A conjunction of adverse conditions has sent freight volumes plummeting. The challenge for railroads will be to remain competitive in a changing transportation landscape.
Last year in these pages, we predicted a difficult 2015 for the railroads followed by a somewhat easier 2016. While the first half of that prediction came true, we couldn't have been more wrong with regard to our expectations for 2016. Far from posting modest gains, traffic plunged during the first half of the year. Dramatic declines have occurred in the mainstay movements of coal, and crude oil shipped by rail, a previous growth superstar, has seen its luster dim under the pressure of declining oil prices and the tightening of the price differential between imported and domestic crude oil. Most other rail carload commodities have also suffered under the weight of weakness in the U.S. industrial sector, global overcapacity, and the strong dollar. Meanwhile, the railroads' competitive "ace in the hole," intermodal, has also encountered substantial headwinds thus far in 2016.
In short, the railroads are suffering from what might be considered a "perfect storm" of adverse conditions. The key question is, how much of the current difficulty is the result of transitory factors, and how much of the change is permanent? What does the future hold, and what must the industry do to meet those challenges?
Article Figures
[Figure 1] Total carload trends including intermodal platforms, 2006-2015Enlarge this image
Volumes decline across the board
Through the first half of 2016, North American rail carloads were down 11.5 percent year-on-year, a decline of over 1.1 million. Of the 20 rail carload commodity groups, eight recorded year-on-year gains, accounting for an increase of fewer than 100,000 cars. Most impressive of this group was motor vehicles and equipment, which increased 8.6 percent (39,500 carloads) over an already strong 2015 performance. Part of this increase was fueled by higher automotive sales, while a portion was due to consumer sentiment shifting toward larger sport utility vehicles (SUVs) and trucks, which must be carried in bi-level cars with two-thirds the unit capacity of the tri-level cars used for sedans and other conventional passenger vehicles.
The remaining 12 commodity categories fell short of the prior year by 1.2 million carloads. Coal accounted for over 800,000 of that shortfall (down 26.5 percent year-on-year), as low-priced natural gas aided by tightening environmental regulations continued to displace coal-fired electric power generation, and the strong U.S. dollar hindered coal exports. But volume has been improving, with the most recent four-week moving average (at the time of this writing) at 94,000 loads per week versus 68,000 at the trough.
Among other commodities that substantially contributed to the shortfall, metals, metal products, and metal ores stand out. This category saw a decline of 155,000 units as global overcapacity, particularly in China, put pressure on domestic supplies. Petroleum products, which came in 109,000 cars lower this year, reflected the headwinds from reduced crude oil production and the substitution of imported crude versus domestic by East Coast refiners.
Meanwhile, intermodal was also suffering. Through the end of the first half of 2016, intermodal containers and trailers were down 2.3 percent year-on-year. This was much better than the carload side, but since the railroads have become accustomed to a growing intermodal sector, it nevertheless was a jolt. There are multiple causes for the weakness, including the shift of import cargo from the West Coast to the less intermodal-friendly East Coast; lower, more competitive truck rates due to ample capacity; and lower fuel prices.
Fundamental changes underway
In the near term, barring an economic downturn (which could well happen given various international concerns and the turbulent domestic political situation) we do expect things to improve. That portion of the current carload shortfall that stems from cyclical economic factors, primarily weakness in the industrial sector, will eventually self-correct. Coal will stabilize, at least for the time being, although at exactly what level is hard to predict. Intermodal, after a lackluster 2016, will look better next year when truck capacity tightens due to implementation of federal requirements for electronic logging devices (ELDs) and other regulatory developments. But issues like the reduction in shipments of coal, crude oil, and fracking sand will remain. How will the shortfall be addressed?
This is not the first time the rail industry has faced such challenges. During the deregulated era, the railroads have achieved unprecedented financial success through operational excellence, cost cutting, economies of scale, being more selective in the business they handle, and raising rates faster than the rate of inflation. But, with the important exception of intermodal, they have not grown volume.
