The Evolution of the Paperless Railroad

At 12:00 noon on November 18, 1883, time became a little less relative.

On this date, a group of railroads lobbied the U.S. Naval Observatory (then the authority of timekeeping in the United States) for a system that would regulate differences in time across the United States.

Previously, individual communities existed and operated within their own space. That is until railroads introduced Standard Time: a system of four time zones for the continental United States and one for Eastern Canada based on mean sun times on meridians west of Greenwich, England.

Aside from the important cultural implications, Standard Time or “railroad time” had a major impact on freight transportation. As the United States transitioned from an agrarian economy to an industrialized one, railroads became more self-regulating in terms of timeliness and reliability.

Shippers were now capable of moving freight on more predictable schedules, arguably laying the groundwork for time-definite logistics.

But where the railroads left off in the late 1800s, Henry Ford and the automobile took over a generation later. Hampered by government regulation, railroads existed within a tightly controlled vacuum for much of the 20th century, gradually losing large chunks of market share to a thriving trucking industry.

Then came the 1980s and deregulation, and railroads began to reinvent themselves.

The evolution of the rail freight industry in the past two decades has been progressive, albeit slow. More recently, however, rail freight growth has accelerated as traditional perceptions of “railroad time” have once again been cast in a new light.

Innovative communication technologies, greater demand for intermodal moves, and a new aggressive breed of customer service-oriented regional and shortline railroads are creating a new standard for railroads in today’s global supply chain.

The same goals that railroads hoped to create in 1883 by standardizing time—accountability, reliability, better customer service—are now coming full circle as today’s smaller railroads are integrating with Class I’s and shippers to provide time-definite services and seamless supply chain visibility. “Real Time” rather than “Railroad Time” is driving freight railroads into the new century.

Track Record: Staggers and Beyond

Railroads have long been stereotyped as slow, inflexible, and outdated. But to be fair, until the past decade or so there was little demand for much else. Railroads operated in their own niche—primarily transporting heavy, time-indefinite bulk freight commodities such as coal, lumber, petroleum, and aggregates—and shippers were resigned to that fact.

As rail freight volume increased in the past 20 years, however, the demographic of traditional rail shippers expanded. Today these customers expect and demand a lot more from their carriers.

“The railroad industry by and large has become a lot more customer driven,” says Peter Kleifgen, president of RMI, an Atlanta, Ga.-based provider of management systems and services to shortline and regional railroads. This customer-centric bend can be traced to the Staggers Act of 1980 and railroad deregulation.

Prior to Staggers, freight railroads operated under the authority of the federal government as a result of the Interstate Commerce Act of 1887—a regulatory structure put in place by Congress to compensate for a general public distrust of railroad oligarchies at the time.

But during the early and mid 20th century, railroads lost significant market share to motor carriers. By the late 1970s their inability to set and negotiate rates, increasing fuel costs, and infrastructure deterioration were driving the industry into the ground. The stage was set for reform.

The Staggers Act allowed railroads to become more customer focused in the way they conducted business and ran their operations because they were no longer bogged down by bureaucratic red tape. Railroads could freely negotiate rates with shippers and therefore became more competitive among themselves and with other modes.

As a result, the industry became exposed to consolidation and M&A activity, creating a healthier marketplace for upstart local railroads and better service for rail shippers.

Deregulation gave railroads the autonomy to “exit markets that they could not serve efficiently and to dispose of under-performing assets,” says David Clarke, assistant professor of civil engineering, Clemson University, in the 2000 research study, Local and Regional Rail Freight Transport. “The result was a tremendous growth in customer-oriented, entrepreneurially driven local and regional railroads.”

