Record-high diesel prices pushed freight off the highway and onto the railroads in the third quarter, lifting CSX, Union Pacific and Norfolk Southern to record revenue.
The three carriers shared analogous anecdotes that encompass the current state of Class I railroads, identifying elevated fuel costs, an exodus of truck drivers and capacity from the market and intermodal volume growth as reasons for the strong quarter.
The railroads have yet to reap the price benefits of the volume growth, since intermodal rates are set in an annual bid season each fall and winter. Freight that switched modes mid-year is riding on prices agreed before the truck market tightened until the 2027 bids reset them.
CSX opened the sequence on Wednesday with revenue of $4 billion, up 12 percent year over year, as intermodal volume rose 7 percent to an all-time high of 820,000 units.
Union Pacific followed on Thursday with a 15 percent increase in operating revenue to $7.2 billion, with intermodal volume climbing 11 percent and domestic intermodal volume growing 13 percent to a fifth consecutive record quarter. The same morning, Norfolk Southern posted revenue of $3.5 billion, up 14 percent, with total volume up 3 percent and domestic intermodal units up 10 percent.
The Association of American Railroads (AAR) backed up the impressive showing within the railroads’ intermodal category, indicating in its October overview that the third quarter saw the highest volumes in U.S. history.
In the Wednesday earnings call, CSX chief commercial officer Maryclare Kenney outlined the benefits clearly.
“Reduced trucking availability, high truck rates and elevated diesel cost continue to benefit our intermodal segment. Conversions from the highway remain strong,” said Kenney, who noted that intermodal revenue jumped 20 percent while intermodal revenue per unit (RPU) increased 13 percent. “Essentially, all of the RPU increase was driven by fuel surcharges.”
Diesel prices have skyrocketed since the start of the war in Iran in late February. On-highway costs were $6.276 per gallon as of Monday, with the figure reaching an all-time high of $6.529 per gallon as of Sept. 21.
The escalating fuel prices helped surcharge revenue nearly double at each railroad.
Union Pacific collected $1.17 billion in fuel surcharge revenue against $602 million a year earlier, accounting for nine of its 15 percentage points of freight revenue growth, while Norfolk Southern attributed eight of its 14 points of revenue growth to higher surcharges and CSX collected $466 million against $234 million.
Pricing excluding fuel largely stayed flat to last year, since the newly converted freight is mostly moving at old prices. Execs at Union Pacific and CSX both said the trucking market tightened after this year’s intermodal contract bids were already set, noting that the railroads will seek the bulk of the rate benefits in 2027.
“We saw a transition in what’s going on with the truck rates and truck capacity over spring to summer when much of the bid season was pretty much baked,” said Union Pacific executive vice president of marketing and sales Kenny Rocker, in the Thursday call. “Now we’re going to have an opportunity at the end of the year and the first several months of 2027 to support the inflection that occurred in the summer. Looking forward, you would expect a better environment for stronger pricing.”
Whether the converted freight stays if diesel prices retreat became a chief contention point of the two proposed merger partners. Norfolk Southern CEO Mark George warned the forces behind the conversion wave are unlikely to hold and framed the potential acquisition as the industry’s structural answer to a potential reversion.
“We view most of the macroeconomic factors that are driving the recent truck-to-rail conversions as temporary. But what the freight market today is showing us is that when shippers are given a rail product that offers better value than the highway, they move freight to rail quickly,” said George. “The Union Pacific-Norfolk Southern combination is designed to create those conditions permanently.”
George added that a large portion of the gained freight would return to the highway within one or two years after fuel prices fell back absent industry consolidation.
Union Pacific CEO Jim Vena again made his retention case for the Class Is, arguing high fuel prices give railroads a natural advantage over other transportation modes. Vena said the current task is proving service is strong enough to hold customers trying rail, simultaneously conceding that not all will stay.
CSX, which opposes the merger, did not address the $85 billion consolidation attempt in its release or call.
The Surface Transportation Board (STB) is taking comments on the application through Nov. 18, and Vena said its procedural schedule points to the combined company reporting first earnings a year from now.