Railroads do not mind shippers saying they have high rates. What does have an impact is showing that a railroad’s rates are putting you at a competitive disadvantage in your markets.

What this means is, in order for a shipper to have reasonable rates, it needs to know something about its competitors’ rates.

Fortunately, obtaining information on competitors’ rail rates is easier than many shippers realize. Railroads are required to submit a large amount of data on their moves to the Surface Transportation Board (STB). This data contains costs, rates, volumes, and profit, which helps shippers become more knowledgeable about the rates they compete against in their markets.

Two primary methods are used for benchmarking a shipper’s rates against competitors:

1) Public Use Carload Waybill Statistics (Waybill)

The Waybill is a large database, containing information on over one million annual rail movements with detail down to the five-digit STCC. The Waybill provides valuable intelligence on rates and carloads:

1. For specific origin and destination pairs, as well as,

2. For all origins that serve specific destination markets.

The following scatter graph provides an example of the rate information available for a specific origin/destination pair. The graph contains Waybill rate information for moves between the Houston, TX and St. Louis market areas for Plastic Materials, STCC 28211.

The graph organizes rates by mileage range and our hypothetical shipper’s rate of $6,000 is shown by the purple diamond for this 850-mile move.

The average of all Waybill rates is $4,424 which is shown by the red line.

The blue line shown at $5,400 represents the rate, which is 1 Standard Deviation above average. All moves above $5,400 are therefore in the top 15% of all Houston Plastic rates into this market.

The green line shown at $3,450 represents the rate which is 1 Standard Deviation below average. All moves below $3,450 are in the bottom 15% of all Houston rates into this market.

Some Intelligence Learned from the Graph

1. There is a wide range of rates for Plastic rail movements between Houston, TX and St. Louis

2. Rates going shorter distances are priced similar to longer distance moves and, in many cases, are higher than longer distance rates.

3. The range of rates varies by more than $4,000.

4. The average rate is $4,424

5. The shipper’s rate of $6,000 is:

   1. One of the highest rates from Houston into the St. Louis market area

   2. In the top 15% of all rates between Houston and the St. Louis market area.

2) Cost and Profit Benchmark Rates

Cost and profit Benchmarking provides the rate that gives the railroad the average profit received from all movements of your commodity on the whole rail system. No shipper wants to have above average rates, which makes this an important benchmark to understand. This benchmark rate is calculated using data railroads submit to the STB and is determined separately for captive and competitive moves as they have different levels of rail profit.

To demonstrate, Table 1 below contains:

1. The railroads long term variable cost and Revenue to Variable Cost Ratio (RVC) for the Houston to St. Louis plastic movement

2. The average Captive, Competitive and Overall Average RVC for all Plastic movements on the whole railroad system (Benchmark RVCs).

3. Based on the Benchmark RVCs and the specific details for this movement, the table contains rates that would provide the railroad with the average profit being made from all plastic movements. These rate benchmarks are different for Captive and Competitive movements as they have different levels of profit (Benchmark Rates).

Table 1 Railroad Variable Cost for Move – $2,008
		Cost and Profit Benchmark Rates
	Movement RVC/Rate	Captive	Average	Competitive
RVC Ratio	298.8%	275.9%	200.9%	122.8%
Per Car Rail Rates	$6,000	$5,541	$4,034	$2,467

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Summary of Waybill and Rail Profit Rate Benchmark Analysis

Table 2 shows the cost and profit benchmark rates that would provide the railroad with no more and no less profit than what railroads make from all plastic movements versus the Waybill market rates and the shipper’s rate:

Table 2: Summary Table for Rate Benchmark Analysis
	Cost/Profit Benchmark Rates	Waybill Market Rates
Captive moves (little or no competition)	$5,541	$5,400 (1 STD Above Avg)
Competitive Moves (Direct competition)	$2,467	$3,450 (1 STD Below Avg)
Average of all moves (Partial competition)	$4,034	$4,424 (Average Rate)
Rate for Shipper’s Movement	$6,000

All benchmark rates are lower than the shipper’s $6,000 rate and the highest benchmark rate is $459 less than the shipper’s rate ($6,000 – $5,541). However, most rates the shipper is competing against are in the $4,000 range. In addition, many movements with Direct competition have much lower rates in the two and three thousand dollar ranges.

To get reasonable rates you first need to know what reasonable rates are.

Railroads thrive on a lack of rate transparency which means it is up to the shipper to provide that transparency. Rate benchmarking provides ammunition that helps protect rail shippers from excessive rates from railroads that hold monopoly power over their traffic.

