Weathering the COVID-19 Storm

Written by Nicholas Little, Director Railway Education, Center for Railway Research and Education, Michigan State University Eli Broad College of Business

On March 3, 2020, Railway Age published my early observations on the COVID-19 pandemic’s potential impact on North America’s freight railroads. In just over three weeks, our world has become a very different place.

With the U.S. now reporting more positive cases than China, and Congress very slow to agree a stimulus package (finally passed on March 27), uncertainty rules the day. We have seen stock markets plunge, pause, rise, plunge again and try to regain ground. Yet the market and company valuations remain well below the record high from a very short while ago.

Indeed, this is a huge shift from March 3.

Uncertainty is hard for all businesses to deal with. It affects long-term investment, financial plans and budgets, inventory holdings and many other aspects that influence our daily lives. One thing becoming clearer almost by the minute is that a reduction in consumer spending is occurring.

Despite any increase in on-line commerce, consumers are reducing their spend on non-essential goods and services. Some would argue that they are facing enforced reductions, especially in services where anything from shoe-shine to hairdressing, fitness and restaurants are all suffering drastic declines in demand. Transit and passenger railways are seeing massive declines in demand the world over.

Discretionary spending on consumer durables and the shuttering of automobile production is impacting parts production and distribution, and there are fewer finished vehicles to distribute to dealers who cannot sell in their usual manner. We could be seeing a major inflexion in the way commerce is undertaken, both B2B (business to business) and B2C (business to consumer). Freight rail will be heavily involved in this because our demand is derived from the demand for manufactured and other products and services.

The AAR traffic figures for the week ended March 21, 2020 are possibly indicative of a slow-down in the economy. For the first 12 weeks of 2020, intermodal traffic is down by 11.5%, likely reflecting a drop in imports from China. Predictions for global container traffic range between an 13% and 18% drop year-on-year for 2Q20.

We see major problems emerging in supply chains. Retailers and their suppliers and their suppliers in turn have applied principles of lean manufacturing, waste reduction and strong financial management of fixed assets and inventory. Very few organizations have implemented emergency plans to handle what is being referred to as a “black swan” event.

Recent MIT research found that only 16% of firms polled had “set up an emergency management center” to deal with the problems they face as a direct result of the pandemic. I would argue that even the ones that have are struggling to find ways to deal with the real issues they face throughout their extended supply chain.

When it comes to transportation and the railroads, we’re clearly doing everything we can to protect our workforce and keep them safe and well. Some railroads have put in place emergency plans including duplication of command and control centers, thereby minimizing the risk of mass contamination at a critical dispatch operations center. Railroads are keeping in touch with key customers to modify service according to likely demand. Railroads have also adopted working from home for staff wherever possible in order to try and preserve good health.

Michigan State University has switched all its classes to on-line delivery and sent students home. All non-essential staff were working from home for their own safety, even before the state’s Governor implemented a “stay-at-home” emergency order through April 13, 2020. Our supply chain management faculty is launching a webinar series to help provide firms and other supply chain organizations with guidance on what they may need to do to address many different supply chain critical issues.

An overriding fact in this situation is that we must do all we can to keep our extended supply chains and the railways’ role in them working. Trucking gives the impression that they can rapidly respond to demand changes. Rail can do the same, but we, as the rail industry, need to be part of the conversation and act quickly.

That conversation and the relationships it manages also includes short lines and regional railroads, which have the capability to work locally to help provide a key link to national and international service, whether it is the first or last mile. We need to be in leadership mode, otherwise we could suffer from a structural change in the economy that doesn’t include rail, long-term.