Many rail shippers try to reduce their rail expenses. Those with the most leverage have the most success. The leverage shippers develop with their railroads ultimately determines whose rates increase and whose rates decrease.

From a marketing perspective, leverage with railroads determines whether your company operates at a competitive advantage or disadvantage in its markets. The most important part of any rail negotiation is, therefore, the leverage a rail shipper brings to the table.

Leverage enables a rail shipper to make demands on the railroad. Without leverage, shippers’ rates will tend to increase each year. On the other hand, with leverage, a shipper has much more control over the level of the rate structure for its movements.

To those not directly involved in shipping products by rail (like many in upper management), gaining leverage with a vendor may not seem like that big of a deal. However, once it is recognized that railroads frequently have no competition at the destinations where your products are delivered, the difficulty in obtaining leverage with railroads becomes all too clear. The very nature of the railroad industry makes it more difficult for shippers to obtain negotiating leverage.

However, it needs to be understood that just because you are captive to a railroad does not mean you aren’t able to create negotiating leverage. Many shippers miss out on opportunities to increase negotiation leverage as they don’t fully explore all their opportunities for generating leverage.

To create negotiation leverage with a railroad that believes it has monopoly power over your movements, you must educate that railroad on why it is wrong. To do this a shipper must understand all of its internal options, all of its railroad’s options, and the positive and negative impacts of changes in rates.

As an example, when Escalation Consultants first starts working with a shipper to better control rail expenses the first department we want to talk to, after the transportation department, is marketing and sales. This is because they hold information that can be instrumental in increasing negotiation leverage with railroads. This includes information on:

1. Business that has been lost

2. Markets that are not economical for your company to go after

3. Alternate sourcing options

4. Your customers ability to use logistic options other than rail

5. The location of your competitors

In order for shippers to achieve success in controlling expenses on captive rail movements, they need to be creative. To do this effectively, the rail negotiating team will frequently require access to more internal and external information than is normally available in the transportation department.

The issues that work to improve negotiation leverage with railroads tend to be different for every company. However, what works best for every shipper tends to fall in the following areas:

1. Information from within your own company

2. Information on your railroads

3. Intelligence on your primary competitors

4. Information on potential alternate logistics and sourcing options

Details on each of these options for increasing negotiation leverage will be covered in future blogs. 

Click here for more information on Reducing Rail Rates on Captive Moves or to schedule a discovery call.

When looking at what a reasonable margin is for a railroad to make above its cost on captive rail movements you normally get a different answer from a shipper than from a railroad. A shipper logically wants to have a lower rate so it would want the Revenue to Variable Cost Ratio (RVC) for a move to be lower. The railroad benefits from higher rates, so it would normally want a higher RVC. It is therefore interesting to look at how a more neutral party looks at what a reasonable RVC is for captive rail movements.

The Surface Transportation Board (STB) regulates railroads, and it annually puts out two RVC values for captive movements on each Class I Railroad. These RVC values show:

• RVC>180% 
  • RVC>180% provides the average RVC value each Class 1 railroad is getting from its rates for all of its captive movement (all moves with RVCs above 180%).
• Revenue Shortfall Allocation Markup Ratio (RSAM)
  • RSAM represents the average RVC a railroad would need on all captive traffic (traffic with RVCs above 180%) to be revenue adequate.

The RVC>180% value provides the average markup above cost a railroad is obtaining on captive movements, while the RSAM value shows the average markup it needs to be revenue adequate.

It is interesting to look at these RVC values for the most current year available (currently 2021), but the historical change in these values is even more interesting.

Historical RSAM and RVC>180% Values for CSXT

The following table shows that between 2018 and 2021 CSXT’s RSAM value decreased 64.5% (243.5% – 179.0%). These yearly RSAM results are quite revealing as to the profitability of railroad movements. The RSAM values show that in order for CSXT to be revenue adequate in 2018, it needed an average RVC of 243.5% on all its captive movements (all moves with RVCs above 180%). The RSAM value decreased each year and by 2021 the average RVC CSXT needed on captive moves to be revenue adequate was only 179%. This 179% RVC RSAM value is less than the 180% Jurisdictional Threshold for captive movements.

The 179% RSAM value in 2021 is a significant indicator of the large increase in railroad profitability that has resulted from the rates and RVCs for CSXT captive movements over the 2018 to 2021 time period. In 2021, approximately 49% of CSX revenue came from movements with RVC’s above 180%.

In 2021 there is close to a 100-point difference between the average RVC CSXT is obtaining from its rates on captive movements and the RVC the STB shows that it needs on captive movements to be revenue adequate. It would likely be difficult for a shipper to negotiate rates for captive moves with RVCs below 180%. However, this type of data from a third party like the STB, impacts a shipper’s views on what is reasonable and the rates that are needed for captive movements.

This analysis is not meant to be critical of CSXT. CSXT’s values are simply being referenced for demonstration purposes. The values of other railroads are similar to those of CSXT. As an example, of the four major US railroads, only one has a 2021 RSAM value above the STB’s 180% Jurisdictional Threshold.

Click here to connect with Escalation Consultants’ for a historical summary of RSAM data for all Class I railroads.

Check the Index You Use to Escalate Multi-Year Rail Contracts

The All-Inclusive Index- Without Fuel (AII-LF) is the primary index used to escalate rail rates in contracts. However, there are two versions of this index that are used to escalate rates and during rapid inflation. One index tends to increase more than the other. The graph shows:

• Since 1Q2021 the AII-LF index Before Error Adjustment has consistently increased more than the AII-LF index After Error Adjustment.
• The cumulative difference over the last eight quarters is 2.2% (17.4%-15.2%).
• The difference over just the last quarter is 1.3% (4Q2022 to 1Q2023)
• Shippers need to verify which version of the AII-LF index is being used to increase their rates.

**This graph was generated using the Rail Cost Control program**

The Rail Negotiation Seminar is the most highly recommended program by rail shippers for rail shippers. The seminar is effective as it provides policies, strategies and negotiation practices that help reduce and better control your rail expenses. In addition, it keeps you current on changes in the marketplace that can impact your rail expenses, such as the changes referenced above in the ALL-LF indexes.

Thousands of rail shippers, from every industry that ships by rail, have attended the seminar over the years. Below are some of the observations they have made:

Click Link for more information on the Rail Negotiation Seminar. 

As of January 27, 2022, the newly released STB Annual Rail Rate Index Study (Study) summarizes trends in freight rail rates between 1985 and 2019. The Study shows that inflation-adjusted Real Rail Rates have decreased 27% over the past 34 years. Because Real rail rates are lower now than in 1985, the STB Study may be read by some to imply that current rail rates are reasonable in relation to what they have been historically. Unfortunately, this is not an accurate conclusion, because the historical trend in rates provides an incomplete picture of the change in cost of shipping freight by rail.

To read the full article, click below: