The North American freight rail industry is at a critical juncture, facing service issues, erosion of customer relationships, and a loss of market share to an innovating trucking industry. The insights below from RailTrends 2022 highlight the obstacles and opportunities for railroads in meeting today’s challenges and returning to a focus on customers, service reliability, and market growth.
The path to growth
Leaders present at RailTrends 2022 were more focused on growth than ever before. Rail traffic continues to decline as the industry loses market share to trucking. Surface Transportation Board Chairman Martin J. Oberman pointed out that rail volume is below 2006 levels (even excluding coal).
A restrictive focus on financial returns has led to a loss of efficiency and erratic, unreliable rail service. Only by providing a level and quality of service that is competitive with trucks can railroads hope to earn back customer volumes. This will require a reversion to simple and efficient operations with a focus on service outcomes.
Chairman Oberman encouraged the industry to see growth as the ultimate measure of success and customer satisfaction. Fundamentally, with inflation at an all-time high and trucking being more expensive than rail, there should be a significant opportunity to expand rail’s role in the economy.
Increasing rail market share will require railroads to transform overall operations and achieve greater reliability. To do so, railroads must be customer focused, talent driven, and tech enabled. It will take visionary leadership to drive what will be multi-year transformation efforts. The softening market provides a real opportunity to begin. With the right leadership and focus, noticeable strides could be made relatively quickly toward more service-focused operations.
Another operational issue raised at RailTrends was that shippers want to know where their cargo is and when it will arrive at its destination (as do interchange railroads, short lines, and terminal operators). Better visibility for all stakeholders continues to be a challenge but the technology exists to make it happen. So why is the rail industry so slow to progress?
A Focus on customer-centricity
All eyes are on leading railroads to see if they can refocus on customer-centric service that delivers market share growth. Railroads are being encouraged to prioritize customer-centric service metrics and track what customers care about most, such as dock-to-dock (carload) or cut-off to availability (intermodal) service performance.
Stakeholders (railroads and shippers) have ideal numbers in mind; now the industry needs to set the precedent of committing to specific service metrics and being transparent on how they are delivering against these commitments.
Improving labor relations
With labor shortages affecting all industries, railroads have a critical need to re-engage and retain their workforce. While we have no doubt that the industry will get through near-term labor issues, management must address fractured relationships with labor and find a new way of working together.
Canadian National CEO Tracy Robinson mentioned that railroads historically have had a “command and control” culture, one where employees follow orders and are not encouraged to be creative. But with a new generation of employees coming on board, coupled with communication and technology innovations, this culture is no longer tenable.
Another insight that stood out was the importance of new employees mixing with experienced railroaders. New employees bring different perspectives and help drive change, while experienced railroaders have learned what works and what does not: a blend of both can drive innovation that is practical and realistic.
Capitalizing on technology
The rail industry needs better technology for its customers and itself, which will require leveraging “outsiders” and diverse industry expertise. As an example, presenter Rahul Jalali was hired as Union Pacific’s new CIO after a long tenure at Walmart. He brought the lens of the customer and a bias toward action to UP’s initiative to reinvent the digital customer experience, as well as developing better technology to support operations and modernizing the entire technology platform.
RailPulse, a collaborative joint venture involving two Class I railroads, several short line groups, car builders and lessors, and shippers, presented their efforts to create a digital platform. Their solution is designed to provide real-time car locations and status information not currently available for the industry.
Not many RailTrends participants discussed the threat of cyber or the new TSA rail directive on cyber. A cyber-attack on the rail networks could be extremely disruptive if someone achieved a material breach and was able to shut down operations. While service and labor were top of mind at the conference, this topic is a major challenge that must be addressed by the industry in the future.
Railroads touted their environmental advantages over trucks and investments in cleaner energy at the conference. Canadian Pacific CEO Keith Creel talked about the hydrogen locomotive that CP has tested in actual service. Michael Miller, president of Genesee & Wyoming’s North American operations, discussed a “steam” approach, where distilled water is injected into the engine to save 20% on diesel fuel and nearly eliminate NOx. There is concern over a California emissions regulation that could force investments in cleaner diesel locomotives, potentially diverting investment away from the development of hydrogen and other clean energy sources.
While railroads have long touted their environmental advantages compared to trucking, the trucking industry is innovating rapidly – through increased fuel efficiency and the development of advanced concepts such as electric trucks. Rail eventually will be pushed to innovate in turn, both to keep its advantage and to meet what are likely to be more stringent sustainability requirements in the future, whether due to regulation or customers developing enhance requirements for their supply chains.
STB Chairman Oberman highlighted how railroad embargoes (not moving traffic due to congestion or other issues) used to be the exception but now seem to be part of rail operating strategy. He mentioned the Foster Farms ruling, where an emergency response was issued by the STB to force the movement of millions of chickens, which would have been euthanized if they had not been transported. Chairman Oberman said the STB needed to explore what to do about the railroads’ common carrier obligation. The topic of crew size also was mentioned several times, including a campaign promise by President Biden to require two-person crews.
While there appears to be a significant amount of lobbying and industrywide communication on the environmental and societal benefits of rail, a number of issues continue to dominate regulators’ focus, particularly whether regulation is needed to guide or direct the railroads in ensuring customer-centric service.
My question to all of you is this: what will you do differently tomorrow to support this industry in transformation?Adriene Bailey, Partner and Rail Practice Lead