RCC Blog: Acknowledging Railroad Service Issues

Are Railroads Turning the Corner on Bad Service?

Much has been written about current problems with the United States supply chain. The problems are far ranging, but the primary focus has been on:

  • The backlog of ships at ports;

  • The breakdown of rail service at major ports, which is making it more difficult to clear docks; and,

  • Poor rail service for important Agricultural commodities like Grain and Fertilizer

To assess the current situation with service, this article takes a closer look at railroad’s overall performance of Intermodal, Unit Train, and Manifest traffic. Railroad operating results indicate that service problems are stabilizing on a large segment of rail traffic and the hope is that this is the start of an overall improvement in rail service.

Change in Carloads

Illustration 1 tracks the percent change in monthly Intermodal carloads versus Manifest carloads on the four major U.S. railroads between January 2019 (beginning of pandemic) and May 2022.

Service Issues Blog 1

Illustration 1 shows that Intermodal carloads recovered more quickly than Manifest carloads from the height of the Covid pandemic in May 2020. Unlike Manifest traffic, Intermodal carloads exceeded pre-Covid levels in much of 2020 and 2021. However, by March 2022 Intermodal and Manifest carloads were both above pre-Covid levels.

The percent change in carloads for Coal and Grain unit train movements are tracked against Intermodal carloads in Illustration 2. This shows that Grain carloads fluctuate more than Intermodal, but the cumulative percent change is approximately the same as carloads for Grain and Intermodal are both at pre-Covid levels. Coal carloads are down 20% to 30% for reasons that are not related to the Covid pandemic.

Service Issues Blog 2

The cumulative change in carloads for other major rail commodities between January 2019 and May 2022 are in Illustration 3. The carload data indicates that service problems are unrelated to an increase in carloads on the rail system, as carloads currently reflect levels similar or below pre-Covid volumes.

Service Issues Blog 3

Change in Train Speed and Dwell Time

Most rail traffic is moving slower now than before Covid had an impact on the U.S. economy. Intermodal traffic is doing significantly better than Manifest traffic as well as Coal and Grain Unit Train traffic as it is only slightly down from where it was in January 2019.

Illustration 4 shows that the average speed of all types of traffic, other than Intermodal, on the four major U.S. railroads has been in a steady decline since the second quarter of 2020.

Service Issues Blog Illustration 4

Intermodal Train Speed stopped decreasing in the second quarter of 2021, while the speed of Manifest traffic continued to decline.

Overall, the speed of Intermodal traffic is only down 1% since the first quarter of 2019, while the speed of Manifest traffic is down 7% due to a consistent drop in 2021 and 2022. Illustration 4 shows that the decrease in Train Speed is a more significant problem with Coal and Grain Unit Train movements.

Illustration 5 shows that as Manifest traffic Train Speed started to continually decrease in the second quarter of 2020, the Dwell Time of rail trains at rail terminals continued to increase. This is bad news for rail shippers as trains are spending more time delayed at rail terminals and when leaving the terminal, trains are moving at a slower speed. Illustration 5 shows that this problem has gotten continually worse since the second quarter of 2020. This problem is causing big delays in rail shipper’s deliveries to customers, and it is a significant contributor to the slowdown in the U.S. supply chain.

Service Issues Blog Illustration 5

The one bright spot from this data is that service for Intermodal movements appears to be improving. The Train Speed for Intermodal has been relatively stable since the second quarter of 2021, while Intermodal carloads have had big up and down fluctuations. Intermodal represents a very large percent of all rail traffic, and the hope is that improvements in this area will have a ripple effect on the entire rail system.

Railroad submittals to the Surface Transportation Board (STB) are the source for the data in this report. Current and historical data on rail service, rates, and volumes by commodity and market area are available in the Rail Cost Control program.

STB Rate Case Index Study Rebuttal

The STB Study Saga Continues

Escalation Consultants, Inc.