A Decade of Growth

To put this growth trend in perspective, consider these changes in the railroad industry over the past decade:

• In 1990 there were 14 Class I’s and 516 Non-Class I operators, including local and regional companies; in 2001 there were eight and 563 respectively. (The Association of American Railroads defines non-regional railroads as linehauls operating at least 350 miles of track and/or earning between $40 and $261.8 million; local railroads fall below the regional criteria in terms of mileage and earnings.)
• Class I employment during the same 11-year period fell 23 percent, while employment at regional and local operators declined only 14 percent, according to the Federal Railroad Administration’s 2002 statistics.
• Between 1990 and 2001, freight railroad productivity nearly doubled from 4.8 to 9.3 million revenue ton-miles per employee as traffic increased and employment dropped.

Railroads have no doubt become more efficient and productive, but more importantly, as Class I railroads consolidated, they invariably created a niche for more localized carriers.

Following deregulation, “the larger railroads lost customer focus at a more local level because they couldn’t sell those businesses very effectively,” says Clarke. “The advantage of shortline and regional railroads is that they are a lot closer to the smaller customers, and a lot more responsive and capable of identifying their needs.”

This dichotomy has clearly been favorable for the rail freight industry as a whole. Larger rail operators are more willing to divert business and lease assets to regional rail companies, while smaller carriers are still dependent on their larger constituents for infrastructure, equipment, and technology.

“A lot of Class I’s are leasing out rail branches to shortlines,” says George Bonner, director of transportation for Hampton Lumber, a Portland, Ore., supplier and reloader for the wholesale lumber industry. “Shortlines are now feeding into the larger railroads. These smaller operators tend to be more service oriented and customer friendly because they are targeting a linear network rather than a more expansive coverage area.”

This altruism has enabled smaller railroads to generate new business opportunities for themselves and for Class I’s in markets that were traditionally impossible to sell to.

An important dynamic moving forward will be how well these smaller carriers and shippers are able to integrate their disparate processes and create an efficient and seamless transportation network—first at a local level, then on a regional and national one. Technology, and further cooperation from Class I’s, undoubtedly will be the driving forces behind this transition.

The Paperless Railroad

Railroads are slowly starting to integrate technology into their operations. “It has been a long process,” says RMI’s Kleifgen. “These businesses tend to be highly automated and digitized in sales and administration, but on the production and operations side progress has been much slower.”

These growing pains, however, are quickly dissipating as railroads realize the potential rewards of what Kleifgen terms the “Paperless Railroad.” Aside from the obvious economic and cost benefits of automating manual, paper-driven processes, rail shippers are demanding more value-added services from their rail partners.

Where such investment in technology was previously cost prohibitive, especially for smaller rail carriers, intermediaries such as RMI have made outsourcing rail-specific technologies a practical alternative.

RMI Connects the Dots

Since 1979, RMI has been working with regional and shortline railroads, shippers, and even some Class I carriers to help automate antiquated processes and facilitate seamless information sharing among supply chain partners. In the late 1990s, RMI developed a suite of integration tools that allow regional and local railroads to communicate more seamlessly with their customers and rail partners as well as manage day-to-day operations in a tech-centric environment.

RailConnect, RMI’s proprietary solution, covers all the fundamental requirements of shortline railroad operations including transportation management, revenue accounting, equipment management, and executive information systems. Additionally, it provides customer service applications for railcar billing and shipment tracking.

Though the solution is geared toward smaller carriers, the benefits are manifest throughout the rail freight landscape. “Forty percent of Class I freight business is interline traffic. Therefore they stand to benefit from more seamless information sharing and visibility between shortlines and regionals,” says Kleifgen.

RMI’s ShipperConnect functionality similarly provides rail shippers with an Internet-based interface that enables them to manage a rail shipment at any point in time, as well as access and view all shipments en route and all railcars already spotted on the tracks.

“Previously, when a shipper released a car, that information would be faxed to a railroad agent who would then manually enter that data into the railroad’s database,” notes Kleifgen. “Now, that information goes directly to the train crew, thereby integrating both rail and shipping processes in one step.”

