There May Be No New “Normal”

Written by Nicholas Little, Director Railway Education, Center for Railway Research and Education, Michigan State University Eli Broad College of Business
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In response to Jim Blaze’s interesting “Railroad Mega-mergers” article from earlier this week, I’m not sure that the historical perspective will apply in a developing “new normal” business economy in the United States. I believe COVID-19 impacts will massively change behaviors. Consumer spending will be driven more toward e-commerce and “Amazon-like” solutions. Interestingly, Walmart has weathered the storm much better than many thought. Perhaps their massive presence in brick-and-mortar stores alongside a rapidly evolving fulfillment capability using common inventory will turn out to be a model for the future.

Amazon won’t take the railroads’ view that they’ve been through this before and expect business to rebound in their direction. They are already establishing themselves as a supply chain and fulfillment company with warehousing and transportation capabilities. Walmart won’t be far behind. UPS and FedEx will face diminishing market share, just like USPS.

The question will be “What business are we in … and what business do we want to be in?” Railroading will not be a viable answer. PSR has enabled Class I’s to lean out their organizations and sweat their assets, something that perhaps should have been done long ago. Shippers want a piece of the cake. Their customers’ supply chain managers are very cost-reduction-driven. As such, they are driven by measurable outputs. Time and cost, both easy to measure and relatively easy to achieve, at least in the short term—harder to sustain over longer periods of time.

Amazon and Walmart tend to run their businesses on outcomes rather than outputs. Yes, data and metrics are important, but only the right ones to achieve market success. If your suppliers cannot contribute to your desired outcomes, you adopt a more vertically integrated structure. Amazon’s airfreight capabilities and smaller distribution centers located near airports, servicing areas of high population density and affluent consumers is an example of outcome-driven thinking.

I would venture to suggest that a Class I railroad serving 80% of the U.S. population and having container port connections on all three coasts would be ripe for a take-over or merger with either of those commercial behemoths, if they can avoid the pitfalls of past M&A events. However, there may be no new “normal.” The new may be very abnormal compared to our current way of thinking. Cost and faster performance of current operations may not be valued by end consumers—the folks that fund supply chains of which transportation should be a value-adding element rather than a necessary evil. Take a leaf out of the passenger rail playbook.

Multimodal mobility enabled by technology is already here. I can plug into my cellphone where I want to go and when I want to be there and an app can tell me choices of mode, departure time, route and price—thereby treating passenger transportation like a marketplace. Why not for freight? LTL freight is getting close to this and shippers are already looking for a similar solution at times of disruption. A good example was use of converted passenger planes for COVID-19-related emergency supplies this year. Where can the railways fit into this? Do we railroaders want to let our market become commoditized? Do we want to stay in our geographical pockets? Do we want to stay as a railroad … or do we want to become a fulfillment organization before a fulfillment organization gobbles us up?

Nick Little is Director, Railway Education at Michigan State University’s Center for Railway Research and Education. His career began at British Rail and he now runs MSU’s successful Railway Management Certificate Program and other railway educational events. These thoughts are his own and do not represent policy or results of academic research at the Center for Railway Research and Education, the Eli Broad College of Business or Michigan State University.

Categories: Class I, Freight, Freight Forecasting, Intermodal, News, Regulatory, Short Lines & Regionals, Switching & Terminal Tags: