“As an outsider, I’ve been looking at PSR and trying to figure out what it is, what it does, and what it means for the future,” Peter Swan, associate professor of logistics and operations management at Penn State Harrisburg, told the North East Association of Rail Shippers on Thursday.
Swan says PSR is an effort to eliminate unnecessary assets and work; strives to schedule trains to reduce the need for locomotives, crews, and freight cars; aims to smooth peaks and valleys in traffic by demanding that customers level-load their requests for service; and maximizes return on investment by cutting costs and assets while increasing revenue.
PSR is not, Swan says, a system to offer precise transit time from pull to placement; does not schedule cars on specific trains; does not maximize value for customers; and does not recognize stakeholders other than stockholders.
“This is a system for short-term gain for shareholders,” Swan says.
That could change, he says, and some railroads are taking the needs of customers more into account than others as they implement Precision Scheduled Railroading.
“But in reality, most of the railroads that have implemented Precision Scheduled Railroading have seen serious complaints from shippers regarding service,” Swan says. “It’s between this mismatch between what the railroad can provide with its asset-management efforts and what the customer expects.”
The lean approach to locomotives, crews, and cars means PSR railroads simply don’t have the capacity to grow or respond to increased demand from shippers, Swan says.
The PSR railroads say the operating model championed by the late E. Hunter Harrison creates capacity by moving tonnage on fewer but longer trains. Fewer trains means less congestion on main lines as well as getting in and out of yards, they say. And that translates into faster, more reliable service, they say.
Swan disagrees, saying that long trains destroy a railroad’s ability to run on schedule and that those trains wind up eating terminal capacity because they won’t fit into most yards. And local yards no longer have the capacity necessary to absorb volume swings, he says.
Swan also was critical of railroads’ more restrictive demurrage and accessorial charges, which are designed to encourage shippers to load and unload freight cars more quickly so fewer cars are needed.
The rules were changed so quickly, Swan says, that many customers were unable to adapt their facilities or production schedules and face a choice of rising rail costs or shifting traffic to more expensive trucks.
Swan left the audience of shippers and railroaders with several questions.
Among them: How can railroads grow or even maintain existing traffic with less capacity? What about surge capacity? How can railroads dodge their common-carrier responsibilities? And how long can federal regulators “permit the fleecing and betrayal of the shipping public to continue?”
Independent analyst Anthony B. Hatch told Swan he disagreed with almost every point in his presentation.
PSR does not reduce capacity, Hatch says, it reduces assets. The Canadian railways have boosted capital spending under PSR, Hatch notes, and are outgrowing their American counterparts.
Swan was asked about the inability of pre-PSR railroads to handle surges in demand, such as BNSF Railway on its Northern Transcon in 2013 to 2014, Union Pacific in the Gulf Coast in 2017 to 2018, and Norfolk Southern in the Southeast in 2017 to 2018.
In each case, the railroads ran short of crews and power and coagulated under the strain of increased traffic. How were they any different than a PSR railroad?
The answer, Swan says, is that BNSF, UP, and NS were all trying PSR-like tactics to keep their costs down.
Canadian National has learned a lesson, Swan says, from underinvesting in capacity expansion on its key western corridor between Edmonton and Winnipeg in 2016 to 2017. Traffic came on faster than expected and CN lines became bogged down in Western Canada amid a shortage of crews, power, and track.
CN has since invested around $400 million in each of the past two years to add power, crews, and mainline and terminal capacity to handle its growing intermodal, petrochemical, and agricultural traffic in Western Canada.
Two of my favorite oxymorons:
Government worker
Railroad management.
What happens when the land the railroad sits on is more valuable then the ongoing railroad. How does this make the business a transportation service as opposed to a real estate company.
ALEX – Do the airlines sell service? Yes the airlines sell service and that includes Cattle Car Airways. Cattle Car Airways gets me where I want to go when I want to go there on a selection of routes and schedules. That is service. The planes are clean and modern, as are the terminals. Terminals provide services such as food and beverage and parking, as well as ground transport and rental cars. The planes are cramped for sure, but I find the seats more ergonomic than today’s tiny automobiles. My only complaint is the unsuitable size of the lavatories.
Air Cattle’s network is flexible enough and reliable enough that it can deal with problems such as weather delays, planes removed from service for mechanical issues, etc. For the price of an upgraded ticket I get a free beverage and indemnification over a change in my plans.
Would I prefer that Air Hog Transport give me a larger serving of pretzels, say two micrograms instead of one microgram? Well, I eat before boarding. Something I wasn’t able to do when waiting for Amtrak at its bus stop shelter at Lapeer, Michigan.
