Rail Traffic Picture is More Complex Than it Often is Made Out to be by Pundits

A common refrain in discussions of U.S. rail freight traffic in recent years has been how railroads are losing market share to trucking companies.

“It is clear that rail carriers have lost market share to trucks over the last five years and the ongoing service issues threaten to increase that shift,” said Todd Tranausky, vice president of rail and intermodal at freight forecasting firm FTR Transportation Intelligence.

Consulting firm Oliver Wyman found that rail is losing share in the fastest-growing freight segments, which includes such traffic as autos, which can move by truck or rail.

The consulting firm concluded that if current trends hold, the truck versus rail gap will widen and railroads will lose $177 billion in revenue by 2030.

Class 1 railroads that adopted the precision scheduled railroading operating model have come under fire from some quarters for reducing their work forces and, some critics have said, seeking greater profits by ceding market share of some shipments to trucks.

Among the critics has been U.S. Surface Transportation Board Chairman Martin J. Oberman.

Oberman cited STB waybill data that shows that between 2006 and 2019, “adjusted carloads” fell 1.3 percent.

Yet some in the railroad industry say that’s not a complete view. They point to traffic data from the Association of American Railroads showing that rail ton-miles grew 10 percent between 2006 and 2019.

The AAR data also shows that since 2006 terminating carloads and intermodal units rose nearly 8 percent through 2018 and 4 percent through 2019.

Looking at terminations and not just originations captures traffic generated on short lines as well as the significant shift of U.S. West Coast international container volume to ports in British Columbia.

Whether you use the figures Oberman is using or the AAR data, the figures exclude coal traffic. Railroad supporters also argue that some rail traffic was lost due to trade wars instigated during the Trump administration.

Yet Oberman said during an interview with Trains magazine that no matter what data you examine, the larger point is that railroad freight traffic has shown no meaningful growth.

As Oberman sees it, the influence of Wall Street is at work pressuring railroads to focus on their operating ratio, which measures the percent of revenue that is devoted to paying operating expenses.

“The railroads’ emphasis has not been on growth,” Oberman said in a speech to a shipper group. “Rather the emphasis has been on cutting in pursuit of the almighty O.R. down to below 60 percent.”

During the interview with Trains, Oberman acknowledged that many factors and not just pressure from Wall Street investors, has led to railroads losing market share to trucks.

Some of those factors involve economic changes unrelated to railroads, such as a dramatic drop in the shipment of crude oil by rail and declining shipments of frac sand used to extract oil.

Some industry observers also note that railroads have hurt themselves by failing to deliver shipments on time and by failing to be as easy to do business with as trucking companies are.

Jason Miller, associate professor of logistics at Michigan State University’s Eli Broad College of Business, told Trains that slower rail traffic growth has more to do with changes in the economy than anything railroads have done.

He said studying data from the Bureau of Economic Analysis shows that railroads and trucking companies alike have had ebbs and flows to traffic growth.

Between 1997 through 2003 truck traffic was rising while rail traffic was flat.

Yet in the mid 2000s rail traffic had a boost that corresponds with an increase of industrial production.

Rail and truck alike also lost business during the Great Recession that began in 2008. Rail traffic began growing again until falling in 2015 due to a loss of traffic from coal mining and hydraulic fracking.

“As such, the slower growth seems more a function of the changing nature of economic activity,” Miller said.

He said similar patterns can be seen in data of intermodal traffic versus trucks that haul consumer goods.

Intermodal grew faster immediately after the Great Recession, and then grew in tandem with trucking until 2015 when trucks began to dominate.

Miller said the gains by trucking companies were rooted in low truck rates between 2016 and 2017.

Then in 2019 railroads began allowing some intermodal loads to move to the highway while at the same time West Coast ports lost market share to East Coast ports, where international containers are far more likely to travel by road than rail.

The Trains analysis of traffic data also shows that rail traffic excluding coal, intermodal and automotive, reveals a gap between eastern railroads and western railroads.

Between 2006 and 2019, carload volume was down 16 percent in the East and up 5 percent in the West.

Most U.S. manufacturing is located in the East, but that region of the country has had truck competition inflict a bigger hit because of the shorter hauls involved, which favor trucking companies.

The analysis also suggested that policy decisions made by individual railroads play a role, citing how BNSF has long sought traffic growth while Union Pacific has long favored profit margins.

Consequently, between 2006 and 2019 BNSF carload traffic grew by 12 percent while at UP carload volume was down 1 percent.

The Oliver Wyman study concluded that to retain traffic  railroads need to be more reliable, provide shipment visibility, and become easy to work with while becoming supply chain partners.

Nick Little, director of railway education at Michigan State’s Center for Railway Research & Education, agrees.

“The sooner the Class Is change their culture to think and behave like a key part of their customers’ supply chains, the better chance they will have of helping the nation, and the world, by enabling the switch to rail that Marty Oberman really wants to see as his legacy in his STB role.”

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