For STB, an Earful on Freight Rail Growth

“Freight rail is critically important to the Nation’s economy, and the Board has an interest in the health and growth of the industry, as well as in rail customers’ need to move their goods efficiently and reliably,” the STB said when it announced in July it would hold the hearing. “While the Board recognizes that some shifts in volume may not be primarily within the control of rail carriers, the Board has observed that over the past 10 years carload volumes have not grown and have in fact decreased. The Board wishes to explore how industry participants are strategizing and innovating to reverse this recent trend and achieve freight rail growth. The Board is also interested in shippers’ plans or desire for future use of rail, factors that may affect shipment decisions, and what rail carriers are doing and can do to increase shippers’ use of rail. This hearing presents a chance to discuss opportunities for growth in the freight rail industry, as well as the challenges and effects associated with a failure to grow.”

The STB requested the attendance of executive-level officials from the Class I railroads, and invited testimony from industry analysts, other rail carriers, rail customers, rail suppliers, labor organizations, and other interested parties.

Below, Railway Age provides highlights from a sampling of industry comments and testimony submitted to the Board ahead of the hearing.

Association of American Railroads (AAR)

“As the Board recognizes, smart, sustainable growth in rail traffic is in everyone’s interest,” wrote AAR President and CEO Ian Jefferies in testimony filed with the STB. “It is in the freight railroads’ interest to grow their businesses and increasing the percentage of freight that moves by rail has many positive benefits for the American public. Indeed, rail is the safest and most environmentally friendly method of moving freight over land, while also reducing the burden on the American taxpayer relative to other modes.”

Boosting Capacity

Jefferies pointed out that freight rail growth requires capacity, and that additional capacity requires “time, investment, and thoughtful analysis.” Freight rail demand, he said, “is generally derived from broader economic trends and depends on factors outside the railroads’ control—or what economists call ‘derived demand.’” Companies and even industries “can and do change rapidly and unexpectedly, and railroads must be able to deal with that flux,” he noted. “For example, the rise of cheap, abundant, domestic natural gas coupled with the expansion of government policies that support green energy production have significantly reduced coal traffic. For railroads, these broad, often-unanticipated changes are reflected in the volumes, and the types and locations, of the commodities railroads are asked to transport. To successfully adapt to these challenges, railroads must be flexible and innovative, while maintaining the efficiency and productivity essential to sustaining their long-term financial health. Adding capacity in a smart way can enable railroads to meet changing demand and seize opportunities to grow when they present themselves. At the same time, having too much unused capacity is inefficient and can drive up the cost to operate the railroad. We saw the results of excess capacity, coupled with comprehensive rate regulation, in the 1970s, prior to passage of the Staggers Act in 1980. Finding the sweet spot is what our nation’s railroads must do to stay financially healthy and continue to provide freight rail service that is the envy of the world.”

Jefferies pointed out that adding capacity requires “long-term investments in people, equipment, and infrastructure.” Employees, he said “are the railroads’ most valuable resource”; “adding new workers takes time and money, so railroads do it carefully and thoughtfully.” Having the “right number of employees is a core part of strategic planning to enable railroads to take advantage of growth opportunities, and AAR’s members are committed to doing just that,” he said.

“Forecasting expected demand into the mid- and longer-term future and matching it against the assets that will be required to take advantage of it is both art and science,” Jefferies continued. And “adding physical capacity to outdoor rail infrastructure also requires time and money.” It can take more than a year ”to plan and build even a small project, like a siding,” he noted. “Larger projects, especially those that require extensive environmental review, can take much longer—a decade or more. These long-time horizons make investment choices especially vulnerable to shifting economic trends. A product that may be in high demand in one year and require specific infrastructure may not be there the next year … Because of the expense and time such investments can take, each must be carefully chosen, backed by data and expert insights, and have the traffic necessary to justify the expenditure. As an industry, railroads have experienced the downsides of underinvestment, but from that have learned the value of continuing to reinvest the necessary resources into their systems to grow.”

Role of Policies, Regulation

Jefferies said that policies and regulations play a role—either incentivizing or impeding growth. “To be direct, a policy and regulatory environment that increases investment risk and stifles innovation impedes growth; however, an environment that provides regulatory balance and certainty can foster innovation and growth. This is an area where the Board can help,” he said. “For example, one recent regulatory action that threatens railroad growth across the country is the California Air Resources Board’s (CARB) In-Use Locomotive Regulation (CARB rule). … While the CARB rule raises numerous important legal issues, for the purposes of this proceeding, it represents an excellent example of how regulation can chill growth in rail’s share of the freight market. The CARB rule cuts short the useful life of already-purchased, long-term investments, and cuts off new investment in the locomotives that are currently commercially available. Decisions to invest resources in California are being negatively impacted right now, but so are decisions to invest elsewhere. Stranding capital through regulatory fiat does not encourage future capital investment. And businesses that cannot reasonably invest in growth will, in turn, be poor investment choices for those with capital to invest. This is a downward cycle we must not allow. The industry appreciates the Board’s letter to EPA regarding the CARB matter. Clarity of jurisdiction over transportation by rail, and the uniformity thereof, creates certainty and reduces the inherent risk of such expensive, long-term investments. On the other hand, a patchwork of different state or local regulations—or even just the threat of them—creates significant risk to the industry and, ultimately, decisions to grow capacity. Simply put, regulatory certainty is imperative to making smart investment decisions. The industry encourages the Board to help preserve a uniform and more predictable regulatory environment for the railroads.”

“Forecasting expected demand into the mid- and longer-term future and matching it against the assets that will be required to take advantage of it is both art and science.”
— AAR President and CEO Ian Jefferies

Another impediment to infrastructure investments, Jefferies said, “can be the time and uncertainty associated with permitting.” While railroads “don’t seek to circumvent the applicable environmental laws and the federal permitting processes,” he said, “too often these processes and reviews are over-broad, inefficient, expensive, and unnecessarily delay projects, sometimes for years, without a corresponding benefit. …”

Taking Advantage of Technology

The regulatory environment must also encourage technology advancement to enable growth, Jefferies noted. “For example, Automated Track Inspection (ATI) vehicles can inspect hundreds of thousands of track miles yearly and can spot defects and concerns invisible to the human eye,” he reported. ”And because ATI can be utilized during revenue service—instead of shutting down or slowing service over a particular track to permit manual inspections—this technology can increase capacity without the need for additional infrastructure. Indeed, the data shows that the blended use of ATI with visual track inspections increases rail safety. However, for the last two years the Federal Railroad Administration has refused to permit the railroads to efficiently utilize—or even broadly pilot—this technology, even though the record of its effectiveness is undisputed. This has been a dramatic about-face in policy regarding ATI which one railroad was forced to go to court to try and rectify. Regulatory uncertainty like this complicates and even disincentivizes future technological investment decisions. But if policies create certainty for the regulated entity and encourage future innovation, efficiencies can be realized that make railroads safer and more competitive.”

Ensuring Modal Equity

Jefferies told the Board that for railroads to convert substantial traffic volumes from road to rail, “increased modal equity is essential,” so if government, “through regulations or other policies, places a thumb on the scale in favor of other modes, it can make it more difficult for railroads to compete, much less grow.” He noted, for example, that “the oversight of emerging technologies—including automated systems—is increasingly divergent across the various modes of transportation.” U.S. Department of Transportation “policies promoting development of automation in the trucking sector stand in stark contrast to DOT policies and practices concerning automation in the rail sector,” Jefferies told the Board. “The Federal Motor Carrier Safety Administration (FMCSA) and DOT are funding research and advancing policies for autonomous commercial motor vehicles (CMV). FMCSA is also currently advancing a rulemaking on how ‘to establish a regulatory framework for [autonomous driver system or ADS]-equipped CMV operations’ because it is ‘consider[ing] amendments to the [Federal Motor Carrier Safety Regulations] to ensure the safe integration of ADS-equipped CMVs into interstate motor carriers’ operations.’ On the other hand, FRA recently went the opposite direction, mandating, in perpetuity, two people be in the locomotive cab for nearly all freight operations. This regulatory about-face is unsettling, as historically rail staffing levels were a matter left to collective bargaining.” Additionally, “policymakers are considering limiting train length—even though the safety of the industry has only improved over the past several decades—while also looking to increase truck size and weight,” Jefferies said. “Different safety regulatory policies for different modes of transportation further distort the freight transportation market, tipping the scales in favor of those modes with fewer barriers to incorporating new technologies. Even so, railroads have successfully won truck-competitive traffic, especially on longer hauls, and the industry sees substantial opportunity for future growth given a projected intermodal tonnage increase of 28% by 2030.”

Jefferies concluded by saying that “if there is one takeaway from this hearing it is that railroads are committed to growing their share of freight traffic.” Railroads, he noted, “have the requisite experience and expertise, and with the help of governmental regulations and policies—whether related to funding, safety, operations, or economics—that encourage additional investment, freight railroads can and will grow.”

