Industry Insights - Freight
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August 6, 2020
What is Precision Scheduled Railroading?
As the demand to transport goods faster and more efficiently grows, all transportation sectors are looking for ways to optimize their operations. Rail transport is no exception, and Class I railroads across the U.S. and Canada are implementing strategies to meet this demand.
Precision Scheduled Railroading (PSR) is one such strategy. Created by the late Hunter Harrison, the goal of PSR is to transport the same, or an incremental amount of freight, with fewer rail cars and locomotives using a more simplified, direct line of transport across their network.
What is Precision Scheduled Railroading (PSR)?
Precision scheduled railroading (PSR) is a railroad strategy that uses departure schedules and point-to-point delivery methods to achieve low operating ratios and consolidate railroad networks.
PSR has grown in popularity, already being implemented at most Class I railroads across North America including Canadian National Railway (CN), Canadian Pacific Railway Limited (CP), CSX Corporation, Norfolk Southern Corporation (NS), Union Pacific Corporation (UP), and Kansas City Southern (KCS). The only major Class I rail line that hasn’t completely adopted this strategy is BNSF Railway, but the company has stated they are willing to implement certain aspects of a PSR strategy if it benefits the company and its customers.
The common goals first introduced by Hunter Harrison that later transformed the operational targets of many railways are as follows:
Consolidate rail networks
Implement a point-to-point delivery method
Increase asset velocity
Achieve better fuel efficiency
Optimize the dispersion of capacity
Rightsizing the fleet and employee payrolls
Through both the benefits and challenges that accommodate this methodology, the ultimate goal is to achieve a lower operating ratio (OR) – the industry’s most widely used measure of operational efficiency.
Importance of Lowering Operating Ratio
At the end of the day, consolidating networks, eliminating less efficient lanes, increasing speeds and sizes of trains, and reducing payrolls are all in the name of decreasing ORs. The OR is the most common metric used to measure the success rate by a railway’s investors. The operating ratio represents how much a company needs to spend to make a dollar.
In other words, if a railway’s operating ratio is 60—the common level most railways implementing PSR aim to achieve—the company would make 40 cents for every 60 cents spent. A variety of strategies can decrease OR like decreasing the workforce costs, removing older trains or railcars from the fleet, and implementing newer more efficient equipment and technology, as mentioned above. PSR is the most popular and lucrative means of decreasing OR.
However, this focus on OR may have certain drawbacks because the priority is placed on short term gains. As a result, these railroads tend to focus on traffic that fits this model and do not seek shippers who are not a good fit.
Consolidating Rail Networks
Because of PSR, most railroads ultimately eliminate shorter, less efficient lanes in favor of high-volume—and highly lucrative—lanes. This strategy to focus on service and profitable lanes to satisfies the investors of a railway, but it has also received the most contention from customers, shippers, and intermodal marketing companies (IMCs). Regardless of the railroad’s benefit, this consolidation can come as a temporary detriment to rail users due to changing run schedules and poor service in the interim as changes continually take shape.
Operating Ratios at CSX
CSX is continuously experiencing service issues after eliminating nearly 40 percent of their lanes at the end of 2018. This elimination had major effects on its operating ratio and service network, but when looking at the impact it has on individual shippers, the impact is more muted.
Despite many lane closures, the lanes identified were relatively low volume. The elimination only effected 5 to 7 percent of overall Breakthrough shippers’ intermodal volume. Ideally eliminating less-viable lanes will result in better efficiency in the long-term, though the short-term effects may disrupt daily operations for shippers.
NS & UP Lane Closures
Both NS and UP took an approach like CSX. The two companies closed a total of 425 low-volume, low-efficiency lanes combined. The closures either eliminated the lanes entirely or provided an alternate route that requires shippers and intermodal carriers to dray crosstown to an alternative rail hub. Additionally, the railways have discontinued all NS to UP interchange points through St. Louis, Missouri.
This poses another challenge for shippers and carriers, with specific implications for service and capacity. While this seems like a significant amount of closures, the move only affects approximately 1 percent of overall Breakthrough Fuel Recovery intermodal volume that utilizes the two railways.
UP has also aggressively been reducing its operating ratio to compete, reaching a company record of 59.5 percent. The company has also appointed a new Chief Financial Officer (CFO) who plans to achieve additional efficiencies – setting a more insistent goal of 55 percent operating ratio. Similarly, NS just hired a new Chief Operating Officer with experience in PSR at CSX and UP.
What is the Point-to-Point Delivery Method?
Prior to the widespread adoption of PSR, most railways used a “hub-and-spoke system.” Hub-and-spoke systems typically occur in a “hump yard” and allow many rail cars to enter a hub or terminal to be reshuffled to different trains, often requiring numerous redirects before finding ultimate destinations.
