Richard L. Beadles, Primary Author

January 17, 2019  

 


 

We have followed the current I-81 study (2018 GA session SB 971) at some distance and are familiar with the problems on I-81, the history and performance of rail in the corridor, and the potential for improving rail in the corridor.  We are also familiar with RAIL Solution chairman, David Foster’s, comments on the I-81 Corridor. Foster is also a Virginia Rail Policy Institute director.  While Rail Solution’s high-performance rail vision for corridors such as I-81 may be feasible, and indeed may at some point be the only remaining option, the current climate of private-railroads, partnering with the public sector, removes this option. In the meantime, organizations such as the Virginia Rail Policy Institute, the Southern Environmental Law Center, and RAIL Solution should be commended for their on-going efforts to promote rail as an alternative to 100% highway capacity augmentation.

This paper examines the current dynamics and challenges facing freight rail in the I-81 corridor and outlines a path forward for policy makers.  While I-81 is the current “poster child” for many of the problems identified in this paper, it is really a State-wide issue. Please refer to our Eighteen-Wheeler Pandemic paper. At a minimum, the I-81 study and any subsequent legislation should ensure that the potential for rail to improve the corridor is recognized and the opportunities for funding feasible improvements maximized.

Norfolk Southern’s Cold Feet

            The unofficial word is that Norfolk Southern (NS) has no interest in being a part of the current round of I-81 capacity enhancements. Norfolk Southern maintains that they have everything they need to accommodate additional truck traffic by rail.  That may be so, because NS has not been very successful in exploiting their Crescent Corridor, in which the Common-wealth of Virginia has already invested substantial funding on the presumption that such additional rail capacity would be fully utilized by highway-to-rail conversions within a few years.  It has now been a decade or more since Virginia spent millions on the NS Crescent Corridor, yet we know little of the result.  One would have thought that if the Crescent Corridor were a success, another round of rail capacity improvements would be in order at this time.  It is not surprising that NS is reluctant to receive additional public funding (nor match same with its own capital).  Frankly, it appears that the current rail model, relative to the marketing of Intermodal service, is simply not working very well.  Rather than pour more public money into an ineffective remedy, Virginia should first critically examine what is wrong with rail.  This does not mean that we should reject rail as a highway alternative.  Some modification of our public approach to rail may yet be found to be effective.

 

Highway/Rail, a No-Brainer?

            From years of observing the cyclical promotion and retrenchment of rail/truck intermodal (IM) initiatives, it takes more than capital investment in rail infrastructure to yield satisfactory results; namely, a competitive return on invested capital, plus a highway-competitive commercial marketing package.  The essence of the foregoing means and requires, a highway competitive price to the customer, and a level of service approximately comparable to over-the-highway movement of cargo.   Neither NS, nor its peer group of Class 1 freight railroads, can do that under current conditions.  For the most part, what we see on rail IM is overflow truck traffic that can tolerate substandard (inferior to highway) service generally at a price below the target ROI (return on investment) objectives of the railroads.  IM appears to have always been a marginal business, at best.  Yet, in theory it offers so much potential and promise that the concept should be further pursued rather than abandoned.

            Just because one sees railroad track and moving trains does not in itself mean that railroads are willing to offer IM service to potential customers. Regrettably, CSX has recently withdrawn rail IM rates, routes and service in approximately two-thirds of its origin-destination (OD) pairs.  NS has been more aggressive, but investor pressures suggest that one will soon see NS following suite.  To add insult to injury, CSX’s solution has generally been to offer the alternative of over-the-road “drayage” by private (non-rail operated) eighteen-wheeler trucks.  It would be interesting to learn how many big truck movements in the I-81 Corridor are the result of intentional diversion of traffic that moved in rail IM service during an earlier part of the haul, e.g. L.A. to Memphis or Atlanta, thence highway into the east.

 

Why don’t the railroads fix the problem?

            So why have railroads allowed themselves to get in such an unfavorable position?

 

Wall Street Interference with Rail Management Prerogatives

            For 150 years, or more, railroad executive management – while always sensitive to the interests of those who provided their capital – generally operated upon the premise that the railroad company also had a public service obligation.  There has always been tension at this juncture; however, in the last two decades, or a bit longer, the demands of capital providers have seemingly extinguished any sense of public service.  Whether or not this change was a result of early 1980s rail deregulation, or just the aggressiveness of so-called hedge fund operators is a debatable matter.  In any event, for rail executives, the current environment has simply become a matter of feed the beast or be consumed (fired) by it!

            From VRPI’s perspective, the most demanding culprit is Wall Street, specifically stock analysts, most of whom have never run anything; yet they are now directing CEO decision-making at NS, CSX and Union Pacific.  This is not entirely new, but the extent to which Wall Street analysts and hedge fund managers are bullying rail CEO’s is unprecedented.  Most of these predators (referring particularly to the hedge fund folks) do not know, nor presumably care, what it takes to: (a) grow market share and top-line revenue, while at the same time, (b) produc-ing a respectable operating ratio (percentage of revenue consumed by operating expenses (OR).  We suspect that maintenance of a diversified, broad-based, system-wide-quality rail freight service probably requires an OR of something better than 75%.  Currently, Wall Street-types are intent upon coercing CEO’s to drive down ORs into the mid-60s, or lower.  Such low ORs are generally attainable only when service is limited to few routes, and then concentrated in few trains, hauling cargo for a few shippers having very limited alternatives.  Resulting rail market share will inevitably decline over time as rail becomes even less attractive and shippers continue to become resourceful in their efforts to identify and utilize non-rail alternatives. This result would seem to be contrary to Virginia’s multi-modal transportation objectives, and dramatically inconsistent with the State’s decade-long effort to divert some long-distance truck traffic from road to rail.