Railroads react differently to you saying you have high rates than they do to you showing that their rates are putting you at a competitive disadvantage in markets. If you can show railroads where their rates are putting you at a competitive disadvantage you will have much better success in rail negotiations. In addition, if you can show that high rates are causing both you and your railroad to lose volume in markets, you can accomplish a lot with your railroads. This all starts with rate benchmarking.  For information on benchmarking your rates against all competitor origins that serve your destination markets click here to read the “Benchmark to Reduce Rail Expenses” blog article.

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The types of rate benchmarks described above are automatically calculated for individual moves or on a macro basis in the Rail Cost Control program (RCC). Click on the link to learn more about the RCC.

The process for determining and negotiating more competitive rates for rail movements is an important part of Escalation Consultants Rail Negotiation Seminar. This seminar changes how shippers negotiate rates with railroads. The next Rail Negotiation Seminar is in Tampa, FL. on March 19^th and 20^th. Click the link below for more information.  

Rail Cost Control (“RCC”) is a program developed by Escalation Consultants, Inc. to help shippers reduce rail expenses by managing costs and empowering negotiations. For more information about RCC and other related articles, visit the RCC Blog.”

Many rail shippers believe that if they are captive to a railroad at a location, they have little leverage to negotiate better rates.

The graph below shows why this isn’t a good way to look at your rail traffic. The graph contains rail rates for Iron or Steel Products (STCC 33123) going into the captive rail market of Nashville, TN.

The question to answer with this graph is:

Why Are Rates So Different at a Destination Market Like Nashville, TN that Is Completely Captive To CSXT?

The graph shows that some rates are below $4,000, while other rates going the same distance, are above $9,000. The question is: If Nashville is a captive market, then why aren’t all rail rates above $9,000?

There are many reasons why rates for specific movements vary, but the big picture answer is very simple, Effective Strategic Planning. Shippers that make railroads look at their traffic differently get better rates from their railroads.

Strategic Planning causes captive moves to have different rate levels. Significant downward pressure on rail rates can be generated when the following issues are addressed by shippers in strategic planning.

Eight Ways to Get Better Rail Rates at Captive Locations:

1. Railroads need to compete for your business when you have multiple plants that produce the same product.

   • Even when a location is captive to a railroad, a shipper can use geographic competition to obtain lower rates from railroads.

2. Large shippers that bundle all their rail traffic in an RFP can get better rates at captive locations.

   • In order for a railroad to get more of a shipper’s competitive traffic it must reduce its rates on captive traffic. More traffic is always better than less traffic in rail rate negotiations. RFP’s that take advantage of a shipper’s entire book of potential business increase negotiation leverage.

3. Forward storage of products at captive locations.

   • To avoid bottle necks at captive destinations, explore forward storage options at sites with rail competition, then truck to captive locations. You don’t have to bypass railroads at captive locations forever. Railroads get the message.

4. Take freight costs out of the system with commodity swaps or buy/sell agreements

   • Commodity swaps or buy/sell agreements work best when you have a competitor serve your customer when its facility is closer to your customer and you serve a competitor’s customer that is closer to your plant. The higher your rail expenses, the greater the cost savings are for you and your competitor from this type of agreement. Commodity swaps or buy/sell agreements are normally a short-term action as a railroad gets the message pretty quickly that you have competitive options.

5. High rates create the economic incentive to invest capital to increase your logistics options.

   • The railroad needs to make it uneconomical for a shipper to take traffic off its system. If your rates are too high, then other logistic and capital investment options become more attractive. A railroad must provide rates that discourage a shipper from investing capital to increase its competitive options. Otherwise, a railroads high rate structure could become a big problem for the railroad.

6. Railroads need to compete against trucking on short and mid distance moves.

   • Large rail rate increases allow trucks to compete with rail for longer distance moves. The cost of trucking needs to become the ceiling price for short and mid distance rail moves.

7. Political pressure!

   • One of the best and easiest sources of leverage to create is political pressure. Politicians want to talk to you as your company is a great source for tax revenue, political contributions, and you employ many voters. Politicians can be a great benefit because if you have the ear of someone that is important to the railroad, then you become more important to the railroad. There is a right way and a wrong way to address politicians, and all politicians are not equal, which should be considered in your strategic planning.

8. Foreign Imports: 

• • It doesn’t matter if a railroad’s moves are captive, if imports are reducing your domestic production. The shipper and railroads have the same goal with imports – STOP THE BLEEDING. (Additional information on this topic will be contained in an upcoming Blog Article.)

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Rail Negotiation Seminar

If you are interested in ways to effectively reduce the rates for your captive rail movements, you should attend Escalation Consultants Rail Negotiation Seminar. For the last forty years, Escalation Consultants, Inc. has conducted the most highly recommended Rail Negotiation Seminar for shippers. The Rail Negotiation seminar changes how shippers negotiate with their railroads. The next seminar is on March 19^th and 20^th in Tampa, FL. Click the following link for more information:

Rail Cost Control Program (RCC)

Escalation Consultants’ Rail Cost Control program and consulting services are used extensively by shippers to help reduce the rate structure for their movements by managing costs and empowering negotiations. For more information about RCC and other related articles on effective methods to reduce rail freight expenses, visit the RCC Blog.

