Reinventing America’s railroads



Reinventing America’s railroads
Gradually coming into focus is a fundamental
shift in public policy and perception toward rail transportation that
could pump billions of public dollars into the system.

By William C. Vantuono, Editor

It may still be asked whether this perfected transportation tool will
have a role to play in future economic development," said Louis
Armand of the railway industry in 1964. "There still persist people
who
believe that the economy of modern nations can get along without
railways and that, as a consequence, railways ought to consider that
their job is to shrink, with the goal of disappearing entirely one of
these days."

Armand himself was not among the doubters. A wartime resistance hero
who went on to become director general of the French National
Railways, secretary general of the International Union of Railways
(UIC), and a member of the French Academy, Armand wrote 37 years ago
of the "railway use of cybernetics" (today, computerization) and the
role other modern technology would have to play in "plunging the
industry ahead toward audacious accomplishments."

But some of the basic questions posed by the world’s best-known
railroader nearly half a century ago are still being asked in the
United States today: Where does the railway industry fit in,
economically, socially, politically? What does it need to do to
compete effectively as a transportation provider with those modes,
primarily highway and air, that garner the lion’s share of public and
legislative attention?

Economically, times right now are tough. Business is down in just
about every sector. Growth capital is short or non-existent. But
despite all this, the industry is beginning to position itself to
claim a much larger share of the transportation marketplace than it
has had in many years. Gradually coming into focus is a fundamental
shift in public policy and perception toward rail transportation that
could pump billions of public dollars into the system. Equally as
important as new capital is a rethinking of business practices, a
reconsideration of traditional industry values and concepts, a change
in railroad culture–indeed, a "reinvention" of the industry.

A new source of capital

A key word, says Ike Evans, is "partnership." Partnerships will
certainly unlock many opportunities for the railroads. Union
Pacific’s chief describes the rapid growth of interline alliances,
and speaks of the need for more partnering with highway
carriers. Indeed, Evans describes a railroad industry that
may not need to "reinvent" itself so much as it needs to
more aggressively capitalize on its strengths.

Other railroad leaders are beginning to say that partnering in a
broader sense, and in ways that many in the industry may find
disagreeable, could unlock many more opportunities in the future.
What they’re talking about is federal subsidies to freight railroads–
subsidies that will create, in the words of Association of American
Railroads President and CEO Ed Hamberger, "the railroad equivalent of
the Interstate Highway System," a system that will support sustained
growth in both freight and passenger traffic. For example, the
infrastructure for operating higher speed short- and medium-haul
intercity passenger trains: It’s owned, operated, and maintained by
freight railroads. Investing federal and state dollars to increase
the frequency and speed of passenger trains without compromising the
integrity of freight service or safety–adding track, improving
signaling and train control systems, closing or improving highway/
rail grade crossings–would cost a fraction of expanding an airport or
highway, and would certainly be environmentally wise.

Federal aid–two words that would have given some railroaders a heart
attack just a few years ago–may very well be the only way a capital-
intensive railroad industry that often doesn’t earn its cost of
capital can remain alive and well. Burlington Northern and Santa Fe
President and CEO Matt Rose speaks for a growing number of
railroaders when he says that "we’re singing a different tune
from the one we have sung in the past," and that "this is today’s
reality."

Rose has called attention to "breakthrough proposals" now moving
through Congress that would help railroads strengthen and expand
their infrastructure. Legislation known as RIDE-21 in the House and
RAIL-21
in the Senate would make $35 billion in low-interest loans available
to Class I’s, regionals, and short lines. These bills would also
provide billions of dollars of funding for rail passenger projects,
many of which would benefit freight carriers by adding much-needed
capacity to existing rights-of-way. The Senate bill includes
authorization for $350 million per year for three years to upgrade
small railroads to handle 286,000-pound cars.

"These proposals recognize the need for more public/private
partnership initiatives to improve the nation’s rail infrastructure
and to be responsive to concerns about traffic congestion, safety,
transportation flexibility, and economic development," says Rose.
"The rail industry needs ongoing help with its infrastructure
investments
to remain strong and competitive. Public policy dictates a sound rail
infrastructure for America so we can continue to be a strong economic
force globally."

