The absence of a freight train strike this week is a huge win for the US economy and its still struggling supply chain. But that does not mean that the freight railways serve their customers well.
Many of the problems that are confusing the supply chain, driving up prices and slowing the economy can be traced back to the steady decline of rail freight in recent years. Even the railroads themselves admit that the nation’s current freight service is a problem, largely because of fewer calls to pick up or drop freight cars, routine, lengthy delays and general unreliability plaguing the industry, critics and customers say.
“Railways understand that service is not at the level that 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 the Association of American Railroads, the industry trade group.
“Union Pacific is well aware of our customers’ concerns and we have taken aggressive steps to address them,” said a statement from one of the four major railroads that together handle 90% of the country’s rail freight. UP, the AAR and the other major railroads all say they are working hard to find the staff they need. And some say the statistics show that the service level is improving even before all the new hires are in place.
But many business groups complain about poor service, which includes longer transit times and fewer railroad trips to pick up freight or return empty cars to the companies they serve.
“It seems like things are only going to get worse,” said Geoff Cooper, CEO of Renewable Fuels Association. “The bottom line is that if you’re an ethanol producer, you cross your fingers and hope everything goes smoothly because this is an industry that’s really at the mercy of the railroads.”
Last week’s employment agreement “shone the spotlight on how important the railroad industry is to many supply chains,” said Rob Benedict, vice president of American Fuel & Petrochemical Manufacturers, a trade group representing the country’s refineries. “We are pleased that they have resolved this issue. But we have been shouting from the rooftops for five years how much the service has deteriorated.”
A recent survey conducted among its members by Benedict’s trade group found that all respondents experienced train shipments that were delayed or delayed for three days or more. One member noted that at the time of taking their survey, they had more than 350 cars delayed in transit for more than 72 hours.
Many rail-dependent companies are reluctant to speak about the issues publicly, even though they have officially expressed their concerns to rail regulators. The companies have little choice but to try to keep relations with the railways as smooth as possible. But their industry associations are less reluctant to speak in public.
“Many of our members have told me that this has been the worst year of train service in their careers. Some span 30 years or so,” Max Fisher, chief economist and treasurer of the National Grain and Feed Association, told CNN Business.
The biggest concerns are the reduction in the number of service calls railways make to pick up freight, and the time it takes to deliver the goods. And since the rail cars themselves are largely owned by the customers, there are growing concerns about getting those empty cars back so they can be filled with freight again.
According to the Renewable Fuels Association, the ethanol industry transports nearly 400,000 car loads per year. But trains of ethanol are standing still 30% more than they were a year ago, and 40% more than before the pandemic, Cooper said.
Rail delays are also a big part of the problem with the flow of goods through the Port of Los Angeles and the neighboring Port of Long Beach, the main entry points for shipping containers from Asia.
On Monday, there were 26,376 containers destined for railroads on the docks in the Port of Los Angeles. That’s about three times what it was on an average day before the pandemic.
Nearly two-thirds of that is nine days or longer.
The problems date back to well before the pandemic. Statistics show that rail service is much worse than it was at the turn of the century, and has gotten particularly bad in the past five years, according to Pete Swan, a professor of logistics and operations management at Penn State.
“Railway management was focused on maximizing shareholder payouts and returns on assets, not quality of service,” Swan said. “What got us into trouble now is that there is no incentive to provide good service. There are many incentives to make the service suffer and reduce costs.”
Profits have definitely increased. Union Pacific (UNP), Norfolk Southern (NSC) and Berkshire Hathaway’s (BRKA) Burlington Northern Santa Fe all reported record profits in 2021.
In principle, there is no alternative for rail customers for the products they ship. Freight transport has its own shortages and service problems and cannot competitively move the freight volume over the distance it carries by rail.
And many train customers are what are known in the industry as “captive shippers,” companies that are served by only one railroad and cannot negotiate fares between different providers.
Swan said it is unlikely that any other company could survive if they offered the same poor quality of service as the railways.
“What other company has the monopoly power that the railroads have?” he said.
That’s one of the reasons a number of business groups are pushing for stricter regulations and sanctions on railways that cause delays or service problems.
“We are all for free market solutions, but this is not a free market,” Benedict said. “That’s why you need a government backstop.”
Hearings have been held by the Surface Transportation Board, one of the federal railroad’s regulators, to consider penalties for poor service. There is also legislation before Congress. Not surprisingly, the railroads argue that this is the wrong solution.
“The current challenges in temporary services in no way justify a reversal of the market-based principles that have lifted the industry off the brink and paved the way for the safest, most efficient freight rail service in the world,” the statement said. the AAR.
The industry argues that the proposals now before STB and Congress “would have far-reaching negative impacts on the efficiency of the freight rail network, but combined they would be devastating to the long-term U.S. rail services, reliability and investment.”
But while the railways struggle against the rules and legislation, the increased regulation has gained widespread support in much of the rest of the business community looking for better services.
“The railroads are very adept at Washington’s insider game, which is why these conditions have lasted so 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 solve the freight rail problems that continue to slow the U.S. economy and prolong the supply chain crisis.”