Surviving in the face of adversity

Posted by Fred Frailey
on Wednesday, March 14, 2018

Railroad financial results look awesome, better than ever. But the reality of this business is deceiving. The business is shrinking, or at best treading water, and in a booming economy. Non-coal carloads are down almost 13 percent from their peak in 2006, coal loadings roughly 40 percent. And market share versus trucks? In a presentation for clients of Stifel Capital Markets, the analytic firm of Transportation & Logistics Advisors put it this way: Rail carload volume today would be 40 to 75 percent larger than in 2000 if it had kept up with growth of truck tonnage or that of industrial production plus imports. “Railroad renaissance”? It doesn’t look that way from here.

We a problem. But rather than bemoan the predicament, let’s consider ways to reverse it. Here are five ideas, starting with the most basic:

Improve your service. A primary reason freight customers distrust railroads is their dismal history of doing what they say they’ll do, when they say they’ll do it. Run your trains any length you want; just meet the expectations you give customers. How to do this? It’s easy, actually. Align the compensation of management with its success in meeting this objective. Every loaded car comes with a trip plan, which is the series of trains that will handle it to destination, right to the actual day of arrival. Boards of directors set the criteria for bonuses and stock grants, and service is almost an afterthought in some compensation plans and nonexistent in others. Set challenging but achievable goals for completing trip plans on time, reward or punish compliance and I guarantee service will improve, perhaps dramatically. People follow the money.

Be easy to do business with. I can book a flight on United Airlines with United or any number of other third parties; it’s very easy. But if I want to ship goods in a freight car, I can only deal with you, the railroad. Maybe I’ve never done so before and find the process intimidating—oh boy, is it ever!—versus the truckers who are forever calling me with bids. Begin by broadening your points of contact with shippers. So-called third-party logistics providers are increasingly assuming the shipping chores of companies with complex needs; they provide corporate transportation needs from A to Z. By and large, they know trucking but not railroading. Partner with them. Better yet, buy one and bring that knowledge inside your railroad.

 Make marketing a revenue center. Railroads consider sales a cost, and cut such costs to the bone. CSX and Union Pacific customers complain to Trains that they hear from their marketing people about rate increases and not much else. Little effort is made to find and cultivate new carload business, because that means going into the field and getting inside the heads of potential shippers, learning how their businesses work and how your railroad could fit in. Revenue from carloads is a multiple of what intermodal boxes bring in. If you spend some money to make money, and do so effectively, you might be surprised at the results. Canadian National knows this, and Canadian Pacific is finding out.

Use your technology. Imagine what you can do combining positive train control, which allows close spacing of trains, with distributed power, which lets one engineer control multiple sets of locomotives. Now you have the makings of platooned trains. Imagine CSX building a train in Albany, N.Y., for Jacksonville, Fla., with blocks of cars for four destinations. Each block is fronted by a lower-horsepower locomotive, which every railroad owns in abundance. Think of these blocks of cars, each with a locomotive, as modules. As you reach Baltimore, uncouple the Baltimore module with its locomotive and be on your way. You can do this today. It’s only a short leap of technology to adapt distributed power and PTC so that one or even all four modules run separately and close together, under the control of the engineer of the lead module. Now as you reach a module’s destination, the engineer turns over its control to the terminal and the other modules never stop. Or as you pass Richmond, Va., the terminal gives your engineer control of the module it assembled for Jacksonville, either attached to the train or closely following it. Trains within trains. Platooned trains. Imagine the possibilities.

Ditch the diesel. Locomotive technology in the U.S. is stalled out. Tier 4 emission rules have made new diesels not worth their cost, which is why they aren’t being ordered by any railroad that has an alternative. At the same time, the world is turning away from fossil fuels. In a decade, you won’t be able to buy gasoline or diesel automobiles in some European countries, and maybe not even drive them in cities like Paris. Meanwhile, the cost of producing renewable energy is plunging. Railroads have resisted electrification because of the enormous upfront costs of catenary (including raised clearances), transmission facilities and so forth. But what if you electrified using battery power? Now you’ve shed the up-front construction costs. If Tesla Motors’ Elon Musk actually produces that promised battery-powered highway tractor than can haul a loaded trailer for 500 miles, and then recharge it in 30 minutes to go another 400 miles (many doubt he can), then the same technology can be scaled to locomotives, perhaps at great savings.

Screwball ideas? Perhaps. But continue down the path of pursuing short-term financial goals and nothing else, and railroads risk becoming irrelevant as the future of transportation views trains in the rear-view mirror.

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