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.”

Rail Shippers Favor Trucks Over Railroads

A survey of rail shippers finds they believe trucks better meet their shipping needs than do railroads.

The survey conducted by consulting firm Oliver Wyman of shippers in seven industries found that all respondents overwhelmingly preferred trucks, seeing them as superior in providing on-time performance, shipment visibility, and the availability of equipment and capacity.

Adriene Bailey, a partner at Oliver Wyman, said during the RailTrends 2020 conference that railroads continue to lose market share to trucks and could lose $177 billion in revenue by 2030 if current trends continue.

Although Class 1 railroad executives have touted their shift to the precision scheduled railroading model as having provided better service, one automotive shipper pointedly said, “We didn’t get faster or more reliable.”

Bailey said PSR may have made railroads more profitable, which benefited shareholders, but the true test of the operating model will be whether being more efficient can result in a material and sustainable growth trajectory for railroads

Between 2012 and 2018, railroads slightly grew their share of heavy, bulky, and low-value commodities that favor movement by rail while trucks maintained their share of high-value commodities such as perishables that favor movement by highway.

That left in the middle traffic that could move either by rail or highway that Bailey said represents the best opportunity for railroads to increase their traffic volume.

More than half of freight ton-miles in North America falls into this middle catgory.

Bailey said that although this represents the best opportunity for railroads to make gains, this freight has not been trending toward railroads.

If railroads want to capture this freight they must fit better into supply chains, improve the transit experience, and become customer-centric.

That would mean understanding each shippers whole supply chain.

Shippers now have the ability to calculate the entire cost of each shipment and to weigh such factors as on-time performance and the carrying cost of inventory in transit.

Such factors could chip away at the advantage that rail has in terms of cost over trucks.

Bailey called on railroads to provide on-time and reliable delivery while providing real-time shipment tracking information.

She said shippers want railroads to offer a better customer experience, from simpler online tools to more responsive customer service, and to be accountable for service failures while providing service metrics that are relevant to shippers.

The survey reached rail shippers in seven industries, including automotive, food, chemicals, metals, retail, oil and gas, and logistics firms.

Bailey said respondents would like to use rail more often but railroads are falling short of trucks when it comes to service, ease of doing business and customer focus.

There has been a turning away from rail by some shippers who are building new facilities without rail spurs or considering whether these new locations can easily be served by intermodal. “They are essentially dealing rail out of the deck in many cases,” Bailey said.

She added that it is not a story of doom and gloom for railroads.

“There is absolutely a huge opportunity for the railroads to continue to take advantage of the efficiency and capacity dividend that they have generated over the past three years through all of the work that they’ve done and turn this into a growth story,” Bailey said.

TSA Requiring Security Training Plans by Dec. 21

Railroads and transit systems are facing a December deadline to submit to the U.S. Transportation Security Administration their plans on compliance with rules on security training.

Freight and passenger railroads along with “higher risk” transit systems must submit those plans by Dec. 21, 2020.

Trains magazine reported on its website that some forms of railfanning might be deemed to be a security threat.

This includes watching railroad or transit operations, or taking photographs.

Part 1570 of the regulations includes as examples “taking photographs or video of infrequently used access points, personnel performing security functions (for example, patrols, badge/vehicle checking), or security-related equipment (for example, perimeter fencing, security cameras).”

Also described as a suspicious activity is “loitering near conveyances, railcar routing appliances or any potentially critical infrastructure, observation through binoculars, taking notes, or attempting to measure distances.”

The rules apply to all Class I railroads and any freight railroad that hosts Class I carrier or passenger operator.

Rail lines handling hazardous materials and those operating within a designated “high threat urban area” are also covered by the rule.

The TSA lists 46 such areas in 28 states and the District of Columbia.

TSA estimates that the cost of compliance to the freight railroad industry will be $35.2 million over a 10-year period.

It will be $23.8 million over the same period for passenger carriers and transit operators.

“The regulation isn’t as onerous as it may appear,” said Harry Schultz, a TSA section chief.

Railroads and transit agency must have a security coordinator and at least one alternate security coordinator who must be accessible to the TSA 24 hours a day, seven days a week.

Significant security violations are to be reported to the TSA within 24 hours.

Affected railroads and transit systems must provide security training to any employee or contractor operating, inspecting or maintaining a transportation vehicle and to those responsible for dispatching.

Also covered by the rules are workers who come into contact with the traveling public, such as ticket agents and onboard train staff.

Plan Sees Rails Losing Market Share to Trucks

Railroads are expected to lose market share to trucks over the next quarter century a new federal plan predicts.

