Rail Trends Recap: Shared Strategies, Mixed Signals
From growing pains to safety to regulation, the rail industry will cross many challenges in the year ahead, and they all affect shippers. Inbound Logistics brings you aboard with Rail Trends conference coverage.
The 2013 Rail Trends conference, sponsored by Progressive Railroading and hosted by Tony Hatch, principal at ABH Consulting, came off without a hitch. That was a relief after Hurricane Sandy delayed the 2012 conference by one month.
This year's conference centered on a tempest of a different sort—a July 2013 train derailment in Lac-Mégantic, Quebec, in which an engineer left a train hauling crude oil parked, running, and unattended on the tracks. The train rolled through the mountainous area, careened off the tracks, and exploded. The regulatory clouds have been gathering ever since.
While the circumstances surrounding Lac-Mégantic were unique, the incident coalesced a number of trends that have been swirling for some time: the Keystone XL pipeline impasse and movements of crude oil by rail; railroad safety; equipment standards; the viability of short line and regional operators; infrastructure concerns; and the constant chafing between public and private sectors.
Lac-Mégantic provided an unfortunate backdrop to many of these discussions. The regulatory rush to judgment that often follows misfortune is forcing the industry to yank the brakes—at a time when railroads are opening the throttle to keep pace with new growth opportunities.
Intermodal traffic hit record numbers in 2013. Investment in hinterland infrastructure, hastened by the shale oil and natural gas boom, is off the charts. As U.S. energy independence nears and manufacturing returns, the railroads are in a prime position to capture market share.
The juxtaposition between regulatory constraints and free-market growth framed the 2013 Rail Trends program.
Defending Safety Records
The 2012 conference's defiance over the recurring threat of re-regulation was notably muted in 2013. Instead, railroad executives were forced to defend the industry's safety record while addressing questions about regulatory change in the aftermath of the Quebec derailment.
"Any time something like Lac-Mégantic happens, it's devastating," shared Hunter Harrison, president of Canadian Pacific Railway. "I laid awake at night, thinking about what should have been done, what should have happened, and if we have done everything we can do."
Acknowledging the failure that occurred, and the need for industry to learn from the experience, Harrison cautioned against rash reactions. He believes railroads need to focus on helping to change human behavior—grow the culture and pride of railroading—to ensure compliance with existing rules.
"If an engineer doesn't set the brakes, regulations are not going to help," he said.
Regulatory pushback, however, is already in full force. Michael Bourque, president of the Railway Association of Canada (RAC), wouldn't comment on specific details of the incident because the investigation is ongoing. But he did talk about its inevitable repercussions.
"There's sensitivity around what happened," he noted. "Public pressure to increase regulation is a natural reaction."
Following Lac-Mégantic, authorities directed an emergency order that addressed locomotive securement. Two-person crews are now mandated when operating locomotives transporting dangerous goods; trains can't be left unattended; doors have to be locked and reversers removed; and railroads have been instructed to reassess braking procedures.
Bourque and the RAC are in the process of working with Transport Canada to identify how these directives might be shaped into permanent rules. He expects some significant changes coming down the legislative pipeline.
One change is Canada's push to adopt the U.S. Positive Train Control (PTC) mandate. Currently, a bigger issue is new grade-crossing regulations—a concern that directly pits public and private sector interests against one another.
"It will cost a significant amount of money," Bourque said. "The most nefarious part of the regulation limits a train from occupying a crossing for more than 10 minutes. We run longer units, and 10 minutes would force even some 6,000-foot trains to be out of compliance. We are pushing back on that issue."
"Part of the problem in the rail industry is too many committees, and too many regulatory agencies," said Harrison. "We're so stuck in the mud we can't get anything done."
Harrison was specifically referencing the spring 2013 flooding in Alberta—which at one point wiped out four of Canadian Pacific's main routes—and the regulatory disorder that followed as the railroad tried to get back online.
Lac-Mégantic similarly triggered action on a number of different fronts. The U.S. railroad industry's response has largely shadowed Transport Canada's emergency directive.
Investing in Rail Safety
As rail spending on infrastructure and maintenance rises, accidents are on the decline.
*Capital spending and maintenance expenses—depreciation
**Accidents per million train-miles | Source: AAR, FRA
"One tweak the United States added is that a train crew must call the dispatch office and report where a train is parked, how many cars are tied down, the slope of the track, and the weight of the train, among other things," explained Ed Hamberger, president and CEO of the Association of American Railroads (AAR).
The AAR is also tweaking OT-55, a long-standing voluntary safety protocol that railroads have adopted for hazmat trains. Following Quebec, the AAR added unit trains—more than 20 cars of flammable liquids—to the definition of "key train", and made hazmat specifications more inclusive. For example, a 50-mph speed limit is in effect for all key trains carrying crude and ethanol.