 

Counter-Productive Rail Operating Practices

            In a misguided attempt to please those on and from “the Street”, who hound rail CEOs about what is now hilariously termed “precision” railroading—the term itself, as applied to today’s freight operations, may qualify as an oxymoron—rail CEOs have taken numerous steps to alter freight operations in the name of “productivity”. Undoubtedly, some improvement in service has been and is being achieved in a few instances, but taken as a whole, it is painfully obvious to anyone familiar with current rail operations that the only thing achieved system-wide is a reduction in some (but not all) operating expense categories at the expense of quality service.  Restated here for the purposes of this paper, each such step backwards further distances IM, and other rail services, from participating in the vast pool of highway freight. The most egregious example of the types of things alluded to above has been the recent practice of operating much longer freight trains – including IM trains. At best, this practice delays rail shipments. A truck can travel the distance of Virginia I-81 while a big IM train is in the loading process. While the practice may make sense to Wall Street people, the result in the field is often more frequent and longer delays with corresponding service disruptions, as these two-plus-mile-long trains frequently experience equipment malfunctions, and crew service limitations, which drain capacity and business-development opportunity out of the network. It is hard to conceive of anything that would be more incompatible with efforts to divert highway cargo from road to rail.  One truck with a mechanical problem is bad for the shipper, but one monster train “timing out” on the trip, or stuck behind another that has tied up the route, can delay 200 to 300 individual shipments.  These extraordinary rail delays occur frequently across Virginia.  Just ask Virginia Railway Express, Amtrak, or even citizens at blocked railroad crossings, who witness what CEOs and “Wall Street” often miss.

 

Public Policy Misadventures and Unintended Consequences

            A third, and even more intractable, impediment to rail competitiveness is public policy which has, over the last sixty years (generally associated with the Interstate Highway construction program beginning in 1956), produced, delivered, maintained and by execution thereof, insured that highway movement of cargo operates within a more favorable cost/service environment than railroads, e.g. easy access, liberal laws and regulations as to truck size, weight, length, speed, and user fees, taxes, etc.   Essentially, the highway alternative to rail is usually a compelling choice from a private business perspective. Why not use the public highways if they are available to all at a discounted cost to the user and, even with today’s congestion, yield better, more reliable trip times? As a nation and as a State, we have built ourselves a perpetual challenge, to maintain and expand this model. Will that situation ever change? It could, by degrees, largely as result of greater recognition of cost/responsibility inequality, and corres-ponding imposition of more compensatory user charges, e.g. tolls. This is one possible outcome of current I-81 studies that could tilt the highway user advantage a few decrees toward center.   But even tolling I-81 would be a modest first step toward dampening down the compelling policy-driven incentive to move cargo via highway rather than rail. That incentive package has been incrementally put in place since about 1916, and is highly unlikely to be withdrawn in time to “fix” I-81, this time or the next.

 

A prudent course for policy makers

            All of which leads us to beseech Virginia transportation planners, as well as the General Assembly and the Administration, to think in much broader, and in longer terms than just another I-81 problem patch, even if the “patch” has an eye-popping  $2 billion price tag.

 

1.  Don’t give up on rail.  It has been with us about 190 years, and probably will be at 250 years, in some form or other.  Thinking will change, policies will change, people will change. The technology already exists, but for investing in it.

            If Norfolk Southern is not interested now, their successors may be.  A future merger of NS with Warren Buffett’s privately-owned, not Wall Street-beholden, Burlington Northern Santa Fe (“BNSF”), or Union Pacific, could change thinking at HQ (headquarters).  Even more radically, Amazon could buy NS with their petty cash, and somebody like that just might someday; tired of 20th century road options when 21st century rail technology holds so much promise.

 

2.  Formulate a multi-step plan to begin to chip away at the great public subsidy – and thus encouragement – of highway freight movement. We cannot go on this way indefinitely.

 

3.  Formulate and issue a Request for Expressions of Interest and Qualifications to be sent world-wide (including China) to those who could possibly be interested in designing, financing, constructing and operating the RAIL Solution I-81 high-performance-rail “solution”.  We might be surprised. 

            This could ideally be in conjunction with NS, or its successors, involving some of the Railroad’s right-of-way, rather than a parallel stand-alone arrangement.

 

4.  Protect the existing Rail Enhancement Fund (“REF”), and see that rail is eligible for participating in any new revenue sources for I-81 Corridor improvements.

            Granted, some of the foregoing will strike traditionalists – in both rail and highway circles – as too radical to even consider, but when faced with the prospect of recurring $ 2 billion dollar periodic “fixes” of I-81, the situation calls for some unconventional thinking.