The National Freight Strategic Plan released last week by the U.S. Department of Transportation projects that rail freight volume will increase 25 percent by 2045, but trucks will see their freight load increase by 32 percent.

The 118-page report said railroads in 2017 handled 1.4 percent of the nation’s freight in terms of total value while moving 9.3 percent of the tonnage and 26.9 percent of the ton-miles.

As for types of freight that railroads are expected to handle, the report projects that they will haul less coal and crude oil in the coming years, but shipments of ethanol may increase.

Agricultural and natural resource freight shipments and intermodal also are expected to increase.

Over the next 25 years the trucking industry is expected to encounter worsening highway traffic congestion and driver shortages.

The plan offers few railroad-specific recommendations although it does commend the CREATE program in Chicago, a $4.6 billion public-private partnership that is working to improve the region’s railroad infrastructure.

It also urges policymakers to update and eliminate unnecessary regulations; improve collaboration among transportation modes and federal, state, and local governments; and invest in systems that can provide transportation planners with better freight data.

Transportation systems may change in coming years due to the development of autonomous trucks, aerial drones, and such technology such as 3D printing.

The plan said the development of positive train control is expected to largely be finished by the end of 2020 but does not mention how it might lead to autonomous trains or one-person crews.

Nor does the plan make any recommendations for resolving rail congestion in such terminals as Chicago, Kansas City, Memphis, Atlanta, Houston and Cincinnati.

Railroad economist Jim Blaze told Railway Age that the plan raises several questions, but he described it overall as vague and lacking in data and a well-defined funding stream.

Blaze noted that the placed concedes that DOT lacks the data necessary to drive smart innovation.

“That’s not a good starting point for planners,” he said.

Blaze also said the plan claims that safety it the agency’s top strategic goal, but that is not addressed until page 86.

Some of the data shown in the play is outdated, Blaze noted, and there is no research and development plan put forth even though R&D was among the 19 theoretical ‘to do’ boxes shown in the plan.

Panelist Discuss How Technological Changes are Affecting Competition Between Rails and Trucks

Railroads hold advantages over trucks in moving freight over longer distances, but those advantages might be wiped out or greatly diminished by the development of battery-powered rigs and autonomous truck operation.

Still, members of a panel that met during a recent Intermodal Association of North America webcast said Class 1 railroads have the money and time to do something about that because widespread use of battery-powered trucks and autonomous operation is still at least five years away.

Railroad industry observer Anthony Hatch said railroads have five advantages over trucks: Railroads are less labor intensive, more fuel efficient, have a lower carbon footprint, own their own infrastructure, and are financially strong.

In fact, Hatch said, the railroad industry is more profitable than ever.

But if railroads sit on those resources rather than invest them in becoming more efficient operators, trucks may erase some of those advantages.

Electric and autonomous trucks hold the promise of being less costly to operate, which would overcome the labor and fuel costs advantages that railroads have now.

“If we were to see a magical turnover to an all-electric road fleet, that would be good for the air that we breathe and not very good for railroad shareholders,” Hatch says.

He said some “very smart people” in the trucking industry are working diligently to figure out how to improve the range and lower the cost of battery-powered trucks as well as implement autonomous operation.

Battery-powered trucks are currently on the road, but their high cost means that trucks powered by diesel fuel are still cheaper.

Another drawback of existing battery-powered trucks is a range limited to 150 miles.

Currently, the economics of battery-powered trucks only work in California and because of a state subsidy implemented to reduce air pollution.

Most battery-powered trucks are being used for drayage and local service.

Brian Cota of Daimler Trucks America said many of the costs of owning and operating electric trucks, including battery life and charging costs, remain unknown.

He said trucking companies will need five years of experience with electric rigs before being able to get a handle on what the market will look like.

Panelists said battery-powered trucks need a range of at least 350 miles to become practical for regional moves.

The consensus in the railroad industry is that 500 miles is the floor at which railroad double-stack service can compete with trucks.

As for autonomous trucks, technology firm TuSimple is testing autonomous truck moves on Interstate 10 in the Southwest with a driver in the cab to monitor operations.

TuSimple is working with Navistar to produce self-driving semis by 2024.

TuSimple’s Robert Brown expects autonomous trucks to be used primarily for highway moves. Human drivers will be used for pickup and delivery at shippers’ docks.

Brown said the initial market is expected to be team driving routes that aren’t competitive with intermodal.

Seth Clevenger, managing editor of features at trade publication Transport Topics, said the move toward autonomous trucks is expected to be an evolution, not a revolution.

