Good evening. The nice thing about coming to Boston from
Philadelphia is I can do it on the train. In the words of the World’s Greatest
Railfan, E. M. Frimbo, “We must all have our best bedside manners with our favorite
patient, the American passenger train.”
Delighted to do so. Any
time. We may no longer have the Merchants or the Yankee Clipper
or the Penobscot to ride, but we do have the T’s commuter lines as well
as Amtrak. More important, these guys are putting money into infrastructure
that can be used by the freight railroads. Better yet, the fortunes of freight
railroads are on the mend, preserving still more lines that could
conceivably become new freight railroad-owned commuter lines.
That’s why I’d like to share
with you some thoughts about the present state of freight railroading in
general, the realities of freight transportation in the 21st
Century, and some growth opportunities for New England’s freight railroads.
To begin, North American
freight railroads are hauling more than one trillion ton-miles of
freight a year – a record – and they do it with fewer miles of track, fewer
people, and fewer locomotives than ever before. This year North American
freight revenues for the Big Six Class Is will be about [anybody want to hazard
a guess?] $45 billion. A lot of money to be sure but it’s less than 10% of the
$550 billion spent on NA goods
movement every year. So the first challenge to the rails is --- How are we
going to increase share, especially when $8 bn or about 20% comes from hauling
coal. Where is the growth?
The traffic increases I see
are in grocery store food items from frozen broccoli to fresh apples to wine.
Chemicals from plastics to stuff you wouldn’t want to touch, forest products (paper
and lumber to you and me), construction materials like steel and aluminum, and
automotive, both finished vehicles and, increasingly, parts. But my money for
the fastest grower is on intermodal – containers and trailers on flat cars.
Why? Because it looks and
acts a lot more like a truck than a boxcar.
It shows up like a truck, loads like a truck (filling the voids between
pallets in a boxcar is a pain), and unloads like a truck. It’s just easier than
carload. But I think too often truckload and intermodal are cop-outs because
nobody at the railroad has taken the trouble to educate the customer about
how to make the boxcar work once again, and at much reduced rates than truck.
Sometimes in spite of
themselves railroads have continued to increase revenues, even with the recent
economic slow-down. And judging from the industrial activity of the past few
months, we’ve turned the corner and 2004 promises to be a very good year for
the railroads. Wall Street evidently thinks so too. Rails are among what economists
call leading indicators – if business is heating up then inventories must be
replenished, and that takes transportation. And so the rails look very
inviting.
Stock prices of the big four
US Class I rails were up 18 to 28% during calendar year 2003. The Canadians did
slightly better averaging a 50% increase in US dollars, but some piece of that
was due to the strength of the Canadian dollar. Still, a strong story all
‘round. In just the last three months as the economy really picked up steam the
six rails are all up double-digits from 15 to 25%.
In New England, there’s not
a lot of Class I railroad representation among the Big Six. CSX, with the
former Boston & Albany main, is the biggest presence. CP dips its toe into
northern Vermont, but that’s about it for any direct Big Six presence. Sure, NS
gets in over Guilford and the CP; CN gets in over the NEC and SLR. That’s a big
change from years ago when we had a dozen Class Is in New England. (But then we
didn’t have the interstates paralleling every major rail route, either.)
We also have the
government-funded passenger lines that replaced the Class Is’ own passenger
services. Back in the day, dispatchers on the NH, B&M, MEC, B&A, CV,
and CP successfully mixed freight and passenger on the same real estate. Not
any more. Freight trains on passenger lines have sometimes found themselves in
a position like Blanche in “Streetcar.” They have to depend on the kindness of
strangers. But as “The Tee” and others come looking for more access to freight
lines the quid pro quo is better.
As commuter agencies look to
expand over track under the freight railroads’ control, the latter tend to fear
loss of operating capacity. It’s basically a single-track railroad out there
and paths are limited. Squeeze freight windows too much and it’s more trucks on
the highways.
For example, I’m talking
with CSX right now about 20-car blocks of perishables to a location near here
on a single-track line. The only way it works is to have these cars blocked by
the UP for a serving yard near Boston. During the trans-con run the cars have
to bypass intermediate yards on what is essentially a passenger-train schedule.
Anything less degrades transit times and car cycle times, not to say the
product.
The good news is it’s not as
hard as it used to be. With “the scheduled freight railroad” increasingly a
reality, fitting scheduled manifest freights into local passenger service can
work. Where we ran into trouble until very recently was with UNscheduled
freight ops, when train time was any time.
Then there are the 20 or so
New England shortlines. Together they own or operate over some 2,000 route
miles of their own lines and trackage rights. Their Unique Selling Proposition
– service to meet customer needs – is also their liability: the need to make
interchange with the connecting trunk line and the dwell time that entails.
It’s a liability because
shippers used to the reliability of trucks are impatient with the inevitable delays
that occur at junctions between rail carriers. Dwells at interchange still
average 20+ hours according to the AAR. Having multiple line segments in the
route means multiple train-starts – and multiple delays. Not good.
That’s why the Class Is are
taking out intermediate yards and train starts. They’re handling cars fewer
times between origin and destination. And there’s less gathering and
distribution of individual carloads. It makes the carload network more like the
intermodal network. Somebody else does the gathering and distribution at either
end with the core train running point to point.
But wait; there’s more. If
you’re running a 90% on-time railroad and a boxcar takes five trains between
origin and destination, then it’s on-time rate will be 59% (do the math). Some
guys have told me they think the average merchandise carload takes two
train-starts at intermediate locations.
That’s still four
train-starts: origin dock to serving yard, core train one, core train two,
serving yard to destination dock. Others will say I have to be talking crew
starts. Au contraire – some trains
take more than one crew to get over the road.