The issue of safety is paramount among railroads. But the industry has a decent track record. Rail is 10 times safer than truck, according to Joe Szabo, head of the Federal Rail Administration (FRA). And accidents and injuries have been reduced by 43 percent over the past decade.
"2012 was the safest year ever, but that's last year's news," Szabo said. "What are we going to do tomorrow, and every day thereafter?"
If Congress, the Department of Transportation, and its many arms—including the FRA—have any say, more legislation and regulation is likely. The threat of further restrictions is a serious concern for railroads.
Regulations are an enormous headache, said General Richard F. Timmons, president of the American Short Line and Regional Railroad Association. By his count, there have been 608 new rules or amendments since 2008—and it's a continuing trend. This oversight puts a considerable burden on his constituents.
"These unfunded mandates for small railroads offer few safety and productivity returns," he said. "Given the profile of small railroads—their size, speed, the time of day they operate, a lack of crude for the most part—many of these mandates are also very costly."
Lac-Mégantic also generated much discussion about hazmat securement and two-man crews. While two-man crews are standard operating procedure for Class I railroads, short lines have long relied on single-person crews for economic reasons.
The 500-mile Indiana Rail Road Company is a good example. It was the first railroad to make extensive use of remote control technology. Today, Indiana Rail Road uses more one-person crews over the road—about one-third of all its crew starts—than any other railroad.
"In 20 years, not one accident occurred that could have been prevented if we had two or 15 people on board," noted Tom Hoback, president and CEO of the Indianapolis-based operator.
Still, two-person crews will likely become a divisive issue between regulators and railroads.
"We're having a necessary, but spirited, debate," Szabo said. "The FRA believes that for most railroad operations, the use of a multiple-person crew enhances safety. We're not looking to force a one-size-fits-all approach. We clearly understand there are nuances in railroading."
The AAR has also been heavily engaged with the FRA on the issue, contending that lack of crew wasn't a contributing factor to Lac-Mégantic.
"Two-man crew proponents argue that you need redundancy. Safety is about human error; and human error is a major cause of accidents," said Hamberger. "We're spending $8 billion to install positive train control (PTC) systems, which are necessary to override human error."
Two outstanding concerns surround PTC systems—an issue Hamberger calls a "veritable favorite" at Rail Trends conferences over the years. The AAR is still awaiting confirmation from Congress regarding a five-year extension for full roll-out. Hamberger expects it will have some PTC installed by the year-end 2015 deadline.
As far as installing infrastructure, AAR has run into issues with the Federal Communications Commission (FCC) and Indian nations regarding land rights and usage. Consequently, it hasn't installed one PTC antenna since April 2013.
"The FCC told us we're not living up to National Historical Preservation Act requirements in terms of where we site our antennas," explained Hamberger. "It wants us to assess each antenna installment.
"These are not big, 300-foot radio towers. They are monopoles, 50 feet high, 95 percent of which are installed on railroad right of ways, not sovereign tribal land," he added.
The AAR, the FCC, and Indian nations are now in discussions to resolve the problem. The FRA, which does not have purview over PTC, is playing regulatory peacemaker, to a degree.
"We are making sure the FCC understands the sense of urgency and importance in seeing this necessary safety technology implemented quickly," Szabo says.
The biggest news on the legislative front involves proposed new flammable tank car standards. AAR proactively petitioned for this policy change in 2011, and met with the Department of Transportation and Pipeline and Hazardous Materials Safety Administration (PHMSA) to start the process. It fell through. Following Lac-Mégantic, regulators picked it up again.
The proposal would require all tank cars used in transporting flammable liquids—notably crude oil and ethanol—to be retrofitted or phased out, and new cars built to more stringent standards. AAR recommends new tank cars include steel jackets and high-flow capacity pressure relief valves, among other features.
Given Lac-Mégantic, and North America's energy boom, the timing is notable.
"The day we submitted our comments to PHMSA, a Washington Post headline noted that for the first time in 20 years, the United States produced more crude oil than it imported," Hamberger said. "We don't want to stand in the way of that development. We don't want to impede America's progress toward energy independence. We need to make sure we have the right balance of safety and capacity so we can continue to haul what America needs for fuel."
Re-regulation, the bane of the railroad industry, has abated for the time being. Talk of re-regulation was notably understated among this year's Rail Trends presenters. Some even speculate that Senator John "Jay" D. Rockefeller's (D-WV) impending retirement could cast a different light on the debate as new leadership assumes control of the Senate Committee on Commerce, Science, and Transportation.
