ATLANTA — Railroads are putting their money on the line and shippers are starting to notice, the Atlanta Journal-Constitution reports.
Trying to rebuild reputations damaged by a post-merger “meltdown,” as their biggest customer United Parcel Service termed it, big railroads are aggressively courting business long lost to long-haul truckers.
Their latest weapon: On a growing number of long-distance routes, railroads offer intermodal cargo shippers free delivery if the goods are late.
The success of such initiatives is important to rail hubs like Atlanta, the site of major switching yards operated by two rail titans, Norfolk Southern and CSX.
The on-time guarantee is an effort to rewrite the equation that often comes out in trucking’s favor when a shipper wants to get a load of, say, Chinese-made running shoes from the port in Los Angeles to distribution centers in Atlanta.
Railroads typically offer the cheaper option for such intermodal cargo, the term for shipments loaded into containers or trailers easily transferred among trucks, trains and ships. But railroads have long been viewed as slower and less reliable — an image worsened by service problems that followed two thorny mergers in the late ’90s.
Since then, railroads have invested heavily in intermodal yards and other infrastructure.
And now the three largest railroads — Norfolk Southern, Union Pacific and Burlington Northern Santa Fe — offer delivery time guarantees on more than a dozen routes.
With their “Blue Streak” service launched in October, Norfolk Southern and Union Pacific say they can now match the service offered by a single truck driver on the five-day run between Los Angeles and Atlanta. They say the cost is lower even after charging a premium, about 15 percent, for a guaranteed delivery time.
Atlanta is “a prime target” for additional guaranteed lanes likely to be announced later this year, said Norfolk Southern’s Ryan Houfek. That’s because the Norfolk, Va.-based railroad doubled its intermodal capacity here when it opened a $100 million intermodal rail yard last year near Austell.
Intermodal cargo is Norfolk Southern’s top load on the 100 or so trains that rumble in and out of metro Atlanta each day.
While intermodal shipments are already one of railroads’ largest and fastest-growing services, guaranteed deliveries so far are still a tiny part of their business.
Norfolk Southern has shipped about 2,000 loads since launching the premium service last year vs. an annual volume of more than 2.2 million intermodal shipments.
But the initiative is more important than the numbers yet suggest, people in the shipping industry say.
“Now finally the railroads are standing behind their service,” said Dan Yoest, president of CrossRoad Carriers Intermodal. The Stone Mountain-based firm arranges intermodal shipments of military freight and paper and consumer products.
The guarantees make it easier for Yoest to persuade customers who have used long-haul truckers to try rail, whether they pay extra for the guarantee or not.
Anything that builds shippers’ confidence is crucial, agreed Tom White, spokesman for the Association of American Railroads.
“Intermodal really is the engine of growth for railroads,” he said. Rail intermodal traffic has tripled in the past two decades, he said, and now is the industry’s second-biggest revenue source, after coal shipments.
Intermodal cargo has also been one of the few segments to report a significant increase this year.
Most types of cargo shipments remain anemic because of the recession and the impact on the airline industry from the Sept. 11 terrorist attacks.
Air cargo volumes were down 4.8 percent in the first quarter from a year earlier, while truck cargo tonnage was up only 0.8 percent.
Overall rail traffic was down 2.2 percent, said White. But since April, weekly intermodal traffic totals “are showing some rather healthy increases,” he added.
Volumes have been 8 percent to 13 percent from year-earlier levels.
It will take a lot more than promises and a short-term uptick for railroads to retake market share from the trucking industry, say skeptics and competitors.
“Service guarantees are a great way to market the reliability. FedEx proved that 30 years ago,” said Donald Broughton, a transportation analyst with A.G. Edwards. “The question is, what service level are you guaranteeing?”
He said the railroads won’t make meaningful inroads on highway shipments until they can meet or beat truckers’ delivery times.
Bob Costello, chief economist for American Trucking Associations, is also taking a wait-and-see attitude.
“They’ve been promising things like this for years,” said Costello.