So yes the airlines sell service. Do railroads sell service? No. Every day the railroads tell increasing numbers of former customers that their carload is no longer of any importance to the carrier. The customer can call a trucking company. That’s not service.
@ John Winter,
You see my two statements as questionable, seemingly because you didn’t gather the context and understand the way I wrote them. No problem, let me expand them.
First: “…they’re not in the business of moving freight. They’re in the business of making money.”
Yes, of COURSE the railroad earns the vast majority of their revenue by moving freight. But earning revenue and being in business are two different things. The point here is that the railroads are not in the business of moving as much freight as possible, rather they’re in the business of making as much money as possible. I think you can see what I mean now, I am talking of course about the disconnect between volume, revenue and profit. It’s a key distinction that is business 101. Command economists and socialists will melt down at that statement, but well so do they at lots of things, so…
Second: “Shippers pick the lowest price that makes logistical sense.”
You basically came back as said exactly what I mean. Timeliness is a core component of “logistical sense”. Basically what I was saying is that all transportation competes ultimately on price and time.
Now, don’t anybody go tell me “but service!”. Surely, the airlines must sell a service in addition to price and time, right? Wrong. Except to the few moneybags who sit up front sipping champagne, the vast vast vast majority of airline tickets are sold on price alone. People may have their favorite airline and service may be a tiny part of that, but price and time will win out almost every single time somebody picks a flight.
Same thing with shipper x moving stuff y to destination z. They’re gonna get quotes from (probably) several trucking firms, and perhaps a rail route or two if it makes sense for variables y and z. They’ll chose the option that fits the time and money constraints. Many railroad customers wish there was better customer service, but they’ll still ship by rail with the time and dollar compute better than for trucks. A few times the service part may make a sale, but as far as the railroad are concerned, that volume is peanuts.
All reflective of no coherent national transportation policy. The freight wave is moving to the highways railroads be damned. The railroads are in effect cutting themselves into a false prosperity should the trend continue. The efficiencies they have deemed as so necessary under PSR have not translated into lower costs or tariffs for traffic currently destined to trucks.
Carl W, kindly let us know what sort of government regulations are preventing railroads from competing with trucks.
I believe the answer is there are NO government regulations preventing it. There haven’t been for almost 40 years now.
Class 1 railroads have made a conscious executive decision to abandon carload, merchandise and the sensitive freight to trucks. The shippers and public pay with higher rates or poor service and the environment is further degraded.
Railroads don’t know what they want to be. The same as in the 70’s when the IC was making more money selling soda pop under the name IC industries, than they were running the Illinois Central Railroad. Back then it was the same, Customers got in the way of running an efficient railroad.
PSR withstanding, the railroads are and will lose more customers if they stay on the current “track” that they are on. Of all the cost cutting, very little has translated to lower rates and or moving to bring back some marginal freight lost to the trucking industry. Furthermore, no action under PSR has improved customer relationships and or user friendly systems to attract new customer. The railroads are hard to deal with compared to trucking and are less customer orientated. Everyone compares the U.S. railroads to the Canadian railroads. It is not exactly apples to apples there either. The railroads east of the Mississippi River run both north and south with many more potential corridors to deal with than the longer west to east Canadian railroads. PSR can rip service on the eastern carriers as it is implemented. I believe that is what happen with CSX. The railroads have squeezed a lot of assets out of their operations to achieve nearly remarkable operating ratios. I wonder however, when there is bad weather or potential surge in traffic, if such ever occurs again, whether the railroads will be in a position to respond without major disruptions. The debate goes on, but I see very little reason under PSR how new traffic will be attracted to the service the railroads have to offer, other than the BNSF a non declared PSR railroad. I would say now however, to better deal with the situation, there is a good argument for east west mergers, the final stage of railroad consolidation.
To be respectful, Alex you made two very questionable statements.
“…they’re not in the business of moving freight. They’re in the business of making money.” How do you think they make their money? Answer: By moving freight!! So they’re in the business of moving freight in order to make money for their freight moving business
Second questionable statement. “Shippers pick the lowest price that makes logistical sense.” Not entirely true. Shippers will pick more costly truck transportation to get their product there in a timely manner. So in some cases time is more important than costs.
Their are plenty of high value products that are shipped regularly as pointed out by people on this blog. While I don’t speak for these companies, I think they would be willing to pay RR’s premium price to get their product there in a timely fashion. But RR’d can’t meet the customers needs to it goes by truck.
No one is talking about companies with 1 boxcar a week. And not all businesses are located along a major rail line. Many are served by a local in industrial parks or secondary lines. There is a Georgia Pacific plant in my town that gets 2-4 boxcars a day of paper goods 5 day a week. It is served by a local UP job. Not exactly a high value product but UP can make it work if they want to.
