“AEI (Automatic Equipment Identification) technology is 40 years old and tells us where our shipment was. What we need is a technology that tells us where our shipment is, and a more realistic estimate of when the customer can expect to receive it.” – a railroad member of RailPulse
The entire U.S. freight industry today generates $1.063 trillion of revenue. Of this, Class I railroads represent only $72 billion (6.7%), while trucking revenues represent more than $850 billion (80%). he U.S. Department of Transportation forecasts U.S. freight revenues will grow to $1.627 trillion by 2050, driven largely by transport of higher-value freight. Overall, the forecast represents 53% revenue growth—but unfortunately for railroads, bulk commodity tonnage growth is only projected to grow 12% by 2050. The real growth opportunity for railroads depends on the ability to accelerate the industry’s shift toward transportation of higher-value goods.
Higher-Value Freight and Railroads
Union Pacific does a good job identifying freight market segments and how they fit into the value hierarchy: By segmenting the standard AAR commodity codes into a value ranking identifies the commodities that demand higher service levels and offer industry growth opportunities.
Exhaustive studies have been conducted by the AAR and others that clearly quantify the modal shift opportunity from road to rail. The primary benefits of rail over road are sustained higher diesel prices, driver shortages and environmental benefits, to name a few.
Diesel per-gallon fuel prices have gone from an average of $3.20 to $5.20 over the past year. We remain in a diesel crisis, despite a small price decrease recently. The impact of this increase to the U.S. economy is greater than $74 billion—an impact that exceeds the entire North American freight rail industry. The 4:1 fuel advantage that railroads enjoy over trucking is well documented. But despite this advantage, intermodal shipments have been stubbornly flat for far too long, exacerbated by service woes.
Rail offers significant price and cost advantages to shippers when compared to over-the-road truck, especially on routes exceeding 750 miles. Higher-value freight, not just intermodal, moving more than 750 miles should be our collective target—as long as we can provide good service with accurate, real-time shipment status reporting.
Accelerating the shift from road to rail benefits not only railroads and shippers, but the whole of the U.S. economy.
Cult of Growth
As Oliver Wyman illustrates below, should rail carloads pivot to 0.5% annual carload growth, driven by increasing their share of higher-value freight, railroads revenues could potentially grow to $177 billion. Suddenly, railroads become profitable growth companies, with commensurate valuations. The “cult of operating ratio” becomes the “cult of growth.” Those who demonstrate growth will be valued higher than those who don’t.
Growth and Real-Time Tracking
Why is this growth story relevant to real-time tracking? The battleground for growth lies with higher-value freight: Consumer products (intermodal), autos and auto parts, perishable goods, forest products, and industrial products represent the largest share of higher-value freight growth opportunities.
Higher-value freight demands higher levels of reliable and predictable service. Key to providing this higher level of service is the ability to provide the customer answers to the questions “where is my shipment right now, and when can I expect to receive it?”
In Union Pacific’s words: The effort (real-time tracking) is part of an industry focus to improve visibility down to the track level while generating efficiencies to improve rail competitiveness vs. truck.
Railcar and Shipment Tracking Background
Railroads realized in the 1960s that it was essential to better track and manage railcars and locomotives on their right-of-way. It wasn’t until 1988, through a Burlington Northern initiative, that AEI tags were applied to 1,500 taconite cars.
By 1989, an AAR task force was created that developed performance standards and product specifications. In 1990, the task force submitted proposals to the AAR O&T committee, who in turn requested a cost/benefit study. In August 1991, the O&T committee voted to make AEI tags mandatory on all cars used in interchange service, with all such cars—14 million—tagged by 1994. Talk about moving fast! The reader/tracking infrastructure followed suit.
The cost of an AEI tag (also known as an RFID tag) is $30-$40, and there are two per railcar. The cost to install the tags is approximately 3x this, or $200, bringing the total fleet installed cost of AEI tags to about $450 million on 1.6 million railcars, and this doesn’t include the cost of the reader networks. There are about 2,500 readers throughout the North American rail network spread across 140,000 miles of track, with an installed value of $125 million, not including the cost to maintain them, This translates into 57-mile spacing between readers, assuming equal spacing. The total installed value of the AEI network likely exceeds $700 million.