Truck carriers, which handle about two-thirds of the cargo tonnage in the United States, are among the railroads’ biggest customers, using them for hauls of about 1,000 miles or more, he said.
“We’ve wanted them to improve their on-time deliveries for years now,” Costello said.
But even if the railroads have indeed improved, he added, he sees little competitive threat.
“They are such a small part of the puzzle,” he said.
‘Ultimate meltdown’
For decades, railroads have been on the losing end of a tug of war with truckers over America’s cargo. Railroads carried 90 percent of produce and frozen foods after World War II, for instance, but now carry about 10 percent, said White. (Railroads are also trying to recapture that business; Burlington Northern and others have announced delivery guarantees for refrigerated cargo, too, on some routes.)
By the 1970s, about 1 in 5 railroad companies was bankrupt, and the average railroad’s return on investment was less than 2 percent.
The industry got a reprieve when it was partially deregulated in the 1980s.
But profits again began sliding after 1996, when most of the major railroads stumbled after a wave of big mergers, alienating their customers. By 2000, industry profits were $2.5 billion, a third lower than their peak in 1996. The rail trade group projects that railroads’ profits rose last year, to $2.7 billion.
Union Pacific’s 1996 purchase of Southern Pacific led to “ultimate meltdown,” said United Parcel Service spokesman Norman Black.
“We ended up going to trucking at heavy expense to us.”
Likewise, Black said, UPS had to divert about half of its rail cargo to the highways for about a year because of Norfolk Southern’s and CSX Corp.’s problematic carve-up of Conrail in 1999.
“They were preoccupied with merger-related issues. Rome was burning,” Brian Bowers, vice president of intermodal and brokerage services at trucking company Schneider National, said of the railroads.
‘Better than it’s been’
Things are better now, Bowers said.
“That’s all behind them,” he said.
Today, Schneider’s intermodal business totals more than $500 million a year, much of it involving trailers that piggyback on Norfolk Southern’s and Union Pacific’s “Blue Streak” service between Atlanta and Los Angeles.
“Railroads’ performance is better than it’s been in the last decade, but the marketing effort hasn’t been there,” said Bowers.
That’s where the delivery guarantees come in, said Houfek, with Norfolk Southern.
“The key challenge to us is to get the message to shippers that we are as good as we are,” he said. “You have to convince the market.”
Yoest, the Stone Mountain shipper, said the message is starting to stick. A trucking firm typically charges about $2,700 for the five-day run from Atlanta to Los Angeles, said Yoest. The Union Pacific and Norfolk Southern intermodal service takes the same time and costs about 20 percent less, even with the premium for guaranteed delivery time, he said.
He has shipped about 100 loads on the Blue Streak so far.
“Every one of them’s been on time,” he said.
UPS praises Norfolk Southern and the other railroads’ improved performance.
“They offer us a very high degree of reliability now,” said Michael Martini, vice president for transportation at UPS. The percentage of on-time intermodal deliveries over the past year has been in the “high 90s,” he said.
More on the way
“Pretty soon you’re going to see more and more of this guaranteed service,” said Randall Durden, who oversees Norfolk Southern’s intermodal operations in Atlanta, including the daily Blue Streak train.
Durden said he can’t remember the last time Norfolk Southern paid a late claim. (The company said it has paid about a half-dozen claims, out of about 2,000 premium loads shipped so far.)
But some days it still takes a lot of work to beat deadlines.
On a recent Friday, Durden said UPS’ freight had to be hauled by truck to Atlanta because the daily Blue Streak from Los Angeles had arrived almost 12 hours late at Union Pacific’s intermodal yard near Memphis.
But Durden predicted the train, which still had four other premium loads onboard, would reach Norfolk Southern’s Inman Yard in Atlanta that afternoon, with about seven hours to spare.
“It’s just like being on the interstate,” he said.
Floods, downed trees and derailments cause unpredictable delays, he said, but “it’s nothing that interferes with the service commitments we’ve made.”