NEW YORK — At a key industry meeting that attracted a crowd that several veteran attendees all believe was the biggest in years, the size of the crowd didn’t alter the hand-wringing message prevalent in so much discussion about the U.S. rail industry: We should be a lot bigger and better.
It is a theme that is heard frequently, that the rail industry has not been able to make significant inroads into the market share of the trucking sector and that it’s time to change that.
This year at Progressive Railroading’s RailTrends conference in New York, it was again Adrienne Bailey, a partner with the consulting firm of Oliver Wyman, a division of Marsh McLennan (NYSE: MMC), who spelled out the shortcoming but also the opportunities facing the industry.
Bailey said she did not want to be known as “Dr. Doom” in the industry, a moniker that was well-earned in her address to the RailTrends conference a year earlier.
Her outlook this year was about what the rail industry needs to do to increase its freight market share, which various sources put at about 28%. That share hasn’t meaningfully improved for a lengthy period of time. Bailey tried to make her outlook more about opportunities and to help shake any reputation of being a doomsayer.
Bailey’s plan had four major planks. One was to “acknowledge the need for transformation” and also realize that it would take time. “Anybody who thinks the railroads can do this in less than three years, I would challenge that,” she said. “This is a long-range type of program. We need an operating transformation. We’re not bootstrapping ourselves back to earlier levels of service.”
Another part of the four-step plan would be to “use the downturn as a runway.” A slowdown in freight volume, which could provide relief from a market where the railroads are consumed primarily in maintaining the service levels they have, should not be seen as an opportunity to cut costs, Bailey said. Rather, it should be seen as a chance to “provide some breathing room” to make long-term improvements in service that will persevere when the market picks up.
Bailey made several mentions of equity analysts and suggested indirectly that their focus on the short term has been a problem in the rail industry. That was a key part of the plank to “prove the value of growth.”
“We need to more clearly articulate the benefits of growth over the focus on operating ratio,” which Bailey said now can “distract management from value creation.”
The message needs to be that “providing better sustained service will take back market share,” Bailey said. If that message can be driven home, she added, analysts will more often ask questions about safety and servicing growth rather than focusing on OR.
The final plank was the need to “foster a constructive regulatory environment.” Action plans under that broad goal, Bailey said, include obtaining more waivers to use new technology and persuading governments to “credit rail for the public benefits” it provides.
Those benefits — higher fuel efficiency, greater safety levels than trucks and a variety of environmental benefits — were discussed in the RailTrends opening fireside chat featuring the heads of two key rail lobbying groups: Ian Jefferies, the president and CEO of the Association of American Railroads, and Chuck Baker, the president of the American Short Line and Regional Railroad Association.
Baker said the “vibe” around railroads this year has been negative, indicative of a “bad year.”
“Railroads are not the bad guy. Not only are we not the bad guys, but we have a huge range of good guy public policy benefits,” he said, citing the usual litany of positive energy and environmental aspects of rail.
“We think we have a good story to tell,” Baker said. “And it is a frustrating feeling when we feel that labor, some folks in Congress and communities are mad at us. We’d rather be talking about the win, win, win that we bring.”
Jefferies said his organization has tried to make the point to officials in the Biden administration that rail is an ally in some of its macro goals, such as jobs, infrastructure investment and environmental benefits.
“We align with those perfectly,” he said. “But the challenge is when you get into the agencies and there is a disconnect with the top-line goals.”
In the background to the fireside chat is the reality of the slow slog to approval of a new national rail labor contract. Of the 12 unions that underwent contract negotiations with the freight railroad, seven unions have ratified their labor agreements. Three are back at the bargaining table after their members voted against ratifying their agreements. Members of the two largest unions — the ones representing train conductors and locomotive engineers — are voting now whether to ratify their agreements, and those voting results will be released next Monday.
Baker and Jefferies made no predictions on how the remaining negotiations will play out after the U.S. narrowly averted a national rail strike in September. But another walkout is a possibility depending on the outcome of the ongoing votes and negotiations.
Jefferies said he viewed the contract as a “massive win” for labor, ticking off what he said were some of its key features: maintaining health care coverage, “the largest wage increase in 50 years, and I am thrilled for the seven unions that have ratified. They are getting on average $16,000 checks,” a reference to the one-time bonus in the deal reached between unions and the railroads.
But Baker said there is work to do after the contract is ratified and labor peace is achieved. “I will say as soon as this is concluded, it is imperative that we fix this relationship,” he said of the interaction between management and labor. “It is not sustainable to be in a relationship where we feel their hostility.”
The irony is that Baker’s member companies, the short line railroads, are not part of the negotiations with labor. But he said the short lines would need to largely match what is in the contract, though there are nonmonetary benefits at the short lines that can make employment there attractive. “You go to sleep at home every night,” Baker said to cite one example.
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