Railroading, By the Numbers

AAR Senior Vice President-Policy and Economics Rand Ghayad also provided testimony to the STB on the association’s behalf. “Since 2010, total U.S. Class I rail traffic has generally declined, largely due to a significant drop in coal carloads,” he wrote in an STB filing. “However, when coal is excluded, rail volumes have shown a slight upward trend over the same period.” Last year, intermodal “was the dominant rail traffic segment, representing nearly half of all originated units,” he noted. “Intermodal also generated about 25% of Class I rail revenue, making it the largest revenue contributor. Meanwhile, coal accounted for 13.2% of the total Class I volume, with 3.4 million carloads, followed by chemicals (8.1%), food products (6.4%), grain (5.3%); and crushed stone, sand, and gravel (4.9%). Overall, Class I railroads originated 26.0 million carloads and intermodal units in 2023, with total terminated volume slightly higher at 27.6 million due to cross-border shipments from Mexico and Canada.”

He pointed out that rail traffic volumes “are highly variable and subject to fluctuations driven by changing customer markets, economic conditions, and external factors like pandemics,” and annual Class I rail volumes “often vary by hundreds of thousands of units, with few sectors showing consistent, steady long-term growth or decline.” While national volumes for a commodity “might remain stable,” he noted, “regional gains and losses can offset each other, complicating railroads’ planning efforts.”

“The weakness in U.S. rail volumes today is a product of economic conditions and consistent with an economy in which manufacturing and commodity-related industries are struggling. While railroads are positioned for growth, their success hinges on a favorable economic environment.”
—AAR Senior Vice President-Policy and Economics Rand Ghayad

There are many factors impacting rail demand that are out of the railroads’ control, Rand told the Board. “Rail service demand is closely tied to the performance of goods-related sectors of the economy,” and railroads “are also affected by what’s happening within specific industries.” He highlighted chemicals and grain as examples.

Grain, he said, “is a crucial commodity for U.S. freight railroads.” In 2023, Class I railroads originated 1.45 million carloads of grain, representing 5.3% of total carloads and 9.2% of total tons carried, according to Rand. “The grain market is highly competitive, with railroads facing strong competition from trucks and barges,” he noted. “Domestic grain demand tends to be relatively stable, with year-over-year fluctuations remaining modest. However, U.S. grain exports are inherently volatile, fluctuating significantly from year to year due to a range of factors such as global production levels, economic conditions in importing countries, exchange rates, grain prices, government policies, trade tensions, and ocean freight rates. Railroads generally hold a higher mode share in U.S. grain export market, capturing around 38% according to USDA data, particularly for long hauls to ports. However, railroads still face stiff competition from barges and trucks in transporting grain to ports. The unpredictable nature of grain exports means that much of variability in U.S. rail carloads of grain is tied to changes in export volumes, underscoring both the significance of international markets and the challenges posed by their volatility. Despite these challenges, the focus on cost control remains critical for railroads to maintain competitiveness, especially against other major grain-exporting nations like Brazil, Argentina, and Australia.”

Chemicals are the third-largest carload segment behind coal and intermodal, Rand said. “The chemical industry is a critical segment for railroads, but it also presents unique challenges,” he noted. “The U.S. chemical industry, comprising thousands of firms, is primarily concentrated in the Gulf States due to the availability of petroleum and natural gas. These raw materials are essential for chemical production, which is then distributed across the country. According to the American Chemistry Council (ACC), in 2023 approximately 1.01 billion tons of chemicals were shipped domestically at a cost of $77.2 billion. Railroads accounted for 16% of the total transportation costs and 20% of the chemical tonnage, with trucks dominating the market. This intense competition from other transportation modes, coupled with the competitive pressures within the chemical industry itself, suggests that the railroads’ role in this sector continues to face challenges.” On a positive note, he said that “the shale gas boom has led to increased U.S. natural gas production, which in turn has boosted chemical production (and rail chemical volumes) due to lower natural gas prices. This growth has resulted in the expansion of chemical plants, with railroads playing a crucial role in transporting this increased output from these facilities.”

In sum, Rand said, “[t]he future success of railroads in the chemical sector will depend on their ability to adapt to these changing market conditions while staying competitive with other transportation modes,” and the “extent of the impact from these factors remains uncertain and will depend on various economic and industry-specific factors.”

Like Jefferies, Rand told the Board that intermodal has been “the fastest-growing segment of rail traffic over the past 30 years, contributing approximately 25% of Class I rail revenue in 2023.” That growth trend is set to continue “as railroads adapt to the ongoing shifts in the U.S. and global economies, which have moved away from heavy industries and towards the production and distribution of smaller, higher-value goods,” he explained. “In 2023, the four largest U.S. railroads originated 12.7 million containers and trailers, an amount expected to grow—S&P projects robust growth of around 28% in tonnage by 2030. Given that nearly all goods transported by rail intermodal could alternatively be moved by truck, price and service competitiveness are critical for railroads.” Rand told the Board that that “[w]hile competition from trucking remains extremely strong, the flexibility and scalability of intermodal transport position railroads to … drive future growth.”

In conclusion, Rand told the STB that “[w]hile the railroads are positioned for growth, their success hinges on a favorable economic environment.”

American Short Line and Regional Railroad Association (ASLRRA)

“Growth in the freight rail business is essential to short line railroads,” wrote Sarah Yurasko, Senior Vice President of Law and General Counsel for the ASLRRA, in STB testimony. “Carload volume is the lifeblood of the short line industry. Short lines keenly focus on retaining and growing carload volume—and will partner with anyone to better serve a customer or build out a rail option for a new customer. Whether it is one carload of scrap metal a year that is hauled for a one-man scrap processor who hand loads rail cars with specialty aluminum, chicken feed, lumber through a transload site, steel on a shortcut, unit trains of ethanol, or several hundred carloads of grain a week—there is NO customer that our industry will not work with to serve and grow their business. ASLRRA firmly believes that the way short lines do business is the reason short lines grow business so successfully.”

At the “heart of the short line story,” Yurasko said, is “[g]rowing business where little existed before.” It’s what “short line railroad executives go to bed and wake up thinking about,” she noted. “Since the Staggers Act jumpstarted the modern short line industry, short lines have turned the most neglected rail lines in America into a thriving collection of small businesses where carload growth has been the lifeblood of success.”

“By working with local partners, Class I’s, other short lines, or economic development agencies, short lines drive growth for the local communities and for the freight rail system one creative solution at a time.”
—ASLRRA Senior Vice President of Law and General Counsel Sarah Yurasko

ASLRRA’s members, she said, highlight these four components as key to growth and success:

1. “A deep understanding of our customers—their pain points, their growth strategies—and the ability to provide efficient rail service that is responsive to their specific needs.
2. “Investment in infrastructure—always with private funds, but also often supported by state or federal funding. Short lines are willing to invest with the long term in mind and are eager and willing to work with public partners when the opportunity arises.
3. “Working closely with local business development groups such as Chambers of Commerce and government groups such as Economic Development Agencies to develop rail-served commercial properties such as business and industrial parks.
4. “Strong partnerships with the community and Class Is to develop and efficiently deliver the white-glove excellent customer service our customers depend upon.”

“The Short line rail industry is nimble, necessary, and noted for its attentive and customized service,” Yurasko concluded. “Shippers rely on local rail service, often a short line, for access to markets regionally and nationwide. By working with local partners, Class I’s, other short lines, or economic development agencies, short lines drive growth for the local communities and for the freight rail system one creative solution at a time.”

Representatives from five short lines shared their growth stories in written testimony to the STB. Among them was Henry Posner III, Chairman of Iowa Interstate Railroad, who discussed customer Pattison Company, a family-owned producer of aggregates in Northeast Iowa. Working with Canadian Pacific Kansas City (CPKC), “we have created geographic competition (as opposed to intermodal or intramodal competition) to open new markets for Pattison as they compete in western Iowa with truck-served producers,” he said. “To put it another way, thanks to rail service we are opening new markets for them and at the same time relieving stress on local roads as Pattison’s trucks are used for the last miles as opposed to the complete haul. We have been working with Pattison since 2017 and now have five locations on our west end and have grown to over 2,500 cars per year.”

 It “is our experience that having a consistent story as far as both a railroad’s strategy and its ownership is critical in getting customers to make commitments to rail,” Posner told the STB. “We’re asking them to realign their supply chains around rail, which is…complicated…as compared with trucking; they need comfort that the railroad’s strategy will not be changing based on short-term perspectives. This is linked with ownership: in our case, family ownership in partnership with iCON Infrastructure Partners, which shares our long-term perspective and has been very helpful in exposing us to, among other things, best practices as regards safety, and insight into potential new markets.”

Railway Supply Institute (RSI)

“RSI’s members understand and are aware that there are impediments to the growth of the freight rail system,” wrote Patty Long, President of RSI, which represents approximately 170 member companies. “One of our primary organizational goals is to increase rail modal share, which has been steadily declining while freight tons increase each year. So how do we accomplish growth in freight rail? We believe there are three key ways:

1. “Improve rail service using innovation and technology.
2. “Highlight the sustainable benefits of rail to shippers; and
3. “Enable RSI members to continue developing and deploying functional and innovative equipment to increase the efficiency of the rail system.”

