Two weeks ago, U.S. supply chains dodged a rail strike which could have had dire economic effects and hampered our supply chains. These disruptions could have extended beyond the rail sector itself, and affected other transportation modes, primarily trucking. We estimate that even if a small percentage of rail freight (20%) had shifted to trucking, spot rates could have doubled in a short period of time. So how can rail freight have such an outsized effect on the trucking market? In the following sections, we explore the potential impacts of a prolonged rail strike on trucking demand and rates.
How much freight moves on rail?
While trucking accounts for the majority of shipments in the U.S., rail loads are heavier, and travel longer distances. Our data indicates that the average weight of a carload is 128,000 lbs, and that of an intermodal load is 33,000 lbs. In comparison, the average weight of a truckload is 36,000 lbs. In addition, rail loads travel on average 955 miles, which is approximately 2.6 times more than for-hire truck loads (370 miles). Therefore, it is no surprise that rail moves more than 1.5 -1.8 trillion ton-miles per year, which makes it second after the trucking industry, but still higher than the entire for-hire trucking sector.
What if a fraction of rail freight were to switch to trucking?
Rail loads do not only differ in terms of their weight and length-of-haul distribution, but also in the type of commodities being transported. Carloads often transport coal, lumber, minerals, and grain. Therefore, these serve the highest tiers in the supply chain. Because of this differentiation of commodity types, it is difficult for many rail freight commodities to switch to other modes of transport.
While carloads are generally difficult to move on standard trucks, intermodal loads are more prone to modal shifts. U.S. railroads move a similar amount of carloads and intermodal loads, however, carloads are almost 4 times heavier. Therefore, intermodal loads account for about one fifth of the total rail tonnage. This can give us an indication of what fraction of rail freight can be potentially moved on standard trucks.
What happens if 20% of rail freight suddenly moves to the truckload market?
According to the Commodity Flow Survey, rail carries about the same amount of freight as for-hire truckloads (measured in ton-miles). If we exclude local hauls (less than 100 miles), and light loads (less than 10,000 lbs, which are likely LTL shipments), rail carries 33% more freight than long-distance for-hire truckloads. Therefore, if 20% of rail freight moves to for-hire trucks, trucking demand would soar by about 27%.
Can the truckload market absorb such an increase?
As we’ve learned from the past two years, the truckload market is very sensitive to disruptions in supply and demand. While spot rates react quickly to such changes, contract rates lag by a few months. Therefore, a disruption of this magnitude would have a direct impact on spot rates.
Fortunately, we have a simple method to estimate the magnitude of this impact. At Uber Freight, we have developed trucking supply and demand indices based on various economic indicators. Our demand index measures the underlying freight volumes implied by economic activity, such as consumer spending on goods, manufacturing output, imports, and exports. Similarly, the supply index is based on driver payroll employment and the Class 8 truck population.
Unsurprisingly, the difference between the demand and supply indicators is correlated with the national average spot rate per mile (r = 0.86). While correlation does not always imply causality, in this case it does. Based on the established relationship between the supply and demand indices and the national average spot rate, we can estimate the impact of additional demand on rates, assuming supply remains constant in the short-term.
We estimate that if 20% of rail freight moves to for-hire truckload, spot rates have the potential to double. Although this might not happen overnight, it shows the potential effect of a sustained rail strike, and how sensitive the trucking industry is to small changes in supply and demand.
The consequences of a rail strike could have extended far beyond trucking demand and rates. The largest cost would have been that of unserved freight. Rail carriers estimated the daily cost to the economy to be $2 billion/day. In addition, diesel trucks produce 10 times more CO2 than rail (per ton-mile). Therefore, the total emissions produced by all the truckload freight, and 20% of the served rail freight would have increased by 19%.
Fortunately, a deal was reached a day before the strike deadline. So how did the truckload market react in the preceding week? Despite the magnitude of potential disruption, we were surprised to see how insensitive spot rates were. This shows that the trucking industry is still reactive rather than proactive. This is where Uber Freight, combined with Transplace, can help shippers prepare and guard against such disruptions. Tools like Market Access can always help shippers secure capacity even if the market tightens overnight.
This report is for informational purposes only. The conclusions drawn in this report are based on our own analysis and the Uber Freight marketplace.
1According to the Commodity Flow Survey
2According to our analysis of the Commodity Flow Survey