Revitalized rail offers answers to complex logistics puzzle

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2 Revitalized rail offers answers to complex logistics puzzle Due to the driver shortage, highway congestion, lack of sufficient investment in highway infrastructure, and the current capacity crunch in trucking, savvy shippers are turning to rail with the help of their 3PL. By John S. Schulz, Contributing Editor A decade or two ago, the nation s railroads were in disarray. Railroads were abandoning track, productivity was down, derailments were occurring on nearly a daily basis, and service varied somewhere between dismal and terrible. Then, a transformation occurred. A new generation assumed leadership in the railroad industry, investors such as Warren Buffett began to infuse capital into the sector, service improvements abounded, productivity improved, and almost overnight, the railroads became very competitive with truck lines on some categories of freight. Experts say that this is not your grandfather s railroad industry any longer. If shippers haven t used rail in a while, they would be surprised, says Brooks Bentz, managing director at the consulting firm Accenture. Driver Shortages Hamper Trucking Capacity (Millions of drivers) 2.00 } Driver DEMAND Driver SUPPLY Source: American Trucking Associations 239,000 Potential shortfall There are some surprising attributes, and it s amazing the amount of infrastructure investment these guys have made in the past 10 years, most intensely in the last five. At the same time that this recapitalization of the nation s rail network is taking place, the trucking industry is struggling with cyclical changes that may be altering that mode as well. The trucking industry is suffering from a lack of qualified truck drivers. In fact, the American Trucking Associations (ATA) estimates that the U.S. is short 30,000 truck drivers today a number expected to surge to 239,000 by This surprising number is driven to several trends that are expected to continue into the next decades. The biggest issue in trucking is demographics. The average age of a truck driver is now about 56, while the industry is having a difficult time marketing itself to any new labor pools, especially younger drivers. The federal government is also cracking down on unsafe drivers. There s now mandatory, random drug and alcohol testing, which has also effectively reduced the number of eligible drivers. But perhaps the biggest deterrent of all is the fact that driving a truck is hard work with little pay. The average pay of a truck driver is about $40,000, just about what it s been for the last decade. 1

3 To make matters more difficult on driver pay, back in July 2013, new federal hours-of-service rules went into effect. The key provision was a limit to the use of a 34-hour restart. Drivers have a 70-hour-a-week cap on how much time that they can be on the road. And since drivers are paid by the mile, rather than by the hour, that reduction in miles traveled effectively has resulted in a cut in pay for drivers. Demand for Freight Transportation to Rise Sharply (Billions of tons transported in the U.S.) As a result, according to a survey from the American Transportation Research Institute, more than 80 percent of motor carriers have experienced a productivity loss, with nearly half saying that they require more drivers to haul the same amount of freight. So, while trucking s share of freight tonnage is projected to grow from 69.1 percent today to 71.4 percent in 2025, there s some question whether the industry will have sufficient capacity to handle that influx * 2030* 2040* *Projected Source: FHWA Office of Freight Management and Operations, Freight Analysis Framework version 3.5 According to the ATA, truckload volume will grow 3.5 percent a year through 2019, then 1.2 percent annually from 2020 to However, truckload carriers will make greater use of intermodal rail (the freight that moves by container or truck trailer over the rails) for intermediate- and long-distance hauls. During that same time period, rail intermodal tonnage will grow 5.5 percent annually through 2019 and 5.1 percent a year through There s recognition among railroad CEOs that this is a growing business, says Bentz. Before they were trying to economize into profitability, but now they see it as a growth business again. So, let s look into why and how the railroads are winning that new business. Railroads riding high on service The nation s largest rail shipper is actually a trucking company. UPS is estimated to spend roughly $4 billion on rail intermodal transport this year. The question for shippers should be: if rail service is good enough for UPS, why shouldn t it be good enough for me? The rail guys are shipping more than just bulk materials like coal and grain nowadays, says Bentz. They re shipping washing machines, and other appliances. If they use a high-cube rail car, they re able to fit as many as three truckloads of volume into one car. The reason for such efficiency is the inherent cost advantage that long-haul rail has over trucking. Line-haul savings on the rails can be as much as one-third the cost of over-the-road trucking. WSI, a third-party logistics (3PL) services company, is looking to help shippers become more diverse when it comes to their transportation mix. Between the truck driver shortage, highway congestion, lack of sufficient investment in highway infrastructure and the current capacity crunch in trucking, over-the-road trucking is only going to get more expensive making the rate gap between rail and truck even more pronounced. Gene Loiselle, a sales manager with WSI who worked with short-line railroads earlier in his career, says that a lot of customers are using rail today simply because they have to. Trucks have all kinds of issues, Loiselle says. The driver situation gets worse on a daily basis, there are not enough trucks to haul the product, and our infrastructure is getting worse. Rail solves those issues. In an era of increased focus on limiting carbon emissions and other pollutants, railroads move in the most environmentally friendly way and do so economically. The cost to move a ton of freight via truck is still 2