Long pointed out that “[b]y expanding telematics, RSI members believe there is an immense opportunity to innovate rail in ways that create efficiencies, reduce complexities, and provide more consistency across the North American rail network.” Beyond RailPulse, she said, other companies, including RSI members, “are investing in and developing their own technology to accelerate telematics deployment. Interest and utilization among the shipping community is ripe for growth. These businesses stand to significantly benefit in the areas of logistics and supply chain planning, particularly through accurate and near real-time railcar location. Knowing the precise location of their products will enable them to have eyes into the supply chain and run their businesses more effectively. This alone will drive more to the freight rail transportation mode.”

“Through an open architecture and market-based system, technological advancements may serve as the answer to the questions that hinder increasing freight rail as a mode.”  
—RSI President Patty Long

“In conclusion, we are at a tipping point in the evolution of freight rail,” Long told the STB. “How we move forward will be important. I believe everyone here knows the pressure points and what is keeping freight rail from growing. I also believe we have more in common, and our goals will be the same in the end. Through an open architecture and market-based system, technological advancements may serve as the answer to the questions that hinder increasing freight rail as a mode. The challenges of cost, complexity, and consistency must be met and addressed by all parties. The RSI and its member companies are committed to making freight rail the mode of choice, not just because we are dedicated to advancing safety, innovation, technology, and sustainability, but because we believe using freight rail makes good business sense.”

CSX

CSX President and CEO Joseph R. Hinrichs also submitted testimony to the Board, along with his Executive Vice President and Chief Commercial Officer, Kevin Boone.

Before joining CSX in 2022, Hinrichs spent 30-plus years as a railroad customer. “I have a unique perspective on our industry and how it operates,” he wrote. “From my roles as a Plant Manager to President of Ford Motor Company’s global automotive business, my experience with railroads was disappointing, as it never felt like the railroads had an authentic customer-centric approach to doing business. Over the years I watched as we converted rail docks to truck docks and moved most of our parts by truck instead of rail. This first-hand experience is important because it paints the picture of the opportunity before us—the opportunity that I saw—and was energized by—when I took this job. For CSX to fully seize this opportunity, we must change, we must become one team working better together, and we must become authentically service-oriented and customer-focused.”

To do that, he said, “we have to start with our culture.” CSX is working to create an environment “where every employee feels valued, appreciated, respected, included, and listened to,” according to Hinrichs. “It is essential to our day-to-day operations. We use those words intentionally and often to make sure we are setting the right framework for our leaders in how we treat people. While we have an undeniably priceless and irreplaceable network, in 2024 our most valued assets are the 23,000 employees working collaboratively across our extensive network seven days a week, 365 days a year, and in all weather conditions, to move the goods that millions of Americans rely on to meet their everyday needs. What our railroaders do is invaluable—if the railroads do not run, the economy shuts down.”

“By fostering a culture where our people feel connected to the company’s mission and values, we are building a stronger, more resilient organization. This, in turn, helps us restore trust, earn more business, and unlock the type of growth that has eluded CSX and the rest of the industry for years.”
—CSX President and CEO Joseph R. Hinrichs

Hinrichs explained that through the “ONE CSX initiative, we are creating a culture where our employees are not only engaged in their work but also motivated to serve our customers even better and more efficiently.” He said that “any successful service business relies on engaged, motivated, and inspired employees,” and when “our employees feel valued and empowered, they are more likely to go the extra mile to deliver efficient and exceptional service to our customers.”

But the ONE CSX initiative is not just about improving employee morale, Hinrichs told the Board. “It is about driving real business results,” he said. “By fostering a culture where our people feel connected to the company’s mission and values, we are building a stronger, more resilient organization. This, in turn, helps us restore trust, earn more business, and unlock the type of growth that has eluded CSX and the rest of the industry for years.”

In 2023, Hinrichs said, “[w]e saw merchandise volume growth ahead of industrial production, solid coal volume growth, and superior intermodal service performance,” and “we had strong alignment between commercial and operations, focused on customer experience.”

And he noted that CSX is “still hiring where needed so we can attract more business growth and give our customers the service they deserve.”

CSX has also extended network reach, “including through more first and last-mile services and, in the U.S. Northeast, more single-line service opportunities, and offered access to new products, markets and regions for our customers,” according to Hinrichs.

The railroad’s approach to growth “is not just about weathering the storms of economic uncertainty,” Hinrichs pointed out, “it is about positioning CSX for long-term success.” What does this require? “[A] commitment to strategic investments that enhance our network’s efficiency, capacity, and resilience,” he said. “By making these investments, we are not only responding to current challenges but also preparing for future opportunities.”

Kevin Boone, in his written testimony, provided further details on CSX’s growth initiatives. “We touch nearly every part of the economy with a heavy concentration in the U.S. industrial base,” Boone told the STB. “While some of these industries have faced secular headwinds, we are excited about the future and the opportunity to grow. Our objective is to drive initiatives that deliver opportunities for share growth in the market.” These initiatives, he said, can be broken down into four distinct categories: “growth of existing customers, industrial development, emerging markets and expanding the reach of the CSX network.”

“First, you have to start with growth with existing customers and winning modal share,” Boone said. “We have been actively listening to our customers through increased site visits, surveys, whiteboarding sessions, and other touchpoints. With our operations and sales and marketing employees collaborating closely as a ONE CSX team, we have been able to better identify solutions to customer issues and demonstrate that they are our top priority.” He pointed out that the railroad offers the ShipCSX portal, which is “tailored to meet the specific needs of merchandise, automotive, intermodal, and unit train customers.” The platform has been redesigned to simplify “navigation around core tasks—plan, ship, trace and pay—making the user experience more intuitive and efficient.” The railroad is also introducing GPS shipment tracking on railcars. “Unlike the former system that only tracked shipments when they passed certain points, GPS gives a continuous view of a shipment’s journey,” Boone said. “As we expand this technology, our customers will gain unprecedented insights into their shipment’s progress. Joining RailPulse earlier this year allows us to work with a coalition committed to increasing use of GPS and other telematics technologies across North America’s freight industry.” CSX, he added, was “the first among the Class I railroads to implement anIntermodal Terminal Reservation System” that improves “the booking process for intermodal shipments by allowing shippers to easily reserve slots for their truckers to either return empty containers or deliver loaded ones at CSX terminals. It is used by more than 99% of our intermodal customers and significantly enhances operational efficiency, delivering a better and more consistent experience for the customer.”

Second, on the “industrial development front, we are really seeing a shift in investment,” Boone said. “As opposed to trying to offset losses from industry offshoring production, post COVID, we have seen customers pursue investments in our footprint. Our strong service product combined with investments in our industrial development team is helping customers identify rail-served locations for new manufacturing facilities, yielding impressive results. Over the last year, the CSX Select Sites program has successfully brought on $4.2 billion in total partner investment.” CSX, he said, has more than 500 new projects in its industrial development pipeline. “These projects range from those anticipated to launch later this year to proposals set for construction in the coming years,” Boone said. “While project scopes and timelines may evolve, the outlook is promising, indicating substantial growth contributions spanning multiple years.”

“[W]e are excited about the future and the opportunity to grow.”
—CSX Executive Vice President and Chief Commercial Officer, Kevin Boone

Additionally, Boone said that the “reshoring trend in the U.S. is generating substantial opportunities for industrial development, especially in the Midwest and Southeast, where demand for new manufacturing facilities is high.” CSX’s network in this region positions it “to meet the growing transportation needs of these facilities.”

Third, “new markets are also emerging that offer tremendous long-term growth potential for CSX,” Boone pointed out. “One of the most compelling opportunities is the increasing demand from environmentally conscious consumers. As companies strive to reduce their carbon footprints, they are turning to more sustainable solutions, such as rail transport, which aligns perfectly with these environmental goals.” Boone noted that as “reliance on coal decreases, CSX is strategically positioned to provide essential logistics support for emerging industries, reinforcing our role as a key partner in the transition to a more sustainable future.”

He also said that large-scale state and federal infrastructure initiatives “promise to create demand for critical materials and products, further increasing the demand for rail transport.” He referred specifically to the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. which have multiple projects associated with them.

Fourth, “CSX is also expanding our reach to tap into new markets and customer segments,” Boone said. “The key here is finding opportunities to reach customers that we do not currently serve by rail today. This includes extending our rail network through investments and combining truck capabilities with rail to serve locations that our network is unable to serve directly.” He referred to CSX’s subsidiaries TRANSFLO, which provides bulk material transloading and “has grown to nearly 50 terminals and has capacity expansions planned to ensure we meet increasing customer volumes,” and Quality Carriers, a North American provider of bulk liquid chemicals truck transportation, as well as its acquisition of Pan Am Railways in 2022 and its and newest initiative pending STB approval, MNBR [Meridian & Bigbee Railroad], “a potential new interchange in partnership with CPKC near the Alabama-Mississippi border that will create greater connectivity and efficiency for East-West and Mexico traffic.”

