The industry is being transformed by its adoption of the Precision Scheduled Railroading philosophy. Traffic is down thus far in 2019, but is a foundation being laid for growth?
For the North American freight rail system, 2019 has, thus far, been a year of mixed signals. Railroads are recording record profitability, and operating ratios (operating expenses as a percent of net revenue) were lower than ever in Q2. Yet during the second quarter, carload volume was down 1.6% year-over-year even as U.S. gross domestic product (GDP) grew by 2.1%. Why did this significant shortfall in rail carloads occur, and what does this mean for the industry's future?
One reason for the seeming discrepancy is that the industry is in the midst of change, and the effects are being felt across the system. Of the seven U.S./Canadian large Class I railroads, all but one (BNSF) have initiated or completed the transition to a new operating philosophy known as "Precision Scheduled Railroading" or PSR. What exactly is PSR? There is no precise definition, but in general PSR, as pioneered by the late Hunter Harrison, includes a streamlining of railroad operations while at the same time working to increase their consistency and reliability. These operational changes may include efforts to reduce the sorting of railcars, create longer trains, make cost and headcount reductions, and increase asset utilization.
One of the core concepts of PSR is a relentless focus on identifying those markets that play to the railroads' strengths. Freight that introduces too much complexity and requires too many "touches" on the journey from origin to destination is viewed as undesirable. As this undesirable volume is shed, the operation will become simpler, and speed and consistency theoretically will improve.
The adoption of PSR has incontrovertibly led to improved financial performance for the rail industry. But, in the near term, it has also led to lower volumes in spite of a growing economy. PSR advocates maintain that this traffic loss is a necessary prerequisite for tuning up the rail network and that the process is setting the stage for future growth as the quality of rail service improves. Detractors claim that PSR is actually just a short-term cost-cutting exercise being driven by and for the railroads' investors at the expense of long-term volume and growth. Who's right? We won't know for quite some time.
The transition to PSR has not always gone smoothly. Some railroads opted for a "big bang" approach that attempted to compress the changes into a short period of time. Service disruptions led to shipper dissatisfaction, which in turn got the attention of the U.S. Congress and the Surface Transportation Board. More recently, railroads making the transition to PSR have adopted a more measured pace which has reduced, but not eliminated, such issues. While the situation has improved somewhat this year, there is still a long way to go to fulfill the promise of "precision railroading."
But in fairness, looking only at the broad system averages for service obscures signs of real progress on the part of some PSR adopters. The system average speed for "merchandise" trains (those trains carrying general classified freight that pass through yards) stands at roughly 20.4 mph at the time of this writing (mid-year). This speed is more than 3% better than the prior year, although 3.4% lower than the average performance over the previous five years. Perhaps a better measure of progress is "yard dwell"—the average time that railcars spend in a yard waiting to be placed on the next outbound train toward their destination. In 2019, yard dwell is running about 10% below the prior year and the long-term average. This metric indicates that service has improved, as railcars are spending less time sitting in yards and more time on the move.
Larger economic issues at play
Before concluding that PSR is the leading cause of the reduction in volume, however, it is important to consider other factors that could be affecting rail volume. A good deal of railroad carload volume is made up of key commodities. Whether the volume of these commodities is rising or falling often depends on macroeconomic factors well outside the control of the railroads. To determine the true effect of PSR on rail performance, the effect of these commodities must also be taken into account.
For example, coal has continued to decline due to broad competition from natural gas and renewables, despite the Trump Administration's attempts to prop up the industry. Conversely, movements of crude oil by rail (CBR) have recently been growing strongly as world oil prices have shifted (at least for now) in favor of U.S. sources. However, despite increasing U.S. oil production, shipments of frac sand (a growth star in recent years) have recently declined, as drillers have shifted more toward the use of locally sourced, inexpensive "brown sand" versus the gold standard "white sand" that needs to be railed long distances from mines in the upper Midwest to drilling sites such as the Permian Basin of Texas. Shipments of grain are also down due to both weather and trade tensions.
