Rail Contracting: “The times they are a–changin’”

I was recently out west visiting shippers in the new oil patch and discussing issues in rail. In this area, rail does not mean intermodal, it means tank cars and hopper cars leased by shippers and shipped long distances to and from the many new oil and gas wells that have been drilled in the past few years.

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I was recently out west visiting shippers in the new oil patch and discussing issues in rail. In this area, rail does not mean intermodal, it means tank cars and hopper cars leased by shippers and shipped long distances to and from the many new oil and gas wells that have been drilled in the past few years. 

Of course, the hot issue for many energy producers and suppliers is that the railroads announced steep price increases for 2015 and 2016 late in 2014. They then failed to withdraw those increases when the drilling and energy industry supply markets collapsed this spring.

The rail oligarchy had rationalized that as their customers were making money they too were entitled to a share in the energy windfall. Despite the fact that the rails didn’t tie their increases to relevant costs, they now insist that they can’t afford to reduce prices. In turn, the customers get the double hit of higher costs—well above inflation—and lower revenues for their products. 

To be fair, there are examples of recent limited distribution tariff (LDT) actions and rate increase dial backs in contracts, but the net increases still exceed the rate of inflation. Price increases above inflation in transportation are classically caused by one of two factors: productivity losses due to lack of innovation and price gouging. To add injury to insult, rail fleets of tank cars and hoppers are being idled as volumes fall. In the meantime, shippers are stuck with multi-year leases on excess equipment, while short lines and some private rail yard owners have received a windfall in storage charges. 

There is a positive side to all the pain currently being felt by shippers. They’re getting back the discipline of running a tight logistics organization enabled by web-based optimization tools and assisted by third-party logistics firms specializing in rail asset management and contracting. Few are even exploring creative solutions like buying short line railroads and swapping product with competitors located nearer customers to shorten or cut out railroad routes altogether.

The few temporary discounts quickly being granted, some in the form of the LDTs, is evidence that a smart team of rail market managers is taking the field. The idea that railroads can negotiate quick, short-term agreements to try alternate sourcing points and new joint line routings shouldn’t be revolutionary, but it is. 

Railroad price management has historically been deliberative—meaning weeks of multi-level reviews. This process will simply not work when the customer is trying to respond to a quick quote to a well operator with a bid for some spot volume. With volumes at supply points and receiving wells moving up and down on a near daily basis, there’s high volatility in tonnage. We see many reverse auction events taking place to keep wells supplied and spot product prices to keep suppliers operating. 

Today, the new breed of product and market managers at the railroads are being introduced to new rail buyers with strong analytical skills and a thirst for data. In fact, the vast improvement in operating efficiencies for both the shipper and the carrier using information and statistics to help make decisions is now well documented. 

The problem for both parties is that rail data is still less than dependable and freight invoices are prone to error. As a former external auditor for a Class 1, I witnessed a consistent 1 percent error rate year-over-year that was split between overcharges and undercharges. Wrong rates and variations in car delivery times, particularly on empties, continues to mean that poor data-based cost and service forecasting is hurting both parties trying to plan operations. 

Rail leaders need to empower operating professionals to move loaded and empty shipper cars on a consistent basis and not shunt them aside for intermodal and unit trains. Railroads need to empower managers to make deals that can keep plants and wells running and cars moving. 

Finally, both shippers and carriers need to push for better visibility, data collection, and analysis to illuminate the hidden opportunities at the points where they interface. If that interface is a third party, then that organization must be integrated into the planning meetings on both sides. 

The results are smaller, more efficient fleets, new opportunities for rail volume, and a tempering of per-ton costs increases. Dare we dream that railroads restrict future price increases to inflation rates or even less? The proven way to beat inflation is productivity gains from innovations—something collaboration with shippers will yield.


About the Author

Peter Moore
Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at [email protected]

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