Not surprisingly, smaller railroads have easily gravitated toward RMI’s solution. In fact, more than 75 percent of shortline and regional railroads in the United States, Canada, and Mexico utilize one or more of its services.

Getting Everyone on the Same Page

RMI’s footprint is important because “the challenge facing the railroad industry has been getting everyone on the same page,” says Dave Collins, senior vice president, NY/PA region, Genesee & Wyoming Inc., a holding company that owns and operates regional railroads. “RMI represents the generic needs of the shortline railroad industry.”

Given the breadth of Genesee & Wyoming’s regional assets—it operates more than 20 railroads in the United States, Canada, Mexico, Bolivia, and Australia, including 8,000 miles of owned and leased track—partnering with RMI has enabled it to better manage technology integration for its entire rail network.

“RMI gives us the economy of scale we need,” says Collins. “It is also our primary outsource for hardware requirements. We buy time on its computers and all we have to do is connect to our systems via the Internet.”

Essentially, RMI has become an integrated system for the shortline industry, collecting disparate information from numerous railroads into a data soup that railroads and shippers can then dip into.

Hampton Lumber has experienced similar success with RMI’s track-and-trace functionalities. With nearly 70 percent of its freight moving via rail with various carriers, having visibility into shipments at any point in the supply chain is crucial.

“Rail has always been a key element in our transportation network,” says Bonner. “Previously, we had to contact all the railroads to find out where our shipments were. Now, we have seamless interline visibility because RMI has integrated all the information from all the railroads. We have a lot of leased cars that we use to ship our products. RMI provides reporting for these cars so we can keep track of empty and loaded moves.”

Having this type of visibility into cargo movement allows shippers such as Hampton Lumber to go online and view shipments in transit, then submit switching requests, releases, and other instructions to a particular railroad. This type of seamless information sharing has brought real-time logistics into the railroad lexicon.

Scorecarding Service Efficiency

Another important advantage of RMI’s RailConnect and ShipperConnect solutions is that railroads are better able to scorecard service efficiency.

“Railroads have to run their systems in a scheduled way and provide reliable transit times to be competitive. Therefore they have to track reliability themselves before they can start selling to customers,” notes Kleifgen. This information is dually important to rail shippers as it allows them to monitor their shipments, and discern whether a carrier is meeting its needs.

“Traditional Class I railroads have had their own systems for tracking cars, but they haven’t always tracked historical records,” adds Bonner. “RMI can pull records together to track trends and provide measured service levels so that railroads know how efficiently they are operating.”

Railroads have definitely improved in tracking, adds Bonner, “because we’re getting a lot more accurate information.” As a result, they now have the IT resources and empirical accountability to begin targeting customers that require more urgency and information in their moves.

The Intermodal Factor

In addition to customer-driven demand, the opportunity to tap into new markets has similarly compelled smaller railroads to court technology enhancements.

Multi-modal exchanges are where Kleifgen sees increasing need for automation. “We’ve had a lot of success selling to companies that involve complex intermodal operations—for example, moving material straight from a mining operation onto a ship,” he says. “The cost benefits are becoming sizable enough that it catches their attention.”

Given rail intermodal trends, this is a ripe market for growth. Between 1999 and 2002, total rail intermodal volume in the United States—including both containers and trailers—increased from 9,841,112 loadings to 10,934,330, according to figures reported by the Intermodal Association of North America. By comparison, in 1980 there were approximately three million domestic intermodal loadings.

Deregulation clearly has had a marked impact on intermodal growth. Railroads can negotiate rates more freely, allow market conditions to shape their business decisions, and compete in markets and against other modes that previously were prohibitive.

Technology and sophisticated high-tech distribution and transshipment facilities have similarly made loading and offloading freight from rail to truck to barge much easier.

Regional Rails Face Economic Challenge

While intermodal growth has opened up more freight traffic for rail, however, it hasn’t necessarily translated to immediate economic success for smaller railroads. Where Class I’s own the infrastructure, equipment, facilities, and technology to facilitate intermodal moves, smaller regional and shortline railroads are dependent on outsourcing and leasing these assets.