The STB Study Saga Continues

An article was recently published by Railway Age. This article contains an exchange between Jay Roman, Founder and President of Escalation Consultants, Inc., and Dr. William Huneke, former Director and Chief Economist at the STB, on the STB’s Annual Rail Rate Index Study (STB Study).

The dialog that the article contains is of significant importance to all rail shippers as it highlights a need for a change in how the STB operates and the lens in which interested parties would utilize its data.

It is important to raise questions about the STB Study, because it will likely be used by lobbyists, politicians, and railroads to show that there are no major problems with rail rates. This may not be the STB’s purpose for the Study, but this is likely how companies that benefit from railroads ability to continually increase rates will use the findings in the Study.  In other words, if rates are “reasonable” there is no need to change STB regulations to have a more effective process for shippers to challenge rates.

The following link will take you to the Railway Age article.

STB Rate Index Study Rebuttal

We encourage you to forward this email, or share the article, with your teams and fellow rail shippers. 


Please contact us directly if you have questions or would like more information on the article: Info@RailCostControl.com


Rail Negotiation Seminar

NEW YEAR’S RESOLUTION FOR IMPROVING RESULTS WITH RAILROADS

New Year’s Resolution for Improving Results with Railroads

As you start the year of 2022, it is good to consider a new year’s resolution that will make 2022 better than 2021. The best resolution for rail shippers to consider is to become much more proactive in rate negotiations with railroads. The reason for this resolution is that it will help reduce rail expenses by counteracting the substantial change railroads have made in how they develop rates for movements.

Railroads have changed how they develop rates which means that shippers need to change how they negotiate rates. This is why being more proactive in establishing the rate structure for movements is a great new year’s resolution for rail shippers in 2022.

Illustration 1 shows the impact of the change in railroads pricing practices on their revenue. This analysis was performed by Escalation Consultants for the Rail Customer Coalition in conjunction with the American Chemistry Council.

[Illustration 1]

Improving Results with Railroads 1

The graph shows that the total revenue from competitive rates (rates with RVC’s below 180%) was virtually unchanged over the last fifteen (15) years. However, revenue from rates generating monopoly level profits (rates with RVC’s greater than 180%) increased a whopping 231%. The graph shows that:

  • There has been a sea change in how railroads establish rates for movements; and,
  • Actions shippers are taking to control rail expenses have just not been very effective

The change in railroads rate making practices has resulted in revenue from rates generating monopoly profits being the norm and is no longer the exception.

[Illustration 2]
Improving Results with Railroads

Illustration 2 shows that in 2004 revenue from rates generating profits at monopoly levels represented 27% of all rail revenue. However, by 2019 monopoly profit revenue represented 50% of all revenue. Illustration 1 shows that the revenue railroads make from rates generating profits at monopoly levels continues to increase. It is unlikely that railroads will be satisfied with 50% of all revenue coming from monopoly profit rates. This is because two of the eight major commodities in the analysis had monopoly profit revenue, represent over 60% of all revenue. (Footnote 1)

To deal more effectively with the change in railroad pricing practices shippers need to be more proactive in establishing rates for their movements. A great new year’s resolution is therefore to be in the position to tell railroads:

  • The rates you need
  • Why you need them and
  • The Reasons a railroad should give these rates to you

There are many things that need to be considered in a comprehensive plan for reducing rail expenses. However, everything starts by understanding the rates you compete against in your markets.

As an example, Escalation Consultants is annually involved with more than a billion dollars in shippers rail spend. In reducing clients rail expenses, we look at numerous issues as well as the political environment at plants.(Footnote 2) However, we always start by understanding what our clients compete against in their primary markets. This allows us to be much more proactive in establishing reasonable rates with railroads.

There is a reason why Escalation Consultants is successful in reducing rail expenses for shippers that have never reduced cost before. The process for reducing rail expenses starts with a comprehensive strategy and includes:

  • Understanding and quantifying all your win/win opportunities
  • Understanding all your logistics options
  • A process for increasing your pricing options
  • Understanding all your sources of negotiation leverage
  • A process for making your movements more important to railroads
  • Having immediate access to market intelligence.