BNSF

“Growth has been part of BNSF’s DNA since our formation in 1995,” Tom Williams, BNSF’s Executive Vice President and Chief Marketing Officer, wrote in his testimony to the STB. “Since then, our volumes have grown by 30% while total volume across the rest of the Class I segment has declined. By the end of this year, our overall unit volume excluding coal will have grown by approximately 65% since our merger. Our unique growth story has come from a wide range of markets that are highly competitive with trucks. We have grown annual industrial products volumes by 17%, agricultural products volumes by 26%, and consumer products volumes by 69%. BNSF has grown to become the largest intermodal and agricultural products rail carrier in North America by a significant margin. BNSF’s status as a growth leader is the result of decades of consistent, strategic investments in both our network and our customer relationships that have allowed us to succeed in highly competitive global markets. Importantly, this also reflects the tremendous efforts of our employees who have dedicated themselves to serving our customers.”

Growth hasn’t just come to BNSF, Williams reported. “The markets that drive our volumes are intensely truck competitive, and our customers are continuously modernizing their businesses,” he pointed out. “We have seen some traditional rail markets diminish over time and we expect that to continue, although it’s hard to predict which ones with much certainty. Our continued growth thus largely depends upon our ability to innovate and create the efficiencies necessary to keep up with our customers while providing a customer experience that attracts volume away from trucks. We must continue to be a scrappy competitor with an entrepreneurial mindset who is willing to make forward-leaning investments so we can serve emerging growth opportunities as well as replace volumes that will inevitably decline in other areas.”

BNSF’s main “growth engine” has been intermodal business, Williams said, and it remains “core” to the railroad’s growth strategy. It represents about half of all BNSF volume, “with almost two million units of incremental growth since 1996,” he said. “That is particularly notable given the intensely competitive nature of that market and how hard we need to compete on service performance, reliability, rate, and customer experience to continue converting truck moves to rail. This has only become more intense as competition has grown between rail carriers, motor carriers and even routing options for import containers via the Panama and Suez canals versus U.S. west coast ports.”

Williams said BNSF invested approximately $1 billion in intermodal facility expansion and another $300 million “on strategic land acquisitions in support of our intermodal business.” Additionally, recognizing “the potential of our logistics parks to support their growth, our intermodal customers have invested $13.6 billion to open over 340 new warehouses totaling an additional 114 million square feet at our intermodal logistics parks serving the Chicago, Kansas City and Dallas-Fort Worth markets,” he said. “Expanding our intermodal logistics parks sets the stage for what we are now doing in Barstow, California.” The Barstow International Gateway, he said, “represents the single largest investment in an intermodal facility that has ever been made in the history of our industry.”

In 2023, BNSF and J.B. Hunt introduced Quantum, “which gives customers 95% on-time door-to-door performance on a transit schedule that is one day shorter than our traditional intermodal offering,” Williams said. To deliver this “white glove” service, he said, the partners “have created a jointly staffed intermodal innovation center to monitor Quantum loads 24/7/365.” They are “targeting the most service sensitive freight that historically would have never moved by rail, and we have seen a positive early reception and expect solid growth to continue,” according to Williams.

In addition to intermodal, BNSF is also supporting agricultural products growth, according to Williams. “[W]e are the largest transporter of agricultural products in North America, and the grain we haul to the Pacific Northwest alone represents more than a quarter of the entire amount of grain that the U.S. exports every year across all modes,” he said. Last year, the railroad’s “agricultural products volume was 25% higher than in 2000 even as volumes for the rest of the industry were down 12% over that same period.”

“To be clear, we are not just an intermodal and agricultural products railroad, and we see tremendous growth opportunities across our entire portfolio,” Williams told the STB. “Our innovative logistics center concept is an example of how we have been investing in facilities that support the growth of our existing carload customers and make it easy for other carload shippers to convert truck volume to rail … In the past decade, we have opened logistics centers servicing manifest and unit train traffic in the Southern California, Denver, Oklahoma City, and Permian Basin markets … Construction will finish this year on a fifth location serving the Houston market, and we are in the design process for the development of an additional three logistics centers serving the Dallas/Fort Worth, Phoenix, and Northern California markets. One market our logistics centers support is the fast-growing renewable fuels segment, which shows how our forward-leaning investments let us quickly respond to diverse growth opportunities. The deep integration of our network with the agricultural supply chain—and the investments we have made in it—position us well to serve the needs of renewable fuels manufacturers and distributors. This means moving the finished renewable fuels as well as refining feedstocks such as vegetable oils, yellow grease, and other inputs. Our focus on this fast-growing area is already bearing fruit as volumes in our ethanol category, which includes renewable diesel and renewable aviation fuel, have four consecutive years of year-over-year growth, increasing by a total of 33% since 2020.”

“We must continue to be a scrappy competitor with an entrepreneurial mindset who is willing to make forward-leaning investments so we can serve emerging growth opportunities as well as replace volumes that will inevitably decline in other areas.”  
—Tom Williams, BNSF’s Executive Vice President and Chief Marketing Officer

Williams said BNSF also pursues growth through short line partnerships. “BNSF has relationships with over 200 short lines, regional carriers, and switch carriers, and those relationships are key to providing carload customers with efficient, competitive door-to-door service,” he said. “Our short line partners have unique market insights and we use those to benefit our joint customers.”

And running “a safe railroad is key to the quality of our service and our ability to grow,” he noted.

According to Williams, the ability to adjust service offerings “to meet the changing needs of our customers’ dynamic and competitive markets” is also key. “More than 30% of our carload customer volume mix changes every year for various reasons, and intermodal demand can swing substantially depending on trends in the trucking and global shipping markets,” he said. “For example, after low trucking demand depressed our domestic intermodal volumes for the first six months of this year, we rebounded to now be on pace to set an all-time volume record for domestic intermodal for the month of August. To grow in this environment, we must always seek efficiencies that will increase the value we offer to our customers. And that requires investment. Over the past ten years, BNSF has steadily committed substantial capital to our network.”

Specifically, over the past five years, Williams said that BNSF has invested more than $3.2 billion in “expansion capital during a turbulent period where supply chains have been impacted by a number of factors outside of our control, including the COVID pandemic,” and is ”hopeful these large investments will position us for long-term growth and provide sufficient returns.” The “big bets,” he noted, “go beyond portions of our network with which our customers interact directly, like our intermodal logistics parks and carload logistics centers. BNSF has been engaged in a yearslong effort to expand capacity on our Southern Transcon corridor, including a project we have completed this year to add an additional 40,000 feet of processing tracks adjacent to our Belen, New Mexico terminal. Belen is the largest locomotive fueling facility in North America and these additional tracks will minimize the time it takes for fueling, inspections, and crew changes. We expect these investments to improve total train capacity through this portion of our network by 30%.”

BNSF makes investments, he said, “knowing there is no guarantee that the growth we seek will materialize, much less continue over the long term. Our experience with crude by rail is a good example.”

Williams said that BNSF’s “commitment to growth has persisted even as our customers’ markets have changed over time” and “[s]ometimes those markets change quite significantly, such as with coal.”

This market evolution, Williams said, “means that BNSF’s future growth might take a different form than it did years ago and not follow a linear path. The rational efforts of our customers to modernize their businesses to compete in global markets may reduce their inputs and negatively affect our volumes. But BNSF remains dedicated to helping their businesses grow and in doing so, grow the volumes we handle within those market dynamics.” The railroad’s experience in the steel markets illustrates this point, he said. “Over the past several decades, the shift of steel production from integrated mills utilizing blast furnaces to electric arc furnaces has returned some of the domestic steel production that was lost to foreign producers,” according to Williams. “But producing steel by recycling scrap steel in an electric arc furnace requires approximately 50% fewer input materials for a given quantity of finished steel versus integrated mill production relying on iron ore, coke, and limestone. BNSF has been a key part of the steel supply chain for over 100 years, and the innovation in this space means less overall volume for us. However, we have aggressively grown our scrap portfolio to support our customers. As a result, our scrap business has grown by 62% since 2014—more than any other commodity group in our entire portfolio in that time—while metallic ores volume is down 23% and limestone and coke volumes are each down 11%. This example shows how railroads’ efforts to grow in evolving markets do not always translate to an increase in top-line volume numbers.”

National Mining Association (NMA)

“The NMA’s members conduct mining operations throughout the United States and rely on Class I rail carriers to transport mined materials, including coal,” NMA General Counsel Katie Mills told the STB. In her testimony, she said her association “urges the railroads to proceed cautiously as they assess future shipper requirements, and to prioritize readiness for the sudden upticks in demand that are inevitable in our business.” NMA also urges railroads “to maintain the operating flexibility and spare capacity necessary to efficiently and effectively respond to current and future increases in export demands,” she said. “It is our view that the railroads in the recent past have been too hasty in paring back service and redirecting resources during periods of temporary softness, and that has come at a significant cost to all shippers, not just the coal industry.”

