freight transportation markets while smaller businesses might not because of the high costs.
“There is no amount of capacity that can take on what is moving on the rail networks in the U.S., so it becomes a game of the haves and the have nots — the haves being ones that can afford to increase their pricing and pay for it versus the have nots, they’re going to have to take a back seat in terms of truck availability, in terms of long-term service and so on,” Koepke said.
“It’s very similar to what we saw with the ocean market. … Large retailers [were] chartering vessels and it becomes a game of who can afford these significant prices. And the threat from a consumer standpoint is more to the small mom-and-pop businesses … that [will] have a very hard time surviving in these worlds when they can’t get product [because] pricing is out of whack.”
Consumers won’t feel the impact of a strike immediately, but they might feel it at the pump soon
Consumers wouldn’t feel the effects of a rail strike immediately. Much of the inventory for the holiday season is already at e-commerce fulfillment centers, retail centers and warehouses.
“Most retailers have the inventory needed to support holiday activity, so we do not see an imminent impact on holiday sales,” Flowers said.
However, a significant and immediate impact for consumers could be fuel prices, “as greater than 90% of all ethanol used in fuel is transported via rail,” Flowers said.
Koepke said manufacturers would feel an immediate impact from a strike because they will have limited access to the raw materials they need. Those materials constitute the bulk volumes carried by rail: chemicals, plastic resin — “the early-stage materials that any manufacturer requires.”
“Inventory gets depleted from the supplier, then the supplier’s supplier and then all of a sudden, the supplier’s supplier supplier doesn’t have the raw materials needed to make the base product,” Koepke said.
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