Thursday, August 18, 2016

Déjà vu once again for intermodal

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Déjà vu once again for intermodal
Watching Washington, August 2016 Railway Age: Between the euphoria of achievement and the agony of despair resides intermodal—the rail carriage of trailers and containers that have prior and/or subsequent transport by other modes. It’s no new kid on the block.

Produce-laden wagons riding Long Island Rail Road flat cars headed to New York City made a brief appearance during the mid-1800s, delivering a glance at the future.

A second act opened during World War I, as railroads hauled demountable motor-truck bodies—loaded and locked by shippers and trucked to a railyard for lifting by crane atop 50-foot flatcars. With the freight untouched until reaching the consignee, The New York Times termed the steel boxes “individual traveling safe-deposit vaults.”

The birth of modern trailer-on-flat car (TOFC) occurred during the 1920s—the riding by rail of rubber-wheeled highway semi-trailers.

Regulators couldn’t resist crashing the party—“smothering TOFC in the cradle,” wrote historian Albro Martin. Frowning that not all shippers could partake, and that lower rail rates flowing from reduced freight handling and fewer loss and damage claims threatened the growth of infant long-haul trucking, the Interstate Commerce Commission (ICC) ordered TOFC rates increased.

The 1950s saw intermodal’s third attempt to blossom. Pullman-Standard pioneered uniform intermodal flatcars. Beginning with the Pennsylvania Railroad’s TrucTrain service, railroads formed Trailer Train Co. (now TTX) in 1955 to acquire, pool, control and manage a free-running intermodal flatcar fleet. Introduced were demountable (from their rubber-wheeled highway chassis) cargo containers, ushering in container-on-flat-car (COFC)—a superior strategy of stackable containers and low-profile railcars for a lighter-weight, fuel-saving train.

Again, regulators meddled, ordering TOFC/COFC rates increased as an umbrella to protect barge, truck and coastal water carriers’ market share.

Intermodal’s triumph followed the 1980 Staggers Act that partially deregulated railroads and was administered by more free-market oriented regulators who ceased pricing oversight of highly competitive TOFC/COFC. The resulting innovative pricing and service enhancements encouraged doublestack container trains that, with two-person crews, move as much freight as 200 separate trucks and drivers.

Where 168,000 trailers moved by rail in 1955, 13 million trailers and containers now move by train annually, representing half of all rail traffic and 23% of rail revenue. Financial analysts say intermodal is “the key” to keeping rail earnings buoyant in the face of reduced demand for coal and crude oil.

Yet déjà vu again threatens intermodal—but this time regulatory interference could be harshly more damaging as intermodal has a decidedly greater rank in the rail traffic mix and its capital investment needs are substantial.

Today’s threat is from regulators lowering rate ceilings on so-called captive traffic—chemicals, coal and grain—highly dependent on reliable rail transport owing to fewer transportation alternatives.

Shippers most in need of rail service pay a greater share of fixed costs—the portion of a rate exceeding direct costs. Market forces conversely dictate that shippers able to substitute all-truck for rail intermodal bear a lower share of fixed costs, or they shift from rail. Lower intermodal rates still benefit captive shippers, as, absent that traffic, captives would bear an even greater share of fixed costs.

If railroads are to grow intermodal, they must expand capacity, boost train speeds and improve service reliability. To afford that—and railroad investment requirements exceed those of most industries—railroads must earn their cost of capital.

Intermodal rates cannot be increased to yield a greater contribution to fixed costs. That traffic and its contribution to fixed costs would be lost, as truckers, suffering in a lackluster economy, are slashing their own rates.

Regulatory tamp-downs of captive traffic rates would similarly threaten rail revenue adequacy. In fact, few, if any, captive shippers pay more than the replacement cost of rail infrastructure they require.

As railroads struggle to adapt to a changing global economy, they are more solvent than in past turmoils. This doesn’t rationalize another déjà vu moment, with regulators imitating Lucy Van Pelt and pulling that football away before Charlie Brown can kick it. We all know what happens to hapless Charlie—he falls flat on his back.Should revenue adequacy be dashed, most adversely affected would be captive shippers, whose requirement for reliable rail service is greatest.

Frank N. Wilner, Contributing Editor

Frank N. Wilner is author of six books, including, Amtrak: Past, Present, Future; Understanding the Railway Labor Act; and, Railroad Mergers: History, Analysis, Insight. He earned undergraduate and graduate degrees in economics and labor relations from Virginia Tech. He has been assistant vice president, policy, for the Association of American Railroads; a White House appointed chief of staff at the Surface Transportation Board; and director of public relations for the United Transportation Union. He is a past president of the Association of Transportation Law Professionals. Wilner drafted the railroad section of the Heritage Foundation’s Mandate for Change (Volumes I and II), which were policy blueprints for the two Reagan Administrations; and was a guest columnist for the Cato Institute’s Regulation magazine.

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