Shippers wary as rail industry changes

Mergers and service problems have changed the shape of the rail industry. What that means for shippers is still uncertain.

By Staff -- Logistics Management, 9/1/1998

For an industry that developed in the nineteenth century, the railroad business is changing as rapidly as any with roots in the modern world.

In the West, rail service has suffered mightily for nearly a year. In the East, shippers are worrying about whether the two railroads that have purchased Conrail will pay for the costly transaction through higher rates. In the nation's center, yet another merger will further reduce the number of major railroads in the United States.

All that has many shippers concerned about the the railroad industry and how well it will respond to their service requirements in the years ahead.

In one effort to assuage shippers' doubts, the Association of American Railroads (AAR), the industry's largest trade group, has invited shippers to a series of outreach meetings at various locations around the nation. The railroads proposed those meetings earlier this year during Surface Transportation Board (STB) hearings on rail service and competition issues. The STB ordered the industry to follow through on that proposal.

The first of those meetings took place in Chicago late last month. The second is scheduled for the end of this month in Houston. The group plans to hold at least five meetings by the end of the year.

The AAR says it has sent letters to thousands of railroad customers inviting them to attend one or more of the meetings. Says AAR president Edward R. Hamberger: "We want to hear directly from as many of our customers as we can."

Crisis in Confidence

Getting shippers to express their opinions will be no problem. It may be difficult, though, to gain their confidence.

Rail shippers remain angry about service failures in the West, which primarily have occurred in the Union Pacific (UP) network along the Gulf Coast and in Southern California. The Union Pacific operated for much of the last year under an emergency service order issued by the STB, which allowed Burlington Northern Santa Fe (BNSF) and the Texas Mexican Railway to siphon off some of UP's overflow traffic. The board let that order expire last month despite requests for an extention by three shipper groups.

Union Pacific Chairman and Chief Executive Officer Dick Davidson acknowledges that the railroad has a long way to go in regaining customer confidence. His customers agree. The Society of the Plastics Industry (SPI), which represents plastics shippers, reacted harshly to the STB's decision against continuing the emergency order. "This decision is a clear indication that the STB has disregarded the needs of the shipper community, which has borne the brunt of the service meltdown in Houston at a cost of millions of dollars," the organization said in a statement. SPI claims that transit times in the Union Pacific network are 105 percent greater than they were before that railroad absorbed Southern Pacific. In a survey conducted at a meeting it held in April, railroad specialist Escalation Consultants found that 100 percent of the attendees rated Union Pacific as having the worst service of any Class 1 railroad.

The STB has not walked away from the case, however. Although it let the emergency order expire, the board continues to demand biweekly reports from both the UP and the BNSF on a number of operating statistics. The agency also has begun to examine proposals for changing the ownership and operation of some Union Pacific facilities in the Gulf Coast region.

In the Conrail case, shippers are awaiting what the railroads are calling the "Split Date"--the day Norfolk Southern and CSX actually begin operating their segments of the railroad separately. That may well be some months hence, given that the two railroads insist they are proceeding cautiously and that they will not make the move until training is complete, systems are in place, and labor contracts have been settled. In the meantime, Conrail will continue to operate as a separate entity.

With the Conrail case largely behind it, the STB now turns its attention to the proposed merger of Illinois Central and Canadian National. Illinois Central operates 3,370 miles of track in the United States, running primarily north-south from Chicago to the Gulf Coast. CN's system includes 1,150 miles in the United States and 14,150 miles across Canada. The STB issued a 300-day procedural schedule for reviewing the merger proposal that began with the application filing on July 15. The board expects to hear oral arguments on March 8 of next year, conduct a voting conference on March 15, and issue its written decision on May 11.