The Battle Continues Between Shippers and Surface Carriers

The Battle Continues Between Shippers and Surface Carriers

When two sides have irreconcilable differences on an issue, both sides usually can share the blame for the impasse. The gulf these days between railroads and shippers is a good example. This time, however, it appears the government will adjudicate the dispute, and neither side is likely to be happy with the result.

In contrast to the deregulation that preceded the financial crisis and the lax oversight of the oil industry, the surface transportation industry and its customers benefited from deregulation. Shippers, consumers, employees, companies and shareholders all are better off than they were 30 years ago, whether because of greater service options, friendlier freight pricing, improved delivery standards or the industry’s financial health.

Despite this, shippers and carriers are at loggerheads, and the relationship has deteriorated. Why? Primarily because of neglect after the Staggers Act and Motor Carrier Act of 1980 were passed, or more specifically, lack of action or regulatory enforcement.

Yes, consolidation has reduced the service field to two main railroads in the East and two in the West, with multiple short lines connecting to mainlines. Shippers captive to a single carrier have seen their service options shrink and their rates balloon. Or have they?

Before turning the issue of rates over to Congress and regulators, both sides should examine who will make these regulatory decisions. If there ever was a case for warning of “unintended consequences,” re-regulation of surface transportation would be a prime example.

A quick examination of who will do the re-regulating is enough to make the hairs on your neck stand up. In the Senate, we have Sen. Jay Rockefeller, D-W.Va., whose ancestors built a fortune in part by using monopoly powers in shipping crude oil. The resulting rail pricing power eventually led to the creation of the Interstate Commerce Commission, which put the railroads into a financial nuclear winter for 70 years. It also delayed the development of the trucking industry because regulators insisted on approving every application for hauling a particular commodity between interstate points.

It’s easy to forget that in the last years of the 19th century and early part of the 20th century, until the major interstate pipelines were built, oil — not coal — was the largest carload commodity shipped on U.S. railroads. There is a little twist for you.

In the House, Rep. James L. Oberstar, D-Minn., is hailed as the leading expert on transportation. In his 35-year congressional career, the best thing to happen legislatively for surface freight transportation and shippers was, perhaps, nothing.

Let’s look at two recent issues that illustrate the arguments of each side. In a recent Wall Street Journal article on export grain rates, a North Dakota farmers group said 50 percent growth in rail rates over the past five years hampered its ability to compete in global markets. This is a favorite sort of example of shippers who can point to large increases in recent years, especially when allowed to choose the years. However, a look at the history of rates over the last 30 years, tells the opposite story.

Railroads pull the same trick — looking at the two-year combination that best illustrates their point.

But the bottom line is this: Rail rates are still well below the inflation trend line over the period of deregulation. Like any market, there will be periods when rate increases trend above and below the long-term lines. It’s called supply-demand economics.

On the other side, a recent article in a national journal pointed to carriers’ plans to increase rates above the cost of inflation over the coming years. If I’m a shipper, that article goes straight to my congressman along with the appropriate expletives. If I’m a railroad, I’m simply trying to impress the financial analysts with my pricing power.

But a look at history suggests that game-changing economics, after all, are a matter of cooperation, not confrontation.

Consider intermodal. In the 1970s, intermodal was a money-losing proposition for railroads wedded to ancient, labor-intensive technology — and it was thoroughly intermodal deregulated. It was the only service offered by the railroads specifically competing with trucks.

Dedicated and expedited trains, stacktrains and other new technologies, and customer willingness to try alternatives led to the industry’s “renaissance,” along with large capital expenditures for terminal facilities and track capacity.

The same formula exists for boxcar traffic transloaded from trucks, similar to the way trucks handle pickup and delivery of domestic truckload and international container business. Because of the cross-dock movement, transit times may not be quite as fast as truck-only, but it may be cheaper. Might a customer want to make that choice?

Surface transportation is changing rapidly, but that doesn’t mean customer-carrier interaction must deteriorate into pat legislated solutions. Harvesting the productivity that has grown out of previous rail shipping strategies will require common sense, innovation and constructive interface. And it will require that each side recognize each other’s interests.

That’s not as easy as letting the legislators handle the problem, however. That is why the value added is called sweat equity.

Tom Finkbiner is senior chairman of the board for the Intermodal Transportation Institute at the University of Denver and executive vice president of Railex. The views expressed here do not necessarily reflect those of those organizations. He can be contacted at tfinkbiner52@tampabay.rr.com.