Traffic Gains in an Efficiency-Driven Market

The previous discussion has prompted me to speculate on just how a rail industry enjoying its finest hour in perhaps a century should proceeed in a market which both sends mixed signals and cannot escape the possibility of sudden, drastic and possibly misguided political intervention.

Clearly, the bascic energy advantages of rail carriage were demonstable as long ago as the early 1970's. The growth in traffic readily suited to a rail haul, both bulk commodities and easily-transloaded intermodal, took off rapidly in the wake of the long-overdue work-rules reforms ten years later, and the secondary modification of the hardware by emerging carriers such as Hunt and Schneider solidified those gains. Most promising of all, the continuing pressures on the price of petroleum, the dwindling supply of easily recoverable portions of that supply within our borders, and the public's near-addictive identificaton with the mobile, autonomous lifestyle identified with that resource in the mindset of just about everyone living today ought to present a huge oppurtunity for any rail entrepreneur willing to sieze the issue.

Yet as we all know, there seem to be few takers; and I think quite a few of us know the reasons why.

The railroad was the first form of industrialization that really captured the public's attention, and the entrepreneurs of the day learned the hard way that the public had both the technical comptetence of a schoolchild and the usual resentment of any accumulation of wealth. Furthermore, neither the public nor its elected servants had much of an understanding of the workings of finance nor the vulnerability of large sums of capital once fixed in place. Finally, when the more forward-thinking of the regulators began to understand the need for a reasonable return on capital, the "locked-in" regulatory structure that emerged in the wake of the Transportation Act of 1920 merely opened the door to the skimming away of the potions of traffic most expected to cover the overherad by an emerging motor carrier system.

Now, after sixty-five years of locked-in-place decline, followed by a 25-year respite driven by economic necessity, the prospect of additional recoupment of large sectors of freight traffic (perishables are a good example) and perhaps most dauntingly, by the replacement of motor carriage by rail over somewhat shorter distances, seems within reach. The problem.in this writer's opinion, revolves around two issues: (1) a near-fixed capacity which a regulation-shy industry is relucltant to improve without guarantees, and (2)a fixation upon efficiency, often determined by factors inherent in physical plant (grades and curvature) to the detriment of other froms of competition rooted more in entrepreneurship.

Clearly, the industry can't afford to gamble on the possiblity of further movement in the direction of laissez-faire -- It isn't likely given the many tigers out there in the woods and the security-obsession of an increasingly multicultural, environmentally-sanitized and Very Politically Correct public easily led by Hollywood and Madison Avenue. But the emergence of a modest entreprenurial spirit within the industy, the development of new forms of service by that group, and the apparent lack of manifestation of centrally-organized forms of hostiility against another poissible target -- the electric utilities -- leads this writer to conclude that the time is right so some form of play towrd expanding both the industry's target market and the infrastucture to manage it.

It took a while to write this one, gentlemen ..... I'm looking for some input.

I think, 2nd TO, that there has always been a spirit of innovation within the railroad business, but it's been informed by the (changing) environment in which railroads have operated, the markets in which it holds a competitive advantage, and the underlying economics of the business. In the era of regulation when the wheels were falling off the wagon it took one type of innovation, coming out of deregulation and the era of rationalization and new marketing freedoms, another, and, in this period of growth and capacity issues yet another, though informed by the world coming out of deregulation and globalization.

I think railroad growth will be "evolutionary" but not "revolutionary", sizable for the industry itself but not a tectonic shift within the overall transportation marketplace, limited by the capital intensity of the business and need to meet competitive ROI's on long-term investment, the smaller part of the marketplace where rail is most competitive and applicable, and probable innovation that will support competing modes. The modal-share growth we're seeing is intermodal in nature (domestic containers and transloads) oftentimes simply replacing trucking linehaul operations. Coming out of deregulation and the competitive capital environment, as part of the absolute necessity that railroads continue to become more efficient, asset purchase, ownership and management has been disaggregated with equipment and secondary networks spun off from the core major players. And, lastly, large segments of the capital investment going in to support rail traffic growth has required public funding because these investments couldn't be justified with private money. Without public investment these projects wouldn't be happening and I wonder how far transportation economics would have to shift, if ever because of competing solutions, to change this.

So, because of these factors, I think the investment and innovation we'll see to support railroad traffic growth will (continue to) be incremental and come from the multiple conventional players: the railroads making limited "hard" infrastructure investments where it's justified and "soft" investments that will allow them to more-productively use existing infrastructure; a second tier of players (truckers, logistics providers, equipment companies) bringing the equipment and "retail" management; and, lastly, probably federal and state governments providing infrastructure investments (including bringing some degree of ineffective use of monies and possible increasing regulation and scrutiny along with it).

to my mind , the railroads have to go after domestic intermodal aggressively , and now is the time to do it . While traffic is down , they can add new trains , speed up exisiting ones ( add engines , increase hp/weight on all trains , not just the hotshots ).in this way they will make use of resources (human and capital ) that are currently idle , and come out of the recsession at full steam .