“To the extent possible, the NMA urges the railroads to continue to cultivate a high-performing workforce and a deep bench, and to avoid the kind of churn that can lead to an erosion in overall performance.”
—NMA General Counsel Katie Mills

Also important: “sufficient staffing and stability in the freight rail workforce.” In NMA’s view, “there is tremendous experience, talent and institutional knowledge in place at U.S. rail carriers, and shippers, like coal producers, rely heavily on that highly skilled workforce,” Mills said. “In 2023, the railroads pledged and maintained relatively stable staffing levels. However, this commitment was seemingly short-lived as layoffs this spring were announced. These layoffs have resulted in cutting mechanical forces across key coal yard locations and further strained capacity to crew, power, and move train sets. Importantly, once terminated, railroad employees are highly unlikely to return to the industry, and often move forward with a different career path. This reality makes it difficult for railroads to quickly restaff the necessary workforce as market conditions fluctuate. Staffing inadequacies are found at every level of rail operations, from train crews, to rail yard locations, and at the corporate level in logistics for commodity groups. Members have found that the lack of corporate attention paid to service for shippers has made service delays lengthen and shippers lose valuable customers if they cannot get coal delivered in time for domestic customers and pay demurrage fees for exports as docked vessels await deliveries. To the extent possible, the NMA urges the railroads to continue to cultivate a high-performing workforce and a deep bench, and to avoid the kind of churn that can lead to an erosion in overall performance.”

Mills concluded by saying that the NMA and its members “want to be part of the solution. We need to be able to move both thermal and metallurgical coal domestically and to our international business partners, who increasingly require it to keep the global economy healthy and functioning. All this depends on a high-performing rail system with consistent and reliable service, and the NMA and its member companies stand at the ready to assist in any way possible.”

American Chemistry Council (ACC)

“Simply put, our member companies want to ship more by rail,” ACC Senior Director, Regulatory and Scientific Affairs Jeffrey Sloan told the STB. In 2022, railroads transported more than 2.3 million carloads of chemical and plastics products, and “our transportation needs are growing,” he said. “By 2032, U.S. chemical and polymer production is expected to grow by more than 25 million metric tons. ACC estimates that this new production will lead to more than 120,000 additional railcar shipments. This growth is a win-win for the chemical and freight rail industries. It also benefits critical downstream sectors that we supply. For example, 52% of ACC member companies produce inputs to semiconductor production; 62% produce inputs to health care; and 72% produce inputs to clean energy.”

“While rail offers some inherent advantages, ACC members cite excessive rates, unreliable service, and the unwillingness of railroads to make infrastructure investments as key barriers that limit volume growth.”
—ACC Senior Director, Regulatory and Scientific Affairs Jeffrey Sloan

Sloan noted that “circular economy” initiatives offer additional opportunities. “For example, ACC members are involved in advanced recycling projects that convert plastic waste into renewable raw materials that can be used to manufacture new, more sustainable plastic products,” he told the STB. “These projects can increase rail volumes for both raw materials (pyrolysis oil) and finished products.”

But Sloan noted that there are challenges to rail growth. Among them:

• “ACC is concerned that freight railroads are not fully pursuing new business,” he said. “As one member company representative phrased it, ‘Railroads simply do not play an active part in incentivizing our growth.’ And in some cases, railroad actions have led shippers to switch traffic to other transportation modes. Companies consider a wide range of factors when evaluating transportation options, including safety, sustainability, reliability, and ease of doing business, as well as costs. While rail offers some inherent advantages, ACC members cite excessive rates, unreliable service, and the unwillingness of railroads to make infrastructure investments as key barriers that limit volume growth.” ACC recognizes “that railroads have limited capital and require adequate returns on their investments,” Sloan said. However, the association “believes that railroads are too often uninterested in investing for future growth and are leaving profitable opportunities on the table.”
• “[S]ervice issues remain a nagging problem,” Sloan reported, even though “overall network fluidity and railroad performance has improved greatly since the meltdowns rail shippers faced several years ago.” These issues, he said, “are often related to labor shortages. Recently, one ACC member, after consecutive missed switches at one of its manufacturing sites in the Gulf Coast, had to rush truck deliveries of a key raw material to prevent a shutdown at a key customer facility.”
• “[C]ompanies are still concerned that Class I’s lack both the resilience to handle an unforeseen crisis and the capacity to accommodate a significant uptick in rail volumes,” Sloan said.
• “[S]ome Class I railroads are imposing onerous new requirements that make it increasingly difficult to ship [TIH products such as chlorine],” including “forcing their customers to accept liability for hazardous materials incidents that are caused by third parties or events outside of the shipper’s control.”

Sloan said that “ACC urges the Board to exercise its authority to provide reciprocal switching as a tool to promote rail-to-rail competition.” Broadly implemented, he said, reciprocal switching “can help unlock market forces and incentivize railroads to provide reasonable rates and adequate service. This will drive more business to the railroads, with benefits to the nation’s economy, consumer prices, and climate goals.”

Additionally, “policy makers, rail shippers, and other stakeholders need better data on rail rates,” Sloan told the STB. “Specifically, we need data on how much more rail shippers must pay solely because they lack competitive transportation options. In its 2015 report on Modernizing Freight Rail Regulation, the Transportation Research Board (TRB) developed a preliminary economic model to estimate the relationship between shipment characteristics and rates for competitive rail shipments and then to estimate the rate differentials paid by shippers who lack competitive transportation alternatives. ACC strongly urges the Board to support expanding and refining the TRB’s initial model. A fully developed economic model could provide meaningful new data on how lack of competition impacts rail rates. Understanding this relationship would provide policy makers with a more complete picture of the degree to which the lack of effective competition harms growth in the freight rail industry.”

Parallel Systems

Also providing testimony to the STB was Marty Schlenker, Head of Strategy for Parallel Systems, “a developer of independent battery-electric rail vehicles,” which in 2023 partnered with Genesee & Wyoming to petition the Federal Railroad Administration to test its technology. This former BNSF and CSX employee told the Board that “innovative new technology is crucial to railroad growth.”

“Any freight carrier seeking to serve modern logistics campuses must provide vehicles on demand, each vehicle independent of others; move shipments denominated in truckloads; move them promptly; and move them anywhere,” he said. “Parallel Systems was founded [in 2020] to provide this set of capabilities to railroads.” In contrast to conventional railcars, “Parallel is designing its vehicles to be independent,” according to Schlenker. “Each will have its own drivetrain, brakes, navigation, and perception capabilities. Instead of waiting for pickup, movement to a serving yard, sorting, and assembly into trains, Parallel vehicles are designed to depart upon release, route directly to destination, and dynamically form platoons with each other or behind conventional trains.”

“Rail must respond, and must respond with a new approach.”
—Marty Schlenker, Head of Strategy for Parallel Systems

Schlenker pointed out that “[i]ndependence enables on-demand deployment, one vehicle for one shipment.” Parallel’s vehicles and software, he said, “are being designed to integrate with existing train control technology. Platoons of Parallel vehicles will self-form to minimize network footprint and grade crossing occupancy, and will utilize latent network capacity between existing trains.” He noted that “[t]aken together, Parallel’s innovations enable railroads to tailor service to individual shipments, avoiding the aggregation, sorting, and large-batch movement that pose a barrier to today’s increasingly prevalent short haul, single-load, time-sensitive freight.”

In the short run, he said, “our vehicles will connect essentially any pair of rail-served factories, warehouses, transload sites, intermodal terminals, or ports with direct service in lots as small as a single container.” While in the long run, “Parallel expects that railroads, logistics campus developers, or other third parties will develop micro-terminals which will enable containers and trailers to move on rail to within 1 to 5 miles of a campus’s big boxes, and be retrieved by customers’ existing day cabs and personnel. Campuses still on the drawing board may have micro-terminal space allocated from the start, and heavy corridors designated within.”

American Fuel and Petrochemical Manufacturers (AFPM)

“Refineries and petrochemical manufacturers rely on a healthy rail network as a vital part of their supply chains and in turn our industry’s growth strategy,” Rob Benedict, AFPM’s Vice President, Petrochemicals and Midstream, wrote in his STB testimony. “Annually in the United States, over 2.3 million carloads of our members’ feedstocks and products, including crude oil, natural gas liquids, refined products, plastics, and synthetic resins, are transported by rail. AFPM members are increasingly using rail to support renewable energy and recycled plastic projects through the shipment of renewable feedstocks, renewable fuels and recycled plastics. These are rapidly growing segments of our business, which are heavily reliant on reliable and competitive rail service that can grow and meet customer demand.”

He told the STB that approximately 75% of refiners and petrochemical manufacturers are only served by a single railroad. “Being a ‘captive’ shipper amplifies the negative impacts of poor service and limits opportunities for growth,” he said. “To this end, freight rail service issues that elevate transportation costs impact our members ability to grow their business, which can ultimately result in higher costs for consumers.”

Benedict blamed rail service issues, in part, on Precision Scheduled Railroading (PSR). “The spread of the PSR operating model across the Class I Railroads is a key contributing factor to the current service issues we are facing and limits the refining and petrochemical industry’s ability to grow freight rail traffic,” he said. “In fact, recent studies by the Government Accountability Office and U.S. Department of Transportation recognized the negative impact PSR has on railroad resiliency and that industry’s ability to respond to supply and demand fluctuations. The PSR operating model has driven operating ratios to levels once thought impossible. To achieve these sub-60% operating ratios, Class I railroads have slashed their workforce, shuttered facilities, shelved equipment and reduced service to the detriment of their customers. These are not pro-growth stimulating actions, and it should come as no surprise that this has benefited investors but harmed rail shippers’ ability to grow their business.”

