The Rail Growth Imperative – A Tale of Two Days

By Adriene B. Bailey

The landmark Surface Transportation Board (STB) hearing this week on US rail industry growth, at which I was privileged to be one of the speakers, was a unique opportunity to listen a diverse set of stakeholders in the rail industry, as they shared their views on whether traffic growth is important and how the industry could achieve this elusive goal.

Chairman Robert Primus opened the proceedings with a quote from Dickens: “It was the best of times, it was the worst of times,” and almost presciently invoked the fact that there is not a consistent story across stakeholders about where the industry is in terms of being able to manifest more freight on rail and take more freight off our highways.

There did seem to be general agreement by stakeholders that moving more freight on rail was a worthwhile goal for many reasons, including saving lives and taxpayer dollars, promoting fuel efficiency and sustainability, reducing transport costs, increasing rail jobs, and alleviating highway congestion.

After that, things devolved. While the same themes were raised by many speakers, their positions could not be more different. I’ve summarized what I heard here across the prevalent themes:

Growth opportunity: Over and over, the shippers’ representatives (primarily trade associations) who testified talked about their constituents desire to do more business with rail. This is completely consistent with what Oliver Wyman heard in our broad shipper survey a few years back. It was absolutely evident that railroads can have more freight if they want it – and if they can deliver a service and customer experience that earns it. When asked if the railroads were prepared to handle the growth that was available, there was a healthy level of skepticism.

There also were complaints about the inability of railroads to flex up with locomotives and crews when there are demand surges. In fairness to the railroads – holding excess resources in reserve for “possible” demand surges due to unknowable and uncontrollable market forces (such as a jump in natural gas prices creating a run on coal) would not be a reasonable request for any business. But with a meeting of the minds between shippers and railroads – customers offering sustained and predictable volumes (and good forecasting around demand peaks) on the one hand, and railroads committing to reliable, customer-focused service on the other – more freight would move on rail.

Competition: The shippers’ representatives were consistent in calling on the STB to create a more competitive environment. They asked almost unanimously for the STB to clarify the common carrier obligation and to facilitate reciprocal switching. At the same time, these speakers repeatedly noted that their companies/members are moving more freight on trucks because the rail service offering is not compelling, and the truck option is more attractive. Certainly, there are captive shippers and commodities that are not able to move off rail to truck – but the lion’s share of freight on rail is “flexible freight” – that is, freight with a choice between truck and rail.

While shippers nearly always have a competitive option, they are frustrated with railroads consistently raising rates for the past several years with no commensurate improvement in service. And they are unhappy with what they perceive as a “take it or leave it” attitude on the part of the railroads. Specific examples included recent moves by the railroads to push more liability and higher insurance requirements onto shippers, even though shippers have little control over the factors that cause many rail incidents and result in claims.

Technology, safety, efficiency, and innovation: Perhaps one of the most contentious topics of the hearings revolved around technology, where there appears to be a fundamental divergence of interests. CSX CEO Joe Hinrichs mentioned the quote: “Technology always wins” – alluding to the fact that fighting technology as a form of job preservation is futile. Labor leaders accused the railroads of shutting them out of design and implementation planning for new technology that would ultimately impact their members. Railroads criticized the regulators for delaying approval for new and proven technology that could improve safety and efficiency and forcing them to take legal action to move forward. Suppliers accused the Association of American Railroads (AAR) of being “more bureaucratic than the STB” in terms of rules and administrative hoops required to bring new products to the industry.

There is clearly room for the industry to create a more productive and fact-based environment to speed deployment of technology that could further rail’s advantage as a safe and efficient mode of freight transportation. From a policy and practical perspective, all stakeholders should be looking to break this logjam and bring people together to productively work out how to move forward. Digging in and fighting progress is a distraction from the real goal of growing rail traffic – and the host of public benefits that could be realized from doing so.

Investment and capacity for growth: All of the railroads talked about the massive capital injections that they make annually – both to maintain existing infrastructure and as growth-focused investments. Creating new intermodal facilities, attracting new industrial development, investing in transload and other adjacent services (such as bulk trucking) were all cited as proactive investments. In contrast, shippers talked about frustrations with getting their traffic switched with adequate frequency or maintaining a sufficient level of communication and interaction – whether with sales, customer service, or operations at the local level – to ensure efficiency and resolve problems. Shippers also are not convinced that railroads are resourced adequately to handle cyclical demand changes.

Customer-centricity: It was not lost on the room that in each of the shipper oriented panels there were stories of challenges in dealing with railroad marketing and sales departments, such as failure to engage, a propensity to lean toward “no” if anything required outside-the-norm capabilities, and customers losing business because they could not get firm commitments from their rail partners in time or with sufficient conditions – causing that business to ultimately go to a competitor. As a result, some customers said they had opted to not install or to repurpose existing rail access, cutting themselves off from any future option to use rail.

