The railroads have gone through what some have called a “renaissance” over the past decade. Freight volumes are up significantly, fuel efficiency has improved by 94 percent since 1990 and profits have soared. Much has been written about developments such as the opening of Prince Rupert, the closest port to Asia that is now linked by rail to the industrial heartland of America and the introduction of several new intermodal rail corridors and services. These are highlighted as examples of how the rails are upgrading their service portfolios to meet the evolving needs of shippers.
The rail resurgence comes at a time when highway congestion and environmental concerns have become increasingly important. Railroads are an effective means of mitigating both issues, particularly for longer length of hauls (e.g. greater than 750 miles). A single freight train takes 280 trucks off the road and can move a ton of goods 457 miles on one gallon of diesel. In a recent article it was suggested that if just 10 percent of the trucks on the road were shifted to freight rail, America would save 1 billion gallons of fuel each year.
Yet given these successes and the dramatic changes that have taken place, the railroad industry has come under review by both the Canadian and American governments. Why? Lost in the propaganda, the impressive earnings reports and the positive fuel efficiency data are some key issues that need calm and deliberate debate.
The six major class 1 railways do not truly operate in a fully competitive market. There are two large rails in the eastern United States, two in the west and two in Canada. While there is a junior class 1 railway (the KCS) and a number of short line railways that service limited pieces of geography, the six major players have achieved a level of market power. The Rail Freight Review Panel in Canada came to the conclusion that this “market power . . . leads to an imbalance in the commercial relationships between the railways and other stakeholders. This, in turn, reduces the railways’ accountability for performance. As a result, railways do not always face the consequences that come from offering poor service that occur in other sectors in which competition is more prevalent.”
The concern goes well beyond service. In some markets (e.g. pulp and paper), rail service is essential to the business. Truck is not an option on some corridors. In certain geographic areas there may only be one railroad serving the area. Is it appropriate for one or two railways to have control over the very survival of a company or industry without any recourse or accountability to anyone other than the railroads’ shareholders?
The debate in Canada has been over whether to regulate the industry or create commercial solutions to address these concerns. Would regulations on service performance standards (e.g. metrics) be effective or would there be more value in creating some sort of dispute resolution mechanism? Somehow both approaches miss the mark.
Improving customer service is an issue that the railroads can and are in the process of addressing. These companies are run by clever individuals who can improve the optics of service performance. This can be done by hiring senior Marketing and Public Relations executives, commissioning market research studies to identify areas of dissatisfaction and then creating strategies to pacify and appease various consumer groups.
But these “make nice” strategies to improve service don’t address the core issue. How do you create a more competitive rail industry while allowing the rails to run their businesses and make good profits?
If you look at the big picture, all this “feel good” talk about a rail renaissance overlooks some key points. The economies of North America are in decline. The salvation of America will not come from a lower dollar that seems to drop in value on a daily basis. The U.S. government cannot step aside and wash their hands of the rail problem.
They approved the rail mergers that have allowed for the formation of the big four class 1 railroads in the United States. The rail renaissance is a direct result of the fact that on long haul traffic, the rails have a competitive cost advantage. They can charge whatever they like and still beat truck rates.
What if the rail market was more competitive? What if intermodal costs declined by 5, 10 or 15 percent (and the rails still made good profits)? What if those cost reductions were passed on to the consumer so we all paid less for our large screen televisions, clothes and refrigerators? What if lower retail prices spurred a renaissance in the economies of Canada and the United States?
How can we create more competition for rail services? Unlike a trucking company or airline, you cannot buy a few locomotives and rail cars and set up a scheduled rail service between New York City and Los Angeles. In the rail industry, owning rail assets is of no value unless you have tracks. Even with the infrastructure, you need critical mass to run a scheduled service. Running 2 trains a week with a few boxcars or intermodal containers from Toronto to Vancouver isn’t going to make anyone rich.
The argument by Rep. Bill Shuster (R-Pa.) is that re-regulation “would be a potentially catastrophic public policy that could erase 30 years of positive growth, and threaten to reduce the railroads to the ruinous decreases in services and disinvestment not seen since the 1970s. I firmly believe that if Congress re-regulates rail, it will be only a matter of time before our once self-reliant railroads are forced to rely on taxpayer dollars to invest in infrastructure and safety improvements as federal mandates mount.” He argues that it would discourage the railroads from making the capital investments needed to make their businesses viable.
So here is a thought. What if we could come up with a strategy that increased rail competition, that resulted in lower freight rates and better service, that provided the existing railroads with more revenue and allowed them to gain better utilization of their capital investments? Here is what could be done.
What if we allowed entrepreneurs to enter the business and permitted them access to the infrastructure of the big six. They would run their rail services over existing tracks and pay the big 6 a compensatory fee for this access. They would be free to compete on service and price and build their businesses. This could encourage new entrants with money, energy and fresh ideas to change the status quo, to join the cartel and turn an oligoply into a more vibrant, customer-focused competitive industry, an industry that would strike a better balance between operating ratio and customer satisfaction.
This would create a win-win. Consumers would win by having more service options and better rates. The railroads would win by earning more revenue on their invested capital. The naysayers will state that this is unacceptable since these entrepreneurs did not build their rail businesses from scratch, that this will create safety concerns or increase congestion on existing rail lines. All of these points can be addressed.
The question is do our leaders have the guts and vision to transform the existing rail industry that is inflating our costs and making North America less competitive on the world stage. The approach suggested is similar to what has been done in the telecommunications industry. It is not perfect but it could work.
The status quo is not an option. I am not sure that new regulations and mediation panels are much better. It is time to think about transforming the rail industry as a means of improving competition and revitalizing our weak economy. If you have a better idea on how to increase rail competition without re-regulating the industry, on how to provide shippers with more choices, better service and more responsive railroads while driving more revenue through their assets, drop me a line.