Escalating rates might motivate more rail shippers to switch modes
Conducted in November, the survey showed 67 percent of the respondents were “actively” seeking to divert traffic compared with 44 percent in the second-quarter survey.
A majority of the polltakers said railroads’ service had improved modestly, so performance isn’t the motivating factor. Pricing is. A majority of the respondents anticipated rail rate increases exceeding 4.6 percent in the next six to 12 months.
“We believe pulling too hard on the pricing lever runs the risk of gradually eroding primary demand over the intermediate to longer run,” according to the Bank of America Securities survey summary.
Anonymous comments reveal shippers’ irritation with escalating rates: “Railroad's focus is short term in nature to achieve quarterly dividends for the investment community … not on the customer’s long-term needs.” And: “Railroads have enjoyed increased pricing power but are now trashing the opportunity of retaining that business at attractive pricing levels because they're trying to get even more price increases in the context of a marketplace that absolutely cannot support it.”
Shippers have spoken. Now, it’s up to railroads to listen. Raise rates? Sure. Some shippers have had “sweet deals” for years, railroads say. And, for the most part, railroads are providing a good service that commands a good rate of return. But rate hikes well above 4 percent might be too much for shippers to bear. If they want to continue eating away at trucks’ market share, railroads can’t afford to alienate the customers they already have.
As one shipper put it: “Railroads need to pay attention to what’s going on out there. They are losing significant volumes to other modes.”
Posted by: 
Jeff Stagl | Date posted: 1/8/2008
Comments
Posted by LHKMAN on 1/8/2008 10:31:05 AM
It's easy for shippers to lambaste railroads when their comments are presented anonymously. It is quite possible, perhaps even probably, that railroads are not "abusing" their customers on price, but are consciously using price to help ration constrained capacity. To believe otherwise, one would have to believe that railroad executives do not know how to manage their own businesses. Net-net, railroads continue to raise rates and even though volume is down they are generating greater revenue and net income. Those who would re-regulate the railroads will be among the first and loudest complainants when limited capacity causes their rates to climb even faster.
Posted by Roy Srp on 1/8/2008 10:35:19 AM
I think this is right on. I have worked at several class ones for a total of 38 years and have watched this happen first hand in predictable cycles. Take heed.
Posted by rrfin on 1/9/2008 10:59:58 AM
Back when the industry was regulated, railroads were compelled to provide service to shippers with undesirable traffic, like short car load hauls of low-rated commodities, at unprofitable rates. Their only options to survive financially were to obtain higher-than-needed rates for hauling more valuable commodities to offset money losing traffic and chase away undesirable traffic by providing poor service. The deregulated environment now allows railroads to finally demand rates from "low rated" commodity shippers that provide a sufficient profit or not haul the traffic. Once those shippers switch to truck or barge (or go out of business) they'll never ship by railroad again. Hopefully, the day never comes that the railroads want that tonnage back.
Posted by Madeira on 1/9/2008 11:36:09 AM
A symptom of abusive market concentration is when shippers need anonymity to describe their feelings. Shippers complaining about bad services, but captive due to low prices is another. Modal transfer is a matter of fact and cannot be simulated. And since bottlenecks occur in restricted sections of the railroad system, it would be wise for them to reduce freight rates in flows that are not critical, instead of widespread rate increases, which would be another symptom of monopoly. Again, the sad part of lack of true competition is that managers think they are doing the best for their railroad, even though they are destroying their market. Re-regulation? The name is tricky and absurd, if one thinks in open access. Sure an open-access environment will better address the investments to increase capacity, and at same time, reduce the need for regulation, as monopoly will be reduced to line ownership and management, excluding all other assets, to be supplied in a much more competitive way by a bunch of competitors, big or small — or, the shippers will tell, better or worse — prepared to do a great service.
Posted by Dave Smith on 1/9/2008 7:19:22 PM
Are the "re-regulation" bills as hyped by the industry actual attempts at pre-Staggers regulation, or are they in reality a move toward further deregulation? If you look at both pieces of legislation being debated, one is a de facto anti-trust exemption removal, while the other also has elements of eliminating the railroads' anti-trust exemption. In my book, the Staggers Act was really only partial deregulation, so an implementation of anti-trust enforcement is not "re-regulation", it is rather a move toward fuller deregulation. The problem is, it is the type of deregulation that happens to favor shippers, so the railroads are attempting to obfuscate the debate in the minds of legislators. So what's wrong with partial deregulation? Anyone remember the California partial energy deregulation debacle?
