Friday, June 21, 2024

Viewpoint: Railroads talk about ‘growth,’ but where is it?

By John Schmitter

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.

Attend any meeting involving the railroads and you’re likely to hear a lot about “growth.” At CSX’s investor conference in February, CEO Joe Hinrichs said that the railroad would focus on growth. We heard the same thing at Norfolk Southern’s “investor day” in December. For a few years now, Canadian railroad CN has claimed a commitment to “growth.”

This talk is not just a recent trend. As Tony Hatch pointed out in a recap of RailTrends 2022, Surface Transportation Board Chairman Marty Oberman told the crowd, “Rails said at RT21 that they were pivoting to growth and all I got was this lousy T-shirt!”

Have we seen much real growth? Not yet. So far, talking about growth seems to be the only thing that’s growing. With further consolidation among railroads from Canadian Pacific’s acquisition of Kansas City Southern, will we see real investment in growing volume or can we expect more of the same talk?

What do the railroads mean by ‘growth’?

The railroads usually talk of “smart and sustainable growth” while also reaffirming their commitment to operating ratio. How that has generally played out is: no new train starts, no new capacity and the same level of service they provide to their current customers. Some have taken new business in lanes where they perceive they have capacity.

Some are hiring crews now to expand capacity, and maybe they will even keep some of these people on when volume drops. This is a start, but it only means the railroads can handle more of the volume their current customers want to ship. It’s not about expanding the customer base with new services.

Most other businesses would not call that a growth strategy.

Too much reliance on other trends

The railroads cite a few areas that they believe will naturally lead to an increase in demand for rail and say they will be able to grow by capturing that demand. 

1. Onshoring

The railroads indicate that they will grow volume because more companies will move production from China or other places to North America. While there are many incentives for those companies to make such a move, it remains to be seen how much of this kind of onshoring will happen. The railroads becoming the automatic beneficiaries of these moves is even more uncertain.

Why would those companies locate plants at points captive to one railroad? Why would they build supply chains that rely on rail service that has little resilience and experiences yearlong service meltdowns every few years? Why would they choose a mode that offers no service commitments instead of one with better service and more flexibility?

Railroads benefiting from this onshoring without bigger changes to their own businesses is far from obvious. Taking advantage of a trend toward more onshoring (if that actually turns out to be a thing) will likely take better service than is being provided now.

2. ESG

Similarly, almost all railroads say they will benefit from companies looking to improve their environmental, social and governance (ESG) credentials. The energy efficiency of rail compared to trucking is well documented, and the railroads believe companies will shift volume away from trucks and toward rail to take advantage.

Is the assumption that these companies will forgo a well-performing truck-based supply chain to improve ESG scores? That just doesn’t seem realistic. 

Some may make the move, but the level of service transparency and flexibility that these companies have been accustomed to is far different from the experience of those in the rail-based supply chain. For railroads to take advantage of a trend toward shippers looking to improve their ESG, it will require improving rail service considerably. 

3. Labor shortages

Another trend cited as a growth opportunity is a shortage of truck drivers. The truck driver shortage has been discussed for years. 

Larry Gross, in his talk for the Intermodal Association of North America on Dec. 13, showed that since 2018, growth in rail intermodal has trailed overall gross domestic product, while truck greatly outperformed both GDP and rail intermodal. Truckers find a way to add capacity when there is demand, while intermodal has been short of capacity now for several years. For rail volume to benefit in any meaningful way from a truck driver shortage — in Larry’s words, “fahgettaboudit.”

Improving service is the key to growth

At its investor day, Norfolk Southern said the sweet spot for truck conversion is about 600 miles, which is their average distance for industrial shipments. These short-haul lanes are the biggest opportunity for capturing market share because this is the distance of most freight in the U.S. 

These are one-to-two-day truck lanes with on-time performance in the 90% range. The prices are higher than for rail, but more significant competition keeps prices in check and drives higher levels of service performance. Railroads don’t have intermodal products for many lanes of this length, and carload service is an inconsistent three to five days. The railroads need to do more if they want to make inroads.

For railroads to increase market share and really grow volume, it will require new services and a very different mentality on service performance. 

Between my jobs at two different Class I railroads, I spent four years in marketing and sales at a regional less-than-truckload trucking company. Early in my time with that company, I expressed concern to the senior vice president of operations about whether we had the capacity to handle a new piece of business we were targeting. He said, “Don’t worry about it — you find the business and we will figure out a way to make money at it.”

When you hear railroads talk like that, you will know they are pursuing growth.

John Schmitter is the co-founder and chief commercial officer of RailState, a provider of rail network visibility data and insights. He has more than 40 years of experience in rail transportation, including work at railroads, for rail services companies, and through a long-standing practice in logistics consulting.

The post Viewpoint: Railroads talk about ‘growth,’ but where is it? appeared first on FreightWaves.

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