As compared to the peak carload year of 2006, the major rails originated over 3 million fewer non-intermodal carloads in 2015—and that was before this year's difficulties. (See Figure 1.) About 2 million of those missing cars were coal, but deficits can also be seen in all but four of the 20 Association of American Railroads (AAR) carload commodities, and only petroleum products (that is, crude oil by rail) has showed significant gains. (See Figure 2.) Total rail ton-miles have declined by 0.7 percent per year over the last 10 years, while truck ton-miles have grown by 0.8 percent per year. Rail carload has not been gaining share versus highway transportation; rather, it has been losing share.
The rail industry's challenges will continue as fundamental forces currently underway in the North American economy dramatically remake the freight transportation landscape. Macro forces are moving the economy in a direction where transport providers will be asked to provide more reliable, consistent, and faster service for generally smaller shipments moving shorter lengths of haul. Meanwhile, the rail industry has been moving in exactly the opposite direction, utilizing radio-controlled, distributed locomotive-power techniques to put together larger, less-frequent trains composed of larger, higher-capacity cars. The bigger trains generate more yard dwell time and greater variability in delivery because a missed connection means a longer wait for the next departure than in the past. The larger, heavier cars demand that even single-car shippers commit to multiple truckloads' worth of product moving to a single consignee. And where possible, the industry prefers that the customer tender the freight in vast unit-train quantities. Moreover, average length of haul has been increasing. In short, the rail industry is heading one way and the general economy is heading in another.
But that's only part of the picture, because the competition is not standing still. Although the trucking industry will likely go through a period of very tight capacity in the 2017-2018 time frame due to a shortage of drivers, the shortage will not persist in the long term. Giant strides are being made in autonomous trucks, and once these become commonplace (as they undoubtedly will, and sooner than one might think) trucking capacity will become relatively abundant and truck rates will decline precipitously. So the playing field is going to get much tougher for railroads as we move into the 2020s.
Consistency is everything
Where will the volume come from to replace what has recently been lost? Certainly intermodal is one place, but it can't do it alone. The industry also can't count on the creation of another unit-train market like crude-by-rail. Those things come along once in a generation. For sustainable rail volume, it all comes down to the traditional, single-car network.
The problem is that the single-car network currently delivers a transportation product that is really not truck-competitive. The core issue is lack of consistency. Shippers will accept a slow service provided it is properly priced. But what they won't accept is the tremendous variability in delivery time that is typical of today's carload network. Truck variance is measured in minutes and hours, while rail carload variance is measured in terms of days and weeks.
For shippers to convert from truck to rail, they need to have a clear commitment from the railroad on how long a shipment will take—and assurance that the commitment will be met. It's not how fast the car gets there, it's whether it gets there when it's supposed to. The railroad can't just price around the problem, because for most truckload shippers, a service in which delivery can occur any time within an extended period is unsuitable at any price. With that said, price is also an issue, as the railroads will need to convince customers that they have both a viable service model and a sustainable economic proposition.
What's needed is a "clean sheet" approach. Everything must be on the table, including technology, labor relations, operations, network design, pricing, and accounting. Today, the single-carload system delivers inconsistent service and inadequate asset turns while demanding ever-higher prices, prompting shippers with modal choices to avoid rail and leaving shippers without modal choices in a distinctly uncompetitive position. The railroads need to turn the carload system into a precision network that delivers reliable service and better utilization of expensive railcar assets.
The railroads stand at an important crossroads. Volume growth is the lifeblood of any organization. But for the railroads to grow their top line, they will need to create a single-car freight service that can truly compete with over-the-road truck.
Weather conditions in central Florida are forecasted to rapidly improve throughout the day as Hurricane Milton spins out into the Atlantic, leaving behind a trail of wind and flood damage.
