Arch Enemy: Leading Coal Provider Airs Its Rail Frustrations

Railroad Weekly Feb. 21, 2022

·   Arch Enemy: Leading Coal Provider Airs Its Rail Frustrations  

·   Container Explainer: Triton Sees Shortages Easing Somewhat   

·   Dr. Dray: Startup Aims to Make Short Rail Journeys Profitable

·   Book Discussion: Decline and Renaissance of 20th Century Railroads

Track Talk

“The other area [besides trucking] where we need to improve upon is the use of rail. We estimate that there’s currently 30% of our capacity that goes unused in this segment. Intermodal cargo shifted away from the ports after railroads paused service last year to ease congestion at their Midwest hubs. And we haven’t seen this business return in full.”

-Port of Los Angeles executive director Gene Seroka

Get ready for a busy week ahead. Berkshire Hathaway reports Q4 earnings on Friday, which means lots of new information to review about BNSF. In the meantime, other big railroads will present at two major investment conferences, one hosted by Citigroup on Tuesday and the other by Barclays on Wednesday. Last week was quieter as far as railroad pronouncements. But in Washington—or more accurately on Zoom—the STB held hearings on Amtrak’s desire to offer passenger service between Mobile and New Orleans. Sounds uncontroversial, but CSX and Norfolk Southern—not to mention the Alabama State Port Authority—worry the new service could disrupt freight operations. Amtrak, after all, would be using tracks owned and maintained by the freighter railroads. On the west coast meanwhile, L.A.’s port chief gave an update on operations, noting that exports are at their lowest levels since 2005.

Customer Comments

·   The coal company Arch Resources, in its Q4 earnings call, mentioned its frustrations with railroad service. Said the company’s CEO: “I would also be remiss if I didn’t flag another pressure point on our coking coal franchise in early 2022, which is rail service. Rail service has been inadequate to meet our needs since 2022 began, particularly due, as we understand it, to system-wide Covid-related staffing shortages and the disruption stemming from the Curtis Bay terminal late December explosion. But we continue to have good and constructive discussions with the rail carrier, who we believe is highly focused on working with us to address their staffing issues as well as our growing need for trains.” He’s referring to CSX, whose rail network directly touches Arch’s Leer and Beckely metallurgical coal mines in West Virginia. Arch uses both BNSF and Union Pacific at its Powder River Basin facilities in the west.

·   Arch did say the railroad challenges it faced in January and February could result in its Q1 coking coal shipments to be down by as much as 25% quarter-over-quarter. It’s however “cautiously optimistic that we will see steadily improving rail performance as we approach the final weeks of the quarter and as we progress into April.”

·   As for coal prices, executives at Arch “clearly don’t expect these elevated prices to last forever [but] we continue to view the overall coking coal markets as well supported.” Global steel output remains strong almost everywhere, apart from China. And even there, production seems like it might soon shift back into expansion mode. One reason for the extraordinarily high price levels in the U.S., they said, is underinvestment in coal mines. Another reason is high natural gas prices.

·   Arch wasn’t the only one to call out poor railroad service in its Q4 earnings call. Vulcan Materials did so as well. Ditto for West Fraser Timber, a Canadian company that suffered when severe flooding in British Columbia damaged critical rail tracks.

Container Explainer  

·   Triton International of Bermuda, the self-proclaimed world’s largest lessor of intermodal containers, used its Q4 earnings call to give an update on the supply chain situation. A shortage of vessel capacity, it said, drove “exceptionally high” freight rates during the quarter. All the while, container manufacturers had a hard time catching up to demand, notwithstanding a large increase in production. The result was record prices for new and used containers, and “very high market leasing rates.”

·   The container shortage is making it difficult for North America’s retailers to restock their depleted inventories. Trade volumes have been extremely high as Americans in particular sharply increase their spending on goods. Making the shortage worse are logistical difficulties and congested seaports slowing container turn times. Triton mentioned bottlenecks and shortages pertaining to terminals, trucks, rail, warehouse space and labor shortages—shortages that “cannot be examined and fixed until the industry gets some breathing space.” Bottom line: Demand for containers is high and supply of containers is low.

·   That said, the company did note that the “extreme shortage of containers has eased due to high production volumes of new containers.” Manufacturers, indeed, have “dramatically ramped up production, probably by 150% to 200%, compared to where they had been in 2020… we don’t see that absolute shortage, where containers are the limiter for global trade. Again, that probably cleared up back in late summer, early fall.” But it added: “We expect the overall container fleet will stay tight while global logistics are challenging.”

