We shortliners have been warned, regularly and often. Take Jim McClellen, Norfolk Southern's VP-Strategic Planning, for example. He told this May's Advanced Transportation Seminar in Wisconsin that the big carriers would "focus people and capital [viz. freight cars] on those things that will really leverage our companies. We have stopped doing a lot of things where we had no economic advantage." A year ago, the message was even blunter, with the same thrust: "The fleet is aging and we cannot afford to replace it at current utilization rates. Shortline car supply will continue to be a problem because the pool of general service cars will continue to contract. Some low volume, occasional customers are not going to fare well in this environment."
Joe Osborne, Conrail's AVP for Equipment, had these admonishments for the shortlines this spring: "[Conrail's] goals include maximum 60 hours over-the-road transit time, 12.6 days per load cycle time, and compliance with the local service delivery plan. The issue is Return on Assets. Where it is insufficient, we'll bring it up to snuff by improving asset utilization and by raising rates. Where we can't do either or both, we'll exit the market." In other words, shortlines, turn your cars.
So what's a shortline to do?
Because I believe this issue has needed a thorough airing, I put together and chaired a panel on boxcar utilization at the eastern regional meeting of the ASLRA in April. With me were Dick Robey of the North Shore Railroad and Greenbrier's Eastern Region VP and boxcar guru, Bonnie Gillespie. The message was as clear as the one we've been getting from the class Is: better boxcar business begins with better boxcar management, and, for our traffic base, that begins with us. The tools are in place, and there are other car sources than the class Is.
To begin, Robey noted that today's boxcar fleet is about a third what it was twenty years ago. Many classic boxcar markets had dried up where rail services were not truck-competitive, so as cars wore out they were scrapped and not replaced. Meanwhile, shippers have come to require more timely order filling for their customers, more customized service from their vendors, and more consistent travel times, none of which fit the railroad model. As a result, branchline traffic goes down, branchline capex programs are cut, the infrastructure deteriorates, traffic goes down still more, more cars are scrapped, and eventually the branchline is sold or abandoned.
Enter the shortline. There are fewer boxcars to be had, and, as Osborne and McClellan stated, what is left goes to the use with the best return, and that may not involve a shortline. Poor rail service experience has created a list of shippers with a "no-rail" policy, new plants are designed without rail in mind, and where the rail option remains, it's relegated to second priority. So how does the shortline win back business by offering reliable and timely boxcar supply when boxcars are scarcer than natural redheads?
First, said Robey, you focus on niches where boxcar transportation can hold its own: sizable volumes of high-density goods moving long distances. Then you start working the logistics angles -- plant layout, matching materials handling practices to equipment selection (double-tier, bigger pallets, cube/weight ratios, bulkheads, load dividers, etc.), and manufacturing cycles. The results, at least for Robey, have been new brand-name customers making significant commitments to the rail option where there had been none or little before: Heinz pet foods, Magee Carpet, Georgia Pacific, Moore Business Forms, Borden canned milk, and Osram light bulbs. (Yes, light bulbs. To the West Coast.)
As for car supply, North Shore seeks out back haul opportunities to get more use out of the existing fleet, leases cars to hold certain traffic, and is looking into some direct purchase options. Bonnie Gillespie expanded on the alternatives to the class I pool. For the past 11 years, Greenbrier has been the dominant supplier of boxcars, currently building 1,175 boxcars for an unspecified buyer plus another 250 boxcars for BC Rail. And Greenbrier continues to be bullish on boxcars because they have found niches in joint lease and joint use agreements, innovative financing, and shipper-driven engineering initiatives.
On another creative front, Greenbrier and Conrail are negotiating terms of a cooperative venture for the Hollidaysburg (PA) carshops under which Greenbrier would invest $10 million in projects to benefit the shop. The venture will also supplement Conrail's base fleet work with Greenbrier-controlled rail cars, as well as other third-party rail cars. What's happening here is that the economics of having somebody else's cars in your base fleet work keeps car repair costs down, and that in turn helps push down the operating ratio. Shortlines, says Gillespie, please take note.
One innovative scheme which surfaced some years ago for placing cars on shortlines at lower cost to all players was ITEL's "staged" boxcar fleet. The only cost to the subscribing shortlines was a per diem usage agreement and an agreement to move surplus staged fleet cars to nearby shortlines who also belonged to the staged fleet. The program was terminated when GE Railcar acquired ITEL's fleet. Perhaps there's room in today's market for shortlines and leasing companies to revisit the concept.
So, what does it all mean? The class I focus is on asset return, so their assets -- in this case -- freight cars -- go where the return is maximized, and that may or not be on your shortline. As Robey and others have shown, you can win profitable business -- and find the cars to support it -- if you focus on your strengths and, as McClellan so pithily puts it, stop doing uneconomical things.