Class I railroads can continue business as usual and watch their earnings stagnate and profitability fall as their freight volume declines through 2030.
Or they can make meaningful service improvements, become easier for customers to deal with, and launch new intermodal services that capture freight from trucks. Adopting a successful growth strategy will boost revenue, increase profitability, and produce the returns that will raise railroad stock prices.
That’s the choice facing the railroads and their investors, according to an Oliver Wyman report released this week. Report authors Matthew Schabas and Adriene Bailey focused on three potential scenarios: business as usual, holding market share, and pursuit of volume growth.
“Recent research by Oliver Wyman on potential 2030 scenarios for North American Class I railroads shows that focusing on growth — backed by a cost-efficient and reliable operation — is the only strategy likely to lead to long-term value creation,” they wrote.
A growth strategy would increase rail operating income by up to $13 billion and improve the average operating ratio by 2.4 points.
Business as usual would lead to only a $1 billion increase in operating income, while operating ratios would deteriorate by 0.9 points as less traffic rolls over a rail network with high fixed costs.
The report says the industry’s focus on profit margins over volume growth has reached the end of the road.
“In a [business as usual] scenario, the railroads continue to do what many are doing now: cut costs, attempt to raise prices, and fail to materially improve service or the customer experience,” the report says. “The result will be continued market share loss to trucks; price-driven revenue growth will barely offset declining coal volumes. Ultimately, the railroads would become more like utilities: maximizing financial returns while shrinking back to regulated, rail-centric commodities and the network required to support these.”
It’s unlikely that railroads can continue to raise rates and reduce their operating ratios, Schabas and Bailey write.
“Management may believe they can improve on this, but attempting to increase prices further risks market share loss and regulatory action. To sustain today’s O.R. without coal will require deep cost cutting above and beyond prior efficiency improvements,” they write.
A winning strategy for railroads and their investors would lead to service improvements that – along with new shorter-haul intermodal service – ultimately could convert 6 million truckloads to rail.
“To grow volumes, railroads will need to deliver sustained service quality and a customer experience that is consistent and more competitive with truck. Today, shippers universally prefer truck because of its superior flexibility, reliability, and customer-centricity – and are willing to pay more for truck as a result,” Schabas and Bailey write. “Shippers we have spoken with and surveyed have repeatedly told us that they want to do more with rail because of its advantages, but that the product and experience simply are not meeting their supply chain needs.”
The report — titled “The Path to Long-Term Shareholder Value for Rail is Growth” — comes amid a proxy fight that will determine the fate of Norfolk Southern’s growth strategy.
Activist investor Ancora Holdings has been critical of the railroad’s service and resiliency strategy as well as Norfolk Southern’s lagging financial and operational performance. Ancora’s hand-picked management team would fully implement the low-cost Precision Scheduled Railroading operating model at NS while focusing on the most profitable traffic in pursuit of a 57% operating ratio target.
Shippers and rail labor unions have backed Norfolk Southern, and rail regulators have raised concerns about Ancora’s plans. But investors will ultimately decide the matter at the railroad’s May 9 annual shareholder meeting.
Bailey says the report’s financial predictions speak for themselves, and that the road to higher revenue and returns is growth.
“Railroads have to prove it’s possible by getting service and customer experience right,” she tells Trains. “Perhaps analysts are skeptical.”
If Wall Street analysts believe it’s impossible for railroads to grow, then perhaps extracting as much value from a shrinking traffic base makes sense, she says.
“But there are many experienced railroaders who will tell you it is absolutely possible with the commitment, support, and determination to run a scheduled, reliable railroad,” Bailey says.
Get rid of PSR and wall st and focus on service, that’s the only way railroads will grow and prosper
Bill Stephens you are starting to sound like a broken record. How many studies and reports like this have you reported on in the past decade??? Please try to find something new or different to report on for a change.
None of the so-called consulting “geniuses” have figured it out yet but here is the solution, CHANGE THE PARADIGM.
I still have two of the original Santa Fe- JB Hunt Quantum coffee mugs from 1990. The front of the mug features the two carrier names with the Quantum logo. The back side of the mug reads “BREAK WITH TRADITION”.
You and the Wyman gang seem to miss a major distinction here. When you compare truck with rail intermodal where exactly does the Quantum partnership fit in. According to JB and Mike one of the factors facilitating the early conversions was the fact that many potential intermodal customers were already JB Hunt truckload customers.
There were several very amusing stories about some of the early conversion customers not realizing they were using the intermodal product in lieu of truck until JB told them.
Jim I am going to have to plead guilty here. But at the same time when there’s an analysis like this that’s issued, it’s my job to report on it. Of course, railroads have been talking about improving service for a couple of decades now. It hasn’t happened, partly because of the focus on cost-cutting and profit margins. The latest iteration of Quantum should be interesting to watch.
Is this really “new” news or are you (and TRAINS) being played for a fool by Oliver Wyman so they can get some free publicity to drum up more consulting business.
I would argue and present some hard evidence on the status of rail service. First, before Hunt Santa Fe’s largest intermodal customer was a small company you may have heard of called UPS, Inc. As they used to say, “we run the tightest ship in the shipping business”.
Second, in 1989 we started out with ZERO Hunt intermodal loads. Now 30+ years later the legacy Quantum service is the largest intermodal carrier in the marketplace with twice as much volume as the second-place carrier. I personally think the quality of service had a lot to with that record of growth even if you don’t (or refuse to admit it.)
And it was the Quantum intermodal service that help put the UPRR Express refrigerated boxcar service out of business.
Finally has anyone done an impartial analysis of the ability of PSR to meet the trip plan. I don’t see anything on the transit metrics. Are they acceptable or not? You can’t manage what you can’t measure.
What an ironic contrast. This article is side by side with the one on NS’s board bowing to Ancora. Shame, shame, shame on NS’s board for its retreat from service and growth.
Norfolk Southern obviously didn’t read the memo.
(As for Ancona, they probably can’t read.)
Nothing new here really. The rail decline has been pronounced since WW2. The coal boom is over. Intermodal has so far not been the magic revival.