Certainly regional RR’s can make it work serving these smaller companies. Thank goodness for them. And the Class 1’s should be thanking them also to do the small jobs.
Reregulation? The greed of government (politicians and bureaucrats) is beyond belief. The steal from us (taxes) then say they’re helping us. I recently spoke to a regulator of oil and gas operations who told me that he failed at farming and oil and gas production, so he took a regulator job for the steady pay, benefits and retirement. Is Peter Swan’s case similar? He works for government. I’d rather see unregulated competition between railroads and trucking companies. Unfortunately, government has no competition.
Charles states that railroading is a service business.
It seems to me that some see railroading as an asset maximizing business or a cost cutting business. And always have, at least in the last 85 years.
@ john Winter, “it is the way it is” largely because railroads are bound by their makeup and efficiencies. You cannot wave a magic wand and just make them better at something they were never really good at.
So long as the railroads are able to keep themselves flush with the high-volume, high margin traffic like they have now, there is no reason to go after low-volume, low margin traffic.
There seems to be some sort of idea floating around here that moving a single railcar around prints money and that the railroads are leaving it on the table. This is not the case. Railroads of yore, when they hauled everything, had no competition. I’m tellin’ ya, a single boxcar of paperboard doesn’t make the railroad money worth their while. Now, if the same customer can produce 5-10 a day, then it is worth it.
Look at it even just from simple track capacity. It takes about the same amount of time to pickup and setout a 5-car string as a single car. That pickup and setout, if it is on the mainline, is blocking other traffic. Yes, there have definitely been places where railroads actively raised rates to get small customers on the major mainlines to leave. It’s the same as UPS stopping one of their 777Fs at some po-dunk airport to pickup like 3 packages. It isn’t worth their time and gets in the way of other, more lucrative traffic.
If the railroads were losing traffic and it wasn’t coming back, I’d be worried. But right now the traffic mix is just fine. Yeah they have priced a lot of people out, but they’re not in the business of moving freight. They’re in the business of making money, just like every other business. Once you realize this, service industry or not, everything will make a lot more sense.
If you’re a smaller customer or one who needs their stuff in a super consistent timeframe, then you’re going to pay those truckers to do it on the dot. But if you’re a bulk customer like grain, coal or large volumes of intermodal, you’re going to use the railroads. It is simple economics. Shippers pick the lowest price that makes logistical sense. That’s how the volume is split between modes. Have volume? Have lots of tonnage? Don’t need it timed to the hour? Then rail is for you.
And the industry collectively moves 2 million loads a week doing just that. What’s the problem with the railroads hauling a traffic mix that makes the most sense for them?
There are idealist and pragmatists in this world. Idealists hang out in government and academia and pontificate what should be done, but the pragmatists are the ones who do the stuff and hold the money, so they’ll do what actually makes sense.
Gregg. I wouldn’t be in a rush to jump into the reregulation pool. Looking at the RR’s pre-1980’s it was a mess. The gov doesn’t always have a good track record of fixing things. As one famous president said, the scariest words to hear are, “I’m from the gov & I’m here to help.”
Alex, I appreciate your input, but you seem to be stuck in “this is the way it is” mode. I’m trying to think outside the box looking for RR’s to try something different without gov interference. As it stands now it appears RR’s are slowly losing customer base.
In my furniture scenario you dismissed it because I was a new business with an odd business plan. Not sure what that has to do with it, but lets use your example. I am Steelcase & I won’t make recliners until I have orders for 2,000 more & I leave my customers sit & wait. How long do you think I’d keep those customers? Customers will simply go to another furniture manufacturer where they will get faster service.
I believe it’s the same with RR’s. They keep customers waiting until it is convenient for the RR to move their railcars. Meanwhile the customer needs their product moved so they say screw the RR, I’m switching to trucks.
It’s easy for RR’s to move bulk products, grain, coal, oil, but it takes more initiative & work to move smaller but high value loads. Seems the RR’s are only looking for the easy dollar, which works for a while, but as your customer base drys up, so does your revenue-profits.
Alex- for 25 years I did reliability benchmarking for the electric transmission industry. As you may know, there were repeated service quality meltdowns in the form of widespread regional blackouts in the 1990s and 2000s These came about largely due to reduced O&M and CapEx.
Congress finally took note in 2003 after 53 million people were left in the dark and imposed a regimen of mandatory regulation at the national level. Prior to that, the interstate reliability was voluntary and lower voltage distribution was regulated by states.
Well, guess what has happened? CapEx has vastly increased, sometimes directed by the regulator. Operating discipline has increased. New technologies have been deployed. And there are far fewer regional blackouts, and nothing like 2003.