“Intermodal depends on long-haul capabilities to be economically profitable,” says Clarke. This poses a difficult challenge for most regionally based rail carriers because they do not have expensive coverage networks.

Tangential to this difficulty, says Clarke, is that “efficient intermodal transportation requires high-volume mechanized terminals and long haul distances. Local railroads are seldom in a position to provide either, though the major regional railroads might be.” A second factor that Clarke points to in his study is the impact of economic shifts on smaller railroads and the changing landscape of rail shippers.

“The extractive and manufacturing industries that generated high volumes of rail traffic in past years have been giving way to a service-oriented economy increasingly focused on a global marketplace,” he says. “Many companies in the service sector are not traditional rail freight customers. Small railroads, with their limited geographic scope, are extremely sensitive to such shifts.

“These companies will have to be integrated increasingly into the industrial recruitment process to ensure the location of new, high-revenue customers alongside their tracks. The local railroad must partner with the Class I railroads with which it connects; without Class I cooperation, the smaller company is limited in its responses to the market,” says Clarke.

Despite this caveat, regional railroads have shown they have the capabilities to court the intermodal market on their own, if given the right opportunity. In fact, some smaller railroads are no longer marketing themselves simply as railroads, but rather as intermodal companies.

Florida East Coast Rail (FECR), as an example, has developed a partnership with BJs Wholesale Club to deliver shipments from the wholesaler’s distribution facility in Jacksonville, Fla., direct to its clubs throughout the state.

Contracting with regional motor carriers to deliver from dock to rail and vice versa, FECR has created an intermodal logistics network within Florida that can guarantee overnight delivery to stores if necessary. While FECR’s success selling to a retailer may be an anomaly, it does validate the value proposition of local rail freight operators as intermodal partners.

Intermodal: A Dangling Carrot

For Genesee & Wyoming, intermodal business is enough of a dangling carrot to push harder in meeting the necessary requirements. Partnering with RMI has given Genesee & Wyoming the confidence in its IT capabilities to go after new business.

“RMI has allowed us to stretch our market reach,” says Collins. “We have been much more aggressive about going into markets that have typically not been open to railroads, especially intermodal business.”

Collins similarly sees legitimate opportunities for regional rail carriers to make an impact because of their size and scope. “We are very local and most of our operations are focused on a specific geographic area. Therefore it is easier for us to find unusual business opportunities that Class I’s cannot,” he says.

“A second advantage we have is that because of our various regional breadths, we can move traffic via multiple routes,” adds Collins. “This means we can work with any of the major Class I railroads, and offer our customers the most competitive rates.”

Having this type of leverage has made it easier for regional railroads with enough coverage to court businesses that might ordinarily ship via road. A reality for shippers today is that longer hauls are becoming more difficult and costly to fill with trucks. Rising fuel costs and increased congestion on highways in urban areas have rendered motor carriers less efficient than they have been in the past.

As a result, more transportation buyers are looking at opportunities where they can transload freight, which allows them to reap the cost efficiencies of rail without making the necessary capital investment in infrastructure and personnel.

Such reciprocity between trucks and railroads makes sense, says Collins. “By combining the two modes you get the delivery response of truck with the long-haul capability of rail.”

Even still, dependence on Class I connections is crucial to making this paradigm work. In fact, the irony is that too much reliance on one railroad could make it difficult for shortline and regional carriers to be successful over the long haul, says Clarke. If a smaller carrier only has one Class I connection, it is severely limited in how it can serve its customers and offer competitive pricing.

“Where multiple connections exist, these smaller carriers will remain intact because they can provide their customers with more options,” he says.

Rail Down the Road

Rail freight transportation in the United States is becoming a viable alternative to shippers who typically wouldn’t have even considered it in the past. This is a phenomenon partly attributed to technology integration, as well as a more customer service-oriented industry.

