All of the Class I railroad CEOs say that providing more reliable and consistent service is the key to volume growth. So did they applaud when federal regulators proposed minimum service standards that railroads would have to meet in order to avoid potential reciprocal switching orders? Not exactly.
In a nutshell, the Association of American Railroads says there are so many factors outside of railroads’ control that it is simply impossible to prevent service problems. And the AAR adds that measuring on-time performance, variations in transit times, and local service quality are poor ways to judge the level of service railroads are providing to their customers.
As they say in passenger stations, mind the gap.
Railroads can’t have it both ways. They can’t make reliable, consistent service the cornerstone of the volume growth plans they’re selling to shippers and investors while at the same time telling regulators that being an outdoor factory and part of an interdependent network means that service will always be highly variable.
At issue: The Surface Transportation Board in September proposed a rule that would allow shippers located in terminal areas to seek access to a second railroad via reciprocal switch if the serving carrier failed to meet any one of three performance standards over a 12-week period. Railroads risk a reciprocal switch case if:
- They don’t deliver at least 60% of cars within 24 hours of the original estimate
- Average transit time increases by 20% to 25% compared to the prior year
- Their success rate for spotting and pulling cars within a given service window falls below 80%
The standards set a pretty low bar, particularly when trucks provide 95% on-time performance. Plus, the proposed rule includes an important loophole for service failures that are beyond a railroad’s control, such as harsh weather or the actions of third parties.
Earlier this month the AAR and each Class I railroad weighed in on the proposal. The AAR says that railroads have every incentive to provide excellent service. And AAR agrees that shippers should be able to access a second railroad if the serving carrier can’t fix an ongoing service problem; the reciprocal switch is safe, workable, and would improve service; and the shipper has a compelling reason for receiving alternative service.
But the AAR argues that the performance standards should not apply to traffic that moves under contract or to commodities that are exempt from STB regulation. This would make the service standards apply to only about 5% of rail traffic. What this tells you is that railroads don’t want to be held accountable for the service they provide.
Among AAR’s more absurd arguments against service standards:
“One point of particular concern is that an observed decline may be the product of comparing a prior year’s new or exceptional service produced through enhanced investment, to a current year’s solid (but less stellar) performance when the carrier’s resources were spread to other shipments. Ordering a switch in this circumstance could disincentivize the carrier from making future investments in service improvements.”
“Despite the Board’s assurances that it does not wish to discourage increased local service levels that set a higher baseline against which a future reduction in service levels might be measured, adoption of this metric would understandably make railroads more cautious to experiment with increased local service levels.”
In other words, setting minimum service standards will actually hinder service improvements that could lead to the growth that will produce higher revenue and profits. Uh-huh.
The most disappointing response to the service standards proposal came from CSX. Among its points:
“The rail network is never static, and any metric will fluctuate regularly, particularly on a lane-by-lane basis. Given this dynamic, the [proposed rule’s] mechanical approach is ill-suited to identify service problems that could be remedied by a forced switching arrangement.”
“A single measure cannot determine whether a customer is receiving good service.”
“The … proposal that a single metric trigger would be conclusive evidence of service inadequacy creates incentives against maintenance or capacity expansion projects designed to improve service over the long run (because those same projects could produce short-term metric dips).”
“A rigid focus on a single metric could also disincentivize changes to operating plans that decrease transit times or increase days of service, because the railroad would just be setting a higher performance bar for the future.”
“While CSXT supports the Board’s efforts to refine service metrics, there is no perfect quantitative way to reliably divide service successes from service failures.”
“The network is simply too complex, and the needs — and reciprocal responsibilities — of rail customers are too diverse for the Board to predetermine either a particular percentage threshold that would mark the divide between good and bad service.”
This is ironic. CSX CEO Joe Hinrichs this month delivered an eloquent, refreshing, and spot-on speech arguing that railroads need to up their game. In order to grow, railroads must raise their expectations, work more closely together, and make customers want to do business with them, Hinrichs told the RailTrends conference just 10 days after the railroad submitted its response to the STB reciprocal switching proposal.
Hinrichs isn’t satisfied with the railroad’s 88% trip plan compliance figure for the year to date, which sits well above the STB’s service standards proposal. “That’s not great. It’s good for an industry like ours. It’s not great. It’s better but it’s not great,” he says. “We have to set ourselves to higher standards. If we don’t do it, the only one left to do it is the regulators.”
He adds: “We have to challenge ourselves not to just be OK. That’s not motivating. I don’t want to come home to my Mom and say, ‘Man I got a 70 on my test. It’s great!’ That’s not great,” he says.
“Every single CEO that was here last year talked about growth. How’s that working? We’re a year later, how’s it working? I can tell you one railroad that’s grown merchandise volume this year, the only one. Three letters, starts with a C,” Hinrichs says. “Why is that? Because we delivered better service. We won business because of better service. I didn’t say great. I said better. Words matter.”
Hinrichs, a former Ford Motor Co. executive who was once a rail customer, is right. And give some credit to BNSF Railway, too. Despite arguing that the metrics shouldn’t apply to contract shipments or exempt commodities, BNSF otherwise generally supported the STB proposal.
While railroads quibble over how low the service bar should be set, shippers have been judging rail service all along — and they don’t like what they see. They’ve been voting with their feet by shifting their business to trucks.