Viewpoints on such legislation run the gamut of emotions–from strong
support to skeptical acceptance to outright indignation. But
regardless of whatever visceral reaction one experiences, the fact
remains that something needs to be done, and soon, to solve the
problem of revenue inadequacy. The indicators that support such
dramatic steps are clear. Matt Rose identifies them as such: "Over
the past couple of years, railroad industry tonnage growth has
outstripped revenue growth, and that trend is continuing. Similarly,
until this
year, most real rail rates have steadily been declining. In 2001, the
industry has been able to take some prices up in the 2-3% range.
However, operating costs have risen at a faster rate due to
inflationary increases in wages and benefits, fuel prices, and the
cost of materials. We no longer can find big cost savings initiatives
to overcome these operating expense increases. We are not getting
sufficient dollars for what we are providing and we are no longer
able to take costs out of the business at a faster rate than
inflation."

Some of the industry’s largest potential cost savings and growth
opportunities are already tied to legislative issues. One is the 4.3-
cent deficit reduction tax on each gallon of diesel fuel purchased.
Railroads and barge companies are the only transportation modes still
paying this tax. Repeal of it could save the railroads around $150
million a year. "We have come close to having this tax repealed,"
says Rose, "but it hasn’t happened for various reasons."

The greatest story never told

One reason behind the railroad industry’s less-than-stellar track
record on Capitol Hill may be its "stealth" status with the general
taxpaying public and, by extension, those who represent its
interests. "Railroads have been more successful over the years at
blocking
harmful legislation than in getting favorable legislation approved,"
says Railway Age Contributing Editor Larry Kaufman. Adds long-time
supplier Craig Duchossois, CEO of Duchossois Industries, Inc., "With
rare exception, our industry and its leaders are unknown on Capitol
Hill, in contrast to truckers. It’s time to speak up and get our act
together in a unified, meaningful manner. We’ve been out-lobbied for
years, and can no longer afford this tremendous competitive
disadvantage."

Many in the industry are beginning to realize that negative or
nonexistent public perception of railroads is a real hindrance to
progress, whether it be getting an important piece of legislation
passed or obtaining local support for an expansion project that will
bring more trains through town. After years of virtually ignoring
public relations, the Association of American Railroads is putting
together the first elements of what could become a large-scale public
awareness campaign. But getting the Class I’s to commit to an
ambitious and potentially expensive media program will be a hard
sell, especially since the direct benefits are hard to quantify.

Short-term, a one-minute television commercial extolling, say, the
environmental benefits of moving truck trailers and containers by
rail won’t add to the bottom line. Long-term, the public’s repeated
exposure to positive messages about rail transportation could work to
the industry’s benefit. As Matt Rose said recently, "we are examining
every part of our business and are beginning to take steps that are
not designed to make the next quarter look good to Wall Street, but
to make the future successful for each member of our community,
including all of our shareholders."

Reaching out to the public–the customers of the railroad’s customers–
should be part of that.

Whose track is it, anyway?

Drinking from the deep federal transportation trough won’t come
without at least a few strings attached. The biggest string–a noose,
really, to opponents of federal aid–is the "O word": open access
(defined by some as the "F word": forced access), but more accurately
termed "competitive access." Then there’s the "R word": reregulation.
Will competitive access and reregulation scenarios come to pass? Will
railroads be forced to open their rights-of-way to anyone who wants
to run trains in exchange for government dollars? Will they lose some
of
the freedoms of the Staggers Act? Probably not, at least not in as
ominous terms as some are portraying.

"The question of open access will always be with us," says Ray
Chambers, the railroad lobbyist leading the short line charge up
Capitol Hill. "But with only four major carriers, it’s easier for
them to work together to improve service, through alliances and other
means, to the point where open access is not an issue. Call it the
‘private interstate highway approach,’ where the target is getting
freight off the highways, not off other railroads."

"The railroads are lucky that the customer world isn’t united," says
Larry Kaufman. "If the shippers ever agree on what they want, then
all bets are off. Remember, companies like UPS are bigger than the
entire
industry. Competitive access is not like abortion rights or gun
control. It’s not one of those issues that Congress votes for on
principle, and Congress doesn’t like to referee battles between
competing interests, particularly when both sides are PAC
contributors. It’s really a commercial dispute, and the standard
Congressional response is, ‘you people negotiate a deal and bring it
to us to codify.’ That’s why there were so many negotiations between
railroads and shippers, back when 4R and Staggers were on the table."

"Creativity before capital"

The most capital-intensive part of railroading is infrastructure. If
the railroads are to grow, they will have to move beyond merely
maintaining their track and structures to a state of good repair, and
add capacity. But even if federal and state dollars begin to flow,
railroad engineering departments will still need to exercise prudence
with their resources.

"We need to be constantly thinking of ways to solve issues without
always throwing capital dollars at the problem–in other words,
‘creativity before capital,’" says American Railway Engineering and
Maintenance-of-way Association Senior Vice President Mike Armstrong.
"The goal is to avoid expenditures that do not add sufficient value
to the operation of the railroad. As an industry we can help lower
our
costs through standardization of material and equipment.

