A Wallop for Rail Transportation: Current Events that Potentially Pack a Punch.

There are several current on-going events that potentially pack a wallop for rail transportation providers. Although we won’t discuss them all, I’ve highlighted a few that we think are important for the longer term. These events include:

  • STB Review of Reciprocal Switching
  • The impact of the war between Russian and the Ukraine, and
  • The deployment and timing of the rail infrastructure monies committed to on November 15, 2021.

Reciprocal Switching

The Surface Transportation Board (STB) has had an ongoing review of reciprocal switching since filing a Notice of Proposed Rule Making (NPRM) on July 25, 2016. An except reads as follows:

Digest: 1 In this decision, the Board grants in part a petition to adopt revised reciprocal switching regulations proposed by the National Industrial Transportation League. The Board proposes regulations in Docket No. EP 711 (Sub-No. 1), which would allow a party to seek a reciprocal switching prescription that is either practicable and in the public interest or necessary to provide competitive rail service, in accordance with 49 U.S.C. § 11102(c)(1). Decided: July 25, 2016

The guiding force behind this filing is focused on shippers and receivers as represented by the National Industrial Transportation League (NITL) and others expressing their opinions in the proceedings. These proceedings support reciprocal switching and point to captive rail pricing and inconsistent rail service. Having access to two-line haul carriers generally results in better rail rates, particularly when the facility being served was previously captive to one originating rail line. In our experience, this is a true statement.  We often see rate differentials as large as 20% between captive and non-captive shippers.  This not only applies to captive origin locations but also to captive destinations.  Market power of railroads continues to grow with the continuance of several large railroad mergers over the past several years. More rail customers severed by less railroads only adds up to one thing = pricing power. Railroads arguing that operational efficiencies will be gained through said mergers is solid. It’s easier to control the operations if you have ownership of the tools, equipment and assets. The push by Wall Street to squeeze every last dime out of operations through Precision Schedule Railroading (PSR) has jeopardized customer growth in many areas. Railroads, in the opinion of several of our customers, have cut their resource pool too deeply.

One challenge for Class 1 Railroads has always been the delivery parameters for the first and last mile of business.  This has been largely addressed through creation of some 450 plus shortline railroads, contracted loading and unloading services, and reciprocal switching arrangements.

So why are the Class 1 railroads and the STB being so cautious to move forward?

In the 1930’s to the 1960’s, around twenty plus railroads went bankrupt. This was significantly increased in the 1970’s and early 1980’s with approximately 26 additional railroads. Railroads were at that time generally supported by the government at a very high cost to the people of the United States. Not until the Staggers Act was signed into law in October of 1980 did the fortune of the railroads change significantly. Simply put, the U.S. cannot afford to take on supporting such a large transportation industry. One that should be run like a business to ensure its longevity and profitability. Have an opinion? Express it at the STB EP_711_7.

Impact of Russian / Ukraine War

We’ve included an overview of the Russian invasion of the Ukraine in our April 2022 newsletter. It’s worth repeating here.

The Russian invasion of the Ukraine is all the news in todays environment.  The Ukraine area is a significant natural resource provider of coal, oil and a group of minerals. A quick look at crude oil price movement over the past few weeks is telling in just how important oil exports are to the Europeans.  While there could be true shortages of crude oil in Europe, the United States will likely feel the sting of price increases regardless of availability constraints.  Minerals such as potash and other key ingredients in the fertilizer industry are also going to have an impact on the world fertilizer supply and demand balance.

Along with the area of the Ukraine that borders Russia is the bread basket of Europe with exports of wheat being 30% of the world wheat export, corn being 17% of the world corn exports and barley being 31% of the world barley exports.  These commodities are key in feeding people, animals and providing seeds to production agriculture. The food stuffs markets go significantly beyond Europe into China and other parts of the world, causing a ripple effect throughout any importing countries, which are most all of them.

So what has all of this to do with rail transportation on the North American continent?

The US and Canadian rail networks are currently trying to deal with a huge bubble in pent up demand, which was due to the COVID-19 pandemic, and was suddenly let loose on rail, truck, barge and ocean vessel based shipments. The latest  disruption to the supply chain is the Russian invasion of the Ukraine. This invasion certainly  won’t help North America work through this bubble anytime soon. The complexity of this multi-faceted transportation network makes it even more difficult to unwind the rail piece and address service issues therein. The bubble results in handling more railcars quicker so that the commodities and products can get from the supply region to the demand location. Rail networks are challenged with providing service at a level that’s higher than has been required in quite some time to bring home the goods to the last mile distribution networks. As a shipper or receiver, the focus on service also includes you and your operations. Focus on turning rail equipment expeditiously. Private railcar lessees or owners should be one step closer to securing supply by taking out the railcar allocation part of moving commodities or finished products. A shameless plug here for getting your own railcars is in order… we can help you with that!  Prepare for the fact that freight transportation is going to get more complex regardless of the type of transportation method and don’t get complacent. Step up your planning efforts.

3. Freight Rail Infrastructure as part of Infrastructure Investment and Jobs Act (IIJA)

The IIJA recently committed large sums of money over a multiple of years to infrastructure investment.  The IIJA runs the gammet from replacing bridges, highways construction – down to the culvert level, minimizing or making grade crossings safer, highway use tax, construction of ferry boats, buy America, made in America, air quality, highway safety, public private partnerships, Amtrak and how it gets monetary allocations and expectations of what to do with them, public transit, Amtrak, electric grid infrastructure and resiliency, clean water, trial connectivity, freight rail infrastructure, closing rail crossings and much more all within its approximately 1039 pages.  This “act” is an enormous undertaking for the people and businesses of the United States.  It seems as though the underlying structure seems to be real infrastructure development which in most all cases requires movement of materials, rock, stone sand and gravel, lumber, poles, turbines, towers, coal, cement, pipe, steel, etc.  There are a few direct benefits to freight rail such as rail-highway crossing safety, some public-private partnerships and the like.  The real indirect benefit will be much more complicated and challenging.  That is the transport of all these natural materials, minerals, crops, and finished products are the real winner for rail freight. Consider that truck freight is more than challenging right now, barge freight is busy, air freight in pushing the current limits and now we have rail freight being generally the remaining provider of long haul freight. It’s feasible that all freight providers remain stretched for the next five years simply due to the government induced job creation program.  Are you ready for pressure not yet tested on Americas (rail) freight network. To read the IIJA click here.

Ever Changing

We realize that there are a myriad of challenges to the rail transportation system and they are ever changing.  Our thoughts are that on a high level the three potentially wallop packing events are important to understand (and weigh in on) for the continued health of your transportation program be it rail, truck, barge or a combination thereof.

Let’s Create Value Together.

Tealinc is a railcar lessor, railcar management and consulting firm.  Contact us for an evaluation of your rail transportation situation.  We’re always engaged and care about generating positive results be it a railcar lease, management of your rail assets or providing exemplary consulting results. We’re looking forward to creating true value with you.