Rail markets have changed dramatically in recent years.

Shippers must adapt to properly navigate these changes. The results of Escalation Consultants’ annual rail shipper surveys demonstrate how shippers are dealing with the changes being experienced in the rail industry. The survey results highlight critical issues that shippers need to be aware of.

The following results are taken from annual shipper surveys from 2018 through 2023. For reference: the results reflect responses from individuals from over 115 different companies. These companies span all industries that ship by rail. The updated 2024 rail shipper survey results will be released at the September Rail Negotiation Seminar in Washington DC.

Issue 1: Shippers Being Forced to use Tariff Rates

An increasing number of carriers are refusing to renegotiate contracts and forcing shippers to use tariffs or public pricing. 50% of participating shippers said they were experiencing this, and the primary railroads referenced as forcing shippers to tariffs were KCS, NS, and UP. Survey responses indicate a significant increase in the number of shippers being forced into tariffs between 2018 and 2023.

Issue 2: Rate Increases in new contracts

The average rate increase in new contracts in 2023 increased substantially from prior years. In 2023, increases of 5% became the norm for both captive and competitive shipper movements.

Issue 3: Railroads Level of Interest in Shipper’s Competitive Traffic

Almost all shippers (91%) responded that railroads were aggressively going after their competitive traffic.  This was a big change from prior surveys, as back in 2018 less than 10% of shippers were experiencing an aggressive push from railroads to capture all their competitive movements.

Issue 4: Contract Escalation Issues

1. In 2023 the number of shippers escalating contracts by the All-Inclusive Index Excluding Fuel (AII-LF) more than doubled from prior years. Past surveys showed that pre-established set rates of annual increase were the predominate method being used to escalate contracts. In 2023 the All-LF Index was being used just as much as pre-established set rates of increase.

2. When the All-LF Index is Used more than 50% of the shippers negotiated an Escalation Collar (Minimum and Maximum rate of change).

3. The set rate of increase primarily used to escalate contracts went from 3% in past years to 4% in 2023. With a lower rate of annual inflation in the economy this will likely change in the 2024 survey results.

Issue 6: Through Rates Versus Rule 11 Rates

Over time, there has been a steady increase in the number of shippers using Rule 11 rates when more than one Class I Carrier is used in a movement. In 2023, Rule 11 rates were used by 82% of the shippers in the survey. The surveys indicate that through movement rates for multi carrier movements are being used much less frequently.

Issue 7: Pre-Bid Meetings with Railroads

The percentage of shippers that always hold pre-bid meetings with railroads has increased steadily over time. This went from 8% of shippers in 2018 to 22% of shippers in 2022. Shippers that always hold pre-bid meetings then jumped to 62% in 2023. The only shippers that did not always have pre-bid meetings in 2023 answered that they sometimes hold pre-bid meetings.  It appears that pre-bid meetings have become standard practice for rail shippers.

 

We anxiously await the results of the 2024 rail shipper survey, as the economy has changed dramatically between 2023 and 2024. The 2024 survey results will be released during Escalation Consultants’ Rail Negotiation Seminar.

For over 25 years, Escalation Consultants has hosted the Rail Negotiation Seminar. This seminar has become the most highly anticipated event of the year for rail shippers, as it focuses specifically on improving rail negotiations. Over the years, the seminar has been attended by thousands of people from hundreds of companies across all industries.

The seminar is being held in Washington DC, September 11th- 12th, at the Hyatt Regency, and registration is open!

For more information, or to register for the 2024 Rail Negotiation Seminar, click the image below.

STB Proposes Rule to Improve Poor Service for Captive Rail Movements (Docket EP 711)

The STB has issued a Notice of Proposed Rulemaking to provide rail customers with access to reciprocal switching as a remedy for poor service. The proposed regulations provide a streamlined path for obtaining a reciprocal switching agreement when service to a terminal area  shipper fails to meet any of three performance standards.

The proposed standards reflect a minimal level of rail service below which a shipper would be entitled to relief. Each standard provides an independent path for a petition to obtain a reciprocal switching agreement. The standards employ Board-defined terms which can be applied across all Class I rail carriers and their affiliated companies. To readily monitor and measure rail service the rule would require all Class I railroads to provide their customers with the historical data for these service metrics within seven days of a customer’s request. All three Service metrics would be standardized across all Class I railroads.

