The Road and Rail Industry: Investing Essentials

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BNSF train hauling stacked J.B. Hunt containers through Cajun Pass, CA. Image by Mark Loewe under Creative Commons license.

At nearly 188,000 miles, the combined length of the U.S. interstate highway system and the U.S. freight rail system could wrap around the Earth's equator more than 7.5 times. This massive yet intricate network has played a significant role in the growth of U.S. gross domestic product, and has its origins in the first 13 miles of commercial rail track laid in Baltimore in the late 1820s, a route that was piled by the famous steam engine Tom Thumb. The interstate system in turn was launched in 1956, when President Dwight D. Eisenhower signed legislation authorizing its construction.

What is the road and rail industry?


The road and rail industry centers around the companies that use these two networks for commercial purposes. It encompasses both road freight transportation companies (trucking) and commercial rail freight companies. It also includes the rental car and rental truck sectors -- think Hertz Global Holdings, or Ryder System -- as well as shipping companies that have ground operations and facilitate endpoint delivery to consumers, such as FedEx and UPS.

How big is the road and rail industry?

The road freight portion of this industry is divided into two major categories: full truckload, or FTL, and less than truckload, or LTL. The top 25 carriers in each of these two categories have a combined annual revenue of over $58 billion. Estimates peg the commercial rail industry at $60 billion annually. Add in total domestic truck rental revenues of $17 billion, and a car rental market of over $36 billion, and the result is an industry with revenues over $171 billion annually -- before taking into account associated logistics, repair and maintenance, and other services necessary to keep so many wheels turning.

How does the road and rail industry work?

While both road and rail can broadly be described as the primary methods of commercial ground transportation in the U.S., they have a few distinct differences. Trucks ride over an infrastructure provided for and maintained by U.S. taxpayers -- the U.S. highway system. Rail companies maintain their own track. According to the Association of American Railroads, rail companies will spend $26 billion on the U.S. rail network in 2014. 

The rail industry is divided by revenue into three major carrier classes. The largest, Class I, includes rail companies with operating revenues exceeding $467 million in 2013. According to the Association of American Railroads, there are currently seven Class I railroads: BNSF Railway, CSX Transportation, Grand Trunk Corporation, Kansas City Southern RailwayNorfolk Southern Combined Railroad Subsidiaries, Soo Line Corporation, and Union Pacific Railroad. The seven Class 1 railroads make up 69% of domestic freight rail mileage, and employ 90% of U.S. rail employees. The rest of the industry is divided between the smaller Class II, or regional carriers, and Class III, or short line carriers.

The trucking industry is regulated by the Federal Motor Carrier Safety Administration, or FMCSA. FTL freight is propelled by companies in need of bulk shipments, while LTL is characterized by packaged shipments -- a company pays only for the space its packages take up on a truck. 

Road and rail find an intersection in the commercial business known as intermodal transportation, the process by which goods are shipped from one point to another using multiple modes of transportation. Goods are shipped in standardized 20- or 40-foot "containers," enabling efficient transfer from one mode of transport to the next. Each year in the U.S., more than 25 million containers and trailers are transported by this method. The trucking industry often provides short-distance transport of containers from ports to railyards. This segment of intermodal is known as "drayage," taking its name from "dray," a type of cart used historically to carry loads over short distances. 

Companies such as FedEx and UPS are often referred to as "intermodal companies," as they cover several points in the transportation chain, from air freight to ground freight, including package delivery to businesses and individuals.

An example of intermodal transportation: This truck offloads goods from a Japanese ship in the Port of Jacksonville, Florida. The pallets will be loaded onto either a truck or freight train for further transport toward their destination. Image by JAXPORT under Creative Commons License.

What are the drivers of the road and rail industry?

The fortunes of many industries can be linked to the health of domestic manufacturing, yet few have such a broad exposure to manufacturing as the road and rail industry. Since the need to transport raw materials, components, and finished goods increases when manufacturing output rises, most companies in this industry keep a close eye on aggregate U.S. manufacturing activity. For example, railroad giant CSXregularly cites changes in the Institute for Supply Management's "Purchasing Managers" and "Customers' Inventories" indexes when discussing business results.

Commodity demand, agricultural production, and fuel prices also influence this industry. Fuel prices in particular can affect the profitability of trucking companies, and in recent years, major trucking carriers have explored options for lowering fuel costs, including experimentation with new truck engines that run on liquefied natural gas, or LNG, rather than diesel fuel. Though up-front costs to implement natural-gas-burning vehicles are higher, LNG is roughly 60% cheaper per gallon than diesel fuel.

Finally, technological innovation sparks continuous improvement in train and truck operating companies. Recently, both types of organizations have focused on wringing efficiencies from their transportation networks through enhanced logistics. An instance of a widely used commercial innovation is GE's "RailEdge Movement Planner" software for rail companies, which improves scheduling and routing, and has been compared to the rail industry's version of an air traffic control system.

Similarly, trucking companies employ fleet management systems to improve fuel efficiency, safety, and on-time delivery. Regardless of the economic climate, it's likely that innovation will play a prominent role in sharpening the net profits of both road and rail companies in the coming years.

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The article The Road and Rail Industry: Investing Essentials originally appeared on Fool.com.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. The Motley Fool owns shares of General Electric Company and Hertz Global Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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