Good news: Freight railroads are not on strike. Bad news: The service is still terrible

New York (CNN Business)The fact that there is not a freight railroad strike happening this week is a huge win for the US economy and its still struggling supply chain. But that doesn’t mean that the freight railroads are providing good service to their customers.

Many of the problems tangling up the supply chain, driving up prices and slowing the economy can be traced to the steady decline in freight rail service in recent years. Even the railroads themselves admit that the nation’s current freight service is a problem, mainly because of fewer calls to pick up or drop off freight cars, routine, prolonged delays and general unreliability that plague the industry, its critics and customers say.

“Railroads understand that service is not at the level customers expect or deserve. Aggressive measures are underway to put the right plans, people and equipment in place to improve service and reliability,” said a statement last week from Association of American Railroads, the trade group for the industry.

“Union Pacific is keenly aware of our customers’ concerns, and we have taken aggressive measures to address them,” said a statement from one of the four major railroads that collectively handle 90% of the nation’s rail freight. UP, the AAR and the other major railroads all say they are working hard to find the staff they need. And several say the statistics show improving service levels even before all the new workers are in place.

Widespread complaints

But many business groups are on record complaining about the poor service, including longer transit times and fewer trips by the railroads to pickup freight or return empty cars to the businesses the serve.

“It seems like things just keep getting worse,” said Geoff Cooper, CEO of Renewable Fuels Association. “The bottom line is — if you’re an ethanol producer, you cross your fingers and hope that everything runs smoothly because this is an industry that is truly at the mercy of the railroads.”

Last week’s labor deal, “shined a spotlight on how important the rail industry is to a lot of supply chains,” said Rob Benedict, vice president of the American Fuel & Petrochemical Manufacturers, a trade group that represents the nation’s refineries. “We’re happy they resolved this issue. But we’ve been shouting from the roof tops for the last five years how much the service has been declining.”

A recent survey that Benedict’s trade group conducted of its members found that all respondents have experienced rail shipments delayed or held up for three days or more. One member noted that at the time they completed their survey, they had more than 350 cars delayed in transit for more than 72 hours.

Many businesses that depend on rail are reluctant to speak publicly about the problems, even if they are on record voicing their concern to railroad regulators. The businesses have few alternatives than to try to keep relations with the railroads as smooth as possible. But their trade associations are less reluctant to speak publicly.

“”I’m told by a lot of our members that this has been the worst rail service year in their careers. Some spanning 30 years or so,” Max Fisher, the National Grain and Feed Association’s chief economist and treasurer, told CNN Business.

Long waits now the norm

The biggest concerns are the reduction in service calls that railroads make to pick up freight, and the time it takes to get the goods delivered. And since the rail cars themselves are mostly owned by the customers, there are growing concerns about getting those empty cars returned so they can be filled with freight once again.

The ethanol industry ships nearly 400,000 carloads a year, according to the Renewable Fuels Association. But trains carrying ethanol are sitting idle 30% more than a year ago, and 40% more then before the pandemic, Cooper said.

Rail delays are also a major part of the problem with the flow of goods through the Port of Los Angeles and the neighboring Port of Long Beach, the major entry points for shipping containers from Asia.

There were 26,376 containers sitting on the docks at the Port of Los Angeles destined for railroads as of Monday. That’s roughly three times as many as on an average day before the pandemic.

Of those, nearly two-thirds have been there for nine days or longer.

Putting profits ahead of service

The problems date back to well before the pandemic. Statistics show rail service is much worse than it was at the start of this century, and has gotten particularly bad during the last five years, according to Pete Swan, Professor of Logistics and Operations Management at Penn State.

“Railroad management has been focused on maximizing payouts to the shareholders and their return on assets, not the quality of service,” Swan said. “What’s got us into trouble now is there’s no incentive to provide good service. There’s lots of incentive to have the service suffer, and reduce the costs.”

Profits are definitely up. Union Pacific (UNP), Norfolk Southern (NSC) and Berkshire Hathaway’s (BRKA) Burlington Northern Santa Fe all reported record earnings in 2021.

For rail customers there is basically no alternative for the products they ship. Trucking has its own shortages and service issues, and can’t competitively move the volume of freight the distance it is carried by rail.

And many rail customers are what’s known in the industry as “captive shippers,” companies that are served by only one railroad and can’t negotiate for rates between different providers.

Swan said it’s unlikely any other business could stay afloat if they were providing the same poor quality of service as the railroads.

“What other business has the monopoly power that the railroads do?” he said.

Calls for regulation and penalties

That is one reason that a number of business groups are pushing for tighter regulation and penalties to be placed on the railroads that cause delays or service problems.

“We’re all for free market solutions, but this isn’t a free market,” Benedict said. “That’s why you need a government backstop.”

There have been hearings held by the Surface Transportation Board, one of the railroads’ federal regulators, to consider penalties for bad service. There is also legislation before Congress. Not surprisingly, the railroads argue this is the wrong solution.

“Today’s temporary service challenges in no way justify an about-face on the market-based principles that brought the industry back from the brink and paved the way for the safest, most efficient freight rail service in the world,” said the AAR’s statement.

The industry argues the proposals now before the STB and Congress “would have far-reaching, negative impacts on the efficiency of the freight rail network but combined they would be devastating for long-term US rail service, reliability and investment.”

But while the railroads are fighting the rules and legislation, increased regulation has widespread support across much of the rest of the business community looking for better service.

“The railroads are very adept at the Washington insider game, that’s why these conditions have lasted this long. But I think the tide has turned,” said Chris Jahn, CEO of the American Chemistry Council, the trade group that represents the US chemical industry. “The fact remains that Congress and the Surface Transportation Board have more work to do to resolve the freight rail problems that are continuing to put the brakes on the US economy and prolong the supply chain crisis.”

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