Two-thirds must rely on a single rail carrier. Without competition, they say, their service providers have no incentive to improve.

By Lawrence H Kaufman, Contributing Editor

	Photo by John B. Corns

Chemical and plastics manufacturers can be excused if they feel they are seeing deja vu all over again. They also can't be blamed for concluding that rail mergers are not good for anyone, much less rail customers.

Many are still recovering from the western rail service crisis of 1997-1998. Now they are experiencing service failures in the East as Norfolk Southern and CSX Transportation struggle to overcome the early service failures that stemmed from their June 1 breakup of Conrail.

Chemical shippers won't soon forget the rail service fiasco that began in the summer of 1997, when Union Pacific's difficulties absorbing Southern Pacific led to a service meltdown that began along the Chemical Coast of Texas and soon spread throughout the West and to other carriers outside the region.

Chemical companies saw their cost structures blown away as must-complete shipments were shifted from rail to more expensive trucks. Utilization rates dropped precipitously as privately-owned fleets of tank and covered hopper cars, which account for virtually all rail movements of chemicals, sat idle in rail yards or-worse-moved aimlessly through the rail system like the mythical Flying Dutchman sailing ship, never reaching their destination.

Logistics executives at chemical companies are happy to relate their individual horror stories, but few will talk on the record because of real or imagined fears of retaliation if their comments offend rail carriers. They are quite willing, however, to let their industry association speak for them.

Dealing with poor rail service for the second time in three years, plastic and chemical producers have instructed the Society of the Plastics Industry and the Chemical Manufacturers Association to take an increasingly active role in pressing for legislation that would force more competition on their railroad suppliers.

As a practical matter, though, railroad executives are not too concerned about the threat because major legislation is unlikely to be cleared by Congress this late in the year. Next year is a presidential election and all 435 seats in the House of Representatives and one-third of the Senate will be up for reelection, so it is a less-than-even bet that anything will happen then, either.

Despite screams of rage from designated chemical and plastic industry spokespersons, the picture isn't all grim. "Service has come back, but it's not great," says Maureen Healy, director-transportation issues for the Society of the Plastics Industry. "It's back to premerger levels, but shaky." She credits UP with having learned from its humbling experience.

In the first eight months of 1999, railroads handled 1,106,445 carloads of chemicals-a 1.8% gain from the same period of 1998. Significantly, rail carload traffic for all commodities slumped 1.1% over the same period, as chemicals increased their share of rail carload traffic to 9.2%.

The chemical industry, like many grain and coal customers, is among the few truly captive railroad customers. Chemical shipments consist of bulk commodities that can be handled far more safely and efficiently by rail than by other modes. Inland and coastal barges offer less expensive transportation for large quantities of chemicals, but the navigable waterway network serves only limited geographic areas. Motor carriers, on the other hand, are far more expensive and require two to three truckloads to carry the volume of products that can be handled by one railcar.

This leaves rail as the mode of choice. It is best at handling large volumes in repetitive shipments moving long distances.

According to Randy Speight, director-distribution programs at the Chemical Manufacturers Association, CMA members account for 90% of chemical industry productive capacity, and two-thirds are captive to a single rail carrier. Captive plants pay 25% higher rates than those with two or more carrier options, according to CMA surveys, Speight says. "While we don't get the service that is promised [in merger applications], at the same time the majority of our members are paying more for substandard service," he says. "Where there is no competition, there is no incentive to improve."

While admitting that service isn't where it wants it to be, UP says its service crisis is in its past. Customers agree. "UP says it is back to premerger service levels on some corridors. Some of our members have eased pain, but I'm not hearing a whole lot of people saying they are at the level they expected based on the promises made," Speight says.

Railroads invariably promise significant improvements in service quality when seeking Surface Transportation Board approval of mergers. This was especially true in the Union Pacific/Southern Pacific case. The applicants were burdened from the start by the fact that they were the principal competitors in the chemical producing region stretching from New Orleans west through Houston to Corpus Christi, Tex., along the Gulf of Mexico.

Faced with the prospect that many shippers-among them some of the largest companies in the U.S.-would go from two carriers to one, UP and SP negotiated extensive trackage rights to the then newly-merged Burlington Northern and Santa Fe. Citing the infamously poor service provided by SP, the applicants told anyone that would listen that there would be no so-called "two-to-one" shippers, and that service would be much better because BNSF could be counted on to provide superior service in place of SP. It didn't work out that way. UP executives say they didn't realize how decrepit and capital-starved the SP was. Some knowledgeable industry observers dispute that, saying UP knew exactly what it was buying for $4.2 billion, but that it was under tremendous pressure to produce quick merger benefits and proceeded to integrate the two railroads before it was really ready to do so.

Because of the highly competitive environment in which UP and SP operated, there was virtually no premerger integration planning. Unlike CSX and NS, which obtained approval to build some track connections even before their acquisition of Conrail was approved, UP had to wait until after the SP acquisition closed on Sept. 11, 1997. Service improvements were delayed until implementing labor agreements were reached. This prevented UP from instituting directional running between Houston and Memphis, using the former Missouri Pacific main line in one direction and the parallel Cotton Belt in the other.