Not everyone can retain Escalation Consultants to assist in reducing rail expenses. However, everyone CAN use our Rail Cost Control Program (RCC) to become more proactive in rate negotiations with railroads. The RCC provides immediate access to rates you compete against in markets and identifies your primary competitors in markets.

The RCC does much more than determine reasonable rates for movements, it is a comprehensive database management system that offers shippers multiple valuable tools. These include: a bid evaluation tool that optimizes your rail spend. As well as an RFP generation tool that increases your pricing options and develops win/win opportunities that decrease your cost while increasing railroad profit and much, much more.

The change in railroad pricing practices demonstrates that shippers need the RCC program now more than ever. A good new year resolution is to know more about how the RCC will help you deal more effectively with the change in railroads pricing practices. This change is allowing railroads to obtain a significant increase in the number of rates generating monopoly level profit and the RCC is an effective tool for combatting this practice.

 


Footnote 1 – More detail on the analysis is included on the Rail Cost Control website under the blog titled “Impact of Consolidation on Freight Rail Rates.”

Footnote 2 – Several issues that need to be analyzed in an effective cost reduction strategy are included in Escalation Consultants Rail Negotiation Wheel which was shown in the blog titled “Obtaining the Rail Cost Reductions that Shippers’ Management Needs.” This blog is available on the Rail Cost Control website.

Negotiating Multiple Gateway Rule 11 Movements

Negotiating Multiple Gateway Rule 11 Moves

Negotiating Multiple Gateway Rule 11 Rates for Movements

Imagine you’re in the market for a brand new [insert large ticket item]. You think you have a good idea of the price range, but how do you know for sure? Next, you shop around to compare prices, availability, included perks, and interest rates. All these factors are critical elements to be considered before making your purchase. Sounds logical, right?

If you were to replace the “large ticket item” with “Rail Rates,” does the same premise hold true? It should! Especially considering the monopolistic power that railroads have over rail shippers and their rates.

It is always good to get more pricing options from railroads. One of the best ways of doing this is to use Request for Proposals (RFP’s) that have railroads provide Rule 11 rates through multiple gateways. I know what you’re thinking: is the juice worth the squeeze? Is the potential savings enough to justify the time and effort needed to generate these RFPs and analyze the responses? Let alone rearrange the segments to complete the move? What if this was easy to do? What if the RFP and bid evaluation process could be done in less time? Then there would be no reason for NOT generating multiple gateway RFP’s. This type of RFP and bid evaluation process can be a game changer for shippers looking to reduce rail expenses. The barriers for doing this have been eliminated by the Rail Cost Control (RCC) program.

The illustration below provides a real-world example of the potential savings that can be generated for a captive movement by having railroads provide Rules 11 rates through multiple gateways. The total rate and mileage for this complete movement, through three different gateways, is shown below.

Mileage for the move ranges between 600 and 800 miles. The total rate using the existing gateway is $4,600, while the rate through the low bid gateway is $3,600.

Total Rate for a Captive Movement Through 3 Gateways

The difference between the rate through the existing gateway and the low bid gateway is $1000. This move is for 50 annual carloads, which represents a savings of $50,000 on this one move. The low bid move also travels a shorter distance [200 miles shorter] thus improving transit times. Applying the full effect of this process on all of a shipper’s moves can easily add up to millions of dollars saved.

If you don’t go out to your railroads with multiple-gateway RFPs, how do you know you are truly getting the best rates possible? However, there is a harsh reality to generating Rule 11 RFPs for multiple gateways … Shippers can’t generate, analyze, and optimize multi-gateway Rule 11 RFPs for ALL their movements in excel.

To generate and evaluate multiple-gateway Rule 11 rates you’ll need a robust program that automatically does the work for you. This is exactly what the RCC – Cost Optimizer program does for rail shippers.

This comprehensive program allows shippers to AUTOMATICALLY generate multiple-gateway Rule 11 RFPs for ALL their railroads, for ALL their movements. Then RCC analyzes, optimizes, and even generates counterproposals the very same day responses are received from the railroads. Too good to be true? It’s not!

