As demand returns, post-COVID transportation markets are struggling to maintain service levels. Precision Scheduled Railroading (“PSR”) with its asset and workforce reductions worked to reduce Class One operating ratios. Over the five years before the pandemic the Class Ones had already reduced headcount 33% through attrition and layoffs. During the pandemic workforce reduction continued as additional workers were put on furlough. Railcars were returned and locomotives stored. Now post-COVID, as demand returns, the lack of workforce and equipment is resulting in severe service deterioration. In a letter to the STB the American Chemistry Council reported railcars were waiting at railyards for over a week and travel times for some routes had more than doubled. Factories were running out of materials because of lack of material deliveries.
From testimony at the recent April Surface Transportation Board hearings: “Since the fourth quarter of 2021 rail service has deteriorated to such a degree that our industry is struggling…service disruptions have increased average transit times for Cargill’s private rail fleet by 15%…plants have had to slow production and temporarily shut down because there were no railcars available to deliver or ship product.”[1] PSR improved operating ratios by streamlining operations but it now appears it has resulted in the current service deterioration complained of by numerous shippers. Crew and locomotive shortages, and longer trains have worked to reduce train speed, increase asset and crew cycle times, and increase congestion. Rail shippers are faced with paying premiums to get the rail equipment needed to deliver raw material and ship product or switch to truck.
The past Memorial Day weekend demonstrated air travel is building on the resurgence that began earlier this spring. This year’s forecast marks the second highest single year increase in travelers since 2010 (2021 was the highest) bringing domestic volumes almost in line with pre-pandemic levels. Triple A expects 3 million people to travel by air, a 25% increase. Air carriers are planning for a record-breaking summer. The Chicago Department of Aviation is expecting an increase of 47.4% in travelers transiting through O’Hare compared to the same period last year. But air carriers have thousands fewer employees than in 2019. And the Federal Aviation Administration issued only 4,928 Airline Transport Pilot (“ATP”) certificates for the full calendar year 2021 (that’s less than half the number of pilots the commercial aviation industry projects it needs to hire this year). The industry’s outlook was summarized last month on a United Airlines April 21st earnings call, when CEO Scott Kirby said the airlines need to hire 13,000 pilots this year, but training produces just 5,000 to 7,000 pilots annually.
Both the airline and the rail industry cut capacity and implemented cost-cutting measures during the pandemic. Air carriers offered pilots incentives to retire early. The rails implemented PSR, reduced workforce and returned equipment. Deteriorating service levels show both have cut too deep and were unprepared to manage through a recovery. Add the challenges involved in restarting supply chains (which are still being influenced by China’s ‘Zero Covid’ lockdowns), market volatility resulting from Russia’s Ukrainian war’s impact on oil and grain and the negative impact of too much Covid stimulus and we now have U.S. oil prices hovering around $115 a barrel. As fuel demand disappeared during the pandemic, refiners around the world closed older, less profitable plants (one million barrels a day of refining capacity were closed in the U.S.). There are now fewer refineries to convert oil into fuel than before the pandemic (and there are no plans to add significant refining capacity as fuel demands grow).
Pricing pressures will continue. As the Federal Reserve raises interest rates, investment in existing aero and rail transportation will become more attractive. In a turbulent recovery there is opportunity. For results in this market, work with an experienced equipment focused specialist. Call RESIDCO.
Glenn P. Davis, 312-635-3161
[1] Cargill testimony at a recent Surface Transportation Board Hearing, April 26, 2022.
Leave a Reply
Want to join the discussion?Feel free to contribute!