"Re-regulation was not as much of a crisis in 2013 as it had been in previous Congresses," noted Chuck Baker, partner at law firm Chambers, Conlon, and Hartwell, and president of the National Railroad Construction and Maintenance Association. "But we also get paid to be paranoid, so we still spend a lot of time worrying about it."
Bruce Carlton, president and CEO of the National Industrial Transportation League (NITL), rail shipper advocate, and annual AAR foil, was absent from the 2013 Rail Trends proceedings. That eliminated any spirited debate over the mandatory reciprocal switching proposal, which would require a Class I railroad to enter into a competitive switching arrangement whenever a shipper or group of shippers demonstrate that certain "objective operating conditions" exist, thereby providing more efficient, reliable, and cost-effective rail transportation.
A hearing was slated to convene in October 2013, but was postponed following the government shutdown. Any continuation will likely happen in early 2014. The AAR remains resolute in its opposition to the proposal.
Hamberger noted he was proud of the AAR's submission to the Surface Transportation Board regarding the NITL proposal on two grounds: it recognizes the economic cost to the industry; and it opens a second line of discussion that details the impact of an additional 7.5 million annual carload switches on the network's velocity and efficiency.
"Every carload switch is a lost day, more time in the yard, more yard crews needed—and it's the yards that slow down the network," Hamberger said.
Elsewhere on the legislative docket, the truck size and weight discussion is expected to pick up steam again in 2014 with re-authorization of President Obama's Moving Ahead for Progress in the 21st Century Act (MAP-21).
Some shipping industry advocates have lobbied for a legislative provision that would increase allowable truck weights on a single-trailer truck to 97,000 pounds. Additional proposals address increased trailer lengths.
The railroad industry opposes these changes—especially among short line and regional operators, where such policy would have the greatest impact.
The Rising of the Railroad
Safety and security have always been top-of-mind concerns for railroads. Those concerns are magnified even more because of the industry's growing profile. The U.S. industrial base is brimming with potential—thanks, in large part, to an emerging energy renaissance. The railroads are a major lever in this transformation.
Recently, North Dakota's Bakken oil field and the Eagle Ford reserves in South Texas together have accounted for two-thirds of U.S. shale production. Then there's the West Texas Permian shale oil yield, and Appalachia's natural gas stash in the Marcellus Basin. The Athabasca oil sands in Alberta are the largest reserves outside of Kazakhstan and Russia. And Mexico remains untapped. North American fuel independence is looking more plausible than ever.
Energy-intensive industries are already staking their claims. Chemical shippers, long dependent on rail transport—and with whom carriers have a contentious relationship, especially over regulations—are expected to be big players.
"Shipper capital expenditure in the chemical industry, as a result of natural gas, is expected to be $116 billion in the Texas and Louisiana Gulf alone," said ABH Consulting's Hatch. "We'll be a chemical exporting nation again."
Elsewhere, 2013 proved to be a transition year as other commodity groups saw an end to "the slide." Coal had been dropping at a 15-percent yearly clip, while drought-ravaged grain crops also saw double-digit losses—all of which had marked impacts on rail movements.
Hatch expects agriculture will rebound due to America's infrastructure advantage. As one example, he cited the fact that 80 percent of Brazil's soybean harvest moves by truck, while in the United States 80 percent moves by rail.
The future for coal, however, remains bleak.
"We never voted on it, and it wasn't a big part of the last election, but green is here to stay," said Hatch. "Clearly we have codified a set of regulations, and to a lesser degree legislation, that affects the way coal will be moving in this country."
Consequently, railroads are challenged with finding new business to fill that huge void. That's why the Keystone XL Pipeline impasse has been a reprieve. Increasing crude and frac sand movements—a growing commodity for the mining industry—have been a boon.
Hatch believes that even as rail serves as a placeholder for new pipelines, it will eventually retain as much as 40 percent of the business coming out of Bakken when capacity eventually comes online. Pipelines are slow and inflexible. If railroads can prove they are safe and efficient, they'll benefit from long-term growth potential.
New energy commands the headlines, but intermodal is the real growth driver in the railroad industry.
"We all get excited about shale oil, but the real story is domestic intermodal," explained Hatch. "Energy's net-net gain is a negative thus far, because the drop in coal is significantly larger than the increase in oil, frac sand, and pipeline together."
To point, U.S. rail traffic saw record intermodal growth in 2013, with 12.8 million container and trailer moves. This figure trumps the previous record high in 2006, according to AAR.
The trials and tribulations of the trucking industry only give railroads greater leverage to attract more long-haul business. Even though trucking conditions leading into 2014 are favorable, and spot market capacity and rates are holding surprisingly steady—and rising—the horizon is hazy.
