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Tuesday, March 07, 2017

Rod Case at REF 2017: "Try to do more than just run good trains"

Written by 
Rod Case, Partner, Oliver Wyman Rod Case, Partner, Oliver Wyman

Oliver Wyman Partner Rodney Case delivered a thought-provoking address March 6 at Rail Equipment Finance 2017 on the future of North America’s rail industry.

Case said that the railroads must try to turn cars faster. Improving cycle times is critical. Railroads need to try to execute their service plans on time, all the time, do more than just run good trains—as Ford tries to do more than just build good cars. They must try to take advantage of deteriorating highway physical conditions in many lanes. At the same time, they need to run the carload business better than they used to in order to gain traffic from shippers—and not just more intermodal traffic. Perhaps most important, the railroads must react to the new outside-money blitz that’s chasing to control shipper decision.

What is this new money doing in logistics that railroads might try to emulate? It’s big money. A Class I railroad spends maybe $20 million on a rail logistics tool, while new high-tech people—new innovators—invest maybe a billion, getting between the railroads and their customers, Case noted. They’re taking control of the railroads’ sales channel as well as the truckers’ sales channel. It becomes a lot harder to make a play for growth when some smart IT group is between you and your customer.

There are huge accident-cost savings, not labor-cost savings, driving innovations and spurring funding for autonomous trucks. Is there a message for railroads there?

Case said that 10% or more of trucking costs could be eliminated just because of safety-related savings. This is a huge gain for truckers struggling with small margins. An autonomous highway lane for trucks could increase capacity per lane by an order of two to three times current lane capacity rates. Who cares besides the truckers? This has the attention of quite a few state highway planners and administrators. And they, the lead supporting few states, and the big trucking companies, are moving with this technology much faster than the railroads are with government-mandated PTC. The railroads never figured out how to make PTC more than its minimal regulatory program—a lost opportunity after spending a reported $10 billion.

The North American freight railroads are not adapting to technology at anywhere near the rate of change of the truckers, Case said. The smoking gun might be that the privatization of roads is advancing. France, Spain and Australia have advanced private toll interstate systems. The rest of the world is more adhoc  but still advancing. The trend toward that was spotted by some as the emerging U.S. tollway thinking back around 1992. Several U.S. states are now more seriously starting to move toward privatizing their major roads.

One-thousand mixed vehicles per lane hour can with autonomous vehicles turn into two to three times that volume. On private toll roads, there could be a faster adoption pace than on so-called “freeway” Interstate sections. How do railroads replicate this business model, in part, to compete?

Railroads need to reduce their labor costs per train and run faster turns on their operating assets, Case said. They need to reduce their locomotive and railcar breakdown rates. They need to use better, modular, technology-driven maintenance on things like signals and PTC. They Need to get their technology “mojo” back—smarter freight cars, equipment that signals maintenance failures, so that repairs are made before over-the-road failures.

Case also talked about the European freight rail system. In Europe, freight carriers (small companies operating on an open-access network) get more hauls, and more daily miles and turnaround on their rail freight schedules than U.S. railroads. In Germany, rail freight operates in a distance window of typically less than 400 miles—a distance the U.S. Class I’s shrink from, at least for intermodal. A Swedish railroad, as one example, runs a carload/vehicle transport service on a reservation system. Its equipment turns are about two to maybe three times or so what we see here in the U.S. Also, car dwell in a shipper’s hands is restricted to less than eight hours. The per-diem revenue opportunity equivalent could be about $400 a day. No shipper wants to pay that kind of penalty per diem.

Why aren’t the U.S. railroads trying this with stored locomotives and cars? What do they have to lose by experimenting while traffic is down and they have network velocity back up?

Look a little deeper, and you hear and see opportunity that railroad leadership has a chance to seize.