This is the second in a five-part series about railroad growth coming from truck conversions. Given Union Pacific’s proposed acquisition of Norfolk Southern, the Dec. 19, 2025 application predicts there will be more than two million trucks converted to rail from this new network within three years. Based on my professional experience as a former Union Pacific executive focused on growth over much of my tenure, I wanted to analyze and opine based on my own experiences.
In Part 1, we established that a 0.75% carload growth goal over five years (UP says three) could be achievable. From my own professional analysis performed from 2016 through 2018, the Watershed markets do provide underpenetrated opportunity, but the amount of time to reap those conversions is likely much longer than the five years I postulated, let alone the three years positioned by the application.
The Carload Watershed Market is roughly 150 miles west and 100 miles east of the Mississippi River Valley, where major East/West rail interchanges such as Chicago, St. Louis, Memphis and New Orleans are located. A shipper located in Texas on the UP moving goods to the East will ship to one of these four principal Interchanges for connection to an eastern carrier. (More about this in Part 4 regarding competition and why it would be decreased in this transaction as currently prescribed.)
The Watershed is formed largely due to the practicality of railroad costs and resulting pricing. Before insiders cry foul, no, I’m not saying railroads perform cost-based pricing. But as we all know, costs are important part of the pricing process, since knowing the critical metric of the resulting margin requires costs to determine it.
In pricing, revenue dollars per mile ($/mile) is an important metric but not the only one. For every load the railroads touch, there is a fixed component of costs and a variable component. Let’s say it’s roughly 70% variable (think ton-miles) and 30% fixed, per car. Over a portfolio of rates for a given commodity, car type and access status (closed vs. open), there tend to be actual rate equations using a Y=MX+B format of linear algebra. These equations more accurately capture railroad pricing practices than simple $/mile and allow more thorough and comparative analysis and next best alternative comparisons.
For the sake of simplicity, let’s say for Commodity X, Railroad A’s rate equation in RATE = MX+B format is roughly $3.00/mile + $2,000. The fixed component of $2,000 is a significant driver for shorter hauls. The $/mile component becomes a more significant driver in longer hauls, around 667 miles in this equation. To understand the issue with the Watershed, think about two railroads connecting, each with its own equation and the likely range of interline prices that result from an AAR Freight Mandatory Rule 11 interline rate structure vs. a single truck.
Back to the Watershed market. For an Interline Watershed Market example, let’s say there’s a move where Railroad A interchanges with Railroad B. Railroad B has its own rate equation on this same business from the interchange point to the destination. Let’s say for the same commodity, Railroad B’s equation is $1,750 + $3.75/mile. Now add equations A + B together and the rate to the shipper is $3,750 + $3.00/mile on railroad A + $3.00/mile on Railroad B. In the Watershed market, the combination creates a proverbial “dead zone” where short hauls don’t work vs. truck. Each railroad must recover its costs, plus cost of capital and achieve their own profitability goals. This is why partnerships like those that BNSF and CSX talk about won’t work as well as a single carrier in the Watershed market: There are two equations, with neither railroad willing to price below its desired return. Haulage agreements like BNSF does to Atlanta and Northwest Ohio provide a partial solution, but that’s another topic and does nothing for the Carload issues in the Watersheds. This is a creative Intermodal solution to “long-throw” or “extended” drays. More about this in Part 3 regarding Intermodal growth.
These equations have had an impact over time, largely since the mid-80s post-Staggers as railroads began to price competitively. Since that time, fewer and fewer shippers used rail in this dead zone as much as they could as the rates weren’t competitive. Effectively, you see “one way” shippers or receivers develop in these areas, which limits optionality. Fewer businesses are in need of competitive, multi-directional rail located in this area. Those located there may not have rail as a viable option vs. truck. In addition, and most important, more than 80% of the time, these shippers and receivers don’t have the additional infrastructure (think capacity) to use rail in new lanes opened up by a new network—factors like working spots, switching capacity and railcars as examples.
Once competitive rates can be put in place following completion of a single railroad transaction, the development of capacity is a minimum two- to four-year process for the shipper or receiver that requires a business case, analysis and funding budgeted against other capex demands on that business. The costs of connecting a five-spot working track, a switch lead and a switch into an industrial lead was $1.5 million on average in 2017. Yes, I remember that number as it was key to the growth thesis I presented at a UP company leadership forum in February 2018.
That average cost in 2025 for that same switch connection and track construction is just over $2.2 million to shippers—a 47% increase, well above inflation of 32%. This is just for the rail; we haven’t even started to talk about railcars.
The railcar fleet doesn’t have excess capacity. For many car types, the railroads don’t invest in cars; the shippers must invest via purchase or lease for most commodities. Car costs, like rail costs, also exceeded inflation over the past eight years. This culminates in one thing I didn’t realize when I was on the inside until I was ready to leave: how much the cost of doing business by rail beyond just the rail rate often wasn’t considered in the overall rate conversion calculus—a key point. Doing business with railroads is not easy, hence why I started a consulting practice culminating with Shawntell Kroese and I forming Russell-Kroese Partners.
In closing, yes, the Watershed markets are underserved because of the financial return requirements of two separate railroads for short hauls into these dead zones. Yes, a single railroad can apply a single price equation and put in place more competitive rates than what exists today. Will we see this much conversion in three years? My experience says no. Five years? Still no. 10 years? Possibly, but it depends on the next best alternative.
Ultimately, supply chains are dynamic like our economy. Transportation, whether rail, truck or maritime, is fundamentally a waste being continually considered for reduction. Ultimately, the ability to develop and convert freight in the Watershed Markets will depend on the total value proposition the railroad puts forth vs. the next best alternatives.
We’ve had three years of stagnant truck rates while rail rates have increased at inflation to above-inflation levels. If the divergent trend between truck and rail total cost continues going forward, who knows if this Watershed Market freight will be convertible at railroad-targeted returns. It may not make business sense for shippers or receivers to make the capex investment in track and railcars, even if the rail rates were 10% lower than the truck rates.
Rail is a precious commodity, and the benefits of rail (e.g. transportation savings, access to capacity, environmental benefits and better jobs) are without dispute. Yet, the North American rail industry has not grown since 2017 and has consistently lost market share to truck and other modes since 2018.
The above seems somewhat bleak, doesn’t it? This is why generating new rail competition is important. More about competition in Part 4. Join us in a few weeks for Part 3 as we look deeper into the Intermodal Growth Opportunity and the difficulties converting business from truck to Intermodal, based on my 10 years of professional experience trying to do so.
Rob Russell, Managing Partner, Russell-Kroese Partners (RKP), is a seasoned transportation executive who operates fluidly from the boardroom to the shop floor. A certified six sigma black belt and a LEAN champion, Rob is a proven business leader who has a track record of strategy development, financial planning, business development, operations and performance management to accomplish an organization’s desired goals. RKP partners with railroads, ports, shippers and land developers on growth strategy, market development, competitive positioning and operational execution. They help clients translate complex transportation dynamics into clear, execution-ready business decisions. You can learn more about RKP at www.russellkroese.com.
