The Value of Fuel Surcharges in Rail Transportation Agreements for Coal

Implications:     Railroads, unlike airlines and trucking firms, are able to pass along the high cost of fuel in  transportation agreements.  Below discusses this and the value to the railroads for coal transportation.

Analysis:     The railroads transport approximately 70% of U.S. coal as the final carrier.  (Other transportation methods may be involved such as barge, conveyor, or truck.)  The railroads have re-priced legacy transportation agreements over the last 4 years, including a fuel surcharge mechanism.
 
     The railroads have a fuel surcharge mechanism in place tied to the Highway Diesel Fuel Average used for coal transportation two months later.  Utilizing the 2006 average rail transportation haul of 850 miles, the BNSF fuel surcharge of $0.53/car/mile, and an average of 118 tons of coal in an aluminum coal car, the fuel surcharge would add an additional $3.82/ton to the coal transportation cost.  This helps the railroads cover the high cost of fuel. 

     Approximately 1/3 of the railroads coal transportation agreements are still to be re-priced and include a fuel surcharge.  This will be an additional upside for the railroads as these are included in existing coal transportation, on top of their volume growth.  For planning purposes, it would be appropriate to assume that these remaining contracts would be re-priced and with a fuel surcharge at the rate of approximately 20% per year.