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With the Covid-19 pandemic and economic downturn hitting traffic volumes, North America’s railroads are looking to the future and how to achieve profitable growth following the Precision Scheduled Railroading reforms. Dave Lustig investigates.
ok to refine their operating strategies using the principles of Precision Scheduled Railroading and deal with the ever-changing consequences of the Covid-19 pandemic. But while dealing with the day-to-day challenges, they also need to focus on business priorities for the future.
While railroads remain a major contributor to North America’s transport mix in terms of tonne-km, they have changed radically over the past half-century from being a common carrier serving all kinds of industry to focus on specific types of customers and commodities that fit into a profitable business model. Despite the adoption of PSR principles and a move towards a scheduled service concept, keeping rail competitive has been a tough challenge. Short line and regional operators have picked up some of the traffic that the Class Is seem unable or unwilling to handle, but much has been lost to road.
In recent years, most North American freight railroads have been implementing under various brand names the Precision Scheduled Railroading principles first formulated at Canadian National by former CEO E Hunter Harrison. These essentially prioritise operational efficiency in a bid to drive down costs and achieve a better return on capital.
For senior management and Wall Street analysts, PSR has been a great concept that has led to a robust operating ratio and a better profit margin. ‘We’ve got to bring North American railroading into the 21st century’, one financial advisor explained. ‘The old way of doing business is too time-consuming and labour intensive.’
However, employees on the ground remain wary of the threat to their livelihoods, as railroads have significantly reduced the ranks of operating and maintenance personnel. ‘Yes, that means fewer employees’, the analyst accepts. ‘But that has been standard practice in industry everywhere. Efficiency and modern business concepts are necessary to keep the industry alive and moving forward. Call it what you want, the PSR concept produces streamlined operations which allows railroads to become more competitive with not only other railroads but the long-haul trucking industry. Less means more.’
The core tenets of PSR are now fairly well established:
Instead of gathering loaded wagons in a yard until the volume reaches a pre-determined train size, PSR concentrates on moving vehicles, not trains. Movements are scheduled and yard time reduced. Most Class Is have reduced or removed intermediate yards, closed their hump operations, and cut the number of trains on line at any particular moment. That requires fewer locomotives as well as fewer crews.
According to a position paper published by Boston Consulting Group earlier this year, railroads that have adopted PSR principles have all reported ‘a marked improvement’ in operating ratio, ‘sometimes building upon and accelerating cost improvement that was already, if gradually, underway’. The improvement was particularly noticeable at CSX, where wagon utilisation improved by 17%, employee productivity by 8% and train speeds by 19%, with a 15% cut in average dwell time.
Photo: Dave Lustig
The BCG report confirmed that ‘shareholder returns have reliably exceeded benchmarks for the entire market as well as for other transportation and logistics companies’. However, it noted that ‘PSR’s profit improvement potential appears to have a limit, with initial gains reversing slightly and then levelling off’. No railroads had been able to sustain an operating ratio below 60%, while initial improvements in the return on investment had also rebounded. The authors presciently warned that ‘a harsher business environment threatens to make further performance improvements even more difficult to achieve’.
Railroads were facing ‘market headwinds’ arising from threats to demand, evolving customer expectations for reliability and transparency, and increased competition from the road haulage sector. Meanwhile rail revenues were threatened by declining demand in key sectors, notably coal, ‘heightened international trade tensions, and a shift from the consumption of goods to the consumption of services’.
Coronavirus strikesAdding to that harsher environment has been the Covid-19 pandemic. This has significantly impacted on the global economy, triggering a marked downturn in both domestic and international freight traffic. At the same time, railroads were faced with additional costs putting in place the practical hygiene and cleanliness regimes needed to try and limit the spread of the virus.
Since early January, railroads have been working to update and adapt their plans to contain, mitigate and respond to the coronavirus outbreak in line with the recommendations of the Centers for Disease Control.
According to the Association of American Railroads, there have been daily calls among cross-functional teams to share information and best practices aimed at keeping railroad employees and their families — as well as the wider community — safe. The railroads are also in constant communication with the federal Department of Transportation and the Department of Homeland Security, as well as state and local officials regarding public health developments and efforts to contain the spread of the virus.
Photo: Steve Glischinski
PSR principles favour moving more traffic in longer mixed trains to optimise operating costs. BNSF freight train H-NTWGAL departs from Northtown yard near Minneapolis en route to Galesburg, Illinois.
The freight railroads sought to limit possible exposure by screening their workers before each shift where feasible, directing employees to avoid contamination ‘hot spots’, enabling staff to submit reports remotely, avoiding face-to-face briefings where possible, and providing access to licensed health professionals to keep teams updated as the situation evolves.
Cleaning frequencies have been increased, with extra sanitation measures put in place, in accordance with CDC recommendations. These affect offices, maintenance facilities, railroad headquarters and operations centres, which were generally restricted to essential personnel only, as well as locomotives and other equipment, railroad-operated sleeping facilities and motor vehicles. The railroads also requested enhanced cleaning of hotels and motor vehicles used by their contractors. They broadened insurance coverage for virus testing and telemedicine, and in some cases offered staff paid leave to cover virus-related absences.
Wherever possible, company meetings and briefings are being conducted via telephone or radio, and training classes have been postponed. Additional efforts include single occupancy hotel accommodations, staggering breaks, limiting the number of crew members in each locomotive or motor vehicle and limiting communal dining.
In line with CDC guidelines, sick employees were directed to stay at home and other workers instructed to self-isolate if they had been exposed to someone who tested positive for Covid-19. Other measures included a restriction on both domestic and international air travel for employees, along with selective use of personal vehicles. Suppliers and vendors were also required to take comparable precautions.
