Railroad Industry Reform: Policy, Technology, and Change

Introduction: The Case for Railroad Reform

The national railroad system has been a tremendous asset to the United States since its inception. Without the iron horse, the country would not have developed the means for transporting large quantities of goods from coast to coast. The passage of time has brought many technological changes to the rail industry, but to a great extent these changes have been slow to be implemented. Additionally, the nation has undergone a digital revolution in the way business is conducted. Digital and wireless technologies have replaced many positions traditionally filled by staff, and while such downsizing can create short-term problems, the increased levels of efficiency that businesses can pursue have created jobs in new sectors, generated increased revenues, and allowed businesses to improve their overall operating posture. As head of DSP Consulting, this paper proposes ways to improve efficiency on the Indiana Belt Line Railway while improving its market penetration and customer satisfaction.

Today's society would not be what it is without the technological advances that have affected every area of modern life. Communications are now virtually instantaneous. Businesses can monitor their supply chains and sales demands at any time. Organizations can reduce operating expenses by more closely managing supply and demand, and by organizing their shipping resources in the right place at the right time. By adding technological advances to an already steadfast industry such as rail, an organization can transform lagging performance into one that once again leads the country in job creation and effectiveness.

Changing systems means more to an organization than simply purchasing new control devices. It also means changing the culture of the organization itself, and this may be a more significant hurdle for the industry to clear. Implementing new control systems and making procedural changes requires more than updating task lists. Digital technology has enabled businesses to think differently as well as act differently. A business that adopts new controls without changing its culture will encounter significant internal opposition. For this reason, this paper also addresses transforming the organizational culture within the Indiana Belt Line Railway. The purpose of change is not merely to buy and install new equipment — it is to transform the performance of the organization, and this will require a significant internal and external change process.

One popular advancement being adopted by Class I railroads is the remote control locomotive. The use of automated systems not only reduces the crew force needed to operate a train but also eliminates communication problems between the conductor and the engineer. Combined with global positioning satellite technology, scanners, and proximity alert systems, much of the everyday movement of cars around the rail yard can be completely automated and controlled by a small staff from a central control facility, rather than by dozens of employees working in the freight yard. Automating intra-yard transportation also creates a safer environment, as workers are no longer required to move around operating rail vehicles. These ideas illustrate how rail systems can adopt a changed operational posture in order to become a more efficiently operating organization.

The Changing Dynamic of the Rail Industry

After World War II, the decline of railroads was accelerated by an increase in transport competition — mostly from trucking — along with excessive regulation and changing economic conditions. Competing modes of transportation received regular financial support from public funds, while railroads faced increasing doses of regulation. Public funds were used to construct the interstate highway system, airports and support facilities, and to improve inland waterways. This situation created a significant competitive disadvantage for the rail industry. At the same time railroads experienced increased competition, they were still burdened with paying the entire cost of building, maintaining, and replacing equipment and facilities, all within a regulatory price structure that prevented full cost recovery.

Regulation of public businesses is always a controversial measure. The advantages of guaranteed revenues from specific sources are often offset by a strategic disadvantage created between regulated and non-regulated organizations within the same industry. Regulation affected railroads adversely in the following ways:

Rate-making was time-consuming and inflexible. It was also discriminatory because one class of service subsidized another, while some commodities were carried below cost. Trucks and unregulated carriers competed aggressively for the subsidized traffic, forcing rates down and rendering the cross-subsidization policy unworkable.

Railroads were unable to abandon lines that did not cover variable costs, since the procedures to do so were lengthy, taking many years. As a result, these services were provided at a loss.

Regulatory procedures inhibited joint usage and joint control of common trackage, contributing to more costly operating practices. Regulation also discouraged innovation and did not provide managerial incentives (MacAvoy and Snowed, 1997).

Furthermore, the late 1960s and 1970s were a period of increased economic expansion. The tax policies following the Kennedy administration, combined with economic demands created by the baby boom generation, stimulated massive growth in the U.S. economy. In hindsight, the timing could not have been worse for the rail industry to be under anti-competitive regulation. While other modal carriers were becoming more competitive and generating revenue that allowed them to set the pace of the industry, the rail system was slowly degrading due to aging equipment and a lack of funds that could have been generated under deregulation.

By the end of the 1970s, when Congress reacted to the impending financial crisis, another competitor had appeared on the horizon. The shipping container industry was slowly coming of age during the second half of that decade. By the time the second wave of peacetime economic expansion hit the United States during the 1980s, the rail system was positioned to begin recovering lost ground but was not ready to capitalize on the climbing business cycle. Other businesses had made technological advances during the 1960s and 1970s that bypassed much of the rail industry. As a result, the rail industry remained at a competitive disadvantage — this time not due to financial controls, but to outdated equipment, lower revenues, and degrading facilities and track conditions.

Today, a global economy has again changed the dynamics of the playing field. Much of the goods previously shipped across the country during the 1960s and 1970s now enter the country via cargo ship and airliner. Shipments are already broken down by manufacturers into shipping containers, which are lifted from cargo ships and placed directly onto long-haul trucks, completely eliminating the need for the once-dominant rail transport system.

