That J.B. Hunt Transport Services (NASDAQ: JBHT) were locked in a long-running dispute over splitting revenues from their intermodal business is not news. That was known.
What we learned this week is the size of the dispute: $100 million.
In an SEC filing, BNSF, a subsidiary of Berkshire Hathaway Inc., said it has provided J.B. Hunt with calculations for payments due “for the historic periods in excess of $100 million consisting of additional revenue owed BNSF for 2016 and 2017 and certain charges…for specific services for customers from April 2014 through May 2018.”
The amount sought by BNSF follows an arbitration panel’s recent decision to grant BNSF $18.3 million in a confidential interim award. The decision was made in early October and led Hunt to announce, just before it released its third quarter earnings, that it was taking a charge of $18.3 million following an arbitrator’s award in favor of BNSF.
With that award now on record, it is serving as the basis for BNSF’ calculation of back charges that it says are owed by Hunt.
“It’s a proprietary agreement they don’t want any other customers to see,” said Brian Bowers, a rail industry veteran and consultant. “It’s the best rail pricing deal in intermodal. They guard it like the Coca-Cola formula.”
The original partnership was initiated by founder J.B. Hunt himself in the mid-1990s, according to Satish Jindel, president and principal consultant of SJ Consulting, a transportation and logistics consulting firm based in Warrendale, Pennsylvania.
“In heavy freight J.B. was light years ahead of everyone in seeing the potential for trucks as a last- mile service,” he said. Today the company’s intermodal unit is its largest, and generated $4.08 billion in 2017, or 57% of total revenue.
Hunt and BNSF, Jindel said, “found a happy marriage.”
But there have been plenty of bumps along the road — and track. The intermodal agreement allocates services and revenues, according to Bowers, but the two companies have been wrangling over grey areas in the contract for years. This is the second time the companies have been in arbitration.
The dispute seems to hinge at least in part on what those “specific services” are cited by BNSF in its securities filing.
Hunt disagrees with BNSF’s accounting. The trucking company said in its own filing that it would submit its calculation of the adjusted revenue for that period to the arbitration panel, which “may then issue an additional interim award as appropriate.”
BNSF and Hunt did not respond to FreightWaves’ requests for comment.
Whatever the outcome, Hunt’s costs are going to increase as a result of the arbitration, Bowers said. “They are not going to take a hit on their margins, so their rates are going to go up.”
That’s good news for Hunt’s intermodal competitors like XPO and the Hub Group. “Hunt is the biggest bear in the intermodal woods,” Bowers said. “Competitors will tell you their deals with BNSF often dictates pricing. So if Hunt’s rates go up, that’s viewed as positive for other service providers.”
Shippers may see an increase in rates, Jindel said. But intermodal still offers a significant cost savings compared to trucking. “Normally the expectation is you get 15% savings to convert truckload to intermodal, because truckload rates are very high,” he said. Even if Hunt intermodal rates go up by 5%, customers will be getting a good deal, he said.
Intermodal transportation was up 19.5% year-over-year through September, according to the Association of American Railroads.
The big intermodal players are all on multiyear contracts, where rail pricing is fixed. But a surge in pricing lifted J.B. Hunt’s intermodal results in the third quarter, when revenue per load jumped 15% year-over-year.