“The spread of the PSR operating model across the Class I railroads is a key contributing factor to the current service issues we are facing and limits the refining and petrochemical industry’s ability to grow freight rail traffic.”
—AFPM Vice President, Petrochemicals and Midstream Rob Benedict

Additionally AFPM members “have experienced increased rates, reductions in service days, the closure of hump yards and storage facilities vital to our operations, an increase in missed switches, and many other service issues,” Benedict told the Board. “Our members have gone as far as making critical capital investment decisions based on where they can secure competitive rail service. Our members have acquired, leased or built additional storage yards and purchased or leased additional tank car assets to counteract the negative impacts of PSR. In this operating environment, it is hard to grow freight rail shipments when railroads effectively force AFPM members to make investments just to maintain existing service levels.”

Benedict offered three examples of how the railroads are “stifling growth in rail traffic and in turn the petrochemical and manufacturing industries”:

1. “Class I railroads present their customers with a take-it-or leave-it scenario when it comes to service,” he said. “Even though railroads have a common carrier obligation, they require shippers to agree to unreasonable and one-sided language in the carrier’s industrial track agreements before the railroads provide service. Railroads dictate service days and change those frequencies with little notice. Such short notice and lack of consistency interrupts operations and makes it difficult for our members to grow. One AFPM member cited a Class I railroad’s reduction in service days paired with their refusal to invest in infrastructure as the reason that member could not startup a new asset, limiting their ability to grow that manufacturing location.”
2. “The take-it-or-leave-it mentality also applies to shipping rates and private contracts,” Benedict pointed out. “Given the onerous and lengthy process of challenging a tariff rate with the Board, railroads are at an advantage. Railroad’s strategically price private contracts to entice shippers to avoid tariff rates, but then include various provisions that are tremendously advantageous for the railroads at the expense of their rail shipper customers. For example, Class I railroads almost universally and explicitly reject performance terms and conditions in their contracts given their leverage. If the railroads won’t add such performance assurances to their contracts, the contract becomes nothing more than a price document. The only alternative for shippers is to choose a higher tariff rate, and then begin a costly and lengthy proceeding to challenge that rate with no assurances of success or reimbursement for the full cost incurred.”
3. “AFPM members have experienced railroads using their bargaining power in contract negotiations over captive shippers to include unfounded liability and indemnification provisions in private contracts,” Benedict said. “Such requirements effectively absolve railroads from any, and all, liability and require rail shippers to accept responsibility for actions beyond their control. Railroads, as part of these contracts, are also now requiring rail shippers to increase their levels of insurance for certain hazardous materials shipments. In a recent instance, a Class I Railroad required rail shippers to increase their insurance coverage by 10X (from $10 million to $100 million in liability coverage) and gave them just a month to do so. When AFPM members entrust their products to rail carriers, there is an expected duty of care and vigilance and when railroads fall short of their duty, rail shippers should not be left shouldering the liability for someone else’s negligence.”

To address these challenges and foster growth for both the railroads and the customers, Benedict said, AFPM suggested the following to the STB:

• “Reintroduce” competition in the rail markets. “The Board has the potential to directly encourage economic growth in the rail sector, and the broader economy, by using its’ authorities to promote competition in rail markets,” he said. “Unfortunately, the recently published final rule on reciprocal switching represents a missed opportunity to address freight rail problems. The STB’s final rule allows shippers to seek reciprocal switching when their current railroad fails to meet specific service performance metrics. The rule specifically excludes any rail traffic that is moved under a contract rate, preventing most rail customers from accessing competitive rail service. As some on the Board have noted the final rule is ‘unlikely to accomplish what the Board set out to do’ because the rule will not help most rail customers that receive substandard service. This includes an overwhelming majority of AFPM members whose traffic mostly moves under contract rates.” According to AFPM, reciprocal switching “should be available when there is a lack of competition,” he said. “In the absence of broad access to reciprocal switching based solely on lack of competition, a service-based approach would be practicable, in the public interest, and could provide benefits if crafted carefully with targets that incentivize improved service, rather than codifying the poor service of the past.”
• “Revise the common carrier obligation to reflect current market failures.” Benedict asked the Board “to undertake a review of the common carrier obligation and provide needed clarity on what a ‘reasonable request for service’ is, and what minimum standard of service a railroad must provide.” An assessment of the railroads’ common carrier obligation and the associated regulations, he explained, “would also include recommendations on necessary changes (including expanded Congressional authorities) and improvements needed to drive growth in the freight rail industry.”
• Rebuild “partnerships and collaborative relationships.” Benedict told the Board that “a recent report by the Michigan State University and supply chain consultancy Maine Pointe notes the ‘future of the freight rail industry depends on the rail companies actively listening to shippers and other members of the transportation eco-system in order to come up with win-win scenarios—until they do that, there will be stalemate’ regarding growth.” He called on the Class I’s to “return to a customer focused operating model that prioritizes communication and transparency.”

AFPM members, Benedict said, hope Class I’s “will put a greater focus on customers and provide the confidence that the rail network can grow with their customers business.”

National Grain and Feed Association (NGFA)

Also providing STB testimony was Mike Seyfert, President and CEO of the NGFA, whose membership includes “ag shippers and rail carriers who partner on more than 3 million carloads per year, which is greater than 15% of total U.S. carloads.” Seyfert told the Board that “[i]n addition to the organic rail freight growth in moving grain products through increased production, I believe there is room to grow market share for grain and grain products through sustained efforts by the Class I railroads to improve service and become more cost-competitive against other forms of transportation.” These efforts, he said, “can be helped by sound rail regulatory policy and commercial practices.”

“NGFA believes more rigorous competition will result in larger volumes moved by rail.”
—NGFA President and CEO Mike Seyfert

While NGFA members, including all Class I’s and shippers/receivers, “have strong lines of open and honest communication,” Seyfert offered policy recommendations to the STB. “[R]ail freight efficiencies … can be gained through Docket No. EP 768, which seeks the adoption of rules to permit rail customers to levy financial penalties on railroads for inefficient use of private railcars,” he told the Board. Seyfert pointed out that “[f]inancial penalties are used by rail carriers to incentivize shippers to more quickly load and unload trains,” so “[t]o the extent the Board can introduce reasonable incentives for both sides, our shipper/receiver members believe it would lead to more reliable freight rail service and one could argue that freight rail growth would follow.” Additionally, “NGFA believes more rigorous competition will result in larger volumes moved by rail,” and urges the Board to “view EP 711 [on reciprocal switching] as a rule in need of continual updating,” he said, and “[w]e believe defining the common carrier obligation is another route the Board can take to grow freight rail.” Lastly on policy, “NGFA thanks the Board for issuing updated rail rate challenge rules,” he said. “By statute, the rail rate rules do not apply to contract rates, which makes it even more important to introduce more rail-on-rail competition with updates to EP 711 on reciprocal switching. Through increased competition, the need for rail rate rules becomes less important.”

The National Industrial Transportation League (NITL)

Monica Freeman, Chair of NITL’s Rail Transportation Committee, Director of Rail Transportation at CHS, Inc., and an alternate on the Board’s Rail Energy Transportation Committee, shared the association’s testimony. “Although the Board’s new reciprocal switching rule does not promote rail-to-rail competition to the extent that NITL originally intended [when 13 years ago it submitted its petition to reform the Board’s reciprocal switching rules], NITL strongly supports the objectives of the rule as its members have faced serious rail service challenges in recent years,” according to the testimony. “NITL is hopeful that this rule is an incremental first step to encouraging greater competition amongst railroads via reciprocal switching to help drive solutions to rail service and other challenges. NITL also looks forward to the Board moving forward on its stated intention in the reciprocal switching rule to explore at a later date whether it should partially revoke exemptions on its own initiative to allow rail shippers of exempt commodities to file reciprocal switching petitions to address inadequate rail service, without having to first pursue costly and time-consuming litigation to revoke the exemptions. NITL urges the Board to pursue next steps as soon as possible.”

When discussing “how to grow freight rail volume,” NITL noted it is important to “consider reasons why freight rail carload volume has declined 27% over the past decade and decreased 33% since 2000 per the Bureau of Transportation Statistics (BTS) provided data referenced in the Board’s hearing announcement.” One reason, it said, “is the lack of railroad-to-railroad competition which is compounded by the railroad industry’s need to meet Wall Street expectations.” The association pointed out that “[w]ith only six Class I rail carriers, and with four of them responsible for moving 90% of our nation’s rail freight, competitive market forces have been significantly reduced as a result of railroad megamergers and acquisitions.” The lack of “robust competition,” it said, “leads to high freight costs, poor service and customer relations, the inability to negotiate reasonable contract terms (including service protections), and other deterrents to increasing rail traffic. These factors have likely contributed to the decline in freight rail shipping volumes.” NITL also said that while PSR “lower[s] costs for the railroads,” it has “resulted in constrained and congested networks, reduced capacity, the increasing use of embargos, by-passing commodities in favor of other more revenue-generating movements, degraded velocity, and limited resiliency.” The bottom line, NITL said, “is simply dismal service, especially when compared to other transportation modes.” It noted that “one element of PSR is running longer trains”; “[s]ome would argue that this is adding volume. To the contrary, however, capacity is not necessarily being added to other trains or kept in service.”