There are, however, other factors at play.

Rampant congestion on the East Coast, for example, has led to increased interest in railroad options, especially in urban areas. “Class I railroads in the East are reporting increased market share vs. trucking,” says Kleifgen. Certainly the opportunity exists for intermodal moves in these areas, where trucks are finding it difficult to be as cost efficient as possible.

Recently the rail freight industry has pushed to rehabilitate, improve existing rail, and make better use out of under-utilized rail infrastructure. In December, the U.S. Senate introduced the American Railroad Revitalization, Investment, and Enhancement Act (ARRIVE 21), a bill that would provide states with a new funding partnership to invest in freight rail and passenger projects that deliver public benefits.

The plan calls for legislation to invest $42 billion in U.S. rail infrastructure and service to improve freight mobility and expand high-speed passenger rail in congested corridors, among other goals. Accordingly, ARRIVE 21 would give smaller regional railroads even greater leverage in competing with other modes.

Freight traffic growth also brings up important global implications. In the United States, increased security restrictions have complicated cross-border moves via truck. Kleifgen sees this as another opportunity where regional railroads, given the appropriate technology, can make a huge impact with advanced manifest reporting.

“With the new 24-Hour Rule, we will have the ability to integrate moves between modes in advance,” he says.

It’s still too soon to predict how well smaller railroads will fare in the coming years. Technology integration, compared to other modes, is still in its infancy and many operators still lack the capital to make such investments.

Companies such as RMI have pushed the integration envelope by giving smaller carriers better resources to work with. But a lot will also depend on how well local and regional operators integrate with shippers and Class I railroads down the road.

“To prosper in the next century, the industry must successfully address changes in the economy that affect the demand for railroad service, obtain financing to maintain and improve infrastructure, and learn to operate in an increasingly regulated environment,” says Clarke. “To do this, small railroads must become tightly integrated into the logistics systems of their customers, maintain close partnerships with Class I railroads, and keep a high profile in the public sector.

“If these objectives can be accomplished, small railroads will likely serve customers efficiently as the 22nd century begins,” he says.

Time Will Tell

Railroads have come a long way from influencing people to operate on the same time. But even in 1883, there was firm resistance to change within American culture. Resentment against the railroads and the transition to an industrial economy were reason enough for some to buck Standard Time, and justification for the U.S. government to begin regulating the rail freight industry.

Acceptance to change naturally took time, and a similar case can be made for railroads today.

Local and regional railroads are aggressively tailoring their services and outsourcing the appropriate technologies to meet local shipper demands. The expectation is that these relationships will extend well beyond the local scope and radiate out to regional and national operations, ultimately spurring new growth for the industry as a whole.

The reality today is that “time” is no longer a relative concept for railroads, rather an absolute. “The time for rail is ahead of us,” says RMI’s Kleifgen.

Given rail’s recent track record, that’s worth waiting for.

Sidebar:Staggers Act

The 1980’s Staggers Act marked a pivotal transition in the rail freight industry as nearly 100 years of government regulation came to an end.

Among the provisions of the legislation, Staggers:

• Allowed railroads to enter into confidential rate and service contracts with shippers.
• Allowed railroads to price competing routes and services differently, to reflect the demand for each.
• Abolished collective ratemaking except among railroads participating in joint-line movement.
• Expanded the power of the Interstate Commerce Commission (ICC), which became the Surface Transportation Board in 1996, to exempt categories of traffic from regulation if the traffic was of limited scope or if regulation was not needed to protect shippers from an abuse of market power.
• Streamlined procedures for the abandonment and sale of rail lines.
• Directed that where the ICC retained jurisdiction over rail rates, it had to take into consideration the revenue of a railroad in determining whether or not a “rate” is reasonable.

Source: The Impact of the Staggers Rail Act of 1980, Association of American Railroads, July 2003