The challenge for this generation’s rail leaders is to restore higher customer confidence in carload freight. Can it become a volume and market share leader in today’s emerging high-tech freight logistics world? Or will it continue to exhibit a declining role in freight transport here in the USA?
Here in a few graphics from multiple sources is a different way to think about carload freight.
On a positive note, rail carload freight that requires a customer side-track still represents a big number of annual units moved and considerable volume.
For example, 2018 was a good year to be in the railroad carload business. But some industry experts ask ”was it a spike or a sustainable uptrend”?
According to the American Association of Railroads (AAR), the traffic for U.S. railroads in 2018 was 28,113,490 combined carloads and intermodal units, a 3.7% increase over 2017. The carload sector has grown smaller as intermodal has risen. Part of that decline has been a loss of coal volumes.
Here is a carload market segmentation as to size.
- Total carloads: 13.6 million in 2018 (down from 15.1 million in 2015
- Carloads excluding coal, a declining commodity segment at 9.2 million in 2018
- Coal carloads at 4.4 million in 2018
- Chemicals and Petrol carloads at 2.3 million
- Grain and agricultural carloads at 2 million
- Non-Metallic minerals and stone carloads at 1.8 million
The above can be compared to 14.4 million intermodal Trailer and Container units moved.
Let’s now shift to just the carload segment. We will focus on the long-term trend instead of tracking year-over-year numbers.
Let’s start by examining the Federal Reserve Bank (St Louis FRED) blog reports about rail carload traffic.
Clearly, 2006 was the last great year for U.S. carload freight. With the coal loss, overall national carload volume in cars loaded is down by over one-fifth since 2006. That loss could have been worse if crude petroleum hadn’t developed as a niche market.
Here the FRED data graph is calculated against the base year 2000 set as an index of 100.
Rail data from AAR sources has been graphed as the above red line. It has dropped from 100 to about 80 as of the 2016 data plot.
In contrast, trucking has increased from the 100 baseline to the near 140 range. Translation? Using this one measure, the rail carload sector has clearly lost significant market share.
Reminder – this railroad index does not account for intermodal rail traffic units.
As a reference, here is a recent carload graph that measures the 2013 to 2018 pattern.
On a positive note, there are indeed reasons for carload freight to persist — and, indeed, to grow.
The basic attractiveness of carload freight is its equivalent load factor, tonnage carrying capacity, and cheaper cost per ton-mile relative to truck.
A modern 60- to 70-ton boxcar, to cite one example, offers the carrying capacity of three to four truckloads. The volume advantage allows a railroad company to charge the shipper considerably less than what a shipper is charged by a truck service on a per ton-mile price quote.
A rail movement might cost in the 4.5 cents per ton-mile price range versus a truck price in the 9 cents or higher range.
The trade-off to the shipper, however, can often be a higher inventory carrying cost because carloads arrives a day early or a day late as much as 40% of the time.
That poor carload performance makes it difficult for logisticians to schedule.
Over the past three decades, the rail industry marketing promises of advances coming soon for superior carload delivery placement raised customers’ expectations about carload’s dependability. Between about 1995 and today, the railroads never delivered the promised final service delivery reliability that customers expected.
Yet the railroad companies themselves continue to place evidence before both the regulators and the investors showing high profitability from carload operations. If profits are high, are they enough to support reinvestment for growth? Or just high enough to support “a milk-it strategy”?
When examining long-term variable (LTV) costs by commodity types and over certain lanes, and using STB regulatory costing models, there are plenty of carload moves like chemicals which demonstrate movement at rates above 160% contribution thresholds.
If you spend time examining railroad costing as a profession, you find that plenty of carload commodities offer the railroads higher margins than a lot of the supposedly core intermodal traffic.
A few conclusions
If coal continues its expected long-term tonnage decline because of competition from other fuels, the overall carload and rail revenue ton-miles decline in both absolute numbers and in modal share are likewise expected to drop.
Overall, crude oil by rail shipments may continue for a number of years. Eventually, both crude oil by rail and frac sand by rail will succumb to alternate competition from new pipeline construction and resourcing of frac sands to trucking.
If international buyers lose confidence in U.S. trade policies, there could be further losses of grain traffic export rail carloads.
How widely could rail freight grow if we examine the optimistic scenario? Out over a half decade or longer timeline, some traffic like grains and chemicals could clearly grow.
How much upside to rail carload is there? There is a business case that walking away from carload freight isn’t a good strategic plan for the railroads. Selective exit might be, but there are reasons to stay in the game of carload freight if you examine the market sectors carefully. Amidst the complexity, there are worthwhile segments to pursue further.
Sadly, there are two real network hurdles.
They are both geographic circumstance limitations. One is that over the past five decades of my career, way too many manufacturing and warehouse structures were built remote from railroad tracks. Interviews with many developers and real estate experts dating back to 1972 identified the pattern that rail cars just can’t get to many factories and warehouses. This limits the return of the carload mode.
The second geographic factor is that far too many towns were technically abandoned starting back around the 1920s. Perhaps as many as one-fifth or more of the nation’s communities just don’t have rail service. They haven’t had it for years.
At about $3 million to $4 million a level land terrain mile (no bridges and no tunnels), it is expensive to build out new track to those isolated customer places. A search of strategic rail planning literature confirms that there are no significant plans by the majority of state DOT’s to fund such reintroduction of rail to isolated communities.
Therefore, if rail carload volume is to grow and regain mode share, it fundamentally has to occur over the nation’s existing track network.
That decision of how to execute and how to invest is in the first instance the role of the seven Class 1 railroad managers and their boards of directors. What is their strategic outlook and level of confidence? How much CAPEX might that take? Who is going to be the first to deliver that longer term picture for the upcoming decade or two?