Why Railroads Struggle with Telematics

Another week, another conference.? The RSI trade show is our chance to get in front of the railroad mechanical folks.? It is by far our most technical show and the questions are usually pretty challenging, which as an engineer I particularly enjoy.? This time around we had the chance to talk with the AAR, a Class 1 CEO, and most if not all of the Class 1’s.

When we talk with railroads about onboard railcar monitoring (telematics), there’s a general theme in their questions.? These are some of the common ones:

“After East Palestine, we lowered HBD thresholds and improved data visibility through interchange.? We’ve still had some small bearing derailments since then…[but we hope we’ve turned the corner].”

“The AAR doesn’t have rules that allow us to change out wheel sets based on your sensor data, so there’s no point in us pursuing this tech until that’s established.”

“At any given point in time, most of our 60+% of cars on our line are foreign.? How do we affect change when we don’t own the cars?”?

“Sure you can outfit the hazmat loads with this, but it was a plastic pellet hopper that derailed in East Palestine.? Most hazmat releases are caused by the ratty old mill gon, not the tank car.”

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The nature of these conversations has changed over the years from something like, “What is this?” to “Should we do this?” to today’s theme that I would summarize as, “How do we do this?”

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?“How do we do this?” is a challenging question for 4 different reasons:

1. It’s a paradigm shift.
2. Full adoption is an all or nothing for a network operation.
3. Railroad and shipper/car owner incentives are misaligned.
4. Bearing derailments, in particular, are low frequency/high impact events.

The Paradigm Shift

It is my firm belief that the next great technology wave in rail transportation will not be autonomous or electric locomotives.? It will be AI.? I almost hate saying it because AI is generally misunderstood and lacks almost all depth and meaning at this point, but it is a huge opportunity to generate tremendous productivity improvement and greater customer satisfaction.? And it will accelerate modal loss for the railroads quickly if they don’t change the paradigm.

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The thing about AI is that it requires good data to run.? AI = Good Data + Big Data.? You need a lot of data to train a model effectively, but it also needs to be good data or it’s GIGO (garbage in/garbage out).? Railroads have Big Data, but they don’t have Good Data.? Let me explain why that is.

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When I started Hum I spent the first year or so studying the market to develop our strategy.? It did not take me long to figure out that rail performance would not improve until the underlying data infrastructure improved.? Why?? You cannot watch Netflix on dialup and the railroads have been running on dialup for a long time.

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RailPulse, in fact, was born out of the frustration of using CLMs through RailInc when trying to do faster interchanges between G&W and NS.? In 2018 they tried to do it using CLMs and they couldn’t do it.?

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Rail data systems are fed by a cobbled together system of GPS and RFID sensor tag readings.? Locomotives have been equipped with GPS for more than a decade.? This is great!? It’s much easier, I would assume, to block trains, schedule crews, and run your network when you can see where your trains are and how fast they’re moving.

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What isn’t great is that your inventory management system is periodic and not real-time.? In the 1980’s Burlington Northern began piloting an RFID tag system to capture railcar location.? Pilots were run and proven in the late ‘80’s with the AAR fully adopting the system in 1992, if I remember correctly.? We have not changed that system in 32 years.

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The Automatic Equipment Identification (AEI) system has put two RFID tags on every railcar in North America.? Whenever these tags pass an RFID reader, a radio frequency blasts the tag, the tag returns the railcar’s ID, and that information along with location and timestamp are routed to the railroad’s operation systems.?

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Cool cool, but this is actually a big problem for at least a couple reasons.? What if the AEI reader doesn’t work?? Then you have a number of railcars that are in a different location than they were last registered.? I know of at least one shipper that spent several weeks combing the South at the end of the year to try and find a dozen missing railcars before they were returned to the car owner.? Root cause was a broken AEI reader outside a Class 1 yard in Alabama.

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These periodic location pings are also a problem when there’s a dynamic change, such as a derailment, a weather event, or normal delays from crews, power, etc.? The shipper needs an accurate ETA to plan their business.? When do I need to schedule a crew to unload the train?? How much inventory should I buy?? What contractual obligations do I have to my customers on product delivery?? This isn’t the stupid pizza tracker analogy!! ?This is a real-time predictive ETA sending me an alert on my phone that my train will be delayed XX hours/days.

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Periodic location pings are fine in a static network, but in a dynamic network they’re almost useless.? Internal and external events disrupt the network every day.? The shipper has to send workers home when the train doesn’t arrive on time, or pay them overtime.? The shipper has to buy more inventory to buffer these swings in railroad service.? Contracts with customers have to be written broadly.? Larger shippers may have the leverage to avoid negative fallout from these, but smaller shippers won’t.? How can they go after new business if their customers have to worry about variable rail service?

