Productivity’s big payoff

While railroads have come a long way toward maximum utilization of their plant and workforce, the journey isn’t over. History tells us that in a healthy industry, every year brings its share of productivity breakthroughs.

The power of productivity as a driver of profitability was forcefully demonstrated last month when the Union Pacific reported that the year 2010 produced the highest profits in its nearly 150 years of operation and reduced its operating ratio by a remarkable 5.5 percentage points to 70.6%. At a time when the national economy was still weakened by the recession, UP was also able to grow its return on invested capital by 2.6 points to 10.8%.

“Although winter weather negatively impacted some rail operations in the fourth quarter, many railroads including Union Pacific, CN, and CSX posted improved productivity measures,” says Dahlman Rose Director-Equity Research and Railway Age Contributing Editor Jason Seidl. “This was particularly impressive given the growth in traffic during the quarter. Meanwhile, other railroads such as Canadian Pacific and Norfolk Southern should reap the rewards of early hiring for 2011 sometime by the third quarter of this year.”

U.S. freight railroad productivity has long been the marvel of the global railroad industry, and it is winning the attention and respect of investment analysts and the business press—recognition that is critical not only to the railroads’ creditworthiness on Wall Street, but to its image on Capitol Hill, where a single regulatory stroke could wipe out these gains almost overnight.

Chicago-based Morningstar Investment Research recently noted that, during the recession, railroads “dexterously adjusted their networks amidst plunging demand [and] several even set new operating margin records.” Morningstar focuses on operating leverage as a productivity tool: “Most railroads added carloads faster than train starts during 2010’s third quarter, boosting incremental margins. Building longer trains is a key to rail profitability. Long trains make better use of crew, locomotives, and fuel. Several physical properties constrain train length, like siding length and air brake pressure, especially in cold weather. All railroads are addressing each of these constraints by lengthening sidings to up to two miles in length, adding distributed power, and widespread implementation of increasingly sophisticated yard management software.”

The 30th anniversary of the Staggers Rail Act last year reminded economists of how substantial deregulation of the railroads has created a vastly more productive industry. At a time when Congress was seriously considering re-regulation measures, the press (and Congress, it was to be hoped) paid attention to findings like this one from a study by economists Mark E. Meitzen and Kelly Eakin of Lauritz R. Christensen Associates Inc.: “Staggers has allowed railroads wide latitude in responding to market conditions. The outcome has been tremendous productivity gains in the industry, which has lowered customers’ costs while bolstering railroads’ financial health.”

Today, it’s a given that freedom to run their business without the constraints of excessive regulation, combined with a widening stream of high-technology products from the railroads’ supply industry partners, brought productivity gains of a magnitude not seen since dieselization and track maintenance mechanization.

Railroads continue to explore every facet of their operations for new practices and products that will add to overall operating excellence. CN provides a good example.

CN’s Precision Railroading practices produced an operating ratio of 62.7% in last year’s third quarter, and the railroad gave a full share of the credit to operating efficiency. Fuel productivity was high on the list, with recent improvements coming from longer, heavier trains and a new generation of locomotives that consume up to 20% less fuel than those they replace.

While fuel efficiency is an obviously important determinant of productivity, CN’s “Pipeline of Strategic Productivity Initiatives” extends into every area of operations (RA, Nov. 2010, p. 12). Classification yards can be a serious roadblock to fluid operations, and four yard projects were in CN’s pipeline late last year.

Releasing a report on Jan. 25 on CN’s full-year performance, President and CEO Claude Mongeau commented, “Operations and service excellence throughout 2010 allowed us to post solid operating metrics while handling a sharp rise in workload with improved reliability for our customers. Innovation, productivity, and supply chain collaboration are clearly paying dividends.”

Canadian Pacific President Fred Green also had a positive efficiency story to tell as he released the company’s fourth-quarter 2010 results: “We delivered an improvement in our operating ratio by staying focused on three priorities: safety, asset velocity, and productivity.” (The effect that average train velocity has on locomotive productivity was dramatically illustrated several years ago when Union Pacific determined that adding one mph to average freight train speed—then around 20 mph—was the equivalent of adding 60 locomotives to the fleet.)