NITL calls on the STB to “[w]ork with Congress in identifying new statutory authority that the Board requires to provide effective oversight for rail traffic that is based on today’s market conditions instead of market conditions from over 40 years ago.”

In preparation for the STB hearing, NITL said it surveyed its members ”to better understand the factors that impact their ability to ship more volumes via rail.” It found that “unreliable rail service is a significant issue that has caused them to ship volumes that would otherwise move by rail by other modes, including trucks, pipeline, or barges.” The association offered recommendations for railroads and for the Board.

On the railroad side, one member pointed out that “service reliability is critical and especially consistency to the trip plan”; “occasional misses are understandable due to unexpected events, such as weather, labor, disasters, and the like,” but without those circumstances, “once a service plan is in place, NITL members would require far more consistent service to shift greater volumes to rail.” Also important: “[i]mprovements to local ‘first mile/last mile’ service” and “[a]voiding reduced service days and missed switches.” Regarding the role of short lines, “the survey respondents said that they generally get better service consistency and communication from short line carriers and consider them to be partners,” according to NITL. “Short lines also tend to have more reasonable accessorial charges and are more willing to make occasional extra as-needed moves to meet the needs of the customer. One member stated that ‘The presence of [short line] local commercial and operations management who understands the “boots-on-ground operation” is a big plus vs. someone at a Class I managing our business via an Excel spreadsheet located 1,500 miles away who has never set foot on the property being served.’”

On the regulatory side, NITL said “workable STB remedies are necessary to incentivize the railroads to offer more competitive rates and reliable service, which would help incentivize shippers to move more traffic via rail.” It suggested the following STB actions:

• “Clarify the scope and enforcement of the railroad Common Carrier Obligation.”
• “Expedite removal of exemptions for purposes of reciprocal switching petitions to address inadequate rail service under EP 711 (Sub. No. 1) to incentive better service for all rail shippers and allow shippers of exempt traffic who experience inadequate rail service to benefit from this remedy.”
• “Expedite completion of the proceeding, EP 704 (Sub-No. 1), Review of Commodity, Boxcar, and TOFC/COFC Exemptions.”
• “Apply the revenue adequacy constraint so that the railroads do not engage in ‘economic Withholding’ or picking and choosing more profitable traffic especially to help lower their respective operating ratios when most of the Class I carriers enjoy low enough operating ratios to have consistently achieved revenue adequacy over the last several years.”
• “Work with Congress in identifying new statutory authority that the Board requires to provide effective oversight for rail traffic that is based on today’s market conditions instead of market conditions from over 40 years ago.” NITL pointed out that in “the post-Staggers era, the railroads’ revenues have increased exponentially to result in the majority of the Class I carriers becoming revenue adequate. However, this is not the case for rail traffic volumes. Regarding traffic volumes, per the BTS, railroad ton-miles of freight grew from 876,209 million in 1985 to 1,551,438 million in 2003, an increase of 56%. However, this growth trend has not continued. The BTS statistics show that rail volumes peaked in 2014 at 1,851,229 ton-miles but have declined since then with ton-miles in 2022 at 1,533,416—nearly the same level as 2003.”
• “[C]onsidering the last STB Reauthorization Act of 2015 expired in September 2019, the Board is encouraged to work with Congress on several policy items to meet today’s market challenges.” Among them:
  — “Applying EP 711 (Sub – No.2) to contract traffic.
  — “Clarifying the distinction between railroad tariff and contract terms.
  — “Increasing civil penalties for service and other regulatory violations to incentivize significantly better rail service and reasonable rates and practices.
  — “Allowing private rail car owners or lessors to obtain compensation from railroads for unreasonable delays with respect to their rail cars, which undermines asset utilization and efficiency. The railcar ownership market has changed during the past few decades, and shippers own or lease two-thirds of the freight rail cars in use today. In addition to the costs incurred in owning or leasing the railcars, shippers are harmed when railroads unreasonably hold or delay these cars yet they lack the bargaining power to negotiate compensation for such delays, similar to demurrage collected by rail carriers when shippers hold railroad cars beyond a free time period.”

Trades Department, AFL-CIO (TTD)

“In order to address lack of growth in the freight rail industry, we encourage the Board to further delineate the scope of the common carrier obligation, which would provide much needed clarity on an important legal obligation of the railroads, target the heart of freight rail service problems, and holistically address the ongoing issues with the Class I railroads,” TTD President Greg Regan told the STB.

“Enforcing a robust common carrier obligation would hold railroads collectively accountable for providing a higher quality of service, effectively address many of the problems shippers continue to experience, and in turn contribute to renewed growth in the industry,” he said. “As it stands now, railroads continue to fail their customers and their employees by providing insufficient levels of service. It will take action from the Surface Transportation Board, Congress, and the Class I railroads themselves to resolve the core staffing, service, and safety issues that have restricted growth in the freight rail industry.”

Brotherhood of Locomotive Engineers and Trainmen (BLET)

“When it comes to service issues, we want the Surface Transportation Board (‘STB’) and the country to know that rail workers want to work,” BLET wrote in its comments. “We want shippers to receive high-quality, on-time service. Our members are proud of the work they do to keep goods moving, supermarket shelves full, and commerce moving. We want the railroads to be profitable and increase market share. While there are many ongoing safety issues, rail is the safest way to move goods. Trains are also the most climate-friendly way to move freight. This creates a situation where everyone’s best interests are aligned. The workers, the shippers, the railroads, and the end consumers should all want to expand the amount of freight shipped via rail.”

To this end, the union reported, “we want to provide our perspective on why the industry has been shrinking in recent years.” It attributed the drop in carloads over the past 10 years to the “overall deterioration in service quality caused by railroad operating practices,” noting that “this is not because of a lack of individuals willing to work.” It pointed to PSR, an operating model that “is not sustainable to grow the industry.”

“It isn’t hard for CEOs to increase profit for a single quarter by cutting workers and maintenance. What takes true leadership is building a railroad that will maintain relevance and profitability year after year as markets shift, as technology advances, and as new challenges arise.”
—BLET

“Without investing in high-quality service, in fully-trained workers, in proactive maintenance to prevent derailments, the railroads will not be able to maintain their high profit levels,” according to BLET. “It isn’t hard for CEOs to increase profit for a single quarter by cutting workers and maintenance. What takes true leadership is building a railroad that will maintain relevance and profitability year after year as markets shift, as technology advances, and as new challenges arise.”

Brotherhood of Maintenance of Way Employes Division/IBT; Brotherhood of Railroad Signalmen; International Association of Machinists and Aerospace workers District #19; SMART-Mechanical Division, International Brotherhood of Boilermakers; National Conference of Firemen and Oilers/32BJ SEIU; and Transport Workers Union of America (Collectively, Unions)

In their collective comments to the STB, amounting to 125 pages, the Unions said, “the Class I’s cannot grow without increasing the workforce,” but they have “either effectively maintained flat employment or engaged in further workforce cuts” and their “own statements indicate that they are interested in growing profit margins, not in increasing profits by increased revenue from increased traffic.” The solution, the Unions said, “is real and regular enforcement of the common carrier obligation. But to truly have an impact, we need more legislation to better define and enforce the common carrier obligation.” Noting that “[m]any employees of short line and regional railroads are not covered by union contracts,” boosting the “use of short line and regional railroads is not an answer to the refusals of the Class I railroads to take in increased business.”

“The Unions do not advocate pre-Staggers levels of regulation; instead, they advocate a regulatory regime appropriate to the highly concentrated, duopolistic industry that exists today.”

“The Class I railroads are too thinly staffed to provide adequate service today; they certainly are not positioned to handle increased traffic,” the Unions concluded. “This will not change without more regulation appropriate to the industry we have today (not the one that existed in 1980) and better definition and enforcement of the common carrier obligation. Action by the Board and by Congress is necessary. The Unions anticipate that there will be scaremongering about proposals for more robust regulation of the industry and greater Board oversight of the service provided by the railroads and the availability of rail service (see e.g. Center for Regulatory Freedom and Washington Legal Foundation). We will surely hear that any action the Board takes, and any legislative action, will bring the industry back to the days before the Staggers Act. In doing so, those who advance such arguments attack a strawman. The Unions do not advocate pre-Staggers (1940 Act) levels of regulation; instead, they advocate a regulatory regime appropriate to the highly concentrated, duopolistic industry that exists today.”

Loop Capital

Providing testimony to the STB on behalf of Loop Capital was Rick Paterson, who has been a Wall Street analyst covering the railroads for 24 years. He presented consolidated, annual volumes for Union Pacific, BNSF, CSX, and Norfolk Southern back to 2000. “[I]f we focus on the 20-year track record, between 2003 and 2023, it’s a depressing picture,” he reported (see charts below). “Coal is now less than half of 2003 levels. Agricultural products are 11% lower. Intermodal is the bright spot, up 29% over the last 20 years. Automotive has crashed by 37% as the rail-heavy Big 3 U.S. automakers have struggled. All other commodities are down 8%. If you put it all together, the four major railroads hauled 7% fewer loads last year than they did in 2003.