The carload goal has to be max three train-starts: origin local, core
train, destination local.
It's really connection
performance that drives carload shipment performance. Late train arrivals can degrade connection performance, but more
often it's the yard’s internal operations that decide which cars make and which
miss. Yet I see an inherent conflict between on-time departures and leaving
cars behind to make the departure numbers.
One way to get around the
conflict is to count the failures by category and then drill down to root
causes of the most frequent ones. Eliminate the recurring failures and you can
begin to schedule carloads because you’re limiting the variables. Then you’ve
got to measure how often cars get where they’re supposed to be when
they’re supposed to be there. In other words, Trip Plan Compliance, TPC for
short.
No matter where you are in
the food chain – shipper, shortline, supplier or Class I -- you’ll see quickly
how TPC proves its worth in pinpointing flaws in the operating plan and car
trip planning process. A high TPC rate makes the railroad a valuable partner in
the collaborative forecasting and replenishment process that customers prefer.
There’s no doubt in
my mind that supply chain managers are shifting their buying patterns from
fast-at-any-cost to consistent-and-reliable. The Philadphia Inquirer, for example, writes, “To trim
inventory costs, many companies are replenishing supplies less frequently,
taking larger shipments when absolutely
necessary to restock shelves.” Regular over-the-road trucking wins over Fed Ex,
and if that’s the case then so does the well-run boxcar.
The Inky also said,
“Companies looking to pinch pennies switched from overnight air deliveries to
cheaper alternatives” where reliability trumps speed. In the rail industry
we’ve seen the handwriting on the wall for years but have only recently been
able to capitalize on it. Measuring Trip plan Compliance is a Giant Step
forward.
I’ve seen the new trucking
Hours of Service regs and IMHO they open up still more opportunities for rails
that run to plan. DOT says the new rules officially went into effect Jan 4 but
really won’t be fully pressed on any but the most egregious violations until
Mar 4. The DOT press release (www.fmcsa.dot.gov
) estimates that the new hours-of-service rule will save $628 mm a year in
lives, fatigue-related injuries, and property damage. Maybe so, but at what
cost to the shipping pubic?
My read is that a crucial
part of the new law is load-unload waiting time. Previously, drivers could log
off during this wait-time but no more. The regs are very specific as to when a
driver may log off, but in any event the truck and its contents can’t be the
driver’s responsibility when logged off.
Can you imagine a driver saying, “I’m logging off” and walking away from
a truckload of TVs? I don’t think so.
I also see both direct and
indirect effects – direct on trucking companies re hiring, compensation and
productivity. Indirect on warehousemen, private fleet operators, and – if they
play their cards right – railroads.
Consider:
·
The Owner-Operator Independent Driver Association says
playing by the book will cause a 30-40% loss in driver productivity. Hunt and
Schneider see productivity losses ranging from three to 19%.
·
A major private fleet operator sees driver hours needed to
cover the assignments up 6%.
·
Fuel remains stubbornly at a buck-fifty a gallon, new
environmentally friendly engines get fewer mpg, and casualty insurance costs
are up by a factor of three some places.
My Wall Street friends seem to think that truckers and
shippers will negotiate new “ancillary charges,” but the effect on rates will
be de minimus. I’m not so sanguine.
My distribution center client here in Boston says, “Driver time has become a
finite resource that cannot be wasted and the universally-recognized largest
waste of drivers' times is at the delivery docks.
What’s more, “The times are perfect for the railroads as
shippers are responding to cost pressures by moving freight to lower cost
modes. At the same time, rail shipments can help provide solutions for shorter
lead times, no stocks, carrier no-shows, etc., by placing localized inventories
closer to their customers. Inventories at forward warehouses can be absorbed by
the transportation savings of rail over truck.”
What he’s saying is that distant DCs making local deliveries
hundreds of miles away may not work any more. Now, trucks from distant DCs will
have to go to local warehouses that will supply the ultimate destination via
LTL delivery or some such. Cost from origin shelf to the local warehouse now
becomes the main consideration. Why? Because local distribution costs are
common to both rail and truck delivery to the local distributor. But can the
rails compete even in this environment? You tell me.
Lastly, Intermodal. Like I
said, the Class I model is to use trucks to feed the core system -- as opposed
to local freights in the carload model. Instead of a railroad-owned hump yard
there’s the independent terminal operator who makes up the train. The host
railroad never touches the train until the crew shows up and makes the initial
brake test.
Shortlines and carload
railroads hate this. It’s so simple. And it displaces their bread and butter.
But it doesn’t have to. Imagine a shortline loading and unloading trailers
(easier than containers – no chassis to inventory). Think of platforms with
trailers moving between shortlines in carload service – not just any carload
service, but in merchandise trains blocked for distant nodes and setting off at
shortlines as they go by.
I think it’ll work. There
are a number of proposals out there right now. I mean, if the Class Is say
their forte is being the long-haul high-density high-speed core network
railroad, then let the feeder networks – shortlines and truckers alike – focus
on feeding that core network.
In conclusion, we’ve talked
about how the New England railroad scene has shifted. The one-time cadre of
Class Is and a limited number of purpose-built shortlines has become one Class I,
several regional carriers and a bunch of shortlines spun off from the Class Is.
We’ve talked about the changing fortunes of the NE rails and what’s possible.
And we’ve talked about how to capitalize on current trends from truckers’ Hours
of Service rules to shortline intermodal opportunities.
I’m excited about what can
be in New England. I hope you are too. With that, let me open the floor for
questions. I warn you, though, I’m declaring this a negativity-free zone.
Bitching is not allowed, and negative comments without positive solutions
attached will cost the perp a round or drinks. Dennis Cofffey, will you keep
score? Who’s on first?