Railroads made two historic moves in the mid-20th Century that raised their productivity to new levels that economists say may well have saved them as privately owned enterprises. One was completing the dieselization of their motive power fleet. The other was replacing thousands of section gangs with high-productivity track maintenance and construction machines.

The coming of The Messiah

A federal study found that during the three decades (1958-1989) following the beginning of widespread adoption of mechanized maintenance-of-way, labor productivity in the railroad industry averaged a stunning 5.2% a year vs. 1.4% for the business sector in general. Output increased 1.0% per year and employee hours decreased 4.0%. By contrast, in the 1951-1975 period, rail productivity grew at the average annual rate of 1.4%.

Coming as it did on the heels of the higher-visibility motive power revolution, track work mechanization’s giant step in productivity has not always received the attention it deserves in the history of the railroad renaissance. How it came about is one of railroading’s great stories.

The father of the modern track machine, which continues to evolve as one of the industry’s key productivity tools, was the subject of a two-volume work by Charles D. Morgret aptly called “Brosnan: The Railroads’ Messiah.” This writer told the story in the 100th anniversary issue of Railway Age’s sister publication, Railway Track & Structures.

D. William Brosnan’s appointment in 1946 to the job of chief engineer, Southern Railway Western Lines, at Cincinnati gave him the opportunity to pursue his goal of replacing costly track section gangs with high-productivity, multi-tasking track machines. His first foray into track machine design produced the officially designated Ballast Cleaner (BC)-16, known along the track as Gravel Gertie. It began life as a ballast cleaner of simple design that Brosnan purchased from the Athey Corp. of Chicago for $20,000. He then designed modifications, writes Morgret, “to equip it for the full job of removing ballast from the track and cleaning and replacing it all in one operation.”

Thus began the age of the modern track machine. Southern Railway shop personnel put the re-engineered machine together at Somerset, Ky.; it was subsequently built and marketed by Athey and Railway Maintenance Corp. (now Harsco).

Brosnan also tested other existing models. To help convince management that mechanization was a road worth traveling, he purchased three tampers from Swiss manufacturer Matisa for $150,000; they performed so well that within a year a fleet of 20 was working along Southern’s 8,000 miles of track.

Bronson’s crowning achievement was the TieMaster, a machine that lifted rails, removed old ties, dug a tie bed, and inserted new ties in a single pass. A pilot model went into service in 1956.

The decision to go full speed with mechanization was precipitated by a financial crisis at the Southern, which had a 45-year-old mortgage coming due at a bad time. There are two versions of what Brosnan said as he presented his case for meeting such crises with a sharply reduced “labor ratio” (the full cost of labor as a percentage of operating expenses).

The authorized version, in Burke Davis’s official history of the company, has Brosnan saying: ”We’re going to replace people—I mean people by the thousands. Replace them with machinery and more efficient methods. We’ll do it by using new equipment—equipment that we’ll have to develop for ourselves. We’ll need machines that don’t exist today, and we’ll use them all over the railroad.”

A division engineer present at the meeting heard it differently: “What we’re going to do is pay off the SOBs [the mortgage bankers], and I’m gong to take it out of labor.”

Actually, what Brosnan did, and by example led other railroads to do, in the end preserved thousands of jobs by helping to preserve the railroad industry as a thriving private enterprise.

The burden of excessive track labor costs on railroad productivity is indicated by the fact that as late as 1957, U.S. railroads hired more than 185,000 track workers—more workers of all kinds than they employ today to move record volumes of freight.

The diesel-electric revolution

In 2011, the railroad/supplier partnership continues to seek and find new ways to improve track maintenance productivity. The same is true of diesel-electric motive power, which led the postwar productivity revolution.

World War II, with its tremendous demands on the railroads for moving wartime materials and people, temporarily slowed dieselization as the industry pressed every available piece of motive power into service. Once the war ended, however, the railroads—with some strong coaxing—got back to the business of phasing out steam power.

