Precision Scheduled Railroading, Operating Ratios, and Grain Service Metrics

This article has been reprinted from the Dec. 20 USDA Grain Transportation Report.

In September, Union Pacific Railroad (UP) announced its plans to move toward a precision scheduled railroading (PSR) operating model, with rollout beginning October 1, 2018.

Norfolk Southern (NS) also recently announced it would implement a version of PSR.

The operational changes by these two railroads follow a similar transition at CSX in 2017.

Railroads say PSR is an approach to operations that focuses on efficiency and cutting costs through greater asset utilization.

PSR reflects a broader trend in the railroad industry to reduce operating ratios (operating costs/revenue).

Opponents of PSR believe it results in decreased service, in the form of arbitrary reductions in delivery and pulling of trains from facilities, as a result of major reductions in locomotives, crews, and customer service personnel.

Proponents of PSR believe it can deliver both greater efficiency and service to rail customers.

Critics of PSR and operating ratio cuts argue railroads have been too exclusively focused on cutting costs and raising rates (in part, through higher accessorial fees), and have not been focused enough on providing quality service.

Shippers maintain that cutting operating ratios frequently means sacrificing service and shipper-interests for shortterm investor interests.

Shippers express concern that focusing too heavily on cutting ostensibly under-used assets leaves railroads, and the service they offer shippers, vulnerable to surges in rail demand resulting from unexpected market changes; setting up a “do less with less” situation over the longer term.

In contrast, supporters of precision railroading and operating ratio cuts argue it enables them to do “more with less.”

For example, part of precision railroading involves a focus on running fewer, but longer, general-purpose trains.

Railroads argue doing so reduces congestion, requires less labor and fewer locomotives, and reduces car dwell time.

Critics say longer trains are less safe. Supporters believe PSR and lower operating ratios mean providing both a better return on investment for shareholders, as well as better service for shippers.

This article looks at the Surface Transportation Board’s (STB) rail service metrics to assess grain rail service performance in 2018, as well as how CSX service has been affected by its transition to PSR.

The article first analyzes CSX service during and after the PSR transition period, and then looks at rail service in 2018 across all Class I railroads.

The CSX Transition to Precision Scheduled Railroading

The late E. Hunter Harrison joined CSX in March of 2017 and immediately announced plans to implement PSR.

Harrison had previously implemented the model at the Illinois Central, Canadian National (CN) and Canadian Pacific (CP).

Service metrics started in 2017, at relatively normal levels, but around March, grain train speeds began declining while terminal dwell times began rising.

In June, origin dwell times began rising. By August, all three metrics had reached their respective lowest/highest points in 2017, well below/above the same point in previous years.

During this time, multiple shipper groups complained to STB about CSX service, including a letter from Secretary of Agriculture Sonny Perdue that emphasized the costs of poor rail service to agricultural shippers.

Figures 1-3 support shipper’s concerns about PSR by showing the decline in CSX’s grain train speeds, increase in terminal dwell times, and increase in grain origin dwell times, respectively.

The red line in each figure shows performance during 2017 compared to 2016 in the grey, dashed line.

CSX’s performance in 2018, however, shows significant improvement.

The bright blue lines in Figures 1-3 show that after the rough transition period, lasting through October of 2017, CSX’s performance has since improved significantly.

Throughout 2018, CSX’s train speeds and terminal dwell times have consistently been better than previous years.

Origin dwell times took the longest to decline after the transition but have been below average since March.

CSX’s January to October total grain carloads were up 8 percent from 2017, but down 4 percent from 2016.

Grain Rail Service in 2018

Until recent weeks, rail service for grain throughout 2018 has been below average compared to recent years across all Class I railroads.

Figures 4-6 show grain train speeds, terminal dwell times, and grain origin dwell times for each railroad.

Each line shows the percentage change from 2015 for that railroad.

In 2018, average train speeds have been low and dwell times have been high. CSX, represented by the black line in each of the charts, stands out with generally better metrics in contrast to the other railroads’ performance in 2018.

Railroads have cited labor shortages as an important factor behind 2018 service issues.

At the same time, total rail traffic has been high.

Poor performance in 2018 supports shipper concerns that years of operating ratio cuts may have reduced the railroads’ ability to respond to unexpected changes in the demand for rail service and the overall economy, including growth in total traffic.

Conclusions

While critics and supporters of PSR and operating ratio cuts disagree on the respective merits, the data are nuanced.

On one hand, Figures 4-6 illustrate the concerns shippers have been raising over service and Wall Street-led efforts to cut operating ratios.

These concerns are likely to persist if the economy stays strong and the demand for rail traffic remains high.

On the other hand, CSX performance data demonstrate not all efforts to cut operating ratios always result in poorer service.

According to its metrics, CSX’s service appears to have improved (on average) since implementing PSR.

However, there are important limitations to these metrics. First, the data only reflect averages and, therefore, are not reflective of outlier situations.

Second, finer-grain service details are also lost in these aggregates, which can hide local problems.

For instance, during the CSX transition, shippers complained CSX began only offering service at limited, specified intervals.

Such changes represent worse service for those shippers but might show up as faster speeds and reduced dwell times overall.

Finally, CSX grain carloads are above 2017 but below 2016 levels, adding ambiguity to whether CSX is, in fact, doing more with less.

While some railroads believe PSR can help them deliver better service and lower operating ratios, many shippers believe lower operating ratios do not always imply railroad efficiency or better customer service.

Moreover, shipper testimony during the CSX transition revealed the need for railroads who are planning significant operational changes to communicate with shippers long before changes happen.

An open communication channel allows shippers to express their concerns and resolve issues.