Dive Brief:
- Norfolk Southern said elevated fuel prices, driven by uncertainty at the Strait of Hormuz, could boost it’s intermodal business, CEO Mark George said at the J.P. Morgan Industrials Conference last week.
- If fuel prices continue to climb, which impacts diesel costs, pressure on trucking rates may push shippers toward rail. Pressure on trucking “is a pretty good thing for us,” George said.
- “We've been pretty depressed for a while. We'd love to see some evacuation of capacity in trucking,” George said. “Maybe this helps accelerate the evacuation of some of the smaller players who can't sustain the fuel spikes,” he added.
Dive Insight:
Ripple effects from the military conflict between the U.S. and Iran, including the closure of the Strait of Hormuz, have driven up fuel prices. In turn, the rising cost of fuel has quickly become a major disruptor for trucking and ocean freight.
Norfolk Southern noted, however, that the railroad may reap some benefits as a result of the uncertainty.
“When that gas is high, it’s pretty good usually for coal and our coal franchise, or utility franchise,” George said. “You’ll see the utilities burn more coal, so that’s not a bad thing for the business volumes.”
Regardless, higher fuel prices will still have a major impact on rail companies’ expenses. George noted that it burns about a million gallons of diesel fuel a day, equating to about 30 million gallons a month.
“If the rates go up by $1 from where our expectations were, that's a $30 million headwind,” George said. “If it goes up by 50 cents, it's a $15 million headwind for the quarter because of the one month in March.”
On March 23, U.S. diesel prices reached about $5.38 per gallon, up from around $5.07 the week prior, according to data from the Energy Information Administration.
The railroad plans to implement a surcharge to help mitigate the higher expenses, which will take full effect in the third quarter, according to CFO Jason Zampi.
Although surcharges are expected to flow throughout the second quarter, there is a some lag before taking effect. The lag is of a few weeks for intermodal and months for industrial products, he said.
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