“The railroads’ real savior was the diesel locomotive,” transportation journalist Don Phillips writes in the Encyclopedia of North American Railroads (Indiana University Press, 2007, available through Simmons-Boardman Books at www.transalert.com). “And not just any diesel locomotive, but the General Motors concept of the diesel, which was the railroad equivalent of one size fits all. GM’s Electro-Motive Division, the new boy on the block when it entered the business in the late 1930s, simply refused to listen to any railroad chief of motive power who wanted modifications. Any railroad that wanted a GM diesel would take the off-the-shelf version. It could be geared for passenger speeds or freight speeds, but that was the only significant option. This ran totally counter to railroad experience up to that date. In the steam era, every locomotive type was custom-built, with great differences from railroad to railroad and often within the same railroad.

“There was a method to GM’s heresy. The diesel was a different animal. It introduced a new word into the [railroad] vocabulary: ‘transition.’ At low speeds, the diesel power plant delivered electric current to the traction motors on the axles on an individual basis, called a series connection. Thus, a lot of power went to each axle, good for low-speed pull. As speed increased, however, the engine went through transition, switching to deliver the electricity in parallel, with all axles connected to the same power cable. This allowed for greater pulling power at higher speeds. (Modern, 4,000-plus-hp diesel-electric locomotives no longer require transition.)

“Diesels had other advantages. Want more power? Connect together more diesel units controlled by the same engineer. Want to save brake shoes and eliminate wheel-cooling stops on heavy down-grades? Use dynamic brakes. Most compelling of all, diesels could be operated with far fewer facilities and workers (no frequent stops to replenish water and coal). By 1947, 90% of locomotive orders were for diesels.”

Railroad/supplier cooperation

Productivity is something that both the railroads and their suppliers are keenly focused upon. How can railroads and suppliers work together more effectively so that both can be more productive and, as a result, more prosperous?

“The railroad industry supply chain will be continually challenged to meet the demand for materials and services as a result of the ongoing maintenance and capital expenditure requirements to maintain safe and efficient operations,” Kansas City Southern President and CEO Dave Starling told Railway Age. “The supply chain is tight with respect to key commodities and services such as rail, locomotives, certain track materials, and electronics and software. Railroads and suppliers need to communicate more frequently and effectively to identify early supply chain constraints and solutions. Where long-term supply contracts are appropriate, both parties must collaborate to eliminate waste in the supply chain through enhanced logistics and consistent delivery of reliable materials and services.”

“Advance planning with the contractor or supplier is key to improving productivity,” says Colo Railroad Builders Vice President of Business Development Steve Scharnweber. “Thirty-to- 60 days notice in peak season isn’t always enough notice for a contractor/supplier to make arrangements for labor and equipment. We’ve implemented multi-year agreements with several of our customers, which has greatly improved productivity for everyone. 
Railroads and contractors should be open and honest and discuss all aspects of a job. For example, pre-bid inspections should not be scheduled when there is snow on the ground. If that is not possible, relevant track charts, tie-up locations, lists of materials to be installed in track, and road maps to show access points should be shared.”

“It is imperative that suppliers and railroads work continuously to improve the integration of new-technology systems in order to gain the maximum efficiency and effectiveness from the technology,” says Invensys Rail Corp. President John J. Paljug. “We as an industry must continue to work closely to define future operational needs and to jointly agree on the technology requirements that will satisfy those needs. PTC will introduce opportunities to improve productivity that have not been considered in the past. Railroads and suppliers will jointly benefit from these opportunities.”

“There appears to be an emerging spirit of cooperation that never existed before between railroads and supplier contractors,” says Georgetown Rail Equipment Company President and CEO Wiggie Shell. “Our customers are now showing signs of willingness to share the internal details of capital and maintenance budgets that are allowing us to make long-term decisions to meet capacity demands. Over the years, we’ve carved out a service niche that continues to grow as railroads shed the expense of ownership and ongoing maintenance costs in heavy maintenance equipment serving very specialized needs. The investment to become a trusted and reliable vendor is tremendous, and requires planning to meet demand without overspending. Traditionally, railroads have been hesitant to enter into long-term agreements that assist us in assessing the risk of large capital investments. Earning customer trust over a number of years is also resulting in meaningful dialogue about the next generation of tools and services that are still to be developed. Railroad executives and field managers are engaging us to discuss unsolved problems. We’ve developed a rapport and the ability to translate discussions into productivity tools that would never become reality without intense dialogue and understanding of railroad needs.”

(Railway Age Editor William C. Vantuono contributed to this story.)