Joe's a Gambling Man and the Rail Industry's Bearing Problems Just Won't Go Away

Joe Hinrichs Makes a Bet

In my last piece, "UP, Lemonade, and 'Railnomics'," I described the ongoing transition away from PSR and profitability towards the uncharted waters of growth in the rail industry. I labeled CSX, with the appointment of Joe Hinrichs, a former customer, as the face of a new direction at the railroad. It turns out that Joe must have read it and decided to get moving.

From Progressive Railroading,

CSX?today announced that Executive Vice President of Operations Jamie Boychuk is leaving the company.

Boychuk joined CSX in 2017, and served as assistant VP of transportation support; VP of scheduled railroading; and senior VP of network operations, mechanical, engineering and intermodal operations. He previously served?CN?for 20 years.

CSX President and Chief Executive Officer Joe Hinrichs thanked Boychuk for his role in implementing scheduled railroading and cited the company's depth of operational experience that will ensure continuity while CSX searches for a successor.

"CSX has an experienced operations leadership team that helped guide our operational transformation into a top-performing transportation company, and who will continue to implement and strengthen the scheduled railroading guiding principles that have been the foundation of our success," Hinrichs said in a press release.

Wall Street was not impressed on the news with Bank of America downgrading the stock, which promptly fell 3.7% last Friday. Clearly, any perceived step away from PSR, is going to take some convincing for investors. I for one, given that Hinrichs is the former President of Global Operations of Ford, a far more complex organization operationally than a railroad, feel that Joe is probably no slouch in understanding what it takes to run an operation.

But it is a gamble with CSX operating at the top of the pile in terms of service metrics today. The only reasons for removing a young, successful COO are (A) He did something criminal, (B) There's too much ego between him and the new CEO, or (C) He doesn't fit the vision. While B is certainly possible, I find it unlikely that the board would allow it to happen. I think C is the most likely cause.

Hinrichs has been very clear with his "OneCSX" unity vision that restoring labor relations is at the top of his priority list right now. From the back channels, it sounds like Boychuk was pretty ruthless with labor and with him in place, Hinrichs may have recognized he wasn't going to be able to make the gains needed with labor. Or it could be driven by the optics around PSR which runs counter to the direction Hinrichs wants to go, although axing a guy who's only 45 seems a tad extreme if that was the case.

The Rail Industry Has a Bearing Problem

Six months have now passed since the East Palestine derailment. All the journalists must have set their alarms for the milestone as we've had a recent spate of articles from NPR, the AP, and the Hill among others. Norfolk Southern, clearly ready, pushed out their own media to promote all the work they've done in that time. Which brings up the question, what have we learned since the East Palestine derailment?

Call it misfortune, but 2023 is on track for the rail industry to post its worst year of hot bearing derailments since 2009. From the most recently published FRA data through May of this year, there have been 10 hot bearing derailments with 24 projected for the year. The average since 2010 has been 16 derailments/year. These 10 derailments do not include East Palestine with the cause listed as "Under Investigation." Nor does it count the NS derailment of July 6, which the NTSB has already released its preliminary report indicating that this too was another hot bearing derailment.

While some may find the timing to be uncanny, it's hard to understand why hot bearing derailments have seen such a sudden uptick. Some may feel it's a direct result from PSR and decreased car inspection times. As we explained in our white paper, "Bearing Derailment Prevention," bad bearings are not visibly detected except in rare cases such as a bearing adapter being installed incorrectly or a bad grease seal. In other words, this isn't a case where longer car inspections would make any difference at all.

Nor is this a problem that stems just from one particular railroad's safety practices. From the FRA data, CSX is the only US Class 1 RR that hasn't had at least 3 hot bearing derailments this year. The NTSB is investigating NS' safety culture and NS has wisely made the investment of hiring a safety consultant to help, but this problem isn't isolated to the NS.

Frustratingly for the RRs, the cars that are initiating these derailments are almost exclusively privately owned. As shown in the table below, only 2 (GWRR and TTX) of the 10 railcars from these derailments are railroad owned.