Nurtured by historically hot waters in the Gulf of Mexico, the furious storm was stronger than Hurricane Katrina at peak pressure, and registered the lowest barometric pressure—and thus the most destructive storm power—in the Gulf since Hurricane Wilma in 2005, according to analysis by Everstream Analytics.
Fortunately, it weakened slightly to a Category 3 hurricane by the time it made landfall in Siesta Key, just south of Tampa Bay, at 8:30 pm on Wednesday night. However, extremely heavy rainfall totals caused major flooding in the northern portion of that region, soaking Tampa, St. Petersburg, and Clearwater. It also triggered storm surge levels of 4-9 feet, and spun off scores of tornadoes. The National Weather Service issued 126 tornado warnings in Florida on October 9 alone, which was the most in Florida history.
Supply chain impacts of that weather are occurring largely where the flooding hit, and have caused major disruptions on port operations, roads, rails, air travel, and interruptions to business operations – possibly for an extended period. The interior sections of Florida will also likely have significant impacts via overland and river/creek flooding and damaging winds (fallen trees), according to Jon Davis, chief meteorologist, Everstream Analytics.
As the weather clears, businesses in the citrus belt of central/southern Florida will also start to measure the damage. At this time of year, most of the citrus remains unharvested on the trees, so the impact on crop yields could be severe. And Davis says that tree damage is always the biggest concern since it impacts production for years.
But the group also warned that the true rebuilding process usually lags behind the initial emergency response. “During the first 48 to 72 hours after a hurricane, most of the work on the ground is focused on search and rescue efforts,” Kathy Fulton, ALAN’s Executive Director, said in a release. “Because of this, ALAN usually doesn’t receive the first substantial wave of donated logistics requests until after that, when humanitarian organizations can get in, conduct their initial assessments, and determine what’s most needed.”
“We know that can be frustrating for organizations that want to do something tangible as soon as possible. But we hope they will still be willing to provide their logistics help when the need arises, whether it’s in a few days, a few months – or even beyond that,” Fulton said. “The devastation Hurricane Milton and its many tornadoes have caused is heartbreaking. We mourn for those who have lost family members, pets and homes, and we are already working hand-in-hand with various non-profit partners to deliver help.”
Editor's note:This article was revised on October 10 to add input from ALAN.
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
The North American robotics market saw a decline in both units ordered (down 7.9% to 15,705 units) and revenue (down 6.8% to $982.83 million) during the first half of 2024 compared to the same period in 2023, as North American manufacturers faced ongoing economic headwinds, according to a report from the Association for Advancing Automation (A3).
“Rising inflation and borrowing costs have dampened spending on robotics, with many companies opting to delay major investments,” said Jeff Burnstein, president, A3. “Despite these challenges, the push for operational efficiency and workforce augmentation continues to drive demand for robotics in industries such as food and consumer goods and life sciences, among others. As companies navigate labor shortages and increased production costs, the role of automation is becoming ever more critical in maintaining global competitiveness.”
The downward trend was led by weakness in automotive manufacturing, which traditionally leads the charge in buying robots. In the first half of 2024, automotive OEMs ordered 4,159 units (up 14.4%) but generated revenue of $259.96 million (down 12.0%). The Automotive Components sector was even worse, orders 3,574 units (down 38.8%) for $191.93 million in revenue (down 27.3%). Declines also happened in the Semiconductor & Electronics/Photonics sector and the Plastics & Rubber sector.
On the positive side, Food & Consumer Goods companies ordered 1,173 units (up 85.6%) for $62.84 million in revenue (up 56.2%). This growth reflects the increasing reliance on robotics for efficiency in food processing and packaging as companies seek to address labor shortages and rising costs, A3 said. And the Life Sciences industry ordered 1,007 units (up 47.9%) for revenue of $47.29 million (up 86.7%) as it continued its reliance on robotics for efficiency and precision.
The warm waters of the Gulf of Mexico are brewing up another massive storm this week that is on track to smash into the western coast of Florida by Wednesday morning, bringing a consecutive round of storm surge and damaging winds to the storm-weary state.