As for what railroads can do to counter advances in the trucking industry, Hatch said they could borrow some of the technology that truckers are developing.

That would include using battery-powered drayage trucks in order to reduce the costs of picking up and dropping off containers at rail terminals.

BNSF is operating a pilot program using autonomous yard trucks and autonomous and remote-control cranes in intermodal terminals.

It is also working with Wabtec to test a battery-powered road locomotive in California.

Pandemic Effects on Supply Chains Has Been Uneven

The effects of the CVOID-19 pandemic on supply chains served by railroads have been uneven.

A panel of shippers convened on behalf of Railway Age magazine also agreed that despite the pandemic rail service has been strong in recent months with shippers able to get better pricing if they deliver volume to Class I carriers.

Whereas the pandemic had depressed paper shipping to levels one panelist called the “slowest demand environment” she has seen during her time in the industry, chemical shippers have been relatively unaffected because they were deemed to be providing essential services.

The shippers expect traffic volumes in July to exceed those of June but two shippers predicted that July traffic will be flat when compared with the same month in 2019.

Shippers are uncertain if traffic will pick up in the fall.

The paper shipper said business has been adversely affected by retailers having to shut down during stay at home orders.

The retailers weren’t buying paper to advertise what they had for sale.

The shipper said her company has thus far shipped 23 rail cars of paper thus far in 2020 while in a typical year it would ship 750 cars for the year.

On the other hand, the shipper said, shipment of paper for packaging or masks businesses has been strong.

Shippers on the panel noted concerns about the lack of adequate customer service from railroads, which they attributed to the carriers having cut management positions in that area.

One shipper said she seldom hears from the customer service departments of the railroads she works with and another shipper said the customer service representative at the railroad he works with is too inexperienced to be helpful.

A panelist said the situation seems to be that railroads have reduced their staffing by so much that as rail shipping has begun to recover in recent weeks the carriers are struggling to get employees back to positions that could handle the increase.

That shipper said this was similar to what happened during the recession of 2008.

Railroads have been pushing shippers to use self-service applications.

However, when something goes wrong and a shipper tries to reach the railroad customer service department by phone, it has been difficult at times to reach someone who is knowledgeable and helpful.

One shipper said the more that his company uses its own technology the more a railroad it works with wants to work with them.

This has been particularly the case with trucking where anything that can eliminate wait time or paperwork for drivers is welcomed by the carriers.

Yet panelists noted that Class 1 railroads are seeking to boost their traffic volume and marketing staffs are reaching out to shippers for more business.

Although the pandemic has disrupted supply chains, the panelists do not expect it to result in major changes once the pandemic abates.

They attributed that to supply chains already being efficient before the pandemic struck.

Some panelists expect there might be a shift to less reliance on goods made in China to greater use of goods from Southeast Asia or India.

That could result in more shipments landing at East Coast rather than West Coast ports.

Asked about the effect of precision scheduled railroading, the panelists said it has helped with long-haul freight moves but the first-mile and last-mile segments remain slow and frustrating.

Some shippers highlighted a discrepancy between their unchanged transit times and the bragging of Class I railroads about improved transit times, increased velocity and lower terminal dwell.

An emphasis on trip plan compliance might be a better measurement of rail service, but shippers said trip plan compliance can be flawed, too.

Rail Executives See Silver Lining in Pandemic

Two top railroad executives this week saw a possible silver lining in the COVID-19 pandemic that could benefit supply chains and railroads.

Yet that benefit may not be what it might seem, some railroad industry observers say.

CSX CEO Jim Foote said during his company’s quarterly investor call the pandemic could lead more manufacturers away from China in order to reduce their dependence on a single country.

Although some of those manufacturing operations might land in the United States, they also could shift to other low-cost countries such as Mexico.

“I think that there will be more manufacturing that takes place in this country and any kind of business activity like that, it’s good for the railroad,” Foote said.

Echoing that thought was Union Pacific CEO Lance Fritz, although he said it was too soon to see the extent of that movement.

“For sure there are going to be some opportunities to grow out of this crisis,” Fritz said. “One is, we do hear our customers talk about evaluating their supply chains with an eye towards reliability being valued a little bit higher.”

Some industry observers believe that another consequence of the pandemic could be an increase in e-commerce, which could provide a boost to railroad intermodal volumes.

Even before the pandemic, consumers were increasingly buying goods online.

That trend could accelerate even as social distancing orders are eased or eliminated because consumers will have grown more accustomed to shopping online.

Foote said that will benefit railroads by providing an opportunity to move larger quantities of inventory via intermodal networks.

Industry observers interviewed by Trains magazine this week cautioned that these changes are expected to roll out slowly because they involve structural changes.