What these derailments, and the inability of railroads to prevent them even after the increased public scrutiny stemming from East Palestine, have laid bare is that this is an industry problem consisting of two parts: (1) Rolling stock maintenance practices and (2) Derailment prevention technology.

As the Staggers Act of 1980 revitalized the rail industry, RRs were more than happy to invite the capital necessary to privatize car ownership. Under AAR Rule 1 (RRs carry liability for carriage), anything that happened to a railcar in transit was backstopped by the RRs. "If my railcar derails," says the railcar owner, "The RR will just cut me a check. Why should I invest in better equipment?" AAR Rule 1 required railroads to invest in wayside monitoring technology in order to protect their track and reduce their liability risk. Rules were also written that gave a RR license to remove and repair any railcar that had mechanical issues before a derailment would occur. Private car owners seemed happy to give up control of their railcar's maintenance, particularly its wheels and bearings, to the RRs in exchange for liability protection.

The key issue with this approach, however, is that private car owners have little incentive to improve the quality of their fleets. Yes, car owners must pay RRs for maintenance performed, but with little ability to affect change on that expense, car owners largely just pay whatever the RRs tell them to pay. Car owners can shop a car at a private shop, but the freight expense is often just enough to kill any savings over just having the RR perform the maintenance. Since RRs control both the condition monitoring data and the methods of maintenance, what they say goes.

So, the industry uses a one-size-fits-all bearing and wheel supplied by duopoly suppliers. "Running repairs" maintenance expense is viewed as part of the going rate of rail transportation. It's little surprise that these factors lead us to the "lowest common denominator" of railcar maintenance where RRs perform just enough maintenance to keep cars moving while railcar owners invest just enough to do the same.

Returning to bearing derailment prevention technology, from the 1980's through the 2000's bearing derailments continued their decline (primarily driven by the replacement of plain journal bearings with tapered roller bearings) led by increasingly sophisticated detection algorithms that removed the low hanging fruit from the system. Then, hot bearing derailment reduction hit a wall in 2010 and, well, here we are. The wayside detection system and advanced algorithms built on that system have been unable to reduce the risk of bearing derailments any further. Moreover, the NTSB investigation has uncovered the unreliability of acoustic bearing detectors, a replacement for HBDs spaced at 15 miles in the eyes of the AAR. In the case of the GATX car that derailed the train in East Palestine, the last 7(!) readings from an acoustic bearing detector were all unusable.

And its not just that the wayside detection system is unable to catch bad bearings early enough that has created this now very public issue for the RRs, but it's also the fact that once a bad bearing has been identified, the RRs are still derailing cars as they limp to the closest siding.

From its most recent hot bearing derailment on July 6, Norfolk Southern was again able to identify a bad bearing prior to derailment, just as it did in East Palestine. And, just like in East Palestine, a derailment followed despite, in this instance, the added caution in handling the bad bearing. As stated in the NTSB's report:

"About 5:29 p.m., an HBD at milepost 276.3 transmitted a critical alarm message for an axle on the 71st railcar of train 814V404. After the crew stopped the train, the conductor inspected the railcars and told the ATC desk that the axle’s temperature indicator stick had melted slightly, indicating a measurement of 169°F or higher, and that some grease was coming from the back of one of the axle bearings."

The train was alerted prior to the car derailing. The conductor hoofed it back 71 cars (roughly 0.7 miles if on a straight) and applied his tempilstick, which promptly melted when it touched the hot bearing. The bearing had gotten so hot that the grease had separated and was now seeping out around the grease seal. Great! Crisis averted, right?

Wrong. NS decides to limp the train into the nearest siding at 25 mph, which is 13 miles away. On the way, the bearing, now without the aid of grease, burns off the journal and derails the train. NS just can't catch a break. Even when the system and crew responded as designed, they still end up derailing the train.