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GPS location of railcars, in and of itself, may not make rail service consistent and reliable, but as I argued in “The Consistent Inconsistency of Rail,” bad news is better than no news.? If dynamic changes are relayed to shippers in real-time, then they can take action.? They can deal with disruption if it’s communicated early enough.? They cannot deal with it if it isn’t communicated and they can’t get a hold of anyone to get answers.? That frustration causes shippers to exit rail.? This reality is why I argue that railroads should obsess about making it easier for shippers to choose rail.? I don’t see how you can get there on periodic CLMs.

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The reason that railroads haven’t upgraded their underlying data infrastructure from CLMs (dial-up) to GPS (fiber) is because you can’t just plunk down one more wayside detector into your network to improve it.? It’s a paradigm shift.? And, like I’ve stated many times before, you don’t gain the value until a critical mass of railcars are equipped with GPS.

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There’s also a belief among the rail ops folks that since locomotives have GPS, the railroads have all the visibility they need.? I’ve been told by more than one Class 1 that they do have carload visibility by combining their loco GPS data with CLMs from the consist.? That’s over-the-road visibility.? That’s not inventory/yard level visibility.? That’s still usually done by guys walking (or driving) the yard to do a track check, often with just paper and a clipboard.? (INET/Bourque do offer some level of automated yard tracking software using AEI readers, but don’t know that they have much penetration outside the Oil & Gas shippers).

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An argument that I’ve heard from the beginning of Hum is, “We don’t own all the railcars on our network so we can’t affect change.”? Really?? Railroads have no influence on what private car owners do?? I know a few trade associations, let alone individual car owners, who would beg to differ.? If an AAR committee passes a rule that is enforceable by rejecting a car from interchange service, you get near 100% compliance pretty darn quick.

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If the AAR felt it was important they would just implement it and make it a requirement for interchange, like they’ve done so many times before.? More than one shipper I spoke with recently was perplexed that the AAR hadn’t done this already with onboard bearing condition monitoring.? Most car owners still feel that the AAR or Congress will mandate it eventually.? That’s why many are nervous about taking a step without regulatory clarity.

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Whether it be the AAR or an individual Class 1, railroads are not going to win the technology war in freight until they drastically upgrade their underlying data infrastructure.

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Misaligned Incentives

Another challenging hurdle towards tech adoption in the industry is the fact that incentives aren’t aligned.? Roughly 75% of railcars are owned by shippers and lessors.? It makes no sense for the ratty mill gon owner to equip their cars with telematics, but the railroad moving that car would benefit greatly from the enhanced condition monitoring telematics would provide.? These are misaligned incentives.

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To realign incentives, there has to be some financial benefit afforded to the private car owner to spend the time and money to equip their railcars.? This is why I’ve argued for years that railroads should offer shippers rate discounts for equipping their railcars with telematics.? I actually intended to write this article about the history of the car hire rate (maybe next week), but increasing the car hire rate would be another incentive mechanism for private car owners to invest in this technology.

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I’ve also argued that things like GPS on railcars should be given away to shippers/car owners due to all the benefits that railroads would accrue.? That’s probably the case for a lot of telematics, including onboard wheel and bearing condition monitoring, due to all the productivity gains railroads and their customers would receive.? The bulk of the value accrues to the railroad, so the railroad should bear the bulk of the cost of adoption.

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Railroads have to stop thinking about this tech adoption strictly in terms of cost savings from replacing what came before.? Far too many operators are stuck in the mindset that tech adoption has to be justified either from headcount reduction or from eliminating wayside.? There are more ways to drive productivity gains!!? Even if the industry decided to equip every railcar in North America tomorrow, it would take a minimum of 10 years to get that done.? That’s wayyyyy too long for a payback purely on wayside elimination alone.?

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The real value driver is twofold:

First, increased customer satisfaction (i.e. top-line growth or at least arrested decline) from high value applications like an accurate predictive ETA engine that runs on top of real-time GPS data.

Second, productivity savings from things like reduced in-service failures and maintenance, reduced lost cars, AI applications for automated demand forecasting and planning (i.e. Railroad managed inventory), etc. etc.? How can you run an operation without good data on what is actually going on at the most basic level (carload)?

