Carload fate hinges on local service
Class I railroads leave a million carloads and profitable revenue on the table
Let’s set aside the railroad industry’s current bout of temporary service problems and discuss something more important: Class I railroads’ local service, which ranges from OK to downright embarrassing. Shippers divert rail shipments to trucks when a local regularly fails to show up, doesn’t deliver the right empties, or can’t pull loads on schedule. Ultimately, frustrated shippers decide to give rail a smaller share of outbound volume. The problem is not rail, per se, but Class I local service that’s often infrequent and generally unreliable.
In a seven-day stretch spanning February and March, for example, CSX Transportation completely missed or only partially switched 1,260 customers. Shippers can complain, but the squeaky wheel doesn’t always get oil — even when a railroad is in hot water. Sanimax, a shipper in the Twin Cities, has hauled Union Pacific before federal regulators because it reduced service to three days a week from five. Yet service has only gotten worse, with Sanimax saying UP has skipped half of its scheduled switches.
Now consider this: Shortline operator Genesee & Wyoming did an analysis of companies that have facilities located on its short lines and Class I railroads. Plants located on G&W shipped 12% more volume by rail than the plants located on Class I railroads. Why the difference? Short lines earn this business by offering reliable and frequent service.
G&W’s figures suggest that the big systems are leaving a lot of potential carloads and revenue on the table. Some back-of-the-envelope math says that last year the U.S. Class I railroads would have handled a million more carloads and pocketed more than $3 billion in additional revenue simply by showing up.
Those numbers may underestimate the potential business railroads could drum up from existing customers. Two Watco shortline startups showed stellar growth by offering daily local service, up from five days per week under their previous Class I operators. Watco’s Dutchtown Southern, launched in January 2021, is pulling 47% more loads out of a Louisiana petrochemical complex, which it then hands to partner Canadian National. In the Midwest, volume on Watco’s Decatur & Eastern Illinois is up 28% since taking over for CSX in 2018.
There’s no magic in what short lines do. And Class I roads could provide better local service if they wanted to.
But the big railroads have long viewed local service as a cost to cut, rather than a place to gain traffic and revenue. Every year, headquarters orders division superintendents to boost productivity, which means tighter budgets. Once yards have been consolidated, trainmaster territories extended, and carmen positions reduced, the only thing left to cut is — you guessed it — local service.
The thinking goes like this: If a local goes out and comes back with less than 40 cars, let’s cut it to five days a week from seven. Then later from five days to three. Some shippers might see a local once a week. Now the local train is huge, but crews don’t have time to complete all of their work. Service suffers, and the combination of missed switches and infrequent service can add days or even a week to transit time. And eventually customers reduce their reliance on rail or give up entirely.
Why would railroads do this when carload business typically offers fat profit margins? The relentless quest for earnings growth has backed them into a corner. You’ve got three ways to boost earnings and satisfy investors: cut operating expenses, raise rates, and grow profitable volume. The first two are easy. Adding volume requires a commitment to service and the resources necessary to make it happen.
Granted, the Class I railroads face some obstacles that short lines do not, like having to dodge road freights in order to work a customer facility on a busy main line.
But clearly more traffic wants to move via rail and is available with little effort by Class I railroads, if only they’d take it. The obvious solution: Make local service a priority. Run more locals, increase local service frequency, and show up as promised. And if the big systems can’t do that, then they should partner with short lines who can. It would be a win for Class I railroads, short lines, and the railroad industry.