When the trend is not your friend, what does the future look like?

Every month, the Association of American Railroads produces Rail Time Indicators, an always interesting review of railroad traffic trends. This chart in January’s issue caught my eye because it clearly shows how various rail-hauled commodities have fared since 2005.

The bottom line: The long-term carload trend is not the railroads’ friend. This comes as no surprise to anyone who has followed railroads over the years. But the chart, when combined with broader economic data, does put the problem in clear focus.

In commodity after commodity – steel, motor vehicles and parts, pulp and paper, lumber and wood, food and grain mill products – the rail volume decline is much steeper than changes in U.S. production, according to data from the Federal Reserve Bank of St. Louis. What this means, of course, is that trucks have continued to gain market share.

The decline in railroads’ motor vehicles and parts volume through 2019 is particularly troubling. Rail volume has fallen significantly even though American production of parts and vehicles remained roughly at the levels of 2005, according to Fed data. Auto sales in the U.S., meanwhile, stood at roughly 16.9 million in both 2005 and 2019. Yet auto and parts volume is off more than 20%.

There are many reasons behind the decline of carload traffic over the past 15 years. Some of them are out of railroads’ control, including deep and profound economic changes in the manufacturing sector and the trend toward smaller shipments moving shorter distances, which favors trucks. But reasons behind the decline also include unreliable and inconsistent rail service and the fact that it’s much easier to do business with truckers than railroads.

It is no coincidence that the only carload segment to show sustained growth is chemicals, a commodity that is utterly dependent on railroads and typically cannot move any other way. The freight commodities that declined all could find other ways to move – and so they did.

Another contributing factor: The Cult of the Operating Ratio, which demands that railroads carry only the most profitable traffic. Financially, the volume trends have been masked by rising revenue, as rate increases have more than made up for the decline in volume. 

In fact, since 2000 carload revenue is up 40% despite volume being down 22%, notes Jason Miller, associate professor at Michigan State University’s Eli Broad College of Business. “Despite total carload and intermodal volumes staying relatively unchanged from 2000, railroad revenue is up substantially,” he says. “The long-term question: is this a viable business model in another 20 years, especially with autonomous trucks on the horizon?”

That is the existential question facing railroads. One shudders to think of what will happen to the industry if volume trends continue and railroads' carload networks are left with little more than rail-centric commodities such as grain and chemicals.

The experts at consulting firm Oliver Wyman have crunched the numbers and concluded that if railroads could simply maintain market share of truck-competitive traffic through 2030, the industry would hang on to $177 billion in revenue. To put that princely sum in perspective, that’s $17.7 billion per year – or more than the annual revenue of five of the seven Class I railroads.

To hang on to that revenue and halt the volume slide, let’s hope that railroads can do three things: Figure out ways to become more reliable, particularly in crucial first- and last-mile service; get closer to customers and become easier to work with; and tilt toward volume growth now that their operating ratios are at record lows.

You can reach Bill Stephens at bybillstephens@gmail.com and follow him on twitter @bybillstephens