AEI tags’ biggest advantages: They don’t require on-board power to function and are durable. Their biggest drawback is that they must pass stationary readers to identify their location. In most cases, more than six hours may lapse before the location information is updated and made available to shippers, and by that time the shipment may already be hundreds of miles from its last reported location.
Real-time tracking technology, on the other hand, may cost upwards of $600 per railcar to equip. It is anticipated however, that this cost may drop significantly to less than $400 as volumes increase. Adding other functionality (such as condition monitoring) may increase this cost to $700-$1,000 per railcar. Equipping just 30% of the fleet, or 480,000 cars, will cost $175-$288 million. Advancements in battery technology, combined with low powered circuitry, offer useful lives of 7-10 years for onboard monitoring or real-time tracking. In addition to the initial installation cost, anticipate $5-$6 per month per railcar for communication services. The annual communication cost to track 480,000 railcars will likely approach $29 million. As more railcars are equipped, expect the cost per car to decrease.
The Rationale for Real-Time Tracking
Although $175-$288 million represents a big number and captures only 30% of the fleet, the potential impact to profitable growth will be in the billions through market share capture of higher-value freight. Knowing continuously and in real time the exact location of a high-value shipment, its current velocity and progress, and its anticipated arrival time certainly creates a higher value than current methods. Consumers have become accustomed to “Amazon-like” tracking for even the smallest order, and railroad customers are demanding similar functionality. Armed with better data, shippers and receivers will be in a position to better manage their inventories, right-size their fleets, and make better delivery promises to their customers. Put another way: Are we going to be relying on AEI, a decades-old technology, 10 years from now? If not, we need to accelerate the transition to real-time information immediately.
The railcar environment is extremely harsh. Wild temperature swings, high impacts and prolonged maintenance intervals contribute to difficult operating challenges. The many sensors envisioned for railcars include hatch open/closed, wheelset health, handbrake applied, air brake condition, impacts and lading status, to name a few of the potential applications. What all these sensors have in common: They need to be able to sense and communicate in very challenging conditions, and they need power. Railcars currently are “powerless dumb assets.” Turning them into “smart assets” like your smart TV is a much-needed upgrade to unlock real value across the freight rail industry.
The biggest advantage onboard condition/health monitoring has over wayside monitoring is that it’s “always on” and able to report conditions in real time, rather than waiting to pass a detector. (Rather than delve into the details of condition/health, monitoring in this article, I will save it for another article.)
The ideal objective would be to install trackers that are scalable to condition monitoring, mitigating the need to retrofit the gateway device later. The good news: All of today’s offerings are upgradable later.
It is important to delineate onboard tracking and condition/health monitoring (collectively called “telematics”) device companies from the data delivery providers. Ultimately it takes a combination of the two to provide real-time shipment status reporting to freight rail customers, similar to the existing AEI network, but in real time.
Devices and Equipment Providers: A whopping 39% of the European freight car fleet, or about 215,000 cars, are equipped with real-time trackers, compared to only 1.9% of the North American fleet, or approximately 30,000 freight cars. The largest tracker suppliers to the European market are Nexxiot AG, Amsted Digital Solutions (ADS) and COGNID Telematik GmbH, while the tracker suppliers with the largest installed base in North America are Lat-Lon LLC (a Geotab company) and ADS (which in early 2021 acquired the assets of Calgary-based railcar fleet management software company GeoMetrix Rail Logistics. Also in early 2021, TrinityRail launched Trinsight™, whose goal is taking data from TrinityRail’s 132,000 owned and managed railcars and providing it to customers through a proprietary user interface. Another player in this emerging market is IntelliTrans. Last year, Trinity acquired Quasar Platform Inc. from Cando Rail & Terminals Ltd., and Raillinc launched TransmetriQ. Hitachi Rail last year partnered with Dutch supplier Intermodal Telematics (IMT) to offer a railcar telematics solution, combining technology from IMT and British rail technology firm Perpetuum, which Hitachi acquired in April 2021. Nexxiot partnered with New York Air Brake to expand its North American footprint. Then, of course, there’s RailPulse (discussed below).