The Cost Optimizer generates RFP’s, evaluates railroad responses, determines win/win opportunities for both the shipper and railroads, creates counter proposals, and tabulates savings for management. The Optimizer is a finely tuned program that seeks out and quantifies your best opportunities for reducing the cost of rail freight.

Generating multiple-gateway Rule 11 RFPs is just one of many functions that the RCC provides rail shippers. If you’d like to expand your rate options, reduce your rail spend, and obtain immediate access to all your current and historical rates with just one click, schedule a RCC demonstration.

There is a better way to deal more effectively with railroads in less time.

See for yourself! Click this link to schedule a demonstration of the RCC program today.


Registration is still available for the 2022 Rail Negotiation Seminar. Treat yourself and your team to the #1 recommended rail negotiation program in warm & sunny Tampa, Florida. Click the banner below for more information.

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Non-Competitive Pricing Practices

Non-Competitive Pricing – The New Norm?

Study shows that shippers need to be more proactive in rate negotiations with their railroads.

The analysis demonstrates that railroads have fundamentally changed how they establish rates for movements. The takeaway from the analysis is that in order to deal effectively with these changes shippers will need to change how they negotiate rates with railroads.

Escalation Consultants analysis of the 8 commodity groups listed below demonstrates a startling finding:

Rail moves with “non-competitive” pricing are no longer the exception. They have become the norm.

Preparing for Rapid Inflation

The study shows that between 2004 and 2019, railroad revenue generated from competitively priced movements has risen 24.3%. Meanwhile, rail revenue generated from non-competitively priced movements has risen a staggering 230.6%.

To put this into perspective, half (50%) of all rail revenue generated in 2019 was derived from non-competitive rates. Compared to just 27%, in 2004.

Non-competitive rail revenue going from 27% to 50% of rail revenue for commodities represents a dramatic shift in railroad pricing practices. The good news is that this is not a situation without a solution.

Escalation Consultants has found that in order to effectively deal with the changes in railroad pricing practices, you must be more proactive with rail rate negotiations. If not, your rates will likely increase each year, and most traffic will move under non-competitive rates. Being aware that railroad pricing practices have changed is an important first step in building a strong case for lower rail rates. However, shippers must then take corrective actions. To generate cost reductions:

Shippers need an effective plan for both determining and obtaining reasonable rates for their rail traffic.

In 40+ years of assisting rail shippers across ALL industries, Escalation Consultants has helped achieve over $4 billion in cost savings.

If you’d like to learn how, we’re here to help!


Registration for the 2022 Rail Negotiation Seminar is now open. This is the #1 recommended program for rail shippers and slots are limited. Click the link below for more information.

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RCC Blog: Impact of Consolidation on Rail Freight Rates

Impact of Consolidation on Freight Rail Rates

An analysis of railroad pricing practices shows that over the last fifteen years there has been a fundamental change in how railroads establish rates for movements. The analysis shows that rail movements with pricing considered potentially non-competitive by the Surface Transportation Board (STB) have become the norm and not the exception.

The analysis, performed by Escalation Consultants, for the Rail Customer Coalition, covers the change in railroad pricing for eight major commodity groups between 2004 and 2019. Table 1 shows these eight commodity groups. In the analysis, non-competitive pricing consists of revenue from rail moves with Revenue to Variable Cost Ratios (RVC’s) greater than the 180% RVC Regulatory Jurisdictional Threshold. Revenue from moves with RVC’s below 180% is considered competitive revenue.

(Table 1)

8 Commodity Groups Included in RCC Analysis

The analysis shows the following changes in railroad pricing practices between 2004 and 2019.

