Precision Scheduled Railroading’s Various Effects

The S&P 500 posted its best first half in 22 years.  US Job openings outnumber the unemployed by widest gap ever.  The U.S. economy continues to expand (2.1% in the Second Quarter).  Yet U.S. Domestic rail freight volumes are down.  Chinese challenges to the Western Global Trading System certainly are one reason.  And, as Class Ones adopt Precision Scheduled Railroading (“PSR’), they are focused on point to point carload traffic to the exclusion of merchandise traffic; running longer trains with fewer locomotives, and lower employment.  PSR is generating excess equipment.  As these changes ripple through the system, Shippers, Equipment Lessors, and Railway Labor are dealing with the unexpected.  

Shippers are concerned with first and last mile issues, a lack of short haul efficiency, and the demanding loading and unloading behaviors being enforced with rising demurrage charges, less free time, a lack of fault allocation and lack of reciprocity.  Railway Labor is clearly against PSR implementation as a recent Capitol Hill hearing ‘The State of the Rail Workforce’ demonstrated. Chairman Peter DeFazio grilled Federal Railroad Administration administrator Ron Batory about PSR; in addition to job losses, Chairman DeFazio asked about increasing train sizes saying he has received reports of 15,000 foot freight trains passing through Oregon’s Willamette Valley.   

Further effects on rail business

The impact on rail equipment values and lease rates?  Locomotives are stored and cars online are down.  The Class Ones are clearly managing for yield.  With truckload pricing falling, intermodal rail is now more expensive than trucking in some secondary markets.  Yet even in the face of flat to declining volumes and modal competition the Class Ones are reporting record operating results.  “The company is handling the same volume as last year with fewer assets, fewer crew starts and less network congestion, improving customer service, operating metrics and cost.”  Will lower rail cost lead to lower rail rates?  Shippers are saying no, “Rates are up and service is down”.  

What’s the purpose of the Rail freight business?  Shareholders would say profits. Shippers would say competitively priced and frequent service.  Labor would say jobs. Equipment investors would say positive after tax cash flow. Short term, Shippers are dealing with less flexible service caused by PSR and its changing metrics.  Origin destination pairs are being cut and Shipper supply chains are being upset by both PSR and tariff and trade disagreements.  

Railroads have a monopoly on heavy freight.  It must move, and often only by rail.    Businesses exist only because of their ability to generate positive cash flow.  But positive cash flow and profits are the result of competitively delivered services and products.  Free trade is important but not if National security is threatened.  Investment requires confidence in the future. Will the Roads manage for both yield and growth?  Regardless, future rail traffic will be constrained by capital spending, productivity, labor pricing, and our tariff and trade negotiations.  What can we expect as Shippers react to PSR?  For answers to that question call RESIDCO

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