The three proposed service standards are:

1. Service Reliability:

   • The measure of a Class I railroad’s success in delivering a shipment by the Original Estimated Time of Arrival (OETA) provided to the shipper. Actual performance would be compared to railroads OETA provided to the shipper over a lane for 12 consecutive weeks. One proposed approach would be that at least 60% of the shipments for a movement must arrive within 24 hours of the OETA for minimum service reliability during the first year after the rules effective date. This would increase to 70% during the second year after the rules effective date.

2. Service Consistency:

   • The measure of a railroad’s success in maintaining, over time, the railroad’s efficiency in moving a shipment through the rail system. This standard is based on the transit time for a shipment. For loaded cars, unit trains and empties, a petitioner would be eligible for relief if the average transit time for a shipment increased by a certain percentage (potentially 20% to 25%) as compared to the average transit time for the same 12-week period during the previous year.

3. Inadequate Local Service:

   • This service metric provides rail customers with information on all important first mile/last mile service. Local service would be deemed inadequate if the railroad had an Industry Spot and Pull (ISP) success rate of less than 80% over a period of twelve consecutive weeks in performing local deliveries and pick-ups. The ISP success rate measures whether the railroad provides service within its customary operating window for the affected shipper, which in no case can exceed 12 hours.   

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Under the proposed rule a reciprocal switching agreement would be for a minimum period of two years and up to a maximum of four years.

The STB is to be commended for developing this process for assisting rail shippers with inadequate service. There are, however, several issues that need to be addressed and finalized in the proposed rulemaking:

1. The percentages that are used to determine what is acceptable service in each of the three-service metrics.

2. The reciprocal switching fee that the incumbent railroad is allowed to charge an alternate railroad. Setting switch fees based on the cost of service is being considered along with other options. Having pre-determined switch fees is a major part of the inter-switching regulations in Canada but pre-determined switch fees are not being considered in the STB’s proposed ruling.

3. The STB has no authority over contract movements, and it needs to be determined if the proposed ruling would apply to traffic that is provided under rail transportation contracts.

4. It needs to be determined whether the service metrics can consider performance data of railroads under rail contracts or are limited to service for tariff movements.

Comments on the proposed rulemaking are due by October 23, 2023. Rail shippers are encouraged to review the Proposed Rulemaking and submit comments to influence the final outcome of the regulation as this will likely have a big impact on a very large number of shippers.

Reducing Rates on Captive Rail Movements – Part 1

Shippers need to understand everything they have to put on the table in a rail negotiation. The more a shipper knows about the overall volume his company currently ships and will ship in the future, the greater its bargaining power. The following are some examples of in-house information that can be valuable in negotiations.

The Total Inbound and Outbound Traffic the Whole Company Moves on a Specific Railroad

A shipper needs to assess the company’s total market power with a particular railroad. This is especially the case if one traffic department manages inbound traffic and another outbound traffic, if different traffic departments handle different commodities, or if suppliers handle inbound traffic. You need to know the total dollars and volume your company represents to a railroad to understand your leverage and all of the options available to help or hurt a railroad’s profitability.

The Company’s Future Plans to Increase Market Share

Data showing how rail volume is projected to increase can be helpful in demonstrating that a railroad can be more profitable by holding rates down than by increasing rates, particularly when additional sales volume will not materialize with excessive rail rates.

How Much Freight Expenses Represent to the Sales Price of Commodities

Documenting a direct connection between rail rates and sales volume can provide an incentive for a railroad to minimize rate increases. The ratio of freight expenses to sales price over time is also helpful in tying rail rates to sales volume.

Past and Current Service Problems with a Railroad

Documenting service problems can be useful in rate negotiations if the railroad’s lack of service is already creating additional expenses for a shipper. The incentive for the railroad to correct service problems is increased if the railroad receives more carloads by improving transit times. Since the number of carloads you move can have a direct effect on the railroad’s cost for a movement, improving services can lower the railroad’s cost and increase the profitability under existing rates.

How Competitive Rail Traffic on Railroads can be Increased by Changing How You Deal with Railroads Internally

There are numerous ways this can be achieved, the following are a few pertinent points for shippers to consider.

• Using Rule 11 movements vs Through movements to increase the total competitive carload volume on each railroad.
• Having railroads quote rates through multiple gateways to increase the routing and pricing options for each movement  [3 pricing options, instead of 1 can be very beneficial].
• If you produce the same product at multiple plants, use geographic competition to change the status of a movement from captive to competitive.
• Determine if your customers can accept shipments by truck?

Many rail shippers don’t fare as well as they should in negotiations because their railroads know more about their business than the shippers’ transportation department. Transportation represents a big expense for most companies and every transportation department needs to be in the loop on issues related to sales volume, market share and projected plans for increasing market share. Without this information, money tends to be left on the table in rail negotiations, making it more difficult for a shipper to achieve its sales objectives and profit goals.