"We still have a ways to go," says Ed Sims, vice president and general manager-chemicals at UP. He paints a brighter picture. "BNSF has access to UP-maintained track with better capacity. We rebuilt the Houston yards from the ground up," Sims says. Customer satisfaction is improving, according to regular surveys the railroad conducts.

"Houston-New Orleans is running really good and Houston-St. Louis is good." Sims says ruefully that in a role reversal UP now is experiencing fallout from the eastern service failures. This is measured in increased car cycle times and lower car utilization rates. Customers are better off from a pricing standpoint, as BNSF is pricing at SP levels to gain traffic.

"We still have the objectives of the merger case," Sims says, acknowledging that UP won't be there for a couple of years.

CSX and NS problems in the East aren't as severe as was the western crisis two years ago, but that is small consolation to chemical shippers. Mike Heimowitz of the CMA distribution team says: "The only good thing is that the situation has improved. At best we expect gradual improvement." He sees no big rail service spike that will make everything the way it was before. "Service improved some during the traffic lull in July, but August was not much better." Heimowitz says NS and CSX seem to be able to alleviate problems in some areas, but then regress in others. "Every time they make a fix, it backs up in another and they are still having troubles in the Shared Assets Areas [here a residual Conrail operates as a neutral switch on behalf of both railroads]."

"This creates a resource drain with slower transit times" and higher equipment costs for chemical companies, which provide virtually all of the cars used to handle their business. A major concern is the carriers' ability to handle the fall traffic peak, Heimowitz says. "Then it's time for Y2K to kick in."

"The UP meltdown, in a way that no other event has to date, heightened the level of visibility and awareness that transportation is no longer an isolated incident in the distribution chain but an integral part of the overall production process," says Healy of the SPI. "It took that level of the awareness up to the CEO level. Historically other issues have crowded out transportation."

For the plastics industry transportation is needed to: one, move raw material; two, meet customer demand; and three, affect the bottom line of production, Healy says. "It is the second largest part of costs. We are the poster child for needing a reliable and efficient transportation system."

Eighty-five percent of plastics raw materials are shipped by rail, Healy says, adding that the industry also uses cars for storage, a reason the industry provides its own cars.

Like her counterparts at the CMA, Healy says she is not seeing any sustained improvement in the East and that UP now is suffering from the NS and CSX service debacle. "We are forced to micro-manage the car fleet to avoid or minimize shutdowns," Healy says. "The bubble seems to be going transcontinental. Clearly the UP crisis is over, but there's still a lot of problems and now it's focused more in the East. It's a fragile system at this point. A problem with the rail system on the West Coast can affect the East Coast," and vice versa.

One rail executive, who asked to remain anonymous, says the customers' complaints must be taken with a grain of salt, although he didn't want to suggest the railroads were without faults. "If the shippers ever say things are all right, they would get that thrown in their teeth the next time they tried to bring a complaint case to the STB," he says. "How can you complain about rail service when you were quoted in the media as saying service was good?"

Acknowledging that UP has made service improvements over the past two to three years, CMA's Speight points out that merger approval was based on promises that service would significantly improve. "Nobody is saying they have met their promises," he says.

"In the East a lot of promises were made before the Conrail split," Speight says. "There's no question that [NS and CSX] were serious about avoiding the UP mistakes. But, they went belly up, and shippers are having to pay a really high price for their mistakes. It makes you wonder if anyone is capable of maintaining service on systems this large."

"After the split took place and problems were recognized, there have been gradual improvements. Again, we're having to pay the price for these problems." Speight says the chemical trade group is asking the STB to recognize the premerger promises.

Chemical and plastics industry support for competitive access legislation-the railroads call it reregulation-is based on the belief that competition is the best regulator of the market. "When you have the ability to maintain monopoly control, you have the ability to dictate the price you want for whatever service you want to give," Speight says. CMA's activity in the rail competitiveness arena, he says, "all stems from the fact that there is no choice." Service has improved only because customer expectations have been lowered, he says. "Trucking measures on time in 15 minute intervals. Railroads measured it in multiples of days and sometimes weeks. Railroads can't continue at that rate," Speight says.

For those railroads that believe the Washington trade associations are wagging the chemical industry dog, Speight says: "If they wish to fool themselves into thinking that [this is driven by associations], they are missing something important. We are member-driven and this is our No. 1 legislative goal for this year. The CMA has not been a big player on the transportation side [in the past], but there has been a lot of discussion of it of late. One measure of how seriously CMA views the issue is whether or not we're pumping advocacy resources into these issues. We are engaging and involving our members in lobbying."

Chemical company executives, particularly those who are not directly involved in logistics are involved in the quest for competitive access. Many, who normally pay little or no attention to transportation issues, saw their bonuses cut or eliminated during the last service crisis. Most companies base incentive compensation in part on unit profitability. Transportation is such a large part of the cost mix that the service crisis cut into many chemical companies' earnings.

The appearance of an effective monopoly still affects railroads' willingness to give customers what they want. Speight recalls that one chemical company chief executive recently said: "Negotiating with railroads is characterized as plea bargaining."