“The more immediate volume opportunity would come from additional merchandise traffic they are able to attract by keeping velocity high as trucking capacity tightens up over the course of 2021,” said Todd Tranausky, a rail and intermodal analyst with FTR Transportation.

Intermodal analyst Larry Gross expects companies to in time relocate more manufacturing within or near the United States after seeing how much they suffered from their heavy reliance on Chinese manufacturing facilities.

Gross said this could result in a slowing of international intermodal growth and a shifting of traffic from West Coast to East Coast ports.

However, containers unloaded at East Coast ports are more likely to move by truck than rail.

If more manufacturing is located within the United States, that could also result in more goods moved by truck rather than rail.

Gross said that is because there will be more widely dispersed distribution centers situated closer to consumers.

“The bottom line is that amalgamating volumes into megatrains will become more difficult,” Gross said.

If railroads are to capture a share of this traffic, Gross said they will need to change their thinking about the intermodal business.

He said a focus on running the simplest network of the largest trains possible is not going to work well after the pandemic has ended.

Rail Shippers Not Optimistic for Short Term

A survey of railroad shippers found the number expected rail car orders is falling and business growth has come to a near halt.

The survey was conducted by Cowen and Company and the results published on the website of Railway Age.

The survey found mixed results when shippers were asked to estimate how many rail car they would order.

Although most respondents expect to order fewer cars, the percentage that plan to order more than 2,000 units increased to 10 percent from 3 percent in the fourth quarter.

That could reflect a small number of shippers taking advantage of possible price decreases during an economic downturn.

Shippers expect railroad freight rates to increase by 1.9 percent over the next six to 12 months.

Some shippers, though, expect railroads to cut pricing in the face of volume declines and the effects of the COVID-19 pandemic.

When asked if they believe there will be an economic recession in the next six months, 78 percent of respondents answered in the affirmative.

Shippers expect their businesses to barely expand during the next 12 months.

Just 10 percent of shippers are more confident in the economy now than they were three months ago when 54 percent expressed growing confidence in the economy.

The pandemic has affected 85 percent of those who responded and Cowen said had the survey been conducted a few days later the response like would have been higher.

The percentage of respondents that expect a return to normal in April was 1 percent while 10 percent think it will be May.

More likely, shippers believe a return to normal won’t happen until August or later.

Railroads Resist Storing Crude in Tank Cars

Suggestions from oil companies that they be allowed to store surplus crude oil in railroad tank cars are not getting a positive reception from the railroad industry.

Carriers are citing safety concerns when asked by shippers about long-term storage of crude oil.

The oil companies have raised the idea because the plunge in crude oil prices combined with reduced demand have left them with large supplies of crude oil and fewer places to store it.

Railroads have pointed out that federal rules limit storage of oil in rail cars, even at private facilities.

Those rules permit the storage of only a small amount of crude oil.

An oil price war between Saudi Arabia and Russia has led to sharp declines in crude oil prices.

Full Recovery From Pandemic Might Be 2021

The COVID-19 pandemic is likely to affect the nation’s railroad systems, but the degree of that remains unknown.

Progressive Railroading reported this week that industry observers are struggling to get a handle on it because there are so many unknowns at this point.

“A better way to look at this is 10 simultaneous hurricanes in the United States and the destruction that follows,” said FTR Intel Chief Strategy Officer Clay Slaughter during a COVID-19 webinar FTR conducted on March 26. “How many businesses won’t reopen? How much permanent or semi-permanent disruptions will there be?”

Slaughter said that during a hurricane there is a concrete beginning and ending, a process that lasts for 60 to 90 days.

However, the pandemic is not necessarily a onetime event but a series of events with not-so-concrete endings, Slaughter said.

In part that is because of the wide variance in how states have reacted to the pandemic.

Slaughter predicted there will be large regional differences in how the pandemic affects railroad operations.

Another observer predicts that not only will the endings vary but they won’t come soon.

Tony Hatch, who owns his own transportation analysis firm, wrote in a message to his clients the recovery from the fallout of the pandemic might not come until 2021.

He said that will apply to everything from railroads to the economy to sports teams.

In the meantime, a number of railroad conferences have been delayed or canceled.

The Secure Rail Conference that was to have been held in Chicago April 21-22 has been moved to Aug. 25-26.

That conference seeks to address the future of rail technology and rail security.

The North American Rail Shippers Association has canceled its 2020 annual meeting that was to have been held May 12-14 in Kansas City, Missouri.

The group’s next meeting will be Mauy 12-14, 2021, in Chicago.