Immediately in response to this latest incident, NS decided to implement a rule change with how they handle hot bearings. Also from the NTSB report:

"On July 7, the day after the derailment, NS issued an operations bulletin providing clarification of the requirements for responding to hot bearing and dragging equipment alarms. The bulletin states that upon receiving a critical hot bearing alarm, the crew must immediately stop the train for inspection. If the overheated condition is confirmed, the crew must inform the ATC desk and seek guidance on moving to the next available set out location. Any authorized movement must not exceed 10 mph, and the defective railcar must be reinspected at least every 3 miles until set out. The bulletin further states that a visual inspection of the indicated bearing and its associated components must be performed. If this inspection reveals exceptions (for example, leaking grease or visible damage), the ATC desk must be notified, and NS mechanical department personnel must perform an inspection before the railcar is moved."

Ouch. Now if an HBD or dragging equipment detector alarms, the train must be immediately stopped and inspected. If confirmed, they can't move faster than 10 mph AND they now have to stop every 3 miles until set out. In the case of our poor conductor from the July 6 train, in the 13 miles to the closest siding he would have to make that 1.4 mile round trip walk, on ballast, to the bad car and back 4 times for a casual 5.6 mile workout in the middle of his shift. And in the case of grease weeping out of the seal, the train is going to have to park it until a mechanical crew rolls out and confirms that, yes, in fact, that is grease coming out of the bearing.

I suppose the key to reducing bearing derailments is just to stop moving trains. RIP train speeds.

The Railroads Have a PR Problem

Now this new policy clearly isn't a long-term solution for NS or any of the other RRs, but then again, what is? In the aftermath of East Palestine, both NS and the AAR announced multi-point action plans. Quite tellingly, neither of them have come back to those action plans and said something along the lines of, "Look, I know this looks bad, but you have to give us a bit of time to implement all these changes we decided on a few months back. We believe the steps we outlined are clearly the right ones and that they'll contribute to a safer industry going forward."

But they haven't said that. From the recent NPR interview with Alan Shaw, CEO Norfolk Southern:

NPR: "If you look at Norfolk Southern, you look at the other big rail lines, there were 286 train derailments last year. That's about every other day on average, more than every other day on average. And then that's on the main lines you know, that's not counting the rail yard derailments, things like that. It's just that they're not carrying toxic chemicals in towns in the way that happened in East Palestine. What's, what's the big picture problem here? Why does this keep happening at this level and how do you get the numbers down?"

Shaw: "You know, rail is the safest, most efficient, and most sustainable form of transporting goods across land and we can do better..."

(What's unfortunate, at least for me, is that Shaw had Norfolk Southern leading the industry in the exact, post-PSR direction it needed to go before East Palestine occurred. Now he's mired in Capitol Hill and PR work to rehab NS' image).

The AAR has been more descriptive, most recently in a letter sent to the STB on July 7 that listed several notable safety improvements since 2000. As reported by Railway Age,

"According to data from the Federal Railroad Administration (FRA) and contrary to organized labor’s claims, the past decade has been the safest in railroad history. In fact, in 2022 the industry set new safety records, while coming close to breaking others.?Specifically, 2022 was the safest year ever for incidents involving hazardous materials. The hazardous materials accident rate (per thousand hazardous materials carloads) is down 76% from 2000. The overall train accident rate (measured per million train miles) for freight and passenger railroads was 26% lower in 2022 than in 2000, with the accident rate for trains traveling on railroad main lines—that is, outside of rail yards—was 43% lower in 2022 than in 2000...

"Railroad employees’ strong safety culture, paired with the industry’s sustained investments in the network and in safety-enhancing technology have delivered meaningful results, and will continue to do so as we continue to drive toward zero."

The AAR is absolutely correct about all these statistics. The only problem is that the general public, and especially the people of East Palestine, do not care about statistics. A message that expresses no admission of guilt, remorse, or any humanistic emotion at all, does very little to win hearts and minds. While I wholeheartedly believe the money given to the community of East Palestine to be sincere and the people at the NS well-meaning, little has been done to soften the image that RRs are an evil corporation that can simply pay off the victims of its industrial accidents. A picture speaks a thousand words, and those pictures of black clouds and dead fish are far more compelling than a message of, "Nothing to see here folks! We don't need to change!"

