Analyst: Penny-pinching is behind prolonged service problems at Class I railroads

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Loop Capital Markets
SAN ANTONIO, Texas – Rail service has been poor more often than it’s been good during the past five years because railroads run too lean and get caught short of crews, locomotives, or both and can’t recover quickly from the impact of unexpected events.

So says Rick Paterson, a one-time Australian railroader who is an analyst for Loop Capital Markets.

“A lot of railroads are really very, very fragile,” Paterson says. “And a Hurricane Harvey or a polar vortex are basically a gut punch to these systems.”

The problem is that Class I railroads, mindful of Wall Street’s focus on the operating ratio, try to perfectly match crew and power resources with their current traffic levels, Paterson says. And that leaves railroads with no margin for error.

Paterson, who shared his analysis at the North American Rail Shippers association annual meeting last week, lumps rail service into three categories: bad, good, and truck-like.

Bad service is meltdown mode, when operating metrics fall 10% or more below average and take six to 15 months to recover. Good service is when freight generally arrives on the right day but is neither time-definite nor dependable. Truck-like is “rail utopia,” with day- and time-definite reliability and predictability.

Paterson took each Class I railroad’s average train speed and terminal dwell figures and combined them into a single service metric. Then he plotted this service metric against each railroad’s average since 2010.

His conclusion for the industry as a whole? Over the past five years, only 22% of quarters had good service, while 35% of quarters had poor service. The remaining quarters were a hodge-podge, with no clear trend.

Paterson walked through the metrics for each of the Class I railroads.

“CSX is arguably the best-running railroad in North America right now,” Paterson says, noting that the CSX service composite is currently 41% higher than its historic average.

He noted how CSX stumbled through the first so-called polar vortex in the winter of 2013-14 and then again when CEO E. Hunter Harrison made rapid operational changes amid the shift to Precision Scheduled Railroading in the summer of 2017.

“Hunter Harrison cuts the merchandise network over to PSR without apparently telling anybody, including his own operating people,” Paterson says. “But as usual, he was right and everything worked out and all was forgiven.”

PSR railroads are more resilient and have provided the most consistent service, Paterson says, singling out Canadian Pacific as the steadiest performer.

Service suffered at all of the Class I railroads during the frigid winter of 2013-14, Paterson notes, but since then the non-PSR railroads experienced deeper, more prolonged, and more frequent service problems.

A PSR exception was Canadian National, which could not handle a 10% surge in volume in late 2017 and has not been the same since. Paterson says he’s willing to give CN a pass since no railroad ever anticipates such a large spike in volume.

Paterson contends that railroads should prepare for more unpredictable weather events. Climate change is likely to produce more extreme flooding, cold snaps, and wildfires that can wreak havoc on operations, he notes.

It’s good news that six of the seven Class I railroads are adopting PSR, Paterson says. After a pair of hurricanes last year, for example, CSX bounced back quickly while NS velocity sank to its lowest levels since the meltdown after the Conrail split two decades ago.

Railroads can maintain an adequate buffer supply of crews and power relatively inexpensively, Paterson says, which would help maintain service levels.

Sooner or later railroads’ pursuit of lower operating ratios will come to an end because they won’t be able to justify above-inflation rate increases, Paterson says. When that day comes, railroads will have no choice but to seek more robust volume growth, which will require more power and crews.

Ultimately, shippers can encourage railroads to provide more consistent service, Paterson says.

First, they can do a better job communicating expected volumes to railroads. Second, they can encourage railroads to reduce locomotive risk by supporting multiple manufacturers. Third, they can help railroads reduce crew risk by supporting an eventual move toward partial autonomous operations.

NEWSWIRETrains News Wire

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