In summary, the fiscal problems facing the rail industry include:

Lack of financial reserves from previous economic cycles; increased competition; fewer goods being transported intra-nationally; increased drop shipments from international organizations directly to the end user; and aging or degraded equipment (adapted from Tomic, 1991).

Railroads and waterways, saddled with an industrial-revolution-era image and a tax and funding system that favors airlines and trucks, continue to watch their infrastructure fall further behind modern requirements. One study of just one segment of the rail network — the I-95 corridor between Richmond, Virginia, and New York City — identified $6 billion of needed improvements over the next twenty years to reduce bottlenecks. Railroads finance their infrastructure spending with private funds, while the fuel and other taxes paid by trucking companies are still dedicated to highway construction (Panchak, 2003).

Mergers and Collaborations

In response to the increasingly competitive nature of the market, rail companies have been merging in hopes of gaining the advantages of economies of scale. Railroads are combining to provide uninterrupted service to shippers by extending their reach and cutting costs. "We will have the financial strength to make substantial infrastructure investments and service improvements," said CSX Chairman Snow of the recent merger with Conrail. "Together the companies will have stronger revenue, cash flow, and earnings growth than they would have on their own" (Dinsmore, 1996). CSX and Conrail expected the merger to save $550 million per year through cost-cutting, job reductions, and other economies of scale.

A merged CSX and Conrail would operate 29,645 miles of track in 22 states and serve most major markets east of the Mississippi River, including New York, Boston, Washington, Atlanta, Miami, New Orleans, and Chicago. Annual sales would be nearly $14 billion. "This is simply put a terrific marriage that benefits the shareholder, benefits the shipper, and benefits the American public," Snow said. "We're creating a transportation company for the 21st century" (Dinsmore, 1996).

Another avenue explored by the rail industry has been collaborative efforts with other transportation industries. Intermodal pioneer Malcolm McLean once said: "The inter-modal industry has a great future — it always has and it always will" (Sparkman, 2001). That future seemed closer in the early 1990s when the advent of double-stack trains and other new technology made rail intermodal much more attractive for service-sensitive freight. At that time, many in the trucking industry invested heavily in piggyback services, including less-than-truckload haulers, truckload carriers like J.B. Hunt Transport and Schneider National, and package express giant United Parcel Service. Rail intermodal transport was more cost-effective for long-haul traffic and also seemed to offer a viable answer to the dwindling supply of truck drivers willing to spend weeks away from home making cross-country trips.

The enthusiasm drained away, however, during the widespread rail service failures that followed the mergers of Burlington Northern and Santa Fe, Union Pacific and Southern Pacific, and the split-up of Conrail between CSX and Norfolk Southern.

Rail intermodal loads began to edge back up in 1999 and 2000, according to figures released by the Intermodal Association of North America, but the piggyback trailer appeared to be headed the way of the dinosaur. IANA reported that some LTL carriers cut back their use of intermodal while others shifted from 28-foot trailers to 28-foot containers. Several truckload carriers withdrew from intermodal entirely, and those that persisted were more likely to use containers. Third-quarter data showed that containers accounted for 74% of the intermodal mix (Sparkman, 2001).

Declining revenues, aging equipment, increased competition, and a lack of cooperative ventures within the transportation industry all paint the picture of an industry in need of fundamental transformation — not just a cosmetic facelift. The demands of the global marketplace will no longer tolerate train schedules that are hours late or eliminated entirely due to unresolved transportation issues. The rail industry as a whole must address changes in culture as well as changes in the competitive environment if it is to remain solvent and once again become a dominant and reliable industry.

A final consideration for the rail industry is the reacquisition of the passenger travel market. When a business is losing market share in its major product line, looking to develop new products is key to building a prosperous future, according to H. Ansoff. The Ansoff Matrix, discussed further below, identifies alternative directions for business development and gives management tools to ask important questions about business operations — helping companies develop marketing strategies for existing products or identify new markets and new products they can effectively bring to market (Dibb and Simkin, 1997).

Conclusion

The rail industry has moved toward industry-wide integration as a cost-saving strategy; however, it has done so without fully exploring the advancements available in Sectors One and Three of the Ansoff Matrix, or the possibilities of diversification. As a result, combined companies face the same difficulties that individual companies faced, only on a larger scale. Acting together, the companies have greater potential for success, but they also carry a greater risk of failure — a risk that is accentuated if the industry does not deepen its market penetration and expand its product offerings.

Sustainable competitiveness for the rail industry requires a simultaneous commitment to technological investment, strategic market development, and genuine cultural transformation. The frameworks examined in this paper — the Ansoff Matrix and Lewin's Unfreeze-Change-Refreeze model — provide both the strategic direction and the organizational roadmap that the Indiana Belt Line Railway, and the industry as a whole, must follow if they are to regain their relevance and profitability in the twenty-first century.

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