Trucking costs are increasing in every category except fuel, according to Larry Gross, senior consultant at FTR Associates. Some estimates suggest the Hours-of-Service amended rules will result in a three-percent hit on productivity. With driver retention and recruiting problems now entrenched, truckers have less incentive to invest in new capacity. Instead, the industry experienced a great deal of consolidation in 2013—a trend that is likely to continue.
Some of these pressures could be allayed if Congress were to pass new truck weight and size legislation, Gross acknowledged.
Shippers ultimately pay the price—literally—so intermodal will become a viable option. Opportunities exist for trucking companies to steer growth, too.
"In the move from a long-haul driver environment to short-haul drayage pickup and delivery, intermodal allows carriers to access different driver pools," explained Brian Bowers, senior vice president of intermodal and automotive at Kansas City Southern. "Driver retention rates drop from 100 percent for truckload drivers to as low as 20 percent for drayage drivers."
Capturing Truckload Share
With long-haul truckload prospects dimming, railroads see a huge opportunity to capture market share at their expense. There are some nuances, however. Canadian Pacific's Harrison draws a distinction between international and domestic intermodal growth, especially as it relates to scheduled railroading efficiency.
"International doesn't work well for us," he noted. "Some shipping lines are cutting down speeds on the high seas to save fuel. They're running to the ports, where boxes sit for six days, then are dispatched by train to the interior, where they sit for another three or four days.
"That process doesn't fit well with our model, but domestic does," Harrison said. "We are making headway with shippers that previously did not consider rail as a transport alternative."
The biggest growth area, according to Bowers, is cross-border Mexico trade. He called it the last intermodal frontier, adding, "I've never seen a growth opportunity with such scale and scope."
Cross-border trucking is "as dysfunctional as you can find," said Bowers. "U.S. and Mexican trucks routinely terminate at the border, and transfer to one another to manage delivery on the other end. Converting to intermodal actually gives U.S. carriers a bigger piece of the pie, where they can control 100 percent of the revenue."
Beyond that, the distances between emerging Mexican manufacturing locations—Toluca, San Luis Potosi, and Monterrey—and Houston are all well within the intermodal sweet spot of 500 to 1,000 miles. That's a major incentive to shift more freight from truck to rail.
Short Lines & Re-industrialization
Rail transport, especially with all the possibilities that intermodal presents, is becoming a bigger part of supply chain conversations. The Rail Trends conference agenda skews more toward issues of pragmatism than strategy. But as more non-traditional rail users embrace intermodal, that is bound to change.
In 2012, Jim Hertwig, president and CEO of Florida East Coast Railway, impressed Rail Trends attendees with anecdotal evidence that short-haul intermodal works, and that supply chain futurists the likes of Walmart and UPS are using rail to help circumvent the unique inbound/outbound volume imbalance that exists in the Florida market. From an industry marketing perspective, examples such as this are worth their weight in crude.
Amid all the regulatory wrangling and talk about new growth areas, short line and regional railroads have the greatest stake. Heavy-handed government oversight adds costs. Commodity shifts are feast or famine, depending on geography. Consider the reversals of fortune for Dakota boomtowns and West Virginia coal country. As a consequence, smaller railroads need to be innovative and adaptive.
New Ideas, New Energy
At the 2013 Rail Trends conference, another Class II operator stole the show. Indiana Rail Road is a perfect example of the new energy that is bubbling beneath the tracks.
"We conducted a study three years ago that indicated 120,000 to 140,000 containers move from Asia into Central Indiana every year," Hoback explained. "These containers are all going through Chicago. The problems are long transit times getting into Los Angeles-Long Beach from China, congestion in and around Chicago, and a lot of dwell time. As a result, containers often sit on the docks in southern California and Chicago.
"We talked with Canadian National (CN) about capturing this market by creating an all-rail service from Asia into Central Indiana," he added. "CN thought it was a great idea."
Partnering with CN, Indiana Rail Road is bringing containers from British Columbia's Port of Prince Rupert into Central Indiana in as few as 20 days—compared to four weeks going from Los Angeles to Chicago, and drayage inland from there. Shippers can cut one week out of their supply chain.
As an added bonus, Indiana Rail Road is able to load most of the empty containers going back to the West Coast and Asia with agriculture product.
As rumors of U.S. re-industrialization amplify, short line railroads will play an important role as both the first- and final-mile legs to trunk lines.
"Increasingly, companies involved in site selection are looking for not only rail access, but access on regional or short lines because of the flexibility they provide," said Hoback. "The fact that we can give these shippers access to more markets is an advantage."