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Oliver Wyman’s Bailey says it’s time to ‘pivot’ to growth and away from cost-cutting

Adriene Bailey at RailTrends conference. Photo: FreightWaves

NEW YORK — At the RailTrends 2021 conference in New York on Thursday, there was plenty of praise for what workers in the nation’s railroad industry had achieved from the start of the pandemic through today, moving enormous amounts of freight on a system that encountered some of the highest demand it had ever seen. It was also buffeted by off-the-charts impacts like the wildfires of western Canada and the polar vortex in the U.S. Southwest last February.

But in addition, there was a sentiment heard over the course of the first day of the two-day conference that given the difficulty in hiring truck drivers, given rising diesel prices and given the sheer demand for moving freight, the rail industry probably could be doing a lot better. 

For example, Lawrence Gross, the president and founder of Gross Transportation Consulting, noted that the 11% share of freight movement held by intermodal in the third quarter of this year was the lowest in almost 12 years.

“We’ve given back all the gains that we’ve achieved since 2009,” Gross said on a panel at the conference.

Gross said rampant talk of the truck driver squeeze has led some in the rail industry to operate under the assumption that a tight driver market would simply push more freight onto the rails. But noting the locale of his conference, Gross had a one-word, distinctly New York response: “fuhgeddaboudit.”

“The only way we’re going to succeed is to compete,” Gross said. 

And that was the theme of a presentation by Adriene Bailey. Bailey is a partner at the consulting firm of Oliver Wyman. Her rail resume is a long one, including a two-year stint as the chairman of the Intermodal Association of North America.

The long-term numbers for the industry’s efficiency have been solid, Bailey said. Revenue per train mile was up 76% between 2006 and 2019. But revenue ton-miles were down 11% during that time, and total train miles dropped 23%. 

Industrywide, the operating ratio has posted more than a 9-point improvement. But those efficiencies are being laid against a smaller base, she said. 

Bailey dispensed quickly with any suggestion that her talk was going to focus on the current backups on the rails. “We will unclog the bottlenecks and will return to the days with more fluidity and reliability on the network,” she said.

The title of her presentation, “The Great Pivot,” refers to what she described as the industry’s mandate. “We still know we need to change things if we are going to pivot to growth,” she said. “What we were doing before wasn’t getting us to where we needed to go, to become a customer-centric industry.”

It is possible to “get there,” Bailey said, but “it is not going to happen unless we make fairly major changes in the way we approach things.”

Bailey said the rail industry has implemented three significant technology changes in recent years that have made it a far more efficient provider of freight services. One is autonomous track inspection, though earlier in the day AAR President and CEO Ian Jefferies expressed concern that government action might block continued use of that program. The others are railcar inspection portals and positive train control.

Adoption of those technologies “created a great dividend, making railroads more reliable,” Bailey said. “It provides opportunities for us to be more efficient and has created a digital platform on top of which we can innovate.”

Bailey said in her discussions with shippers, a few themes come through. First, as shippers told her, “This is not your mother’s supply chain.” Shippers over the past two decades have made major changes in the way they do business, “so we can’t think about them in the same way we thought about them before.”

Her second point was that railroads need to “improve the transit experience.” Speed is not the only issue, Bailey said. But the service needs to be “reliable and consistent.” If a shipper using rail services encounters too much “variability,” Bailey said, that is a big problem: “Variability is the root of all evil.”

Finally, making the customer central needs to be supreme, according to Bailey. “Embrace customer centrality,” she said. “Treat your customer the way you want to be treated.”

Customers that encounter these changes will return to the tracks, Bailey said. “They want to put more freight on the rails.” Trains are greener and provide greater capacity, she said, “but the product has to work for the supply chain.”

Her formula, repeated several times during the presentation, is that the rail industry needs to adopt all three parts of “reliability plus velocity plus growth.”

The perpetual battle for rails is how much freight can they take away from trucks. In a somewhat surprising statement, Bailey said the trucking sector does a “tremendous job” in many areas, including keeping down the wait times of drivers. This is not necessarily a sentiment that drivers would agree with. 

Railroads’ focus on cost-cutting can be seen in the number of jobs in the sector reported by the Bureau of Labor Statistics. Recent reports put employment at about 142,000 jobs in the sector. Just three years ago, it was more than 180,000.

Having cost reduction in place, Bailey said, has set the stage to “maximize the network.”

And too much focus on cost-cutting can be counterproductive. “At some point, cost-cutting alone becomes value-destroying,” Bailey said.

The railroad sector’s “journey,” Bailey said, has been to “get the fat out of the system to be able to grow.”

With that having been implemented to an extensive degree, “we have to move to the execution of growth,” Bailey said.

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.