Eastern U.S. Railroads Eye Foothold In E-Commerce

Executives with eastern railroads CSX CSX and Norfolk Southern NSC expressed confidence this week that they can compete alongside trucks for e-commerce business.

As customers such as Amazon.com, Inc. AMZN and Walmart Inc WMT explore the possibility of foregoing the middle man in favor of interacting more directly with the railroads, CSX will go along with the change, according to CSX chief executive officer Jim Foote at a May 15 investor conference sponsored by Bank of America Merrill Lynch.

"Transportation is a huge spend for those companies. Reliability is a huge factor with how they compete in the marketplace," Foote said.

"We'll evolve and the industry will evolve…we're getting to the point where we can be players in the e-commerce market because our reliability and our service is to the point where it meets industry standards," Foote said.

Both CSX and NSC also said their relationships with their channel partners are long-term, and as a result, shield them from changes in spot pricing in the truck market.

CSX and NSC tend to have shorter lengths of haul compared with their western U.S. counterparts because of the geography of the eastern U.S. rail network. That shorter length of haul also means that they can find themselves competing with trucks for business.

CSX pays more attention to the long-term trends that could affect the trucking market, such as the impending driver shortage and the mandate requiring electronic logging devices, Foote said. Because of CSX's long-term relationships with its channel partners, the company isn't as exposed to spot truck pricing as an LTL would be, he said.

"If you look at those macro issues, it's still a very positive environment for intermodal," Foote said.

CSX's "unwinding" of its former intermodal strategy, which entailed linking together short-haul moves at intermediate terminals to create long-haul moves, is "mostly done," with many of those operational changes for intermodal made in the fall of 2017, Foote said.

CSX made those changes as part of its 2017 efforts to transition to precision scheduled railroading (PSR), an operational model that seeks to lower costs and maximize assets.

Meanwhile, CSX competitor NSC also said it was continuing to work with channel partners in relationships that could evolve over time as the railroads seek to maintain a foothold in offering transportation options to e-commerce players.

"We are still very much close" with our channel partners, NSC chief financial officer Cindy Earhart said.

Norfolk Southern has also been "pruning" some of its intermodal lanes, resulting in lane changes in February and April, Earhart said. The company in the fall of 2018 announced plans to transition to PSR in several stages, starting in early 2019.

"It's an ongoing process to look at the lanes" and gauge their profitability and see whether they're meeting customers' expectations, she said.

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