The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.
This week’s strategic question is “What are the bold new benefits shippers can expect now that the freight railways are super-efficient?”
It is May, and freight carriers – including the railroads – have issued their first quarter 2020 report cards. Simultaneously, it is a time of considerable economic uncertainty.
Previously in such crises, certain companies and leaders have stepped up with forward-looking new services and products targeted at seizing market share. They pursued strategic advantages, not just incremental advancement.
Therefore, I ask “what new offerings might customers expect to hear concerning how the railroads are going to parlay their recent internal efficiencies generated by precision scheduled railroading (PSR) into a truly expanded service role?” In other words, going for freight volume and not simply top-line revenues.
What did senior executive officers and their boards of directors reveal during the quarterly earnings releases and analyst calls about their revised business outlook for year 2020 and into 2021?
It should have been bold and positive. Right? It should have been detailed rather than vague. Why should we have expected this from our American railroad companies? As a railroad veteran, I believe that of all the modes of transport that the seven Class 1 railroads are the strongest financially.
I’d like to see what they can deliver as competitively priced services now that they are efficiently streamlined and so well capitalized.
Regardless of one’s accounting or financial background, the North American freight railways – all publicly traded companies – have the strongest earnings, positive cash flows, and the highest profit margins of the different freight movers.
While the trucking sector has the highest market share of shipper-paid freight billings (revenues), it is the railroads, with their superior operating efficiency metrics, that are the soundest freight corporations.
As an example, none of the seven Class 1 freight railroads needs federal government assistance during this deep recession and pandemic.
Need further evidence? Let’s examine a few of CSX’s first quarter graphics. Even during the turbulent first quarter, CSX managed to improve its calculated operating ratio (OR) to a record 58.7 percent. Compare that OR to the best of the major trucking companies.
On corridors where the CSX competes, its revenue profit margin is outstanding.
CSX’s free cash flow in the first quarter of 2019 was $866 million. In the first quarter of 2020 it was $812 million. These operating ratio and free cash flow numbers look great; but they are not customer benefits.
What would a customer like about these rail numbers? They would definitely see the financial strength of doing business with such railroads.
Both Kansas City Southern and Union Pacific had similar efficiency as well as accounting results. BNSF is also a strong carrier – although it is not practicing the PSR business model.
These railways look so strong financially, that surely they will step up to begin their long-expected moves to regain market volume from trucking.
That’s somewhat questionable. I see no aggressive new services or market share moves in their investor messages. The official railroad message is more like a restricted “guidance” outlook. That’s not particularly encouraging.
Recently, one informed contributor to Railway Age said it in this manner: “Guidance was pulled, and volumes will likely be light amid the COVID-19 pandemic and uncertain macroeconomic environment…”
CSX said in its first quarter report that it was “withdrawing guidance given economic uncertainty.” Yet at the same time CSX signaled persistent internal cost reduction savings from its PSR model.
Where are the emerging public service or customer service improvement outlooks? A daring display of the railroads’ latent carload power from their streamlined rail networks would be a refreshing market view.
There is evidence of service improvement. CSX is gradually displaying the results of a much better scheduled delivery of carloads to the final beneficial receivers of freight. For a complicated rail carload yard network with multiple possible railroad-to-railroad interchanges, a delivery average close to 88 to 90% performance is considered very good. It is far better than many railroads’ 60 to 70% on-time as the trip plan promises.
CSX can build upon that success story. It can focus on this as an emerging game changer performance.
(Chart from CSX April 2020 investor report)
If CSX is now so much more efficient and continuing to improve, let’s see details of what’s to come in service from CSX (and the others).
With continued improvement in service, there logically could be a second rail freight Renaissance period unleashed.
This new period might shift the big North American railroads from a singular focus on financial goals to service and market coverage relevance.
That, my colleagues, is something different than taking larger price margins. If the railroads are as good as their reports suggest, then they are now in an excellent position to use their efficiency as a launching platform for service and pricing leadership. Moreover, they could do this as their trucking competition struggles. I believe that this railway attitude change is possible.
The following are core rail freight strengths upon which to become aggressive and to attack the market:
Actions the Class 1 railroads should take:
The railroads should create a better image in real business terms; they should tell customers what those higher average train speeds are worth. Think of improved network fluidity this way. A typical 2,200-mile-long intermodal train delivery run that used to take as long as ~90 hours now can be serviced in about 60 hours.
Sell more carload freight. Carloads offer a two to sometimes three times volume advantage at far lower rail rates per ton-mile for selected commodities.
Use market uncertainty to the railroads’ advantage.
None of the seven Class 1 railroads is going out of business. Financial strength can be a real lever in selling.
As I learned during my years with Ram Charan at Conrail, railroad executives can use periods of uncertainty like this to critically readjust their older business models and seize new business opportunities.
Which of the seven Class 1 railroads might do that first?
Why not use these quarterly reports to announce their second Renaissance? Are they ready?
While it might be comfortable to rely upon route leverage and pricing leverage as rail freight’s advantages, that is a dangerous road. That business model can become a crutch upon which rail freight witnesses a continuing market share withdrawal.
Rail traffic has been increasing year-over-year at a lower rate than trucking. That’s not good. It’s time to test the possible railroad market stars. And that means more than just intermodal.