Revenue from rail moves with non-competitive pricing increased by an average of 230% over the last 15 years.
  • Half the commodities had non-competitive pricing revenue increase by more than 300%.
  • Commodity revenue from rail moves without non-competitive pricing either decreased, or had small increases over the last 15 years.
Moves with non-competitive pricing generated 50% of all 2019 railroad revenue (see Table 2).
  • Chemical movements are most significantly impacted, as 68% of all Chemical revenue is generated from rail moves with non-competitive pricing.
    • 64% of Stone and Cement revenue comes from non-competitive pricing
    • 56% of Farm Products revenue comes from non-competitive pricing
  • The percentage of total revenue from moves with non-competitive pricing increased by 23% over the last 15 years. While revenue from moves with competitive pricing decreased by 23%.

The large increase in non-competitive revenue caused the average RVC to increase from 134% to 165% between 2004 and 2019 for shipments of the eight commodities in the analysis.

 

Conclusions from Analysis

Illustration 1 shows the cumulative percent change in total non-competitive revenue and competitive revenue by year for these eight commodities. This shows that non-competitive revenue has consistently increased over time while competitive revenue has had little change. These historical changes indicate that the STB is regulating a very different rail industry today, than it regulated in 2004.

(Illustration 1)

Percent Change in Non-Competitive vs Competitive Rail Revenue

Based upon the large increase in non-competitive revenue, it would be logical to expect a large number of rate cases before the STB. This has not happened!

Many shippers believe that the existing regulatory process is weighted too much in favor of railroads. The large increase in non-competitive revenue, shown in Illustration 1, supports this contention. Non-competitive revenue has increased 230% over the past 15 years. This indicates that railroads are not worried about regulatory pushback from generating non-competitive revenue from a large portion of their rail traffic.

The analysis shows that commodities are not impacted by a railroad’s non-competitive pricing practices to the same degree. Table 2 shows that 3 commodity groups had non-competitive revenue representing more than 50% of all rail revenue:

          • Chemicals – 68% of all revenue

          • Stone & Glass Products – 64% of all revenue

          • Farm Products – 56% of all revenue

These are very large commodity groups, and they have a significant impact on the total non-competitive revenue railroads make from their pricing practices. These commodity groups benefit the most from an improvement in regulations that impact rates.

(Table 2)

Non-Competitive Revenue as a Percent of Total Revenue

Table 3 shows the largest increase in non-competitive revenue occurred in commodities with the smallest percent of non-competitive revenue in 2004. Paper, Wood, Food, and Transportation Equipment commodities make up a relatively small percentage of total rail revenue under non-competitive pricing in 2004. These commodities now have around a third of all revenue subject to railroad non-competitive pricing. The analysis demonstrates that railroad’s non-competitive pricing practices are widespread and affect more movements now, than they did in 2004.

(Table 3)

Impact of Railroad Non-Competitive Pricing Practices on Commodities

Summary 

The Rail Pricing Analysis indicates that railroad pricing practices have changed dramatically over the last 15 years. It also indicates that rail rate regulations have not kept pace with these changes. The 230% average increase in non-competitive revenue indicates that railroads do not appear to be particularly worried about existing rate regulations. 

If the pattern of change over the last 15 years continues, the majority of rail traffic will move under rates that generate non-competitive revenue for railroads. To change this, the potential for winning a rate case before the STB will need to be more favorable to shippers than it has been over the last 15 years. This will likely require a more effective and less expensive method to challenge non-competitive rail rates. 

Consolidation within the Transportation Industry is facing additional scrutiny as regulators contemplate additional rail mergers. Mergers that could have further negative impact on the competitive landscape and the affordability of shipping US goods by rail. This analysis indicates that regulators need to carefully consider the changes needed to the regulatory system to protect shippers from the impact of a smaller number of railroads competing for their business. 

Note – The STB Commodity Revenue Stratification Reports are the source for all data used in the Analysis of Railroad Pricing Practices. 

 

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program 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.

Rail Cost Control Webinar Recording

CN & KCS Merger Webinar Recording

Developing Your Company’s Position on the KCS – CN Rail Merger

Rail shippers will soon need to determine the best position for their company to take on the KCS rail merger with CN. All rail shippers will take one of four primary positions, regarding the merger:

  • Fight the approval of the merger;
  • Stay uninvolved;
  • Support the merger; or,
  • Obtain economic concessions through flexibility with your merger position.

