Unless your business is actively shipping products by rail, you are likely to think, as most people do, that railroads were a great period in American history. And while railroads may illicit sentiment and have avid followers, you may think the industry has little to do with today’s economy. But the rail industry is truly one of the greatest success stories regarding the benefits of reducing government regulation and returning to a more market-based, capitalistic approach.
If shipping by rail is excluded currently from your business plan, maybe it is time to reconsider. More businesses are converting tonnage to rail shipping from other modes of transportation, primarily trucking, for a variety of reasons.
Riding the Rails
For some industries or markets, price is the primary factor that is causing them to turn to rail shipping. Even though freight rate and true economic cost can be very different, initially the freight rate is the determining factor that leads many businesses to select rail over other forms of shipping. Because of economies of scale, rail often has a lower rate, especially when traveling long distances. How is this possible? Consider one simple factor of many. The typical truck weight limit in most states is generally 22 net tons while rail is typically 100 to 110 net tons. One railcar, therefore, can equal four to five trucks. A train of 100 railcars can be moved by a two-man crew. That is equal to moving 400 to 500 trucks using only two drivers!
Hidden costs beyond actual freight rates also should be considered, however. For example, trucks normally allow a very short window, such as two hours, for unloading before detention charges are assessed. If 10 or 20 trucks show up for unloading within the first hour of business, detention charges can start to stack up quickly. (Some unhappy truckers and even more unhappy automobile drivers may struggle with the gate congestion as a result.) Railcars typically are given one to two days to unload, and privately owned or leased railcars often have unlimited time to unload once they have reached their destinations. Trucks must be unloaded during truck unloading hours, while rail unloading locations are often scheduled 24/7, allowing much greater flexibility.
For many industries, the advantage of carrying a rolling inventory is significant. The railroad can spot loads in the company’s facility for unloading and return daily to pick up the empties. While no one likes railroad detention charges (demurrage), sometimes it makes more sense to leave that inventory in the railcar until needed or until arrangements to unload are in place. Likewise, loading a railcar for shipment might take a full week, and having the “vehicle” spotted to allow loading on your schedule has value.
Private railcar ownership and leasing agreements have created a significant opportunity for growth within the rail industry. Many carriers offer lower rates when shipping in cars in which they have no investment (no asset cost). As noted previously, when private railcars are placed on industry tracks, no demurrage charges accrue, no matter how long the railcars sit. Plus, private ownership allows better control over the asset, as it carries the owner’s mark (initialed on the sides and ends of each car), limiting carriers from allocating the equipment for uses other than those dictated by the car owner.
In 1980, when the Staggers Rail Act was enacted, 1.7 million railcars were reported in the U.S. and Canada. Only 26 percent of these cars were privately owned, while 74 percent were owned by railroad carriers. In 1990, the total railcar fleet in the U.S and Canada had shrunk by 29 percent to 1.2 million. In 2000, when railcars in Mexico were added to the statistics, the total was 1.5 million, with 47 percent of cars in private ownership. In 2012, the Association of American Railroads, Washington, D.C., projects that 58 percent of all railcars in North America are privately owned, a share more than double what was privately owned in 1980.
These and many other factors have increased the value of shipping by rail to many businesses. How has the railroad industry been able to adapt to encourage such growth?
The government created Consolidated Rail Corp. (ConRail) in 1976, which epitomized the American rail industry at that time. ConRail combined seven railroad companies—Penn Central, Ann Arbor, Erie Lackawanna, Lehigh Valley, Reading, Central Railroad of New Jersey and Lehigh and Hudson River—that all had filed for, or were about to file for, bankruptcy. Although ConRail operated in the most densely populated area of the U.S., the newly formed carrier, like virtually every other rail carrier at that time, had unused track and yard capacity, old and deteriorating track and equipment (railcar, locomotives, etc.), oversized crews (including a fireman from the days of the steam engines), no capital to invest to improve its equipment and little control over its ability to generate profits.