Let it suffice to say that after major blackouts in the mid-1990s, the industry could have managed the problem if they wanted. But they didn’t.
Class 1 railroads have been systematically underinvesting and abusing their customers and the public. Regulation works. It will be reimposed and the sooner the better.
Professor Swan was formerly employed by CSX in various management positions so I think he knows what he’s talking about from a real world perspective……
I typically put way less weight into something a University Professor thinks than somebody who has been in the industry. Easy to pontificate from afar.
That being said, the Professor pretty much just trotted out the anti-PSR litany of complaints. Not much original thought there, if we’re being honest.
To address a few points from below. I’m not gonna get into what’s said above, as again, none of it is really new or novel and we’ve heard it 100,000 times already.
@ John Winter: The difference between your scenario and class one railroads is that you are starting a business and the railroads are 150+ year old businesses with a large customer base, both realized and potential, and are an economy-of-scale type business. So your argument really just does not fit at all. Now if you were say Steelcase and wouldn’t design a new chair until you had 200,000 orders, then maybe you’d have an argument.
Thing is, the railroads know that they can make plenty of money by just serving the big, easiest-to-serve customers. So that’s what they’re doing since the operating ratio is the sacred metric right now.
@ Gregg Spindler: The idea of re-regulation makes me laugh. See 1950s-1980. Did it look good? Of course not. There are even more forms of competition with rail now than there were then. How are you going to force the railroads do to what you want? Have the government take over the physical plant? Subsidize the infrastructure improvements you deem necessary? Point a gun at train crews and managers and make them work faster? I don’t care how many people you hire, the railroads are not going to be able to handle an influx of low volume, low margin customers. By reducing their customer base to only those with the most volume or margin, they’re actually simplifying their operations and better serving those select customers. Re-regulation never, ever works. I’d like to hear how you think they could be effectively re-regulated though, besides your vague calls to do so.
@ Charles Landey: As noted above, yes the railroads may be a service industry, but it isn’t service in the way Hilton provides you a hotel room, or McDonalds serves you a cheeseburger. They’re volume, infrastructure-driven, based on mass service. They’re focusing on what makes them the most money with the least amount of effort. They need not grow the customer base to grow their profits, as the last decade has continued to show.
We Canucks have been telling ya for the past 19 years… CN has been quietly moving away from the PSR nonsense since 2009, yet not fast enough to save itself from a meltdown.
Btw, today’s hotshot CN 120 was pulling out of Montreal with 0.93hp per ton… that’s your flagship Eastern intermodal folks (also the only one).
I’m starting a furniture manufacturing business. However I will not build any recliners until I have an order for 2,000 recliners. Wonder how well my business will do?
Isn’t that similar to what RR’s are doing? Railcars sitting around in yards until there are 200 cars going in the same general direction.
How about trains leaving frequently or in a timely manner to get freight moving instead of sitting around collecting dust.
I know it takes more crews & resources. But RR’s would gain a reputation of being reliable and therefore increase customers & increase revenue in return.
PSR is short-termism on steriods.
Re-regulations would be a good thing; the sooner the better.
Much as I respect Mr. A. B. Hatch I have to go with Mr. Swan on the preponderance of his points.
Rail is a SERVICE industry. In a MANUFACTURING industry or in RETAIL, a corporation can dump customers, as Chrysler dumped numerous nameplates such as Plymouth, Eagle, DeSoto, and Imperial, and is likely to dump Chrysler, Dodge and Fiat.
In a SERVICE industry, the ethic is to GAIN customers. To take an example, an airline might figure out it loses money serving Austin or New Orleans while it profits serving Houston and Dallas. So does the airline close Austin and New Orleans? Heck no. The airline ADDS flights to Austin and New Orleans.
Rail management isn’t that intelligent.
If Professor Swan didn’t receive a standing ovation from the shippers in attendance; he should have.
And to Tony’s comment concerning CN and CP growing; my response would be “now – yes but; not when psr was rolled out or for several years afterwards. In fact, CN under Hunter reduced the capacity of the physical plant – something JJ is addressing now with double tracking and siding extensions along with the new crews noted in the article. And it’s obvious from Fred Frailey’s recent blogs how necessary this is AND how overdue it was in coming.
Tony is also well aware that Class 1 railroads (BNSF being an exception in my opinion) over the past 15 years have been incredibly slow to address capacity crunches. A railroad has to be on the verge of completely seizing up before any real effort is made to remedy the situation – especially when it comes to recalling or adding operating employees.
Freight volumes are depressed right now in the US in particular but; I’ve very little doubt the psr Class 1’s in this country won’t be caught with their pants down once again when freight volumes rebound.