Not quite back on track
Just when the rail industry is recovering from self-inflicted service problems, proposed reregulation and a faltering economy threaten to derail its comeback.
By Staff -- Logistics Management, 7/1/1999
The outlook for North America's rail carriers continues to improve, but the forecast remains clouded by economic uncertainty, the potentially devastating effects of proposed reregulatory legislation, and the industry's sometimes rocky relationship with its customers.Traffic figures from the Association of American Railroads (AAR) show that freight railroads in the United States set records for total freight volume and for intermodal traffic in 1998. The AAR estimates that total freight volume in 1998 reached 1.376 trillion ton-miles, up 1.8 percent from 1997's total. Carload freight, which does not include the intermodal data, also rose by 2.0 percent to 18.1 million cars.
"The growth in U.S. carloads was led by vigorous motor vehicle and parts activity, which was up 15.3 percent in 1998," says Craig F. Rockey, AAR senior assistant vice president. Other strong increases included loadings of non-metallic minerals, up 6.1 percent, and coal, which rose 3.5 percent over the previous year's figures, he reports.
Despite that good news, the majority of Class 1 railroads suffered drops in revenue and operating income in 1998, according to data provided by the federal Surface Transportation Board (STB). The Union Pacific alone saw its revenue drop by more than $600 million, while its operating income shrank by $337 million. The CSX, Norfolk Southern, Soo Line, and Grand Trunk railroads also suffered reductions in both revenue and income.
Only the Burlington Northern-Santa Fe and Conrail saw significant financial improvement last year. Yet in early 1999, the BNSF failed to meet earnings projections and announced substantial layoffs. And Conrail has ceased to exist as an independent railroad; its assets and operations have been divided between Norfolk Southern and CSX Transportation.
Rail revenue principally is driven by demand for bulk commodities. The outlook for domestic and export coal, chemicals, and agricultural commodities is uncertain at best. Rockey reports that carloadings of agricultural products were off 0.8 percent in 1998, mostly because of exceptionally low grain prices and a resulting sluggish market. Domestic and international chemical demand also is slumping.
At the same time, high BTU coal remains in high demand, but industry watchers are concerned about shifts in fuel source preferences. "The railroad industry depends on the transportation of coal for 22 percent of [its] annual revenues," says Robert Delaney, executive vice president of Cass Information Systems, a freight audit and payment company. That dependence could prove to be dangerous because 88 percent of power plants that currently are being planned are choosing natural gas rather than coal as their primary fuel, Delaney says. "The industries that depend on rail service will have to pay more as coal revenues decline. No scheme of economic regulation can replace our railroads' need for revenue in order to maintain their $7 billion in annual capital expenditures."
The intermodal sector of the industry, on the other hand, is making a strong comeback. In 1998, intermodal volume climbed to 8.7 million trailers and containers, up 0.9 percent from 1997, when the previous record was established, according to the AAR. Canadian intermodal traffic also set a record, reaching 1.36 million trailers and containers.
Intermodal service is improving markedly, says Michael J. Bruns, president of the Memphis-based drayage company Comtrak Logistics. "Shippers are regaining their confidence in the reliability of intermodal service," says Bruns, who also is 1999 president of the Intermodal Association of North America (IANA). "Both volume and revenues are recovering nicely. Intermodal is beginning to take market share away from over-the-road competitors."
The intermodal industry has its own financial challenges, Bruns concedes. Intermodal companies are looking at much tighter cost control to improve their profitability, he says. One avenue to tighter cost control is consolidation, both among intermodal marketing companies (IMCs) and drayage firms.
Rail Regulation Redux?
The greatest threat facing the rail industry, at least from the industry's perspective, is the potential for reregulation. Regulatory changes are the subject of numerous pieces of legislation under consideration in both houses of Congress. Shippers' calls for tighter regulation of the railroads were born out of frustration during the Union Pacific/Southern Pacific service crisis, but enthusiasm for increased regulation persists because of dissatisfaction with high rates, especially on the part of captive shippers. These shippers have had difficulty negotiating competitive "bottleneck rates" for moving their traffic over more than one carrier's track. (A bottleneck occurs when one railroad controls a portion of a route. The bottleneck railroads generally offer rates only for through routings and will not quote rates for service up to a point where competitive alternatives are available to shippers. The STB has endorsed the practice as legal.) The most aggressive captive shippers are calling for open access by competing carriers to facilities that now are served by a single carrier.
One possible vehicle for tightening regulation is a bill to reauthorize the Surface Transportation Board for another four years. Authorization for the STB expired Oct.1, 1998, and some sort of reauthorization bill must be enacted. The potential exists for legislators to use any reauthorization bill as a means to change the board's direction.
In the Senate, two separate bills have been introduced. Senators Jay Rockefeller (D-W.Va.), Byron Dorgan (D-N.D.), Conrad Burns (R. Mont.), and Pat Roberts (R-Kan.) introduced S. 621. Among other things, that bill would reverse the STB's decision in the "bottleneck" case; direct the agency to assure rail-to-rail competition at origin and destination points; expand the award of terminal trackage rights and reciprocal switching; cap rates for agricultural shippers moving fewer than 4,000 cars annually; and eliminate the agency's revenue-adequacy determination.
Senator Kay Bailey Hutchison (R-Tex.) introduced S. 747, which would require the STB to encourage rail-to-rail competition and handle rate cases involving small shippers more quickly. It also would overturn the bottleneck decision and broaden the STB's power to order alternative service in case of severe rail service problems.
The railroad industry strongly opposes any reregulatory legislation, which the AAR says would create "a tidal wave" of problems if it becomes law. "Reregulation might mean lower rates for some customers in the short run. But in the long run it would deprive railroads of the money needed to fund capital improvements," says AAR President and CEO Edward R. Hamberger. "There is a good map to show what happens to a capital-starved railroad industry. It's called the 1970s."
Rail analysts generally think that the rail industry is safe from these reregulatory assaults, at least for the time being. "We believe that the STB will be reauthorized in its existing state and will continue to support the status quo as it relates to open access," says Anthony Gallo, a transportation industry analyst with the Baltimore-based investment firm BT Alex. Brown. "The STB will continue to recognize a railroad's exclusive right to run its assets on its tracks, as opposed to open access, where another railroad is given authorization to operate on a competitor's tracks."
With the UP/SP service crisis past, Congress appears to be taking a wait-and-see stance before it considers reregulatory legislation. One matter Congress will be watching is how well the CSX and the Norfolk Southern handle the absorption of Conrail. The two carriers are aware that they are under great scrutiny, and they are taking great pains to create a smooth transition. "We have to do this right the first time," CSX Corp. Chairman and CEO John Snow recently told a Philadelphia business forum. "Neither the shipping public nor Congress is going to give the rail industry a second chance."
Another rail-industry consolidation that will be closely watched by Congress is the Canadian National's acquisition of the Illinois Central. The deal recently won tentative approval from the STB, but the merger has other regulatory hurdles to clear. Because it is an end-to-end merger, it is less controversial than recent side-by-side mergers. The CN-IC merger also has the advantage of offering demonstrable cost and time savings for shippers because it would eliminate costly interchanges and provide a seamless North/South transportation route from Mexico to Canada.
Mergers clearly are not the whole answer to the industry's financial problems. To regain the levels of profitability that the industry enjoyed earlier this decade, Gallo says, railroads need to make far better use of their assets. "The answer is not even raising rates for shippers," he says. "The answer is in better utilization of assets [like] rolling stock, locomotives, and the rail systems themselves. This is easy to say, but hard to do. It requires running more trains, better schedules, more on-time delivery, and better execution overall."
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
