Last week, many trade publication web sites, as well as the Wall Street Journal, contained news about the BNSF Railway and J. B. Hunt entering into arbitration over revenue sharing. The negotiations relate to a 28-year-old agreement between the two carriers whereby J.B. Hunt transports containers to BNSF for intermodal transportation, and the parties split the revenues. The contract automatically renews each year. The agreement provides for a quarterly review of the revenue split for fairness, but it has not been reviewed by a third party since 2005. Considering the significant growth in intermodal and the increasing complexity in the business as a whole, a review at this time seemed appropriate to both parties. Under the terms of the agreement, both are requesting a review of the revenues since May, 2016.
While there were numerous articles about the arbitration, they all were short, and no doubt went unnoticed by many. Neither company offered any details about the negotiations other than to say they were a normal course of business. This subject, I think, deserves a little more attention however, in that it really is significant to both carriers, as well as well as the entire industry. First of all, intermodal traffic is important to each of them. In 2015, it amounted to 60% of J.B. Hunt revenue and 50% of BNSF volume.
Secondly, such a review is not to be taken lightly. The contract is considered to be lucrative to both carriers. In 2005, after the last review, J. B. Hunt had to pay the BNSF a whopping $16.5 million, or about $.10 per share.
To the industry, the significance of the arrangement goes far beyond the economics. On February, the Atchison Topeka and Santa Fe Railway loaded a J.B. Hunt trailer on to a rail car, which most industry veterans believe was the true beginning of the intermodal industry as we know it today. The program began with 150 trailers and 5 flatcars in service between Chicago and California; and today, Class I railroad intermodal volume is well over 120 million tons. The agreement demonstrated that rail and motor carriers could work together efficiently, to their own advantage as well as the industry as a whole. According to the BNSF, a typical intermodal train takes 280 trucks off the highways. The Association of American Railways (AAR) reported that in 2015, U.S. railroads moved a ton of freight an average of 473 miles per gallon of fuel. Greenhouse gas emissions were reduced 75%.
This ground breaking contract, between competing modes of transportation, has made a significant contribution to the intermodal industry and its customers. Hopefully, the negotiations will end in a settlement that will be fair to all.
On another note, this week, the Senate Commerce, Science, and Transportation Committee will conduct a confirmation hearing for Elaine Chao, nominee for Secretary of Transportation. Ms. Chao has a great deal of federal agency experience, having served as Deputy Secretary of Transportation, Secretary of Labor, and chair of the Federal Maritime Commission. She has the support of ATA and other logistics industry leaders. She is not considered to be a big fan of government regulation; and if confirmed, could offer some relief to the industry.