Exactly how freight carriers, highway as well as rail, generate and plan for new business is something that has never been explained with any degree of either detail or consistency to this writer. Years ago, I started out as a dispatcher for one of the many regulated (specific authity to serve) common-carrier truckers which solicited business mostly for an Eastern Seaboard-to-Great Lakes/Upper Midwest market --- the old American industrial heartland --- by far the biggest market at the time.

Like a lot of its competitors, this firm had grown by buying out a number of smaller cariers and stringing the authority together. At the time, two of the most successful firms in the industry, Yellow Freight and Roadway Express, had determined that their business was so much in demand that they would no longer solicit line-hauls of less than a "break-even' distance, something on the order of 400 miles. Ironically, several of the struggling "second-tier" carriers immediately followed suit, and "unsold" some of their short-haul markets. A few, such as the entreprenurial A-P-A, successfully fought the trend, and one or two others later revived their short haul operation and picked up some of what had been cast off. But over all, the exercise appeared to be a misguided experiment in "trend-setting" (and too often "trend-following").

It was also around this time that several of the eastern rail carriers began "unselling" TOFC service at intermediate points on their main lines such as Scranton and Altoona. The rationale here was that TOFC couldn't make money unless a longer haul was involved. So a load originated at one of the points cited above went by highway to Newark, Philadelpha or Pittsburgh. It probably wasn't solicited unless it was going at least as far as, and likely beyond Chicago or St. Louis as well.

That was how things looked at the rail industry's low point in the late 1970's. Yet for some reason, Conrail experimented with a revival of service not only over a shorter haul, but within one state, in the form of its RoadRailer-based Empire State Express between New York and Buffalo. The experiment didn't last long, but apparently, the Marketing Department didn't have much difficulty rounding up propspective shippers for a trial.

My point here is that the development of an enterprise of sufficient scale within a defined market probably involves more than simple lemonade-stand entrepreneurship. The dwindling number of major carriers know that loss of a major source of business would have a much greater, and negative effect. than the addition of a few more shipments on an established service lane (although a larger portion of the marginal revenue would go directly to the bottom line). In addition, any use of the influence of the public sector would draw a more forceful protest from the carrier losing the business.

Long-term, energy-efficiency pressures, and possibly the redistribution of population back toward the urban centers and corridors, should continue to inveigh in favor of the growth of rail freight traffic. But there are plenty of bumps in the road, and the nature of the industry argues against the ready commitment of large amounts of capital for business that can't be counted on for too long - a regrettable pattern when the industry was "on the ropes" in the 1950's. I would look for the remaining "big rail" carriers to seek further business primarily along lines which are currently underutilized, while possibly developing capacity in less densely-populated areas where local oppposition or the possibility of "indirect confiscation" for passenger and/or commuter service is not a likely factor.

Because railroad demand is derived from other economic activity, growth will occur where the marketplace offers and as you wrote, 2nd Trick, be affected by a drive for fuel efficiency and potential population shifts. Additionally, it will be affected by international trade and shifts in the logistics that underpin that trade as well as increasing driver costs in trucking and that industry's pursuit of efficiency gains, including in their asset base. Also, this growth will occur in certain segments of the networks that comprise the overall railroad system: coal has questionable domestic electric-generation market prospects while offering export growth opportunity; autos would seem to remain somewhat stable; the loose-car network growth probably capped by returns that limit the amount of justifiable private investment; and, intermodal offering mixed international traffic prospects but strong domestic opportunities. So with export coal, I'd think for eastern roads the network is in place but for the western roads, at least at this point, terminal development will be important. And, for intermodal I'd think the growth will be concentrated upon the core network where full overhead clearance is required with additional traffic patterns remaining with highly-managed trucking feeding hub terminals with growth occuring based upon terminal proximity and overall length-of-haul. This, I think, will follow along with railroading's patterns favoring the industry's leveraged economies-of-scale concentrating what capital expansion takes place and putting a large focus, I believe, on innovations and technology that will allow them to further squeeze capacity out of existing infrastructure. We've recently seen it with DPU technology and there's been some experimentation with electronic braking systems for increasing train capacity, and, I'd think the push for PTC will generate efforts to use this as a platform to increase linehaul capacity.

"...the nature of the industry argues against the ready commitment of large amounts of capital for business that can't be counted on for too long..."

What's that story about the lion and the gazelle? The lion wakes every morning knowing he has to be faster than the slowest gazelle to avoid starvation, and the gazelle wakes up knowing he has to be faster than the slowest lion to avoid being killed... not a perfect analogy, but the railroads are a bit like that with business: Every customer has a life cycle, and the roads continually strive to stay ahead of the curve by replacing the traffic that goes away. That's one saving grace of intermodal. If a factory closes, the ability for the railroad to gain a rail-oriented successor at that location is limited. In contrast, an intermodal terminal/network enjoys a more fragmented traffic base with many, many shippers, marketing channels, etc. It's not risk-free... major market share shifts between competing corridors, negative long-term trends (regional population decline, regulation, shipment compaction, etc.) can put the hurt on an intermodal network, but it does provide some insulation from the vagaries of discrete markets.