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We’ve Got Bigger Fish To Fry

When it comes to bearing derailments, I’ve heard the argument many times, particularly from senior management inside and outside of the Class 1’s, that there are far bigger fish to fry than just bearings.? Track issues, for example, can be similar in severity and are more frequent.? The comment was also made to me that grade crossings are far more deadly and should, therefore, take more time and investment.

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I agree with all those sentiments and I wrote a whole article a year ago about how to craft an intelligent safety plan based on the data targeting those very things, but I don’t think the good folks of East Palestine care too much.? Nor did Ancora.? Or the chemical and oil & gas shippers being asked to sign up to BNSF’s new liability provisions.? Or regulators and policy makers.? The list goes on and on.

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I don’t make the rules folks!? Bearing derailments were a top 10 derailment cause in terms of damage costs even before East Palestine; its clearly a much higher priority for all the parties named above given the actions taken.? You don’t have to like the outcomes, but you do have to respect the things you cannot control.

Class 1’s can choose to put their heads in the sand and pretend, “Most derailments aren’t even that bad.? Why should we spend all this time and money on bearing derailments?” Or “We lowered thresholds and standardized bearing monitoring between ourselves after East Palestine so we’re good to go, right?” but that would be a serious mistake.?

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Physics is undefeated.? You can stomp your feet and wish upon a shooting star that temperature is a good indicator for failure, but that isn’t going to stop bearing derailments from happening.? As of the FRA data through July of this year, we’re on track to hit 17 bearing derailments for 2024 which is right in line with the average of 16/yr since 2010.? Continuing to double down on wayside detection and running bearings to failure will not provide meaningful results.

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More importantly, perhaps, is the public perception that the railroads don’t have a handle on rail safety.? Once that ball gets rolling like it did with East Palestine, it becomes a very difficult one to stop.? Rail is statistically safer than truck, yet hazmat loads are shifting to the road because railroads have made it too difficult to keep them on rail.

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There is the perception in Washington that the AAR is powerful and employs very good lobbyists that are very capable at killing unwanted policy action.? There is also the perception that the AAR has gone so long without a loss that they’ve forgotten how to take one.? At some point, the belief is, the dam will break and rail safety regulation is going to get forced upon the railroads whether they like it or not.? I’ve heard that and similar messages more from the Republicans, the traditional rail stalwarts, than I have from the Democrats.

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I don’t have a good answer to the railroads’ PR problem.? They’re not going to get there through token community outreach, like cutting a $100k check to flood victims from Hurricane Helene (or probably any amount of money).? That’s not materially different form XYZ Corp.? I don’t think they’ll get there by signing early agreements with rail labor, although I think this was a really smart move by them.? Rail is seen as in the pocket of Wall Street and that association alone is enough for the general public to perceive them as profits over people.

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What the AAR and the Class 1’s can do is say, “We’re pursuing the best available control technology out there to become the safest mode of land transportation.” (Doesn’t matter that they already are).? “It’s difficult to innovate in rail for a number of reasons, but we’re on a mission to outfit all 1.6 million railcars in North America with real-time telematics to identify issues before they put our workers, our customers, or the public at risk.? Trucks have ELDs, but they won’t have anything close to this level of visibility.? We will be best-in-class.”?

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That’s a message that changes the narrative, a paradigm shifter if you will.

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Or, we can continue down the same path.? Marginal improvements, marginal results.? Increase pricing, declining volumes, fight any kind of effort in Washington tooth and nail.? Offer the occasional goodwill gesture? with a check to charity or employee service in a local community.? Leverage your assets to the max and throw the proceeds to shareholders in dividends and buybacks.? Fight with labor about everything.? Ignore the need to redesign quality of life and work rules (for white collar as well as blue collar) until it becomes ever harder to hire and retain good talent.? Push off the inevitable until you retire because, “It was running when I left!”

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Or be a leader and do something transformative.? Cross the Rubicon.? Bring labor into C-suite meetings to figure out how to drive the railroad forward with them.? Cut prices. ?Don’t “Reimagine” the customer experience, “Revolutionize” the customer experience.? Establish a $100m trust to invest in local schools and towns where your employees live and work to develop the next generation of the workforce.? Promote the rebels and fire the sycophants.? Take the chains off your sales force.? Tell Wall Street to buckle up and set the goal for 10% volume growth in 5 years (and build a real strategy to go after it).

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There are a lot of reasons why the railroads are dragging their feet on embracing the next generation of technological innovation.? But those are excuses afforded to them because they are monopolies.? If they actually competed with trucks, then they wouldn’t be a laggard in tech adoption.

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In the words of the great Chuck D,

"If you don’t stand for something, you fall for everything...Revolution means change, don’t look at me strange."