Growth with better service and better shared benefits pricing could fill up the main lines again. But to execute, requires leadership from railroad executives.
Growth and relevance as the shippers’ choice of transport modes is not a prescription issued by the Surface Transportation Board or by journalists.
Rod Case of Oliver Wyman said this well during his mid-day slide show at Rail Equipment Finance 2020 back on March 2nd. The railroads, he said, have two basic choices to grow. They can try to match trucking, and in some lanes take share from trucking.
A second approach would involve taking less growth risk. But the price may be that the rail industry would see further route consolidations of traffic into fewer high-density rail routes. And there could be a consequence of a further abandonment of lines.
Given the potential upside, and the rail sector’s solid financial stability and streamlined assets, why would railroad leaders take the slower growth role?
The answer might be because “we have become too comfortable with PSR cash flows and assume that cost-cutting has no point of diminishing returns. We might see the easier path as just to keep cutting our internal costs.”
For signs of aggressive marketing, perhaps we need to look north. Are Canadian Pacific and Canadian National showing us the way to do it?
What do you think? Are you optimistic about high rail volume growth?
Jim Blaze
WOW!
Obviously the PSR business model is a controversial subject.
Thanks to each of you for sharing your pasdion and business comments.
Be safe
Time will be the acid test of what the long term results will be.
Paul Dyson
The railroads have no interest in increasing volume at price points that result in raising their average operating ratio. Let’s assume the railroads could put together competitive service packages to attract truck traffic. They could use idle equipment and terminal capacity. Even if moved at say 70% OR instead of say 60 which they are getting now, that 30% margin goes to the bottom line and is good for shareholders, for everyone. But they are so stuck on keeping at or improving on 60 that they won’t take the business.
Using OR as a metric is about as stupid as “revenue per carload” which used to be used. The railroads turned away a lot of short haul highly profitable aggregates business for years because of revenue per carload. Now they are doing it with OR.
The other issue of course is that to run a customer competitive service you need managers and people. The Class One railroads do not want to have to employ people. They hate their employees. They can’t wait for automated trains. Every piece of business has to fit the lowest common denominator of service and the highest monopoly priced rate. Work for new business? Why bother? It’s not what Wall Street wants and it’s not what their bonus is based on!
Withheld to prevent retaliation from employer.
Well said. We employees are expenses to be eliminated as soon as possible. I predict the long term plan of the railroads is this. 1. Make working for them miserable. Furlough as often as possible to keep expenses down, but call employees back often enough they they don’t move on. 2. Once PTC is implemented fully, make the employees more miserable, then go begging to Congress “we can’t keep employees hired, please, we need one person crews to continue to function and provide for the nation.” 3. Congress and states give in to the artificial environment, and repeal 2 man rule laws. When automated tech is good enough, repeat to get rid of engineers.
Chris Bigoness
Perhaps the Class Is are being overly cautious in the current environment, but they do have a history in many cases of cutting routes, operations, people, locomotives, etc. in slack times to the point that they are poorly positioned to go after new volumes or even accommodate business that is forced upon them during upticks. It’s interesting that they must repeatedly learn this lesson.
Yes, there are some resources that should be cut because they will not contribute to the bottom line in any environment, such as branch lines that serve one large shipper that has closed its doors. However, I’d bet there are some abandoned secondary mains that many roads would been happy to have today if they had taken a longer term view of the world. No one has a crystal ball, but thoughtful planning (and a policy environment that supports it) can be a good substitute.
WILLIAM E REDEMSKE
Excellent article.I am currently employed at a Class 1 and been in the industry 40 years.I believe that the Class 1’s will take the latter route,enjoying the benefits of PSR cost reductions instead of aggressively perusing growth.One of the issues that PSR provides that it gives a quick,substantial upshot of money to the stakeholders;being now-accustomed to these quick rushes of funds,will be most reluctant to add locomotives,trains,facilities,and employees to accommodate such growth.Any increases in freight tonnage the Class 1’s will attempt to absorb by running longer,heavier trains with more frequent stops at intermediate terminals using the savings gained by the cost reductions,in the end will reduce velocity and overall poorer service to the customer.Investors are in the attitude of “I want it now,as much as possible” with little consideration for the long term;they can cash-out anytime.While Hunter implemented PSR,it is no way the ultimate solution.The railroads should also factor John Barringer III’ s vision as well.Harrison,in my opinion,ran his railroad’s like a cash-strapped shortline with a captive shipper;it’s about the railroad first,customer second.Barringer ( and others in his posistion)see the railroads as a viable,profitable institution that provides excellent customer service,but contributes to country and the overall public good.
(Note: if published,I request my name to be withheld,to prevent retaliation I fear from my employer)
Withheld to prevent retaliation from employer.
Fantastic read on the article. I also work for a Class 1 railroad, but my seniority is such that I’ve been furloughed during this slowdown. From my limited perspective, the railroads absolutely are infatuated with PSR, and don’t care about the customer, except that they pay. One of my managers claims to have said, sarcastically, on a conference call, “it saves us even more money if we don’t run the train at all.” And that pretty much sums up PSR in my mind. The low traffic routes cost similar to maintain as the high traffic routes, let’s cut them off, better yet, sell them, for the short term fiscal gain, and increase our operating revenue from having more high traffic routes. It’s horrible, and I hope my route is purchased by a non-PSR class 1.