Rail Rate Negotiations Archives

Reducing Rates on Captive Rail Movements – Part 2

September 15, 2023

Information on Your Railroad that Helps Reduce Rates on Captive Rail Moves

Most shippers agree there are certain things they must know about the railroads with which they do business. Shippers tend to agree they need to know what is happening with costs and rates at their railroads. Even if this type of information does not result in any type of benefit to their rates or services, it is simply required knowledge for a professional in rail transportation. Shippers have found the following railroad data to be very valuable in negotiations.

The Cost of Specific Movements

Shippers need to know the margin railroads make on their movements. This data can be valuable in answering the following types of questions.

How low could a rate go if a shipper had competitive alternatives?
What is the profitability of individual movements for a railroad?
How much combined profit do all of a shipper’s movements provide to individual railroads? (How important are you to a railroad?)
How much profit will a railroad lose if you take certain movements away and how much profit will it gain if you add movements?
How will the railroad’s costs change if you change the parameters of your movement?
And, frequently most important:
- What the railroads RVC’s for your major movements are in relation to benchmark RVC’s for your commodities.

How Much of a Shipper’s Commodity is Carried by a Railroad

Do you represent 80% of the shipments of a commodity on a railroad, or only 1% of all its shipments? You need to know whether you are the railroad’s only opportunity for carrying a commodity to certain markets. If that is the case, you need to partner with the railroad to penetrate certain areas and that needs to set the tone for negotiations. If a shipper is captive to a railroad but is the only opportunity for that railroad to obtain market share in a region, then it makes no sense for the railroad to give the shipper monopoly level rates. Shippers need to point these opportunities out to their railroads and demonstrate that rate increases are not beneficial to either of their volume and profit objectives.

The Political Impact You Can Have on a Railroad

One of the best and least frequently used methods of increasing negotiation leverage with railroads is political pressure. Railroads frequently interact with state and local officials in areas where shipper’s offices are located. Understanding what a railroad needs from local officials and how your company can help or hurt the railroad’s efforts is a good source of leverage, which frequently goes unused.

On the national level, involvement with congressional representatives in Washington, as well as with the STB can make a shipper much more important to a railroad. The government regulates railroads, and the greater a shipper’s input and access to politicians and regulators, the greater its potential leverage with a railroad.

Escalation Consultants has developed political leverage for many shippers and what we have found is that there is a right way and wrong way to address rail issues with politicians. In addition, all politicians are not equal in the eyes of railroads, but if you do this properly you become more important to a railroad. To give an example, after generating political pressure we had a meeting with the railroad. In the meeting our client was told that it was not the largest shipper of its commodity on the railroads system, but it was now the most important shipper of the commodity. The takeaway from this example is that if you have the ear of someone that is important to a railroad, then you become more important to that railroad.

Click here to read: Reducing Rates on Captive Rail Movements – Part 1

RCC Blog: Impact of Consolidation on Rail Freight Rates

Impact of Consolidation on Freight Rail Rates

August 4, 2021

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)

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)

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)

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)

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 Carloads Rebound from COVID-19

June 9, 2021

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.

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.

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.

Rail Rates – When is Enough, Enough?

May 25, 2021

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 railroad’s 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.

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.

RCC Webinar #2 – Using Competitor’s Rates to Reduce Your Rail Rates

May 18, 2021

What:

Creating Rail Rate Reduction Opportunities by Using Competitor’s Rates to Reduce Your Rail Rates

Where:

GoToWebinar – Click Here to Register

When:

Tuesday, May 25, 2021 @ 10:00 AM – 10:30 AM EST

How:

To register for the upcoming FREE Webinar, click here.

Why:

Railroads love to say they are pricing you into the market but how do you know what market price actually is? This 30-min FREE webinar will discuss how you can understand how your rates stack up in the marketplace and if you are being put at a competitive disadvantage to your competitors. This is integral information to be aware of but more importantly, to show your railroads that you know what market price is. Railroads thrive on a lack of rate transparency and it is up to you to provide that transparency!

There will be a Q&A session at the end of the webinar where questions you have about the data and how to use it will be answered. This is meant to be an informative webinar to help you reduce your rail expenses.

This webinar is being put on by Escalation Consultants, Inc. who has been serving railroad customers since 1979.

For the last 40 years, Escalation Consultants has assisted companies in reducing the delivered cost of their products. We are normally involved with large and small rail shippers in reducing rail expenses on more than a billion dollars in rail spend annually.

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.

Tag Archive for: Rail Rate Negotiations

Posts

Information on Your Railroad that Helps Reduce Rates on Captive Rail Moves

The Cost of Specific Movements

How Much of a Shipper’s Commodity is Carried by a Railroad

The Political Impact You Can Have on a Railroad

Click here to read: Reducing Rates on Captive Rail Movements – Part 1

(Table 1)

Revenue from rail moves with non-competitive pricing increased by an average of 230% over the last 15 years.

Moves with non-competitive pricing generated 50% of all 2019 railroad revenue (see Table 2).

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)

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!

Chemicals – 68% of all revenue

Stone & Glass Products – 64% of all revenue

Farm Products – 56% of all revenue

(Table 2)

(Table 3)

Summary

COVID-19 has had a big impact on everything including rail traffic. The good news is that:

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.

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

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.

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

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

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

What:

Creating Rail Rate Reduction Opportunities by Using Competitor’s Rates to Reduce Your Rail Rates

Where:

GoToWebinar – Click Here to Register

When:

Tuesday, May 25, 2021 @ 10:00 AM – 10:30 AM EST

How:

To register for the upcoming FREE Webinar, click here.

Why:

Escalation Consultants has been serving railroad customers since 1979.

Quick Links

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**Moves with non-competitive pricing generated 50% of all 2019 railroad revenue (see Table 2).**