Taking these volatile commodities out of the equation gives us a better idea of railroad performance in the single-car freight network that is a major focus of PSR. (See Figure 1.) Volume for the remaining commodities through the first half of 2019 was down 1.2% year-over-year. Performance in Q2 was similar but slightly weaker at -1.5% year-over-year. At the same time, Q2 GDP growth has been estimated at 2.1% according to the initial estimate. So even after eliminating the special commodities, rail carload growth continues to lag that of the economy as a whole.
But there are other items to consider as well. While GDP is growing, 70% of U.S. GDP lies in the service sector. The goods sector, which provides all the volume to the nation's freight haulers, has probably not been growing as strongly as the GDP numbers would indicate. Yet, truck volume has continued to show gains, while rail has not. There are good indications then that rail has been losing share to highway and not due to an overall economic slowdown.
Intermodal's story
Rail's primary point of competition with highway is the intermodal sector. This sector has also been the recipient of the PSR philosophy. Most railroads have simplified their intermodal networks and eliminated many city-pairs. For example, "steel-wheel" interchange services between connecting railroads have been eliminated in key junction points such as Chicago. Users have instead had to switch to what is known as "rubber-tire" interchanges, where the inbound intermodal load is grounded on one side of town and driven across the city to the connecting railroad's terminal to resume the intermodal journey. Trailer-on-flat-car (TOFC) services have also been reduced as the industry strives to standardize operations on international and domestic containers.
The intermodal business is composed of two equal-size sectors: international and domestic. The International sector involves the movement of ISO containers to and from ports. This segment has been subjected to dramatic push-pull effects as the ongoing international trade tensions and tariffs have altered the normal timing of when import freight hits our shores. While this has not yet affected overall volume, it has distorted the year-over-year comparisons and caused a great deal of congestion and added costs.
The domestic sector consists of 53-foot containers and trailers moving primarily domestic freight along with some transloaded import cargo. This sector is the cutting edge of the competition between rail and highway. Through June of 2019, year-to-date domestic intermodal volume was down a full 6.0% versus 2018. This decline is comprised of a drop of more than 10% in TOFC volume and, more importantly, an unusual 5.2% decline in domestic container activity. The decline in TOFC loads is not surprising because 2018 was an especially strong year for this segment, as the shortage of truck drivers and tight capacity pushed some shippers to shift part of their volume to rail. The TOFC segment is also a rather small piece of the intermodal pie these days. The decline in domestic containers, however, is more significant in that all indications are that truck traffic has continued to rise thus far this year. Hence domestic intermodal appears to be losing share.
At least some of the volume decline is the calculated result of railroad companies "de-marketing" services and lanes that are now regarded as too complex and high cost to achieve the desired level of profitability. Again, PSR advocates argue that shedding less desirable volume will allow the railroads to focus on improving service speed and reliability across the remaining core system. These service improvements will theoretically lead to greater market penetration in desirable freight categories that will, in time, meet or exceed the current volume lost to these actions.
A focus on profitability
Inherent in the PSR revolution is a relentless focus on the railroad operating ratio as one of the most significant measures of efficiency and profitability. The railroad operating ratio is a function of both costs and revenue. While the PSR revolution is focusing on operations and costs in the near term, another facet of current railroad financial performance is what the industry terms "focused pricing discipline." In practice this has meant that the rates that the railroads have received for their services have generally exceeded the rate of inflation in rail cost inputs. Even as economic growth slows, railroads are displaying a strong desire to maintain and even drive pricing, especially in the domestic intermodal arena.
It seems clear that the railroad industry's focus in the near term will be on profitability and not volume. History says that such swings of the pendulum are often followed by a return to more "normal" volume-driven behavior, including more pricing flexibility. Whether that will happen this time around is a question that we will be able to be answer with greater clarity in another year or two.
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.