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.
John Beaulieu
You have confused Michael Haverty with Matthew Rose. Mr. Haverty signed the agreement with Mr. Hunt.
Brian Watt
“The Surface Transportation Board is an independent federal agency that is charged with the economic regulation of various modes of surface transportation, primarily freight rail. The agency has jurisdiction over railroad rate, practice, and service issues and rail restructuring transactions, including mergers, line sales, line construction, and line abandonments. The STB also has jurisdiction over certain passenger rail matters, the intercity bus industry, non-energy pipelines, household goods carriers’ tariffs, and rate regulation of non-contiguous domestic water transportation (marine freight shipping involving the mainland United States, Hawaii, Alaska,
Puerto Rico, and other U.S. territories and possessions).”
The 1980 US Intermodal Exemption allows for truckers and railroads to make contract rates without Federal regulatory review. The grand-daddy of them all is the Quantum Agreement, struck in 1989 between the (then) ATSF Railway and J B Hunt for the benefit of Walmart. ATSF is now BNSF, but the Quantum Agreement still holds serve. The Quantum Agreement’s central feature is a “forever rate” granted by ATSF President Michael Rose to Johnny B Hunt Sr, which freezes the ATSF Network rates to JB Hunt at 1989 levels. It has not changed since then.
The STB, which has jurisdiction, has never publicly reviewed this agreement. Overall price levels in the US have gained in the United States 108% by today’s levels. Other railroads won’t challenge this agreement, as they have their own price-fixing deals in place. Given normal inflationary shifts, Quantum keeps transport pricing for J B Hunt market-warpingly low. It gives J B Hunt inordinate market power. It allows J B Hunt to distort domestic AND international transport markets.
I tell my small truck company friends this: “The reason your kids’ shoes at Walmart are so cheap, yet Walmart’s freight is too cheap for you to haul is Quantum.” I tell my logistics associates this: “Our current state of affairs at all US harbors is what you get when Walmart rules the roost.”
The STB cannot review Intermodal Contracts as they are exempt since 1980.
The 1980 US Intermodal Exemption allows for truckers and railroads to make contract rates without Federal regulatory review. The grand-daddy of them all is the Quantum Agreement, struck in 1989 between the (then) ATSF Railway and J B Hunt for the benefit of Walmart. ATSF is now BNSF, but the Quantum Agreement still holds serve. The Quantum Agreement’s central feature is a “forever rate” granted by ATSF President Michael Rose to Johnny B Hunt Sr, which freezes the ATSF Network rates to JB Hunt at 1989 levels. It has not changed since then.
The STB, which has jurisdiction, has never publicly reviewed this agreement. Overall price levels in the US have gained in the United States 108% by today’s levels. Other railroads won’t challenge this agreement, as they have their own price-fixing deals in place. Given normal inflationary shifts, Quantum keeps transport pricing for J B Hunt market-warpingly low. It gives J B Hunt inordinate market power. It allows J B Hunt to distort domestic AND international transport markets.
I tell my small truck company friends this: “The reason your kids’ shoes at Walmart are so cheap, yet Walmart’s freight is too cheap for you to haul is Quantum.” I tell my logistics associates this: “Our current state of affairs at all US harbors is what you get when Walmart rules the roost.”
Quantum Agreement Math: CPI (1989/2020) 1.00 TO 2.08. Terms and Conditions Not Disclosed
To rectify the current North American intermodal situation for market efficiency and equity, we need:
1) Revisit the 1980 US Federal Intermodal Contract Exemption
2) Examine the initial draft (date – time) and subsequent revisions of the UIIA
3) Open up JBHU – BNSF Quantum Agreement and related large volume agreements for review of price collusion and unfair market practices.
The overall playing field in transport leans heavily away from 80 per cent of the people in this business. This must be redressed. This is why I think the Quantum Agreement is a fair place to start.
“That means most of the gains in private container moves represent a shift in share from other domestic intermodal sectors, rather than an increase in the size of the overall domestic intermodal pie.”
— Larry Gross March 24, 2023.
You can thank Quantum-style rail-truck agreements for this fact. Quantum-style agreements push everyone else out.