2009 State of Logistics: Recession catches up to the railroads
Jeff Berman, Group News Editor -- Logistics Management, 7/1/2009
A year ago, most freight transportation modes were already mired in the dire economic conditions affecting supply chain operations. One exception was the railroad industry.
Even though other modes—trucking and ocean—saw sinking volumes and earnings, the railroads kept humming along, with strong pricing power and financial returns despite slipping volumes that were similar to the record-breaking volumes of 2006 and 2007.
All told, U.S. railroad volumes for 2008 were the fourth-highest on record behind 2005, 2006, and 2007, according to the Association of American Railroads (AAR).
Fast forward a year later, however, and it looks like the recession has finally caught up to the railroad carriers. Today’s situation finds volumes down on a weekly basis, hovering around 250,000 to 270,000 weekly carloads for Class I railroad carriers—numbers that are well below average.
One thing that remains the same is that there is no shortage of acrimony between rail carriers and shippers. As in past years, shippers still contend that rail rates are too high and service quality is too low. Meanwhile, rail carriers continue to plead their case for their pricing structure, pointing to the need for increased infrastructure to meet future freight projections. This is, of course, coupled with the fact that they are on the hook financially for track upgrades and improvements, and just barely earn above their cost of capital.
Some rail shippers continue to turn a deaf ear to the rail industry’s position, maintaining railroads are still having their way by charging high rates while offering minimal service. Meanwhile, the carriers contend that these complaints are hollow, stating that until the past five years rail rates were largely down or flat year-over-year.
“Shippers continue to be very frustrated by the railroads, and the railroads are not being sensitive to the needs of shippers in this economic downturn,” says Bob Szabo, executive counsel for Consumers United for Rail Equity (CURE). “They continue to raise their prices despite the fact that the economy is down.”
Szabo also wonders how rail rates can be up at a time when volumes remain down, adding that this is occurring through monopoly pricing power. But he did admit that while many shippers still have service issues, they are not at the frightfully low levels they were when railroads were at full capacity.
One thing shippers need to understand when it comes to pricing, according to William Rennicke, director of management consultancy Oliver Wyman, is that the physical infrastructure needs of railroads puts them in market competitive situations where there is only one available carrier, and they offer a portfolio of prices—commonly known as differential pricing—to get the required rate of return needed to recapitalize railroad systems.
“There are freight projections that show huge growth in the future,” said Rennicke. “And railroads want to come out of the downturn with capacity, which can be added very quickly. This is why there is a need to continue and maintain investments in infrastructure for things like passing sidings on single track lines and improving clearances for double-stacking.”
This is reflected in the amount of infrastructure investments Class I railroads have made in recent years, according to AAR data. In fact, 2008 was a record year for investment at $10.2 billion while 2006 and 2007 hit $8 billion and $9.4 billion, respectively.
These figures reflect that the railroads are taking their commitment to improvements seriously. But as we have seen in the past, it will likely never be perfect, as evidenced by the ongoing rancor between railroads and shippers.
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