4 as much as 10 times higher than moving the same freight via rail, experts say. In recent years, the railroads have made tremendous strides in developing regularly scheduled routes so that freight can be moved with a great level of predictability. The development of inland ports by the major Class 1 railroads have also increased the efficiency of rail transportation, especially in regards to the movement of intermodal containers. If customers are moving larger items such as rolls of paper, ingots of aluminum and even canned foods, rail may very well be the most economical solution. Whether companies are moving larger items or intermodal containers, if they are tracking their carbon Area of most business Rail 0 to >750 miles Short haul 0 to <750 miles 0 miles 80% of truck 750 miles traffic is in short haul lines. Experts agree that the rails have gotten much, much better at servicing shorter lengths of haul. Source: Accenture footprint the use of rail helps to reduce their overall corporate emissions. Costs and savings Rail is best utilized when using unit trains (A unit train is 100 cars all from the same shipper with the same destination) and intermodal. Single carloads tend to be less attractive because they re more costly; however, intermodal trains are competitive to truck, particularly on certain days of the week. For instance, if you re shipping from Chicago to the Inland Empire east of Los Angeles on either a Thursday or Friday, that intermodal train will get there in time for Monday offloading onto a local delivery or drayage truck. Those intermodal trains are treated by the railroads like unit trains, says Steve Rusch, sales manager at WSI. That s still a point of focus, and that service is still good. You want to take one train from Point A to Point B. That s a 50-hour train leg with a long-haul savings over truck of at least 15 percent to 20 percent. Sometimes you have to re-engineer your scheduling process to make it happen, says Bentz. You may have to back up your schedule and deliver one day earlier. But if you can, it s worth it. That Chicago-to-Los Angeles run is roughly a 1,500-mile length of haul. However, experts say that rail is increasingly competitive on even shorter lengths of haul, from Chicago to Minneapolis, for example. CSX, for one, is leading the charge in shorthaul rail intermodal, with a hub-andspoke network in and out of Ohio. According to Bentz, that directly appeals to regional shippers who have set up their distribution systems to take advantage of quicker transit times. Zero to 750 miles length of haul is where the business is, and the railroads know that, he says. About 80 percent of truck traffic is in short haul lanes, which I define as under 750 miles. 3

5 Experts agree that the railroads have gotten much, much better at servicing shorter lengths of haul. At the same time, truckers are being more selective in the freight they take partially because the driver shortage is so acute. Freight Railroad Spending on Infrastructure and Equipment* ($ billions) $ *Capital expenses, plus maintenance expenses. Data are are for Class I railroads. Source: Associations of American Railroads Truckers are getting more selective in the freight that they want, and rates are going up, WSI s Rusch says. In short haul, I would say rail is making inroads. It used to be 500 miles was absolute minimum to consider rail, but now you can see rail becoming any option in those under-500 mile lanes. According to Forecast, a collaboration between ATA and business analyst firm IHS Global Insight, overall freight tonnage will grow 23.5 percent from 2013 to 2025 and freight revenues will surge 72 percent. Tony Hatch, the veteran rail analyst and president of ABH Consulting, says that the demand for rail is clearly there, and the secular trends oil prices, driver shortage, the state of the highway versus rail networks remain the same. However, the recent service issues at Chicago, the world s rail hub, as well as in North Dakota s shale oil feilds, have put a near-term damper on things. It s important to keep in mind that the service issues aren t permanent, says Hatch. Rather, they reflect a combination of across the board growth from coal, grain, carload, intermodal, and the new fracking business combined with a record bad winter that caused service issues in the Midwest. But these issues are temporary, adds Hatch, while the issues affecting the trucking industry are longer term and harder to solve. Putting rail to work So, how does a shipper make himself attractive to a large Class 1 railroad? Short answer: That shipper may not be able to. That s because a railroad that s already swamped with large accounts may not pay particular attention to a small-volume rail shipper. In fact, a 3PL may be the best way to introduce use of rail into a customer s transportation mix. It s getting tougher and tougher all the time, says Rusch. Most railroads don t have sales people all around the country and it becomes hard to take that first step. Even getting an initial rate quote from a railroad can be difficult. A lot of customers go through 3PLs to put those numbers together. A 3PL, such as WSI, which helps customers move between 25,000 and 30,000 carloads a year over the rail, may be a foot in the door. Rail is still a very important part of our business, Rusch says. And WSI customers know that the rate savings from rail use is becoming even more important to their business. The customer knows that there can be inconsistencies in the railroads, says Loiselle. That is not a huge concern. They are more concerned with getting the best value for their dollar. That was the appeal of the railroads for 4

6 Alan Kirkland, the shipping manager for Atlas Roofing in Allentown, Pa. He used to use truck service to move shingles from the manufacturing location in Hampton, Ga., to its warehouse operated by WSI in Allentown. Now, with the help of WSI, Kirkland directs those movements onto a Norfolk Southern unit train for the 800-mile length of haul to its Allentown warehouse. In summer, it s about four carloads a week, but that can ramp up to about double that during busier times of year. If I were to put that on a truck, my line haul costs would be double, Kirkland says. WSI runs it. They do all the unloading and loading of trucks going out of our Allentown warehouse. However, Kirkland offers one word of caution: Only thing about rail is that you can t be in a hurry. You have to make sure you plan ahead. Loiselle adds that savvy shippers understand that, and their transportation departments today are using a mix of modes and manage it accordingly with the help of a 3PL like WSI. We use our warehouse to build inventory to service their customers, that s what we do every day, says Loiselle. It doesn t matter which mode. The idea is to take advantage of lower railroad rates when you can, and build inventory at our site when transportation pricing is most favorable. So, whether it s shingles out of Florida or boxcars of paper products moving from the Midwest to the West Coast, rail can play a key role in filling shippers capacity needs. And with the situation in trucking only getting worse, that rail advantage can become a cost differentiator. There are something like 600 to 700 bridges in structural jeopardy, adds analyst Bentz. You can t fix that stuff fast enough. Look at demographics. We re going to be a nation of 420 million by 2050, and those people are going to live mostly on the coasts where all the congestion already is. You can t build highways fast enough, and you have to look at alternative modes. Shippers should be thinking of that. John S. Schulz is a Contributing Editor to Logistics Management CORPORATE OFFICE 1160 Mayflower Drive Appleton, WI General Inquiries Sales