"This is easier said than done. We all take pride in our own
standards that have served us well for many years. Fact is, however,
we need to
move beyond the pride issue and consider development of common
standards."

Here, Armstrong, BNSF assistant vice president and chief engineer-
Southeast Operations, is talking things like a standard #20 turnout
design, standard concrete road crossing panels, a standard insulated
joint design, and standard concrete ballast deck bridge spans. "These
are but a few examples," he says. "There are also opportunities to
standardize pieces of production equipment. As an industry, we need
to work with our suppliers and manufacturers and press to achieve
longer
asset lives and reduce our overall life cycle costs."

Armstrong says that "there are ways to deal proactively with
maintenance issues and minimize capital expenditures." As examples,
he cites selective replacement of turnout components that extends
overall turnout life, drainage and subgrade repair work to prolong
ballast
and tie life, and scheduled rail defect testing to extend rail life.
"The
ongoing challenge is to achieve a balance between the required
service needs of the transportation department and the necessary level
of
physical plant maintenance to meet those service needs," he says.

A new electronic world

Perhaps the most fundamental shift in how railroads conduct business
is their entry into the still-developing arena of electronic
commerce. In the not-too-distant future, it may be possible for
railroads,
their customers, and their suppliers to conduct many types of
transactions
on the Internet.

"The move into e-commerce is going to be tremendous for the rail
freight and rail transit industries," says Mike Monteferrante, senior
vice president of iRail.com. "On both the supplier and buyer sides,
there is going to be increasing pressure for all of us to be more
efficient, and to continue garnishing cost-saving concepts and ideas.
A prominent source for that will be the efficiencies of e-commerce.
In addition to that, suppliers and transit authorities and railroads
need to improve relationships and communication tools. E-commerce
will
assist in that endeavor, bringing suppliers and buyers closer
together in terms of their ability to work together to accomplish
their
efficiency goals."

The objective of railroad/supplier e-commerce interfaces like
iRail.com and RailMarketplace.com, which involves UP, BNSF, Canadian
National, Canadian Pacific, and CSX Transportation, "is to enable
buyers and sellers of railroad parts, materials, and services to
reduce their costs and streamline administrative processes around
sourcing, procurement, demand planning, and inventory management,"
says CP Vice President-Purchasing Luigi Armano. "These benefits will
also accrue to suppliers, who will have access to a larger customer
base."

Will there be a limit as to the types of products and services that
can be procured online? Will e-commerce extend to complex
transactions like locomotive and railcar leases? UP Executive Vice
President Brad
King, referring to RailMarketplace.com, says "it will be possible to
source and procure any product and service. This is not to say,
however, that the railroads will replace all of their existing
sourcing and procurement processes immediately."

The same concept could apply to how a shipper selects a
transportation product. That’s one reason why UP, CSXT, CP, and
Norfolk Southern
have invested $1 billion in Arzoon, an Internet-based system that
allows
transportation sourcing and logistics to be handled on a single
software platform.

"Shippers spend up to 20% of their revenues on logistics," says
Arzoon CEO Farid Dibachi. "For large shippers, this can amount to
millions
of dollars. Shippers spend $35 billion annually using railroad
services.
By comparison, they spend $95 billion on trucking services. A small
amount of that business moving from truck to rail will increase
railroad business by a significant percentage. The time has arrived
to give shippers the means to compare rail transportation on an even
playing field with truckers." Using a system like Arzoon, which
"allows shippers to make an intelligent decision about what carrier
to use," could bring more business back to the rails.

Another new age?

"Railwaymen love their occupation, but many have doubts about their
future," said Louis Armand in 1964. "These feelings are fortified
by . . . the often difficult financial performance of their
enterprise, exposing them to criticism by the poorly informed." But,
he said, "in well-informed quarters, an about-face is occurring in
favor of railways. . . . Is this enterprise–the most important in the
present-day world–condemned to extinction? Must it be looked upon as
something which played a big role in a certain period of history, but
which it will no longer play in the year 2000?"

The answer to Armand’s questions, in Railway Age’s opinion, is no.
"It is the good fortune of railways to have little competition among
themselves," Armand said. "Thus they have every incentive to join
together in common effort in all areas."

Reinvention won’t occur overnight. As many veterans in this industry
will tell you, change comes slowly, and not without a lot of
agonizing. But if the railway industry can work together to embrace
cha2KI 2:23-24
.


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