WASHINGTON — The near-term future of freight rail might be one marked by collaboration, whether that’s through private or public partnerships among other supply chain stakeholders or between the railroads themselves as they compete against the trucking industry, according to panelists at the Transportation Research Board annual meeting this week.

One idea that continues to be discussed is that infrastructure investors are interested in developing giant rail industrial parks in North America, said James Miller, a partner with Deloitte Canada, during a Wednesday session. The industrial parks would serve as a way to consolidate activity between transportation modes, with distribution occurring through each individual mode to markets farther inland.

“We see a lot of investors, particularly infrastructure investors, going into this space and creating and building large industrial hubs to do transloading, taking trucks off the road,” said Miller, whose work at Deloitte involves advising infrastructure investment funds on M&A activity.

An example of such a development is a planned major logistics hub in Alliance, Texas, which will have access to the rail lines of Union Pacific (NYSE: UNP) and BNSF (NYSE: BRK.B), as well as BNSF’s intermodal facility. The facility will also have access to Perot Field Fort Worth Alliance Airport, an Amazon regional air hub, a FedEx Southwest regional sort hub, a UPS ground sort hub and Interstate Highway 35 as well as other state highways.

The Alliance hub has “got an airport, it’s got rail, it’s got trucks,” Miller said. The model it uses is similar to the hub-and-spoke configuration of the airline industry in the 1990s, and that model could serve the rail industry today, he noted.

But local and state governments are also interested in developing multimodal projects, as seen through recent recipients of U.S. federal grants as well as inland ports. For example, the Alabama Port Authority is seeking to develop an inland intermodal transfer facility in Montgomery, FreightWaves reported in June 2021. That resource would be adjacent to CSX (NASDAQ: CSX) and nearby two interstate highways.

Localities in the western U.S. are looking at building rail facilities that can accommodate exports, especially agricultural exports.

“[These facilities] are often driven by the ability to have access to reposition empties from the Midwest,” said Donald Ludlow, U.S. vice president for CPCS Transcom, a Canadian consulting firm specializing in infrastructure.

Planned inland facilities in Oregon and Arizona are also aimed at helping regional shippers there facilitate a connection to coastal ports, according to Ludlow.

“Often these are driven by the public sector, by economic development,” Ludlow said. “So it’s a very kind of different dynamic, but I think it’s worth noting.”

Regardless of who’s steering the development, the inland facility must have the ability to hedge market fluctuations, which can be achieved by having anchor tenants, according to Ludlow. What’s driving some of these projects to develop inland facilities is a broader effort to move containers out of the ports and sort them inland.

“There’s been a push to get those containers off the wharf, off the dock faster,” Ludlow said. “And that is a trend that continues to persist and is driving investments both from the public sector and the private sector.”

For instance, he noted that BNSF’s plans for a $1.5 billion Barstow international gateway for Southern California shows that the railroad knows it needs to move the containers expeditiously off docks and into a facility where the railroad can build trains while doing so in an environmentally friendly manner.

But it isn’t all smooth sailing for these tentative projects. Ludlow maintains they can meet local resistance because of traffic issues that might arise, especially blocked crossings.

Meanwhile, rail-served industrial sites have gotten some interest, although shippers insist these facilities also have access to trucks, Ludlow said.

“It’s kind of a double edged sword here,” he said. “[Shippers] want to be able to ship by rail whenever they can, but they realize they can’t be completely rail dependent. So that may tell us something about where our industry’s at, especially in terms of us serving small shippers, as the sad truth is that at least on a ton-miles basis, the share of rail continues to drop against trucking.”

What freight rail could look like post PSR

Wednesday’s discussion came as the U.S. Class I railroads are still recovering from service issues — ones that some maintain came about as they deployed precision scheduled railroading (PSR), a method that seeks to streamline operations and cut costs.

One of the effects of PSR was a heightened focus on lowering operating ratio, a measurement investors sometimes use to gauge the financial health of a company. After the Class I railroads deployed PSR, their OR improved. Critics of PSR have said its main purpose is to improve the financial returns of the railroads at the expense of operations.

With shippers and regulators such as the Surface Transportation Board scrutinizing the railroads’ service performance, some industry stakeholders are calling for a shift away from focusing on OR. They argue the investment community could look to a financial figure that’s more dependent on operational improvements, such as earnings before interest, taxes, depreciation and amortization, according to Miller.

“There’s no consensus on what’s next, [but the industry’s] shift away from that [OR] model is bound to occur. And you’ve got three Class Is that have new CEOs who come from the commercial side of the house versus the operation side of the house,” which supports that transition, said Miller, referring to new CEO appointments at Canadian railway CN (NYSE: CNI), CSX and Norfolk Southern (NYSE: NSC).

Furthermore, PSR’s aftermath has led to a freight rail industry that has limited resources to grow operationally.

“They’re thin everywhere,” he said. “They’re thin in marketing, in industrial development. They don’t have the people, expertise. If you’re building a giant car plant, they’re going to be the ones that can help you out. But if you’re a medium-sized shipper or a smaller shipper, your industrial development is going to be impaired because they don’t have the ability [to help].”

Although technological advances will enable the railroads to make safety and operational gains and collect better data points to improve supply chain visibility, Miller pointed out that “isn’t going to change the dial. This industry is 200 years old. There’s nothing magical that’s going to happen.”

However, one way the railroads might be able to strengthen the industry is to continue to focus on selling stakeholders and regulators on the environmental benefits of rail.

Indeed, earlier this week, President Joe Biden released the U.S. National Blueprint for Transportation Decarbonization, a formal strategy that calls for the prioritization of maritime and rail over trucking in order to fast-track the reduction of greenhouse gas emissions.

“It’s a magic card from the railways if they play it … ,” Miller said. “[The railroads] use about a quarter of the carbon to move a ton of cargo, and they really need to play this up and governments need to use this too.”

Miller also noted the railroads also are exploring alternative fuels for locomotive power, such as hydrogen. He also said they will need to be open for more collaboration among themselves, so they can “go after the common enemy” — trucks.

Such a collaboration might look more like infrastructure sharing or jointly working on infrastructure improvements in congestion-prone areas, such as Chicago, according to Miller. For example, Canadian railways CN and Canadian Pacific (NYSE: CP) use each other’s track on the dense corridor between the Port of Vancouver and Kamloops in British Columia.

However, the difference between collaboration and collusion is clearly “on the infrastructure side,” he said.

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