In 1980, the government took steps to prevent the collapse of the entire industry with the Staggers Rail Act. The goal was to restructure the regulations strangling the life out of the industry and, returning enough control to the railroads to allow economic viability. At that time there were more than 40 Class I (major) railroads. Passenger travel by rail had been replaced by airlines and automobiles. With the development of the interstate highway system, trucking had become the primary means for moving freight. Bloated overcapacity, high labor costs and other factors combined to make rail noncompetitive.
Today, however, it is generally accepted that highway transportation has declined and is struggling, while rail transportation has been revitalized and has once again become an option for every shipper to consider. What caused this transformation?
In general, the primary role of the Staggers Rail Act was to return control of profitability to railcarriers and to allow management to do their jobs within broad guidelines rather than the distant and disconnected government dictating strict rules constraining the railroad carriers’ ability to succeed.
Some of the changes resulting from the Staggers Rail Act were:
1. Labor costs – The standard crew size for rail carriers in 1980 was five—conductor, engineer, brakeman, switchman and fireman. Technology improvements and labor negotiations reset the crew size eventually to two; in some cases, one person operates the train. Regardless of actual hourly rates of pay and benefits, the math is pretty simple. When the crew size is reduced by 60 to 80 percent, the costs are reduced likewise.
2. Technology – Every industry has been revolutionized by technology. Rail is no different. Improved communication tools allow centralized dispatch of crews, trains and power across the system of each carrier. Safety, the No. 1 priority of every carrier, has been transformed through available technology.
3. Internet – Carrier websites now give shippers the tools to manage what once required direct contact with the carriers, such as the transfer of physical documents, physical inventory of railcars and numerous tasks. By providing such tools to customers, the carriers have been able to eliminate vast numbers of staff, further reducing costs, while providing updated information to allow customers to manage their businesses.
4. Capacity reduction – Carriers have reduced or eliminated capacity in at least two phases in an effort to “right-size” capacity to their operating requirements.
a. Line sales – In 1980, 200 or more carriers were not classified as Class I lines. Today, the American Short Line & Regional Railroad Association (ASLRRA) reports more than 550 members. In general, this increase is from other carriers, mostly Class I’s, selling branches or portions of their lines to smaller operators. These short lines typically provide more personal service and more direct customer contact than the Class 1 railroads and allow Class I operators to focus on longer hauling of trains, their most cost-effective service.
b. Abandonments – Staggers allowed carriers to file for the right to abandon lines with little to no business. This not only eliminated the expense of maintaining the lines and the associated taxes and other costs but also generated income from the sales of the rail and track, which could be used to reinvest in other active portions of their lines.
5. Market forces – Prior to Staggers, railroads were essentially unable to price to the market. Pricing was guided, if not controlled, by government forces. With deregulation, rail carriers had the right to negotiate confidential market-based rates. Benefits included allowing some rates to increase to improve profits but also to reduce others to compete with trucking, other carriers and other options. Once more control was placed into the carriers’ hands, management had an incentive to manage their pricing, as they controlled the bottom line more directly.
6. Mergers – Nearly every industry has seen consolidation. Part of the life cycle of any industry, and any economy, historically includes trends toward consolidation and then separation, with the cycle repeating. During the first 20 years following Staggers, the consolidation of Class I railroads reduced the total from more than 40 to just seven. The near-meltdown of the UP/SP (Union Pacific/Southern Pacific) merger created significant resistance to any future mergers, and that was the last merger of Class I’s. All the usual business reasons for mergers apply in general to railroads, and the benefits to shippers have been measurable, even if many questions remain about some of the negatives that resulted. (Note: ConRail was sold to both CSX Transportation and Norfolk Southern in 1999, so it was not a merger but the reverse, a split up.)
7. Private investment in rolling stock – As noted previously, the percentage of the total railcar fleet in North America that is now privately owned has more than doubled since 1980.
8. Capital expenditure – While railroads have limited their investments in rolling stock, they have invested heavily in other areas. Since 1980, the railroads have invested more than $500 billion in their infrastructure and equipment.
The terminology and practices for working together with rail carriers can be daunting. To determine if your strategy should include rail carriers and to help make sense out of the complicated world of rail shipping, you may want to contact a logistics provider.
The author is owner and president of Aurora, Ohio-based Iron Horse Logistics Services. He can be contacted at 330-995-9859 or through www.makelogisticseasy.com.