Labor and its allies in the Democratic party also do not care about the statistics. They see their chance to win important concessions in legislation, such as mandated 2-person crews and longer car inspection times, and are throwing out every anecdote tailor-made for Facebook that they can in order to win hearts and minds.

Now the RRs may not care at all if they win the battle in the court of public opinion. But they do seem to care about not being regulated in new and painful ways. In this divided Congress with key RR advocates in Senator John Thune (R-SD), the minority whip, and Representative Sam Graves (R-MO), Chairman of the House Transportation Committee, the RRs feel pretty good about their chances. Chairman Graves, the key to passing any legislation, has already stated they're going to wait until the NTSB report is published early next year. By that time, the nation will be in full election mode with the Presidential primaries. The RRs are hoping to slow roll this legislation until it gets lost in the noise.

The RRs may very well avoid any onerous regulations, but at what cost in the long-term? If a more labor and regulation friendly Congress is elected in 2024, will the RRs regret not passing weaker legislation before that time? And what if, given the trend for bearing derailments, another hazmat release does occur? Or what if a derailment occurs in a community with far greater population density than East Palestine? The RRs are playing a risky game here and may find the more pragmatic approach is to quickly come to terms with labor and close the open question on rail regulation.

Returning to my original question, what have we learned from East Palestine? The industry has some fundamental issues that are going to take a group effort to overcome. Here are 5 steps the industry can take to move forward:

1. Embrace onboard monitoring technology. Wayside detection has been taken as far as it can go. By being unable to identify damaged bearings before they begin to heat up and start weeping grease, RRs are trying to catch a falling knife. Shifting to onboard monitoring technology, like the Hum Boomerang, can eliminate bearing derailments along with multiple derailment modes caused by wheels or trucks because it identifies damaged bearings months, not minutes, before a derailment would occur.
2. Raise car hire rates for car owners that install onboard bearing monitoring technology. Railroads have complained for a long time that they can't bring about onboard monitoring adoption because they don't own all the railcars. The car ownership fact is true. At any point in time 60-65% of railcars on a Class 1 are foreign. This reason, however, doesn't mean railroads can't bring about change. Private car owners have long complained to the STB about dwindling returns from outdated car hire rates. Give car owners what they want and get better quality rolling stock on your network at the same time.
3. Establish a RIK (replacement-in-kind) rule. As explained earlier, railcar owners have little incentive to invest in better maintained railcars. If a railcar owner invests in premium wheels or bearings, for example, a faulty ABD can flag a bearing 10k miles down the road and a railroad can replace the premium wheel or bearing with a reconditioned one. And railcar owners get the privilege of paying for it. Railroads should be required to replace components with the same quality that existed prior to the maintenance event. Doing so would lift the overall quality of rolling stock in the industry while also opening the door for innovation and competition among component suppliers.
4. Stop stalling and embrace the bad bearing root cause. There should be no doubt in anyone's mind that the East Palestine derailment was caused by anything other than a hot bearing derailment. Pragmatically speaking, the NS and the AAR would do well to rally around that point before the NTSB, the FRA or some other body claims it was due to far more open-ended and threatening reasons, such as PSR or safety culture. If rail legislation was further down the line by the time the NTSB report came out, and especially if it came out with more onerous recommendations, it could largely be ignored.
5. Encourage Chairman Graves to hold a hearing on rail safety to set the table and advance legislation. For the same reason above, it may prove to be in the RRs best interests to advance rather than stall legislation. Get the House bill going in committee, strip out the 2-man crew mandate, and put forward something more passable. There will need to be some concessions for labor, but RRs stand a far better chance of crafting a bill in the House where there are many sympathetic to the cause.

It should be apparent by now to the rail industry that East Palestine isn't going away any time soon. Nor does it seem that a continued reliance on wayside detectors to prevent hot bearing derailments is effective. Continuing to rely on the belief that the rail industry can simply chug along in the background with a business as usual mindset ignores not only the public ire that has been raised since East Palestine, but also the recognition that if the rail industry wants to grow for the first time in decades then it's going to need to do things differently. That starts with solving this bearing problem.