The positive and negative impact of these positions are covered in this webinar.

The focus of this webinar is to determine a realistic path forward for making educated decisions for your company on the merger.

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program 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.

Rail Contracts: Preparing for Rapid Inflation

Rail Contracts: Preparing for Rapid Inflation

Prepare for the Impact of Rapid Inflation on Rail Rates and Escalation in Rail Contracts

Rail contract escalation provisions will be impacted by big changes taking place in the overall economy, as well as changes occurring in the rail industry. The railroad index frequently used to escalate rail contracts is titled: All Inclusive Index Less Fuel. This index is frequently referred to as “A-List.”

Illustration 1 tracks the percent change in the A-List index against the change in the CPI since Q1 2012.

 

Illustration 1

Percent Change of A-List vs CPI Indexes 1

The illustration above shows very moderate increases for both the A-List and CPI indexes through the end of 2020.

The average annual increase in overall inflation, as measured by the CPI, was only 1.6% between 2012 and 2020. Inflation in the railroad industry was even lower as the average annual increase in the railroads A-List index was only 1.3%.

In 2021 the world changed dramatically for inflation in the economy as well as the railroad industry. The inflationary increases in 2021 are the largest the U.S. has experienced since the early 1980’s. This will have a big impact on railroads and rail shippers in the coming months.

To zero in on the changes taking place in 2021, Illustration 2 tracks the changes in these indexes from Q4 2020, to the most current time period available for each index. The A-List index is published quarterly and is always projected out one quarter. This means it is available through Q3 2021, while the CPI is available through June 2021.

Illustration 2

Percent Change of A-List vs CPI Indexes 2

Illustration 2 shows that the A-List increased 6.5%. Roughly half of this increase occurred between Q2 and Q3 of 2021. The CPI increased 4.5% and is expected to have large increases for at least the rest of this year.

If the 2021 changes in the CPI and A-List indexes are annualized, 

they would have a rate increase of close to 9%. 

This type of inflation has not been seen since the 1980’s and this will likely have a big impact on rail rates and the escalation provisions of multi-year contracts. How rail shippers address this will have a big impact on their cost of rail freight.

Escalation Consultants is in a unique position to assist shippers on this issue as we have been active in:
  • Developing escalation provisions for company’s contracts for over forty (40) years and
  • Resolving pricing issues with contract escalation problems that created big winners and losers.

With rapid inflation contract escalation provisions can easily create big winners and losers. For example, in the 1980’s and 1990’s Escalation Consultants helped resolve contract escalation problems where hundreds of millions of dollars were at issue in long term contracts.

We learned that:
  • With rapid inflation, a contract must have an effective process for insuring that the escalation provisions don’t generate big winners and losers; and
  • It is much less expensive to develop escalation provisions properly at the inception of a contract, than to try and resolve disputes after the magnitude of an escalation problem is already known.
Before agreeing to escalation provisions for your contracts, Contact Escalation Consultants to explore the option that best suits your company’s unique shipping needs. This will likely save you significant time, frustration, and money.

 

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program 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.

 

Rail Carloads Rebound from Covid-19

Rail Carloads Rebound from COVID-19

COVID-19 has had a big impact on everything including rail traffic. The good news is that: 
  • Intermodal traffic has rebounded far above pre-COVID-19 levels; and, 
  • Bulk rail traffic has finally risen to pre-COVID levels.  

The graph below shows that weekly Intermodal traffic is up 11% from January 2020. It also shows that Bulk rail traffic has finally risen 1% above pre-COVID-19 levels. 

RCC Blog: Percent Change in Weekly Rail Carloads for Intermodal vs Bulk Traffic

The graph below shows that, except for Coal and Petroleum, Bulk rail traffic has increased for major commodities. Both Coal and Petroleum have factors other than the economy influencing their decrease in carloads. The largest increase in Bulk carloads has been in Lumber & Wood Product 31.4%, Grain 30.3%, and Metal Products 20.3%. Chemicals and Sand & Gravel have only rebounded slightly from pre-COVID levels. 