Railroads talked about investments to make themselves easier to do business with but were light on details and specifics and offered very little in terms of customer testimonials as to the efficacy of their new initiatives. Talk of “technology” solving the problem of being closer to the customer rang somewhat hollow. In a B2B business, there is little appetite for a conversation with a “chatbot” when your railcar has not moved for 72 hours and you have no information about when it will move or when it will arrive at your facility.

Service reliability: There was unanimous agreement among advisors and the customer base that service reliability is a fundamental must-have from the railroads – and it must be sustained across multiple quarters/years before shippers are going to fully trust the railroads to not devolve into another service meltdown. Interestingly, only Canadian National (CN) leaned hard into describing an operating strategy designed at its core to deliver service reliability. CN’s Executive Vice-President and Chief Field Operations Officer, Derek Taylor, gave a credible and committed description of a railroad recognizing that there is currently only one operating strategy that has a hope of delivering consistent dock-to-dock transit times for customers: Run a well-designed operating plan with the field discipline to stick to the plan, run your trains on time, and deliver a high degree of local operating plan compliance. ??

Investor pressure: It is clear that investors have a say in what companies prioritize, and there was a consistent question of whether short-term investment pressures have caused railroads to over-index on the “quick-win” levers of increasing price and cutting costs, to the detriment of service and long-term growth. The cost, distraction, and scorched earth that activist investors have burdened the rail industry with in the past few years has been stunning with four major activist interventions (CSX, CN, UP, NS) in an industry with only five real targets. Each of these battles required millions of dollars and entailed massive distraction for railroad leadership.

Railroad executives at the hearing acknowledged the need to educate and convince investors of the long-term benefits associated with investing for growth and proving that the railroads can actually get service and customer experience to levels that will sustain growth. Scott Group of Wolfe Research shared his view that the “age of price taking above inflation is largely over,” and that investors are looking for credible signs the railroads can attract more freight and turn that into sustainable earnings growth. Ed Elkins, EVP and Chief Marketing Officer for Norfolk Southern reiterated the railroad’s commitment to its industry leading customer-centric, operations driven strategy announced at the company’s investor day in December 2022 by confirming that “the core tenets of our strategy remain unchanged – service, productivity and growth with safety at the foundation.”

Role of the STB: The Board was consistent in asking all of the presenters/constituents, “How can the STB be more productive and more influential in advancing the ability to grow freight on rail?” As discussed above, shippers’ representatives consistently requested more intervention to “create a more competitive environment,” to clarify the common carrier obligation, and to increase reciprocal switching. Railroads said they could use help in preventing a patchwork of state-by-state regulations that would cripple their ability to operate seamlessly across state boundaries and seriously burden them with senseless complexity.

There also were repeated calls for a more mode-neutral, coordinated federal approach to policy, funding, and regulation. This was even echoed by Board members, who I believe can be relied upon to advance this idea within the Washington, DC community.

While there are those who question the STB’s jurisdiction in calling this hearing, I want to offer my congratulations to Chairman Primus and the STB Board Members for creating a forum where all sides of the story could be heard and we could look for opportunities to make real progress.

Joe Hinrichs, CEO of CSX, offered the observation that when he arrived on the job he was “very shocked to see the level of vitriol from customers and employees.” ?Hinrichs' people-first strategy and his experience as a long-time rail customer appear to have given him a more objective view of the industry and CSX, and he has demonstrated his willingness to call out where he sees failings. His strategy is grounded in the belief that service begets growth. To deliver service, employees have to engage and believe and be valued and listened to – so treat people right. Treat customers right, deliver service and you can grow the business. Two years into his tenure, he freely admits that he’s turning the corner on the honeymoon and showing results is what matters.

Vice Chair Hedlund repeatedly asked the question about the role of railroads in the US economy. Ultimately, freight moving on truck is more expensive than freight moving on rail. This means that a failure to shift market share back to rail will essentially levy a tax on American businesses and consumers –not only in the form of higher transportation costs but also indirectly in the form of much higher accident rates and increased spending on energy and infrastructure.

It is up to this generation of railroads, shippers, labor, regulators, investors, policymakers and (yes) consulting leaders and influencers to address this problem and help the railroads return to growth. Failing will be a legacy that we hand down to the generations to come – and one that we won’t be proud of.

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The full hearing is available on YouTube for viewing here:

STB Hearing - Growth in the Freight Rail Industry, Docket No. EP 775 (Day 1) (09/16/2024) (youtube.com)

STB Hearing - Growth in the Freight Rail Industry, Docket No. EP 775 (Day 2) (09/17/2024) (youtube.com)

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