Autonomous Rail

·   “The logistics of Logistics,” a podcast, spoke with Parallel Systems co-founder Matt Soule, a former top SpaceX executive now trying to develop autonomous, battery-electric railcars. But not traditional railcars. They’d basically run on their own (no locomotive needed), or with small groups of other cars, to carry intermodal containers on short journeys. The Wall Street Journal called them “robot railcars.” The economics of railroading are such that it only makes economic sense to ship intermodal containers if the journey is greater than 500 miles. There aren’t many west coast journeys, Soule explains, less than 1,000 miles. “When trains get very, very short, they get very, very expensive.” The reason comes down to simple math: On shorter journeys, the drayage (trucking the container from the warehouse to the train, and then from the train to the customer) makes up a larger portion of total trip costs. And moving containers by truck is more expensive per mile than moving them by rail. Consider the extra labor you’d need to drive lots of extra cargo, compared to the additional cargo you can move via rail by simply making the train longer, no additional labor needed.

·   The result is that Class I railroads tend to operate only on the highest-volume routes with the highest volume of shipments, ensuring enough freight to operate very long trains. Long trains, to further emphasize the point, allow railroads to spread their operational and maintenance costs over a large base of revenue.

·   But it means that most railroads neglect shorter and smaller-volume routes, leaving them to trucks. And that’s what Parallel’s new railcars hope to change. They’re built to use the same existing rails already in place, many of them underutilized. They’ll replace the need for truck drayage on certain routes, which will cut carbon emissions. They’d further incentive a shift from truck to rail. The new railcars can carry single or double-stacked containers. They can be quickly loaded and unloaded. There won’t be any need to manually sort and reassemble freight onto secondary trains. They’ll allow for smaller rail terminals built much closer to shippers and population centers, an important advantage in the age of e-commerce. Service will improve as it becomes more economical to make frequent trips. And by economically shipping containers on shorter routes, railroads will have a new source of profitable revenue growth, addressing concerns about their current revenue stagnation.

·   That’s the sales pitch, anyway. Can Parallel succeed? It’s currently testing prototypes of its new cars on unused track it’s leasing from a shortline railroad near Los Angeles. Soule says the company needs “a couple of years” to refine and test the technology, as well as to establish relationships with potential railroad customers. Satisfying safety regulations will be another hurdle. Parallel, by the way, is headquartered near Los Angeles.

An update on Fleet Demand

·   Railinc, a data company controlled by railroads, said the fleet of North American rail equipment decreased slightly during the fourth quarter of 2021 (from the previous quarter), to 2,074,217. Some equipment types, including intermodal flatcars and box cars, increased in number. But counts of hoppers and locomotives among other types declined.

Westinghouse Air Brake Company (WABCO) 

·   In its Q4 earnings call, WABCO said it was “encouraged by the continuing trend of railcars coming out of storage.” Also positive growing deliveries of new railcars. North American freight markets should grow, it said, despite another year of zero locomotive deliveries.

·   Railcars in storage are below pre-Covic levels, with about 19% of the North American fleet in storage.

Book Discussion: American Railroads, Decline and Renaissance in the Twentieth Century

·   In 1900, U.S. railroads employed 1,018,000 people, or one out of every 29 nonfarm workers in America. A century later, they employed 246,000 people, one in just 533 workers (which as mentioned above, has fallen further since). Yet today, railroads remain integral to the U.S. economy, and extremely successful businesses as well. The story of how the railroads evolved over time is the story of “American Railroads,” a 2014 book by the academics and industry experts Robert E. Gallamore and John R. Meyer.

·   The railroad industry was America’s first big business, developed with significant help from public subsidies and land grants throughout the 1800s. But the 1900s brought a long list of threats, challenges and disruptions.

·   One was the Progressive Era drive to break up big monopolies. In 1903, the U.S. won a Supreme Court order ruling the Northern Securities Trust—a holding company for three major railroads—illegal on anticompetitive grounds.

·   When the U.S. entered World War I in 1917, the federal government took control of the railroads. As it turned out, the move brought some improvements in efficiency and productivity, aided by coordination at the national level. Nevertheless, they returned to corporate hands after the war, despite labor union resistance.

·   By then, a new threat was emerging: The automobile. This included trucks that could carry much of the same freight railroads were carrying. But it would take time before America’s roads were developed enough to make trucking a truly competitive threat nationally.