The point-to-point method hauls freight directly from its origin to its destination—no redirecting or reshuffling involved. This allows products to move to market faster, eliminating the time-consuming nature of switching rail cars in hump yards. The general focus is on as few car touches as possible from origin to destination. The point-to-point method enables longer trains, faster speeds, and less time in terminals.
As shown in the charts above, most rail lines, specifically CSX and NS, have successfully increased their train speeds. Both companies, along with UP, have reduced time trains are sitting in terminals. The decreasing dwell times are a result of the companies consolidating their network and implementing strict departure schedules.
Departure schedules require trains to leave on time, whether the customer’s freight is present on the train or not. In concert with the direct nature of point-to-point, railways can maximize the time their trains are spent hauling freight to achieve the lowest operating ratio possible.
PSR’s Impact on the Rail Industry
Increasing Railcars and Reducing Payrolls
Through the consolidation of rail networks, the number of locomotives online tends to be lower. This equates to longer trains, which increases capacity. Whether rail cars online are dedicated to various commodities or leveraged for intermodal movements, the total number of cars online has largely risen compared to prior years. This is especially true for intermodal cars in recent quarters as PSR implementation accelerates across the industry.
From an administrative perspective, salary and wage expenses have also been targeted as an effective way to optimize operating expenses. Based on STB data in May of this year, Class I railroads employed 118,880 employees, which is a decrease of 4.46 percent from April and 16.84 percent from this month in 2019.
Achieving Greater Rail Fuel Efficiencies
Another method for railways to lower expenses is by investing in new equipment that, in turn, improves fuel economy. The charts below show a ten-year history of each Class I railroad’s estimated fuel efficiency based on figures in each company’s annual reports. In general, fuel efficiency has drastically improved with the rollout of more efficient locomotives, especially in recent years as PSR has emerged as an industry common practice.
The network-wide fuel efficiencies for UP and BNSF have slightly diverted from the industry trend yet remain above the common MPG parameter instituted in Breakthrough client programs. BNSF and UP achieved fuel efficiencies of 17.4 and 15.6 MPG, respectively, in 2018. Both railways have experienced efficiency degradation compared to ten years prior, though UP’s PSR implementation will look to improve this metric in 2019 and beyond.
Breakthrough’s benchmark rail fuel efficiency is also present, revealing that all Class I operators are now achieving a better MPG than what is considered in most Breakthrough client programs.
History of Precision Scheduled Railroading
Hunter Harrison successfully implemented the first PSR strategy at Illinois Central, a small railway connecting Chicago, IL to New Orleans, LA and Mobile, AL. He decreased their OR from 98 percent to 60 percent. When Illinois Central was later acquired by Canadian National Railway (CN), Harrison had the opportunity to incorporate PSR on a larger scale, growing the scope of his PSR strategy’s impact. At the end of his tenure, CN’s OR dropped by 11 percentage points.
Harrison continued his success when he joined Canadian Pacific Railway (CP) and he took OR from over 80 percent in 2012 down to 58.6 percent in 2017, and then went on to do the same at CSX. Although Harrison’s tenure at CSX was short, he successfully lowered OR and the company has seen lower OR as the company continued to implement Harrison’s PSR strategy. At all four railways, Harrison faced scrutiny and push-back from clients due to service issues and schedule changes.
When implementing PSR at CSX, Harrison brought heavy scrutiny from the rail industry’s economic regulator, the Surface Transportation Board (STB). In October 2017, the STB held a public hearing because of the massive service issues that were occurring across the CSX network at that time. The STB continues to closely monitor the use of PSR by Class I railroads across the US.
Harrison paved the way for other railways to implement PSR in their own networks. CSX continued what Harrison started and kept its operating ratio below the company’s 60 percent target and achieved an operating ratio as low as 56.8 percent – the lowest ever operating ratio for a Class I railroad.
Harrison’s history of success has bled into other areas of the industry. The impact of his innovative approach is transforming the bottom lines of railroad companies. His ideas have, however, come with a myriad of new challenges to surmount on the shipper and carrier side.
Railroads claim that PSR makes their networks more efficient and service more predictable, thereby making them more attractive to intermodal customers. However, this focus by the Class Is on cutting costs through the removal of capacity, locomotives, and employees raise serious concerns about PSR’s long-term effects on the rail network and customer service. It also calls into question whether these railroads are truly focusing on attracting new business with less capability to do so due to these extensive cuts.
Railroads have lost substantial revenues over the last few years with the extreme downturn in coal use in the US. PSR’s severe cuts on infrastructure, employees, and power should make attracting new traffic more difficult. At some point, this cost-cutting focus will come full circle and require railroads to increase revenues to grow and properly maintain their systems. In the meantime, rail shippers should carefully monitor these impacts that PSR will have on their service until the railroads decide to follow this path.
Breakthrough’s team is committed to keeping up with the latest news and research on these ever-evolving strategies so that our clients fully understand how these technologies will affect their holistic transportation network.
For further insights on the impact of PSR on transportation supply chains and any other transportation trends, contact us.
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