“Over that same 20-year period, U.S. GDP grew by 50%, Industrial Production by 13%, and for-hire Truck Tonnage, as measured by the American Trucking Associations, was 43% higher. We can drill down further with tonnage data that’s available from 2006 … 2006 is an unusual base year, but if we start from 2007 the rail share loss [for agriculture–corn] is about 19%. Another share loss in wheat, with last year’s crop flat with 2006, while rail tonnage hauled was 30% lower. Soybeans is a better story, with tonnage hauled by the railroads outpacing crop tonnage by 16% since 2006. Here’s a different view of intermodal, and the railroad’s big success story isn’t quite what it appears. Volumes last year were 6% higher than 2006, but if we ignore empties and compare the tonnage of customer freight with the truck tonnage index, to be more comparable, we have a 16% decline in rail tonnage versus truck growth of 35% over the last 17 years. That’s a 51% underperformance on tonnage. … [The automotive] industry obviously took a big hit during the great recession [of 2008/2009], and since then rail tonnage has only recovered by 7%. In contrast, North American light vehicle production is up 43% and U.S. light vehicle sales were 31% above 2009 levels last year … If we go back to using a 20-year timeframe on loads, chemicals have grown by 12% and construction aggregates by 18%, which is good, but it gets ugly after that. Building materials are down 31%. Metals are down 29%. Waste and scrap is down 15%. Food is down 25%. [And] [p]aper and forest has been cut in half as print media continues to go digital.”

“THE RAILROADS ARE LOSING RELEVANCE, and participate less in the U.S. economy every year.”
—Rick Paterson, Loop Capital

“It’s clear,” Paterson said, “that in most of their markets, the railroads are shrinking, while in a handful of others they’re growing slower than the industries they serve. In a nutshell, THE RAILROADS ARE LOSING RELEVANCE, and participate less in the U.S. economy every year.” Why? He boiled it down to three primary reasons:

1. “The first is that the railroads, quite rationally, have exploited the opportunity from post-Staggers consolidation and a lack of rail-to-rail competition to extract above-inflation pricing starting in 2004. Given the choice, a for-profit company will always prioritize price over volumes because, unlike volumes, price has no associated cost and drops straight to the pre-tax line. A consequence of pulling on the pricing lever for 20 years, however, is that the rail product has become a lot more expensive, and customers have reacted by simply using less of it. It’s still been a no-brainer for the railroads, because price driven revenue growth and margin expansion has enabled the rail stocks to outperform the S&P 500 by 3.7-to-1 since 2004, despite a 10% loss of business.
2. “The second reason is of course service, as we discussed here two years ago. 13 Class I meltdowns in the last ten years is a little hard to hide from customers; and the other required element of a modern supply chain is customer tracking visibility. While service will remain a problem, tracking is solvable with emerging car telematics, and this is why initiatives like RailPulse are so important. We need everyone on board with RailPulse.
3. “The final volume growth handicap is the fact that the railroads are completely captive to Wall Street, so let me take you down that rabbit hole and explain why that is, and how the Wall Street pressure points ultimately manifest themselves in terms of price, service, and growth. Wall Street obviously likes growth, in any industry, but the railroads are unusual because volume growth has not been a component of the dramatic outperformance of the stocks over the last 20 years. We remain skeptical of the railroads’ ability to grow because we just haven’t seen it, apart from sporadically in certain business units at certain times. Wall Street still believes the railroads are primarily a pricing story, with the ability to raise prices above inflation on heavy weight and bulk shippers where trucking isn’t a viable option. Wall Street also wants to see operating ratios in every year that are lower than the year before. Now, Wall Street nagging companies to do what it wants is completely normal; it happens in every industry. What’s different about the railroads is the fact that Wall Street, additionally, has a very effective policing mechanism to enforce its demands, and that’s shareholder activism. While activism is obviously not limited to the rail industry, we’ve seen an absurd amount of concentration, and success, of it here. We’ve had four major activist battles since 2008. There’s only six companies, and one of those (BNSF) is protected from activism under the Berkshire Hathaway umbrella.”

Why, then, “are the railroads so frequently targeted?” Paterson asked. “The short answer is the scarcity and premium placed on a handful of operational change agents in networks that are extraordinarily difficult to manage. What’s unique about rail networks is the dedicated right-of-way. If a plane, ship, or truck has a problem, the ones behind just go around it with little or no networkwide effects. Not so on a rail network, where a derailment on BNSF’s Southern Transcon, for example, will quickly back up 200 trains. Domino effects and backlogs take at least two weeks to normalize if everything goes well. The role of Class I Chief Operating Officer is therefore, in my view, the most difficult job in the transportation sector.”

That “hard job,” he said, has been “made it even harder with PSR”; PSR, when “originally sold to Wall Street,” was supposed to offer two benefits. “The first was much lower operating ratios because you’re removing lanes, reducing complexity, and running fewer, longer, trains; reducing costs and capital intensity,” he said. “That piece has played out. The second promise was better service. In theory, by decongesting the system with hundreds fewer daily train starts, it should be easier to get what’s left to run on time. This worked at Illinois Central, then it worked at Canadian National, and then it worked at Canadian Pacific. However, when we’ve tried to apply it to the more complex spiderwebs at Union Pacific, CSX, and Norfolk Southern it’s proven much more challenging. One example of the impediments is the ‘no-fitter’ problem. In order to run the longer trains, in some cases they’re trying to build trains longer than the yards and pass trains that are longer than the sidings. In other words, there’s a mismatch between the operating plan and their infrastructure, which in most cases cannot be solved.

“So we’ve now put these Class I operating departments in very difficult positions,” he said. “We’ve taken the most difficult transportation network to optimize, rail, and further starved it of critical resources under PSR. In pursuit of operating ratio, operating teams are pressured to build trains that don’t fit in yards, pass trains that don’t fit in sidings, and deliver service with not quite enough crews, mechanics, and maintenance of way, and not quite enough capex. Negative growth and periodic service chaos has been the result. It’s frankly a minor miracle these networks function at all, but a tiny handful of individuals have managed to figure out how to do it. Out of a population of 370 million in the U.S. and Canada there are, by my count, exactly eight people with a track record of being able to run these networks successfully. Two of them are retired and one of them is dead. Those that are left are the change agents that an activist like Ancora can pick up and use to persuade other investors that it’s time to replace incumbent management. In the case of Ancora, Norfolk Southern only prevailed because it countered Ancora’s PSR change agent, Jamie Boychuk, with its own PSR change agent, John Orr.”

“After the 3.7-to-1 outperformance of the stocks over the last 20 years, there’s an understandable reluctance to believe the rail pricing story is over. But it is.”
—Rick Paterson, Loop Capital

While, “[t]echnically, Norfolk Southern won the recent proxy battle,” Paterson said, “the next question is whether that will discourage future activism in this industry, thereby removing the policing mechanism? My view is yes, but only partially and temporarily. What we also learned from the Ancora battle is that even when you win – you lose. Norfolk Southern came out of the 2022 Service Crisis determined to focus on resiliency rather than operating ratio, yet in order to win the proxy contest, management had to issue aggressive operating ratio targets and reintroduce operating ratio as a management incentive compensation metric. The proxy battle also got personal and nasty and cost the company $50 million dollars in expenses. No company wants to go through that, so activism as a policing mechanism, while diminished, has not been banished in my view.”

Concluding his testimony, Paterson provided “three growth scenarios we could see going forward”:

• “Scenario 1 is the most negative and the status quo: The railroads will continue to grow slower than the market in a handful of commodities; most prominently intermodal. They will stagnate in others, like grain, and continue to lose business in a lot of their merchandise traffic that entails local operations, plus of course coal. At some point this will necessitate infrastructure rationalization or sharing if revenues become insufficient to justify maintenance and operating costs.

• “Scenario 2 is that the Wall Street pressure points on price and operating ratio do not change, but the railroads are able to manage their way out of their no-growth quagmire by improving service. I basically said earlier that I regard these big U.S. PSR networks as borderline unmanageable, so for this to work someone is going to have to take this PSR foundation and figure out a way to make these networks more manageable, resilient, and consistent, to the point that multi-year service track records can be established, and  customer confidence is restored. This might require a partial rollback of PSR. We basically need a growth version of Hunter Harrison to emerge, but realistically I think this scenario is least likely.

• “Scenario 3 is, I think, how this ultimately plays out. In this scenario the Wall Street pressure points do change. After the 3.7-to-1 outperformance of the stocks over the last 20 years, there’s an understandable reluctance to believe the rail pricing story is over. But it is. The glory days were 2004 through 2011, when annual price growth exceeded 5%. That throttled back to 3.4% between 2012 and 2016 and decelerated again to just 2.5% from 2017 through the present. With the recent exception of intermodal, we’ve been in a freight recession for two years now, and the last piece of Wall Street hope is that when demand strengthens we’ll see a significant increase in rail pricing. If that proves underwhelming, which I think it will, that might be the last straw when Wall Street finally accepts the end of the pricing story, and pressure on management will rebalance into a healthier mix of volume and price. You’ll know when we reach that point, because someone will get on a quarterly earnings call and ask railroad management a question that goes something like this: ‘We all know the rail pricing story is over, so what are you doing to grow volumes?’”

To review all testimony, click here. Also, click here to read testimony from Oliver Wyman.