Real-time trackers have been installed on North American freight railcars since 2005, mostly on TIH/PIH tank cars. Lessons learned from these applications include:
- Intrinsic safety is the utmost concern. Devices must be safe not only on the right-of-way, but at the end destinations where these railcars will load and unload.
- Battery life and ultra-low-power circuitry matter. Longer life translates into higher ROI.
- Cellular communication is reliable and works well for real-time reporting.
- Real time GPS location reporting is feasible throughout the North American rail network.
- Location tracking, particularly outside of geofenced areas, is critical. Key functionality includes the ability to always identify the location of specific TIH/PIH tank cars.
- Early experience on hatch open closed reveals that a mesh network can work on tank cars.
Data Agglomerates and Real Time Information Providers: Data, data, data! It’s all about access to the reams of data from real-time trackers and onboard devices. Who receives, who pays for, and who processes real time data appears to be delaying widespread adoption. The AAR has an overabundance of committees involved in the application of real-time tracking devices: The Equipment Engineering Committee and the Tank Car Committee report to the Mechanical Committee, which reports to the Safety and Operations Management Committee (SOMC), the Railway Electronics Standards Committee (RESC) and Wireless Communications Committee (WCC), which fall under the Interoperable Operations Committee (IOC), which also reports to SOMC, and the GPS Committee, which reports directly to the AAR Board. Finally, there is AAR DRAFT Specification M-9020.V1.0: Interoperable MOTES System Architecture, a System for Monitoring Freight Industry Rolling Stock, published by the RESC in January 2021.
All these committees are involved in real-time tracking. It’s time to break the logjam and move forward, just like the AAR did with AEI in the 1990s.
Most device companies offer tracking software as part of their platform. With the creation of RailPulse, along with partner RailInc and its TransmetriQ initiative, the movement to aggregate onboard data that “transparently” becomes available to the shipper community and other potential users via a subscription-like model should accelerate. Data can then be aggregated through any sort of third-party software solution a customer prefers. RailPulse/RailInc appear to be best positioned to handle the Big Data side of real-time tracking and provide a seamless experience.
It’s time to get real-time trackers onboard now. AAR, are you listening? Just like in the ’90s, mandate trackers be installed on railcars associated with higher-value lading within three years. We are way behind in capturing the many benefits of real-time tracking, and equipping the fleet will take a few years. There is plenty of back-office software being developed to provide the “Amazon-like” customer experience. It’s time to stop arguing over data control and move forward. Everyone benefits. Find a way to fund it now.
Evolve toward condition/health monitoring. As mentioned previously, this has challenges, but is ultimately beneficial to all stakeholders. Ideally, install trackers that can be upgraded to condition/health monitoring—which most already are.
Without a higher level of tracking, tracing and delivery status reporting, it will be difficult for the railroads to capture significant market share of higher-value goods. The sooner we start getting real-time location and delivery status, the better. Think about the possibilities for the rail industry the next time you order from Amazon.
Principal of Rail Supply Chain Associates, Robert H. Cantwell spent more than 40 years in executive positions in the rail supply industry. He spent the first 26 years of his rail industry career growing a successful company, Hadady Corp., a designer and manufacturer of truck (bogie) components and systems for locomotives and transit railcars. Following the sale of his business, Bob helped transform Amsted Rail, holding various executive positions for 16 years. He has been active in the Rail Transportation Division of the ASME (American Society of Mechanical Engineers) and is past Chairman of the Division. Bob holds degrees in Mechanical Engineering from the Georgia Institute of Technology and an MBA from the University of Chicago. He possesses a unique perspective on the rail supply industry, combining his engineering experience along with robust economic and financial acumen. As an active investor in the rail industry, he has a vested interest in the success of the industry. He has also actively advocated with members of Congress in support of the rail and rail supply industry. The opinions expressed here are his own.