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Norfolk Southern Corp. (NSC), CSX Corporation (CSX), Hub Group Inc (HUBG): New Trucking Rules Could Boost Intermodal Segment

New regulations that cap work hours and mandate rest breaks for commercial truck drivers go into effect July 1. Called hours-of-service or HOS rules, they’re expected to aggravate problems stemming from a driver shortage that has already hampered the trucking industry. One potential outcome is increased movement by shippers from truck to intermodal transport. A handful of companies stand to reap significant benefits if that takes place.

Among other provisions, the new rules require drivers to take 30-minute rest breaks every eight hours and work no more than 70 hours every seven days (the previous limit was 82). Implemented by the Federal Motor Carrier Safety Administration, they’re designed to cut accidents associated with fatigue. Opponents call them onerous and predict they will instead cut industry productivity by 2%-5%.

Norfolk Southern Corp. (NYSE:NSC)

They also feel that in combination with the 200,000 openings for long-haul drivers now unfilled nationwide, so-called truckload or TL carriers will become less attractive to shippers. Beneficiaries will be increasingly aggressive competitors in the intermodal segment, which hauls freight largely by rail and uses short-haul trucks to deliver it to and pick it up from local terminals.

Intermodals already on the rise

A decade ago, intermodal transport beat long-haul trucking only on freight movements of 1,500 miles or more. Recent improvements cut that distance to well under 1,000 miles, and even 500-750 miles on certain lanes. Nonetheless, at present intermodal represents just 3% of the total North American freight spend and remains a niche part of most shipping budgets.

Railroads have been seeking ways to change that and supplement declining revenue from coal shipments. A slew of improvements — particularly larger terminals in underserved areas — have already given intermodal a big boost. Volume in 2012 rose nearly 6% from the year before to its highest level ever, and so far in 2013 is up nearly 4.5% from this point last year. It’s also increasing nearly twice as fast as overall railroad carloads.

With truckload carriers facing new obstacles, truck capacity should become even tighter and costly in the second half of 2013. This will likely spark additional movement to intermodal, even for shorter hauls.

Here are 5 companies that could benefit

1. Norfolk Southern Corp. (NYSE:NSC) — The fourth largest U.S. railroad has been one of the most aggressive in trying to offset coal revenue declines, and it shows. In 2012 its intermodal revenue increased 5% to $2.2 billion, and now represents about 20% of the company’s total.

A big part of Norfolk Southern Corp. (NYSE:NSC)’s strategy is to build new rail yards where more cargo containers can be transferred directly between their trains and their partner’s trucks. Central to this is the $2.5 billion Crescent Corridor project, which enhances its north-south shipping and distribution capabilities with 2,500 miles of upgraded tracks between New Jersey and Louisiana and new or upgraded rail yards in Birmingham, Memphis, Charlotte and Greencastle, Pa.

2. CSX Corporation (NYSE:CSX) — While slightly behind Norfolk Southern in the sector, this rail carrier saw an even larger boost in intermodal revenue last year, growing 11% to $1.6 billion. It is also expanding its Charlotte facility, and planning an even bigger-impact project in Baltimore.

In that city, CSX Corporation (NYSE:CSX) is replacing its existing rail yard with one better positioned to handle increased cargo traffic expected through the Port of Baltimore once the Panama Canal expansion is completed in 2015. Containers can also be double stacked on trains leaving the city from this new facility, something not possible at its old one. A labyrinth of federal and state hoops are involved in the process because of the site’s location, but approvals are expected.

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