Numbers downThe impact of coronavirus on the North American rail sector has been plain to see. According to AAR, cumulative traffic to the end of August was 11·8% down on the same period in 2019, with the 12 leading railroads reporting a total of just over 16 million carloads and intermodal units.
Carload traffic for the first eight months of 2020 was down 16%, but a rebound in intermodal business meant this sector was only down 7·7%. AAR Senior Vice President John Gray reported that for US railroads, August 2020 had been the best month in terms of intermodal loadings since October 2018 and ‘the fifth best intermodal month ever. Despite the pandemic and the associated economic dislocations, an enormous amount of freight continues to move on railroads and other transportation modes.’
The pattern is similar in neighbouring countries. For the first 35 weeks of 2020, Canadian railroads reported a cumulative rail traffic volume of 4·8 million carloads and intermodal units, a year-on-year drop of 8·6%. Mexican railroads reported a cumulative volume of 1·2 million loads for the first 35 weeks, down 10·7%.
Looking at individual sectors, AAR reported that coal traffic in August 2020 was 25·8% down on the same month in 2019, while aggregates were down 25% and oil products 14·3%. This was partially offset by a 5·6% increase in grain traffic and 5% in other farm products.
In conjunction with the earlier PSR efficiencies, the sharp downturn in traffic has resulted in a massive glut of surplus rolling stock. Recent reports suggest that across the continent upwards of 7500 main line diesel locomotives have been taken out of use, occupying more than 150 km of siding space.
Photo: Steve Glischinski
A loaded Canadian National sand train heads through Duluth on June 5. Aggregates traffic has been impacted by the economic slowdown resulting from the coronavirus pandemic.
Not surprisingly, this has had an impact on the supply sector. Motive power analysts estimate that only about 40% of the locomotives currently coming out of the principal US manufacturers are new-built; the other 60% are being rebuilt or refurbished from the ranks of stored units.
Looking beyond PSRWhile the coronavirus crisis will eventually abate, railroads are continuing to reflect on their role in the years ahead. Several commentators have already highlighted the limitations of PSR-led efficiency savings, and the need to move from cost cutting to profitable growth.
In April, consultants Sonia Bot and John Orr argued that the rail sector needed to transition to what they called PSR 2.0, embracing not just the rail operations but the entire supply chain. ‘Escalating trade disruptions, rail strikes, blockades, weather events, and the Covid-19 pandemic have highlighted the urgency to make supply chains more resilient’, they wrote in the Journal of Commerce. ‘The weaknesses in international supply chains have been exposed, and the escalating domestic transportation turmoil demonstrates the need for end-to-end approaches, standards, solutions, and greater service level accountability and safety. It is time to take a full transportation ecosystem view.’
Once again, Canadian National seems to be leading the pack. Announcing last year the appointment of a new Chief Operating Officer and promotion of its Chief Information & Technology Officer to Executive Vice-President, President & CEO JJ Ruest explained that ‘CN pioneered scheduled railroading and our vision is to be the first railroad to take it to the next level, using advanced information technology. These appointments are part of our strategy to enhance our scheduled railroading model.’
In the BCG position paper, the authors argue that ‘railway companies need to build upon their efficiency gains from PSR by adopting an expanded set of management principles’. This would allow them ‘to operate effectively and smartly, pursue new growth opportunities, and enhance increasingly important digital capabilities — all while preserving PSR’s focus on operational excellence.’
Suggesting that ‘rail transport will continue to hold competitive advantages over other transportation modes because it is less expensive and more environmentally friendly’, the authors argue that ‘greener transport may become an increasingly important selling point as more end customers and consumers make decisions on the basis of environmental concerns’.
Among the recommendations outlined in BCG’s Beyond PSR report are nine key principles that expand the basic tenets of PSR. These are aimed at improving operational effectiveness by harnessing advances in digital technology and advanced analytics.
As well as using Internet of Things applications, digitalisation will enable railroads to respond to customer demands for increased traceability of their shipments, while predictive analytics will enable traffic to be rerouted for improved speed. The authors are not alone in suggesting that the digitalisation of railroad operations can build on the communications platform provided to meet the congressionally-mandated investments for Positive Train Control, turning a safety cost into a business opportunity.
Greater use of digital systems to manage the scheduling of assets and staff, as already seen in European railways and the airline sector, offers the potential for further cost savings and improved responsiveness to market demands. There may also be scope to harness artificial intelligence and advanced analytics to minimise disruption, while a switch to predictive maintenance offers further potential savings.
In terms of the core commercial functions, the BCG report suggests that railroads should learn from other logistics players in terms of demand management and pricing, in order to attract business through improved customer service while maintaining yield. To compete more effectively against the road hauliers, they need to ‘develop commercial offers and pricing models that appeal to those companies that prioritise dependability’.
Photo: Dave Lustig
A westbound double-stack train traverses Union Pacific’s Sunset Route through San Timeteo canyon in Southern California. Intermodal traffic began to rebound in August after several years of decline.
As one example, railroads need to find a cost-effective way back into the short-haul intermodal markets that most have abandoned as a PSR-driven cost saving exercise. Changes in the international shipping sector mean that import traffic previously moving through West Coast ports is increasingly being handled at ports on the Atlantic and Gulf seaboard. That has resulted in a decline in the long transcontinental hauls from Southern California to the main eastern cities, while rail has been less competitive with road over the shorter trips from East Coast ports.
As Bot and Orr concluded, ‘we believe that waiting for the rising tide of the economy is folly as it could be a protracted wait. Supply chains themselves could shorten as North America contemplates onshoring and building national capacity in critical areas. PSR 2.0 provides a unique opportunity to transform the rail industry and the entire transportation ecosystem. It has the power to achieve sustainable operational effectiveness, organisational effectiveness, and profitable growth.’
This article first appeared on www.railwaygazette.com
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