The increase in rail carloads paints a positive picture of the US economy. The rise in carloads for both Bulk and Intermodal Traffic indicate that the economy has largely recovered from the negative impact of COVID-19. 

RCC Blog: Comparison of Weekly Rail Carloads for Major Bulk Commodities

Weekly Rail Carloads comes from the Rail Rate Checker section of the Rail Cost Control program’s extensive database of rail cost, rates, volumes, and rail profit which is used by many shippers to determine reasonable rates for their movements. For more information go to RailCostControl.com. 

 

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program 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.

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Rail Cost Control Blog - Rail Rates

Rail Rates – When is Enough, Enough?

Carriers and shippers agree: railroads need to be profitable to have a healthy and vibrant railroad system. To provide the best service possible, railroads need to be able to make the capital investment needed to move traffic efficiently and that requires a good return on their investment in track, equipment, and facilities. Carriers and shippers, therefore, agree that railroads need to have a rate structure for their traffic that allows them to operate profitably and efficiently. 

The disagreement between carriers and shippers regarding soaring rates comes down to when is enough, enough? 

In other words, when are the rates and rate increases imposed on rail traffic excessive? This is an important issue as excessive rates can have many negative consequences. Excessive rail rates can be damaging to the U.S. economy, the economy of individual states as well as the financial strength of individual companies. The negative impact occurs because excessive rail rates can: 

  • Cause companies to move production off-shore; 
  • Result in an increase in imports into the U.S.; 
  • Cause bulk traffic to move from rail to already congested highways; 
  • Limit capital investment at operations subject to ever increasing high rail rates; and, 
  • Put companies at a competitive disadvantage in domestic and export markets. 

Shippers understand that rail rates which are too low can be damaging to railroads. Railroads do not, however, seem to fully recognize that excessively high rail rates are damaging to both rail shippers, AND the economy. The question that needs to be answered, is: 

What are “reasonable” rates for railroads to charge for moving their traffic? 

The level of rate increase for rail freight, compared to other benchmarks, is a good indicator of railroads concern about the impact of their rates on companies. The illustration below tracks the historical percent change in rail rates against rates for long-distance trucking and inflation. Rail rates are determined using Association of American Railroads (AAR) average revenue per car data.

Rail Rates Increased More than Inflation

The illustration shows that rail rates increased by 94.2 % over the fifteen years between 2004 and 2019 (2019 is the last year reported).

During this same time frame, Long Distance Trucking freight rates increased 31.7%. Rail rates, therefore, increased three times more than the rates for trucking which is the railroad’s primary competitor. Inflation, as measured by the CPI, increased 35.4%. Rail rates, therefore, increased 2.7 times more than overall inflation.

As a result of the change in economics between truck and rail, trucks are now competing against railroads for longer distance movements. The big increase in the cost of rail freight has made trucking less expense than rail for many movements. This has resulted in traffic being taken off rail which contributes to greater congestion on highways. The cost of moving traffic by truck no longer appears to be effective competition as railroads have increased their rates 63% more than truck rates over the last fifteen years.

The remarks in this article should be qualified by saying that we have the highest admiration for the management of railroads. They have been a huge success for their investors as shown by the increase in the value of their stock. Rail management has taken the advantages and disadvantages of the current regulatory system and used it very effectively to create value for its stockholders. That is what effective management of any company should do and the railroads have done it better than most. On the other hand, shippers are concerned that railroads have become too adept at using the existing regulatory environment to their advantage.

Shippers are concerned about the power of railroads to keep churning out rate increases even as shippers fight for survival during these troubled times.

In looking at the current railroad industry I am reminded of a negotiation I was involved in many years ago. In this negotiation I asked the question, “When is enough, enough?” The response was very honest, “It is never enough!” The troubling fact is that this appears to be the mantra when it comes to rail rates today.

 

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program 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.

 

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