Before reaching the U.S., Hurricane Milton will rake the northern coast of Mexico’s Yucatan Peninsula with dangerous weather. But hurricane watches are already in effect for parts of Florida, which could see heavy rainfall, flash and urban flooding, and moderate to major river floods, according to forecasts from the National Oceanic and Atmospheric Administration (NOAA).
As it revs its massive engines with fuel from the historically warm Gulf of Mexico, Hurricane Milton could possibly hit Tampa as a Category 5 storm, according to the FEWSION Project at Northern Arizona University, which tracks supply chains throughout the country.
With that much power, Milton could shut down the port and seriously disrupt the fuel supply into western and central Florida, which could then hinder recovery efforts. That’s because fuel supplies for much of Florida, especially central Florida, arrive from Texas and Louisiana through the Port of Tampa. That means that anyone who depends on generators or fuel for critical functions should plan for an extended period without access to fuel. And recovery crews and logisticians should consider bringing their own fuel when responding to the storm, FEWSION said.
One of those disaster recovery efforts will be led by nonprofit group the American Logistics Aid Network (ALAN), which is already mobilizing its forces for Hurricane Milton, even as it devotes other energy to the Hurricane Helene response. “In an ideal world we’d have plenty of time to focus all of our efforts on Hurricane Helene clean-up and recovery,” Kathy Fulton, ALAN’s Executive Director, said in a release. “But in the real world, major hurricanes don’t always wait for their turn. As a result, we are officially activating for Hurricane Milton.”
In the meantime, many weary residents of the region are thinking of moving to another part of the country instead of getting hit by vicious storms several times a year. Nearly one-third (32%) of U.S. residents aged 18-34 say they’re reconsidering where they want to move in the future after seeing or hearing about the damage caused by Hurricane Helene, according to a survey commissioned by real estate brokerage Redfin.
“Scores of Americans flocked to the Sun Belt during the pandemic because remote work allowed them to take advantage of the region’s relatively low cost of living. Some thought Appalachia was insulated from hurricane risk, not realizing that the area is prone to flooding and that hurricanes can sometimes cause flash flooding far away from the ocean,” Redfin Chief Economist Daryl Fairweather said in a release. “Americans are beginning to realize that nowhere is truly immune to the impacts of climate change, and we’re starting to see that impact where people want to live—even people who haven’t experienced a catastrophic weather event firsthand.”
The report is based on a commissioned survey conducted by Ipsos on Oct. 2-3, fielded to 1,005 U.S. adults. After making landfall in Florida in late September, Hurricane Helene wreaked havoc across Appalachia, becoming the deadliest storm to hit mainland America in almost two decades. In North Carolina, the death toll has surpassed 100 and the city of Asheville has been devastated.
Shippers and carriers at ports along the East and Gulf coasts today are working through a backlog of stranded containers stuck on ships at sea, now that dockworkers and port operators have agreed to a tentative deal that ends the dockworkers strike.
In the meantime, U.S. importers and exporters face a mountain of shipping boxes that are now several days behind schedule. By the latest estimate from Everstream Analytics, the number of cargo boxes on ships floating outside affected ports has slightly decreased by 20,000 twenty foot equivalent units (TEUs), dropping to 386,000 from its highpoint of 406,000 yesterday.
To chip away at the problem, some facilities like the Port of Charleston have announced extended daily gate hours to give shippers and carriers more time each day to shuffle through the backlog. And Georgia Ports Authority likewise announced plans to stay open on Saturday and Sunday, saying, “We will be offering weekend gates to help restore your supply chain fluidity.”
But they face a lot of work; the number of container ships waiting outside of U.S. Gulf and East Coast ports on Friday morning had decreased overnight to 54, down from a Thursday peak of 59. Overall, with each day of strike roughly needing about one week to clear the backlog, the 3-day all-out strike will likely take minimum three weeks to return to normal operations at U.S. ports, Everstream said.