Posted by TCEklund on 1/11/2008 12:22:23 PM
Customers from time immemorial have always arbitraged truck against rail for that portion of their business that lies in the margin between the two modes. Long-term, the trucking industry will face its own set of issues that will begin to lock-in higher rates for their services. Over the next 20-30 years, the railroads have the ability to win the day, if they handle their new-found pricing power responsibly...balancing the need to generate profits to invest in long-term capacity improvements with the need to maintain volumes and growing market share to justify those improvements and expansions. It will be the market-savvy and customer-focused Class I that successfully negotiates this balancing act.
Posted by LHKMAN on 1/14/2008 10:38:03 AM
One respondent to this subject refers to shippers having to resort to anonymity in expressing their views as a sign of the depth of the problem. It could equally be so that the shippers don't need to resort to anonymity, that the carriers are not behaving abusively, and that the shippers are hiding behind anonymity to level charges that do not stand up to examination. And, for the individual who questions whether the measures being proposed are re-regulation or really further deregulation — what sophistry! Any system that allows trains of one railroad to operate over facilities of another without the owning railroad having anything to say about it, that effectively imposes a cap on rates that can be charged can be called by only one name: regulation.
Posted by Dave Smith on 1/14/2008 6:54:55 PM
In response to LHKMAN, does it really do justice to the very real problem of rail rate disparity by pretending the problem doesn't exist? Usually, internally ignoring monopolistic behavior eventually creates bigger problems for the industries engaged in such behavior. Point of fact: We are a society that deems it in the best interests of a free market economy to utilize the power of regulation for the purpose of ensuring free market optimization. In theory, the seeming oxymoron of free market regulation occurs in situations of monopolistic behavior, as currently being exhibited by the U.S. rail oligarchy. However, to fine tune this description of "regulation" vs "deregulation", it is a well-established concept that anti-trust authority is in line with the idea of reduced regulation, since it eliminates the monopolistic behavior and thus eliminates the need for more comprehensive regulation, e.g. the pre-Staggers environment.
Posted by LHKMAN on 1/18/2008 11:18:26 AM
Mr. Smith: To what problem are you referring that I am allegedly trying to ignore? Is it the concept of differential pricing? Prior to Staggers, all rail tariffs -- all rail traffic, carried the same relative contribution to system fixed costs, which are higher for capital intensive railroads than for any other industry, including electric utilities. Staggers specifically allows differential pricing. Chemical companies, utilities, and some grain dealers knew what would happen before Staggers was passed and opposed the law's passage. As captives, they have greater need for the rail system than do other customers that are not captive. Therefore, the captives should pay rates that include a larger contribution to fixed costs than the rates paid by shippers that can leave the railroads altogether. You never hear from CURE the fact that a majority of rate disputes taken to the STB are resolved by agreement between the shipper and the railroad or in favor of the shipper. Monopoly behavior? Failure of the regulatory safety net? Hardly.
Posted by Dave Smith on 1/18/2008 8:31:45 PM
Quothe LHKMAN: "As captives, they have greater need for the rail system than do other customers that are not captive. Therefore, the captives should pay rates that include a larger contribution to fixed costs than the rates paid by shippers that can leave the railroads altogether." Could you explain the rationale for this statement? Why would a shipper with one rail connection inherently need rail service more than the shipper with two rail connections? All other things being equal, the former and the latter have equal need for rail service, but the latter is afforded market-based competitive rates whereas the former is not. THAT is the problem you seem to ignore.
Posted by LHKMAN on 1/21/2008 12:11:37 PM
Mr. Smith: You have asked the wrong question, but I'll try to give you a response anyway. Whether a shipper has one railroad or more than one railroad available determines captivity. By the way, you can count on the fingers of one hand and have a digit or two left over the number of customers who EVER were served by more than on carrier. The point is that with industry consolidation, shippers no longer can "discipline" carriers that displease them by short-hauling the miscreant carrier. The closure of gateways makes that time-honored technique unusable today. A captive shipper who does not move a commodity that can go by barge or truck (captivity, or market dominance, as the STB uses the term, considers more than just rail-to-rail competition) obviously have a greater need for rail service than does an intermodal shipper, for example. The IM shipper always has the option of leaving his/her freight on the highway. Thus, the utility receving coal should pay for its greater need and use of the system fixed costs. Otherwise, we would have a replay of the 1970s, when 25% of U.S. rail mileage was in bankruptcy proceedings. I was in the industry then and it was no fun. Were you?
