J.B. Hunt requests arbitration review of revenue sharing agreement with BNSF

J.B. Hunt Transport Services wants a third-party review of how revenue is shared between it and BNSF Railway with regard to their joint service agreement and the carrier’s intermodal segment, which accounted for $476.685 million or 67% of its operating income in fiscal 2015.

The agreement allows the Lowell-based carrier and the railroad company, based in Fort Worth, Texas, to negotiate how revenue is divided and review the fairness of the agreement quarterly. J.B. Hunt has requested that a “panel of arbitrators” review the fairness of the deal, according to a Tuesday (Jan. 3) news release.

“The arbitration pertains to the division of revenue collected under the (joint service agreement) beginning May 1, 2016.”

The fairness of how the revenue is divided in the agreement hasn’t been reviewed by a third party in more than 10 years, and “the intermodal network built by the parties over that time has seen tremendous growth and increased operating complexities,” the release shows. The carrier’s intermodal segment started in 1989 when it formed a partnership with what is now BNSF Railway.

The company declined to discuss the news release as it is in a “quiet period” before releasing fourth-quarter earnings, which is planned for Jan. 19.

“While this type of proceeding between the parties has been infrequent and may be lengthy and time consuming, (J.B. Hunt) considers this part of the normal course of business within the long-term relationship,” the company said in a statement.

J.B. Hunt doesn’t foresee reviewing the agreement will “have a material effect upon its current or prior financial results (or) the ongoing delivery of services to its customers.”

In November, the company released its 2017 performance expectations and expected revenue increases across all its business segments except for intermodal. In this segment, while the number of loads is expected to increase to between 2.03 million and 2.09 million and the number of box turns should rise 1%, revenue per load is planned to fall $5.

In October, the company reported earnings declined 4.9% to $109.4 million in the third quarter as a result of reduced demand, lower freight rates and higher driver wages. Operating income for the intermodal segment, which is the largest by revenue, fell 7% to $116.9 million. But revenue for the segment rose 2% to $970 million.

According to the most recent Cass Freight Index Report, shipments fell 0.5% and spending declined 4.5% in November from the same month in 2015. But the Cass Intermodal Index rose 0.3% in November, marking the second consecutive year-over-year increase in 2016.

While rail volumes continue to impact overall shipment volume, they have become increasingly “less bad,” the index shows.

“Rails have seen persistent weakness for almost two years, with overall volumes being negative 89 out of the last 95 weeks,” noted the index.

Rail weakness has been a result of the strength in the U.S. dollar, which has led to fewer exports, and less domestic manufacturing.

For the week ending Dec. 24, 2016, total rail traffic rose 27% to 496,633 carloads and intermodal units, compared to the same week in 2015, according to Association of American Railroads. U.S. intermodal volume rose 37.2% to 252,716 containers and trailers. However, the increase is overstated in that the comparable 2015 week included Christmas day. In the first 51 weeks of 2016, the volume of intermodal units on U.S. railroads has fallen 1.8% to 13.28 million compared to the same period in 2015.

Shares of J.B. Hunt (NASDAQ: JBHT) closed at $96.77 on Tuesday (Jan. 3), down 30 cents or 0.31%. In the past 52 weeks, the stock price has ranged between $102.38 and $63.58.