Worley Blog

A LOOK AT THE RAILROADS

Posted on: December 3rd, 2020 by Clifford F. Lynch

 

Hopefully, those of you who read this had a good Thanksgiving, or as good as possible, considering the restrictions COVID-19 has forced upon us. Black Friday is over (maybe) and barring some wildly improbable circumstances, we will have a new president in January. Even better news is the fact that we probably will have a new vaccine for the virus by the first of the year. If so, that will be a great start for a more pleasant year.

2020 has not been a bad year for most transportation companies, but a look at the railroad industry is particularly interesting. Third quarter results have all been posted, and indicate a good year for the carriers. U.S. grain volumes were up 25% in both September and October, and both the Canadian National and Canadian Pacific had record moves of grain and potash. (Association of American Railroads).

Year over year intermodal volumes were up, boosted by on-line buying during the pandemic. A positive housing market also helped as the movement of construction materials added to the increase.

But the individual railroads that did the best were those that are implementing Precision Scheduled Railroading (PSR). PSR has helped significantly in the improvement of operating ratios, and is relatively new to most of the carriers. Exactly what is PSR?

According to a CP white paper, it is a “philosophy of constant monitoring and optimization of every asset throughout the entire organization.” It is built on five foundations – “improving customer service, controlling costs, optimizing asset utilization, operating safely, and valuing and developing employees.” One of its hallmarks is scheduled train departures. In the past, railroads have held their trains until they are completely full. Under PSR’s operating principles trains leave at a scheduled time regardless. It is not unlike Amtrak or a scheduled airline. They leave whether they are full or not. It was first introduced by Hunter Harrison, CEO of the Canadian National. After a somewhat rocky, but later successful implementation there, he moved on to the Canadian Pacific, where PSR installation resulted in significant improvements in asset utilization, customer service, and financial performance. From there, Harrison was recruited to the CSX where he began installing PSR. He was making significant progress when he passed away in 2017. At CP during the years 2012 to 2016, average train speed improved 31%, train length grew 21%, and fuel efficiency improved 15%. Earnings per share increased 133%. There were similar improvements at CN; and at the time of Harrison’s death, CSX had eliminated 900 locomotives and 2399 employees. Changing railroad culture is not easy, being somewhat akin to trying to nail Jell-O to a tree, but Harrison persevered, and made some of the most valuable contributions to railroading since Jay Gould and Leland Stanford. Other railroads have followed his lead and implemented their own versions of PSR.

PSR is not without its issues, however. Customer service has been a problem at times, particularly during the CSX implementation. With a goal of profit margin improvement, longer trains for example, can put cost reduction ahead of customer service. Some customers simply have been dropped because they were unprofitable or were in less profitable intermodal lanes. One major issue at CSX was the increase in demurrage and accessorial charges. Higher penalties were assessed to discourage the holding equipment, defeating the PSR need for keeping the equipment moving.

All things considered, Precision Scheduled Railroading has been quite successful for those carriers who have implemented it; and for the most part, customer service issues have leveled out. I believe that PSR will be one of the major railroad efficiency and cost contributions of the past century.

One interesting footnote – the BNSF has not adopted PSR. Owned by Warren Buffet, the BNSF is viewed as a long-term investment, emphasizing customer service rather than a strict adherence to operating ratios.