·   The Great Depression of the 1930s was another setback. Passenger service became unprofitable as many business travelers and high-income leisure travelers disappeared. 

·   During World War II, unlike World War I, railroads remained in the private sector. And the industry remained profitable during the conflict, which ended in 1945. The post-war years, however, saw several major geo-economic shifts. Commerce began shifting South and West (as it still is today), with textile and garment manufacturers a prime example—they began moving from the Northeast to the South in search of lower wages. The petrochemical industry moved from the Northeast to the Louisiana and Texas Gulf Coasts which were closer to feedstocks. Manufacturers moved to California to be closer to final markets. Chicken and hog-feeding operations moved from the Midwest to the Middle South (i.e., Arkansas) where they found more favorable climate and lower wages. Coal mining, an activity central to railroad profits even today, moved from Appalachia and the Illinois basin to Wyoming and Montana, where they found nonunion labor and coal seams that could be strip-mined. Railroads, alas, couldn’t just pick-up and move, leaving them with lots of misplaced tracks and other infrastructure.

·   Making matters worse, Washington was heavily subsidizing rival modes of transport, most importantly highways but also waterways. The 1950s brought the debut of jet-powered air travel and the launch of Eisenhower’s interstate highway network. Oil and gas pipelines expanded. Railroads, meanwhile, hemorrhaging their passenger base, underinvested. In 1920, the authors write, 1.2b people travelled on U.S. railroads. In 1940, the number was just 456m, even as total passenger transport (on all modes) increased sharply—and even though trains became safer, faster, more comfortable and more economical. Ultimately, Gallamore and Meyer blame three key factors for the decline and near-demise of railroads in the first three quarters of the 20th century: 1) shifts in the U.S. economy, 2) the rise of new modal challengers and 3) “clumsy” regulations.

·   By clumsy regulations, the authors are primarily referring to tight restrictions on what railroads could charge their freight customers. This was the legacy of a 19th century public backlash against abusive railway pricing practices, especially in agricultural regions (keep in mind that 50% of all American workers were farmers in 1880; this would fall to about 25% in 1920, 10% in 1950 and 2% today). 

·   Things got so bad in the 1960s that even the giant Pennsylvania Railroad was in deep financial trouble. Labor costs were rising. Trucks were stealing market share in the northeast (where shipping distances were short). The economy, meanwhile, was de-industrializing and becoming more service oriented. Once the largest corporation in the world, the Philadelphia-based PRR felt compelled to merge with its old rival, the New York Central Railroad. That was in 1968. Two years later, the newly named Penn Central filed for bankruptcy. And shortly thereafter, much of its network was nationalized and—together with assets from several other railroads—reborn as Conrail.

·   Everything changed dramatically with the Staggers Act of 1980. The law deregulated railroad pricing and led to a flurry of consolidation. Aided by a recovering economy and easing inflation, the industry eventually became strongly profitable, with money to invest in infrastructure and technology. Today, the U.S. has the strongest and most comprehensive freight rail network anywhere in the world. 

·   The book also covers contemporary passenger service, which today is provided by government-run Amtrak, a money-losing entity, and various commuter rail systems. One challenge with high-speed rail (HSR), the authors note, is that it’s logistically hard for fast passenger trains and slower freight trains to share the same tracks—most HSR systems abroad operate on dedicated passenger tracks. Another issue is that airplanes can operate a trip profitably with as few as 50 seats. An automobile can do so with as few as three or four. A train, by contrast, typically needs 400 to 500. To generate that kind of volume, HSRs need to operate in high-traffic corridors, ideally with origin demand on both ends of a route.

·   Amtrak, by the way, was born from the 1970 Rail Passenger Service Act. One of its objectives: to relieve “the privately owned freight railroad industry of the heavy cost burden of operating passenger trains.”

·   The authors ask the big question that’s framed the railroad industry for much of the past century, specifically whether it should be a national system that receives federal subsidies on routes where it can’t cover costs? Or should it be a market with private enterprises that offer service only where profitable. The latter would, they imply, mean the elimination of all transcontinental rail service. At the end of the day, the inescapable fact is that railroads are both capitally intensive and labor intensive, making them difficult to run profitably unless relieved of intense competition and money-losing routes. 

·   What was the single most important technological innovation of 20th century for railroads? Gallamore and Meyer choose the dieselization of electric motors between 1939 and 1959. They mention some other big ones as well, including containerization and double-stacked trains.

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