On August 24, 2020, the U.S. Surface Transportation Board (STB) and the Federal Railroad Administration (FRA) sent a joint letter to the Class I railroads regarding “service issues, including missed industrial switches and excessively late or annulled trains due to crew availability issues.”
This was unusual for a joint letter to be sent regarding service. Usually, any letters about rail service problems only come from the STB. However, because of the unpredictable demand patterns for freight rail service and the recent downsizing by the rail industry, these rail regulatory bodies had serious concerns about a possible spike in the rail business and the railroads’ inability to handle such an increase.
All the railroads replied to this letter, pointing out their attempts to right-size their railroads and their improved service metrics from last year. However, they do note that a significant number of employees remain furloughed and locomotives are parked although in smaller numbers than in May. The railroads claim that they are ready for the upcoming large harvest and are in constant communication with their shippers.
Past Rail Service Crises Should Warn Railroads to Be Better Prepared
While the discussion between the railroads and their regulators does not appear to be overly concerning on its face at this time, rail shippers should carefully monitor their railroads’ performance in the upcoming months due to the unpredictable impact of COVID-19 on our economy and its corresponding freight traffic.
In the past, huge service crises have erupted when railroads downsized following a slowdown in business only to be surprised by, and unprepared for, a quick, unforeseen uptick in business. This is exactly what happened in 2013-2014 when crude by rail suddenly became a huge new rail business in North Dakota. At the same time, there was a large harvest in the area on top of a bad winter. Before the railroads knew what hit them, the U.S. rail network was incredibly congested, especially in Chicago, and service across the country was in disarray.
At that time, the STB held hearings and issued orders in an attempt to improve service, but the damage took months to resolve. Once the service collapsed, the rail system needed time to clear itself of all these congestion issues and right-size itself to handle the increased traffic. Rightsizing does not happen overnight. In the meantime, many shippers were worried that they would have to shut or slow down their plants and grain cars were not available to keep up with the harvest.
Precision Scheduled Railroading Appears to Make Railroads Vulnerable to Service Issues
With the advent of Precision Scheduled Railroading (PSR), many railroads could soon find themselves in this same service predicament as they cut their workforces razor-thin to just meet the demands of the railroad without truly being ready if business spikes. You do not have to look too far to see how this dynamic can disrupt rail service when the slashing of jobs, locomotives, and infrastructure happens quickly.
When CSX implemented PSR in 2017, it did so quickly. The enormous cuts to the workforce combined with network-wide changes to the system resulted in service issues as bad or worse than in 2013-2014.
In fact, Union Pacific just announced that it would lay off an unspecified number of employees despite the STB/FRA service letter. This announcement is worrisome because UP had 44,531 employees in September 2018 when it announced it would roll out PSR. In July of this year, before this announcement, it had only 32,820 employees. Moreover, Norfolk Southern cut its workforce from 24,594 in July 2019 to 19,677 in July 2020. CSX had 17,052 employees in July 2020 and 22,313 in July 2017.
Therefore, with the volatility of the present economy and the severe cuts to the workforces due to PSR, shippers are understandably nervous about a possible rail service crisis if business begins to boom.
Rail Volumes Have Shown Some Signs of Improving Recently
Based on the Association of American Railroads data, U.S. railroads originated 898,227 carloads in August 2020, which is down 14.9 percent, or 156,797 carloads, from August 2019. U.S. railroads also originated 1,122,954 containers and trailers in August 2020, which is up 3 percent, or 33,115 units, from August of last year. Combined U.S. carload and intermodal originations in August 2020 were 2,021,181, which is down 5.8 percent, or 123,682 carloads and intermodal units from August 2019. Total U.S. carload traffic for the first eight months of 2020 was 7,448,257 carloads, which is down 16 percent, or 1,423,522 carloads, from the same period last year; and 8,610,477 intermodal units, which is down 7.7 percent, or 717,985 containers and trailers, from last year. Total combined U.S. traffic for the first 35 weeks of 2020 was 16,058,734 carloads and intermodal units, which is a decrease of 11.8 percent compared to last year.
However, for the week ending September 5, 2020, total U.S. weekly rail traffic was 509,637 carloads and intermodal units, which is up 8.6 percent compared with the same week last year. Total carloads for the week ending September 5 were 222,298 carloads, which is down 6.9 percent compared with the same week in 2019, while U.S. weekly intermodal volume was 287,339 containers and trailers, which is up 24.8 percent compared to 2019.
Therefore, while the August numbers were fairly bleak in comparison to 2019, the first week in September showed marked improvement, especially the large surge in intermodal traffic.
Job Cuts and Significant Upturn in Intermodal Volumes Create Concern in the Shipping Community
On September 10, the Wall Street Journal published an article regarding rail troubles at the West Coast ports stating: “In a sharp turnaround from the spring, freight railroads and trucking companies are scrambling to get workers and equipment in place to handle a surge in cargo. A crush of goods coming into West Coast seaports is straining capacity at the gateways and on key inland distribution lanes, raising shipping prices for retailers and complicating efforts to replenish inventories following the supply chain upheaval from the coronavirus pandemic.”
This article and the joint letter from the STB and FRA demonstrate that there could be more issues to come if the railroads do not right-size themselves in time for the rebound of the economy. PSR only seems to make this dynamic worse as railroads look to make further cuts to their workforces to lower their operating ratios. As a result, rail shippers should be on the watch and make sure their transportation options are protected during this time.