Words are okay. But nothing beats an insightful image – a graph, a photo or sometimes an isolate.
I'd like to take credit, but the truth is these slices of perception about railway freight come from others.
Here are my recommendations for "keepers" from 2019. Each in a different way captures something unique about my railroading world. My role was to spot them; isolate and save them; use them to probe my own thoughts; and now share them with you.
As you eyeball these, please read the credits. Someone deserves recognition. It's not me; I am just a messenger.
There are three types of image messages. Most can be fully understood in 30 seconds or less; a few perhaps in five seconds or less. That type of graphic is rare, but very interesting. The third type is complex. It has layers of data sets. It takes time to study – often with multiple meanings.
As we begin 2020, please accept these images as my interpretation of what's happening in our rail freight sector – or, might be happening.
They are not listed in priority order. You should consider which images have the most important content. Then give us your feedback.
Railway freight car assets still move too slowly each day.
Figure 1 was delivered by Rod Case (of Oliver Wyman) at the Rail Equipment Finance 2019 meeting in La Quinta, California. It portrays in a stark manner how poor the fleet movement of more than 1.6 million freight cars is throughout the North American track network.
Nearly 60% won't move! That is a huge challenge – and at the same time a strategic opportunity.
Figure 2 offers a corollary relationship to Figure 1.
Better empty railcar utilization is the next frontier for railroad profitability managers.
Figure 2's message offered by costing experts like Dany Maron of Alta Rail Technology is simple. If railroads can next attack the loads per year that can be captured by the empty railcar fleet, they can generate both added market tonnage volume and net cash flow. They just need to have an accounting system that identifies best margin opportunities.
That mission will be complex in part because so much of the North American railcar fleet is privately owned or leased railcars. In fact, some of the shipper/receiver private fleets need to step up and more carefully control the critical performance indicators (loads per year KPIs) in order to obtain this added utilization potential.
Figure 3 identifies the challenges of making better use of the existing railcar supply by examining the question of how many railcars are in storage. What happens if pricing and service changes focused on putting these railcars to use at gaining added cash flow? Having almost a quarter of the fleet not being used is a problem waiting for a solution.
Source: Graph produced by the Susquehanna Group using AAR data
Recent divergence of the trucking and rail intermodal growth patterns
Figure 4 is a slide lifted from one of multiple American Trucking Associations (ATA) and Association of American Railroads data sources.
Note that while both rail intermodal truck-like growth and over-the-highway growth grew in parallel on a ton measured basis between around 2012 and 2015, that pattern has changed. The first loss of rail intermodal momentum occurred during 2016.
That differential growth favoring a higher trucking growth slope began in mid-year 2018 and continued into late 2019.
Something more is afoot in the competitive truck/intermodal business model than just the changes in tariff-related disruptions in 2018 often cited in the press.
Figure 4 can be used to interpret that rail management overall has partially elected to exit the market share role in favor of profit maximization. What's your interpretation?
Let's now think in strategic decade or longer timelines. As 2020 begins, towards 2030 and beyond, what is the rail freight outlook in regard to market size?
Figure 5 reflects the outlook of the "big dogs" in freight movement. For higher value per unit of weight, the general cargo movement leaders are unquestionably the trucking industry. How do they see the market ahead?
Market share growth as seen by trucking economists. As viewed by ATA (1950 towards 2015 actual tons plotted) – with outlook towards year 2027. (In billions of ton-miles)
The ATA has a long-run view that rail intermodal doesn't have the long legs to take a meaningful market share from truck drivers. Even if the rail intermodal units moved were to double its growth rate, the ATA's outlook is that rail will still be a niche role player.
Figure 6 shows some of the same slowing rail growth – as determined by proprietary models employed by Oliver Wyman.
The market outlook towards 2045 could still be dominated by trucking – rather than rail freight.
Source: REF-2019 rail equipment meeting. Contact Rod Case for additional content and interpretation.
Advances largely from better technology use and transparent transactional information could see trucking actual growth exceed that of both rail carload and rail intermodal.
By how much? It is possible that rail market share measured by ton-miles of work performed could decline by as much as half when compared to today's railway share.
Others might disagree. But no one seems to have offered a contrasting graph that disproves the ATA or the Oliver Wyman market decline assertions.
To be sure, intermodal rail isn't going away. It is not a disappearing market. But intermodal optimism by many over the past few decades should be rethought. That reappraisal needs to begin at the U.S. Department of Transportation (DOT) as its staff reviews their national strategic plan. State DOT public policy planners also need to rethink what the railroad role is going to be. Figure 7 reminds us visually of the difference between a large potential share shift and the much smaller final penetrated capture rate.
There is a big difference between the overall potential and the actual likely captured or penetrated share
Figure 8 is a financial theme reminder. How the railroads use their rich cash generation business model will signal if they are in a market role growth mode mindset or more focused on profit maximization. Dividends and stock buybacks reward current investors. All well and good. However, it also may signal that management and the Boards of Directors sense that there is no acceptable and probable return on investment from investing in new products and/or new services. We learned that in Accounting 101.
Why does capital allocation or redistribution matter? Restricting capital expenditures to long- term railroad track maintenance and replacement does not necessarily foster either new business volume of new customers. It merely preserves an existing capacity level for already engaged railcar service and in-place rail-served facilities.
Chasing trucking market share is going to take both additional train set equipment and terminal/drayage investment. Where are those forecasts?
Trucking companies are innovating with such capital-backed investments. Rail capital expenditures are mathematically shrinking and research and development in the traffic- generating side of railroading has slowed. What graphic would best signal a change in railcar tonnage movement growth?
Building more miles of new track and railroad carload yards isn't part of the North American railroad strategic plan. Not anymore. Yes, there are a few exceptions where bottlenecks like Beaumont, Texas need modernization. And there are a few lanes with extreme growth like Prince Rupert-central Canada – where track investment is required. There are also a few places like the Baltimore CSX tunnel that are traffic volume capital projects.
Strategically, the largest next opportunity may be to better use the existing railcar fleets by integrating improved GPS and railcar management functions. That integration would create far better market views that could then result in added railcar loading volume.
Image Sourced from Pixabay