INTRO: Following deregulation, North America’s freight railways have continued to enjoy impressive market share, but challenges remain as the industry strives to make the best use of emerging technology and tap new sources of capital funding. Murray Hughes put the questions to Ed Hamberger, President & Chief Executive Officer of the Association of American Railroads

BYLINE: Ed Hamberger

President & Chief Executive Officer, Association of American Railroads

North American railroads have in the past obtained a 40% market share of the freight business, measured in tonne-km. With the economic slowdown of the last two years, how have the railroads fared in terms of market share, and what are they doing to try and retain or grow this share?

Rail market share has held up very well, actually increasing from 40·2% in 1998 to 41·7% in 2001, which is the most recent year available. In spite of the economic slowdown, rail handled a record 2275billion tonne-km in 2001, of which the Class Is accounted for 2183billion. Preliminary indications are that we set another record last year. Intermodal continues to be our primary engine of growth, as we moved a record 9·3 million trailers and containers last year, up 4·6% from the previous year. And by early March, I might add, intermodal was up another 8·6% this year.

We’re focusing on service in order to grow our market share. AAR members are offering a variety of new and improved services, including joint intermodal service, run-through service between the major railways, guaranteed delivery, money-back guarantees, and custom-tailored services offered to specific market segments such as paper, cars and lumber. We’re also seeing a comeback of fresh fruit and vegetables moving from southern California to the northeast, with new wagons being acquired to provide that refrigerated service.

There are persistent reports that shippers are far from happy with the standards of service offered by the US railroads, especially for shipments requiring use of several operators. How do you respond to this?

In point of fact, our service has improved substantially in the past couple of years. Last year, Brian Bowers, Vice-President of Intermodal & Brokerage Services at transport company Schneider National said ’the railroads’ performance is better than it has been in the last decade’. A UPS spokesman told a California newspaper recently that even at its West Coast air hub in Ontario, UPS was using rail rather than air to make shipments. And a chemical shipper recently told Traffic World magazine that railroads have ’done an admirable job of identifying areas of concern and then addressing the problem’. A spokesman for C H Robinson, a major logistics provider, told Transportation Distribution that the railroads are making more effort to design networks and improve service design. So I think the evidence is that our service has improved considerably, and our customers agree.

Deregulation freed the US railroads from many restrictions, allowing them to improve their financial performance substantially. What scope is there for further financial improvement?

There certainly is opportunity for additional improvement. Railroads continually look at ways to improve efficiency and reduce costs. We have consistently been among the national leaders in terms of annual labour productivity gains for the past 20 years now. Technology and changes in operations offer additional opportunity for improving productivity.

But those improvements can only take us so far. It is even more important that we improve the ’top line’, that is, grow the business. The key to that lies in improved service that will not only attract additional customers but also improve the yield. Ever since deregulation our average freight rates have gone down. But as we provide value-added service to our customers it should be possible to increase those yields so that our profit margins improve.

Public policy also plays an important role in our ability to improve our finances. Any move to reverse deregulation would have a devastating impact on our financial condition. Increases in truck weights and lengths would also affect us negatively. But on a more positive note, there is an increasing awareness on the part of policymakers of the role that rail - both passenger and freight - could play in reducing congestion and pollution. This opens the door to possible public-private partnerships, in which the public pays for the benefits it receives and we pay for the benefits we receive. I think there are some real possibilities here.

Are any more mergers or consolidation of major railroads likely, or is the basic structure of the North American network now stable?

It certainly is stable for now. As to the future, that all depends on circumstances and it would be pointless to speculate on what circumstances may exist then.

Are the US railroads making enough money to be able to fund capital replacement?

We don’t currently earn our cost of capital, and that is a concern. Railroads are one of the most capital-intensive industries in the USA. Over the past five years, we’ve put more than 18% of our revenue back into the industry in the form of capital improvements. The average for the manufacturing sector is 3·8%.

One reason for this is the disparity in the way government treats different modes. Railroads are responsible for the entire cost of maintaining and improving their right-of-way. Then we pay local property taxes on top of that. And then an additional $0·043 per gallon tax on diesel fuel, and that tax goes into the general fund. Trucking companies, in contrast, pay no fuel tax into the general fund. Everything they pay goes to support their infrastructure. But on top of that, the large trucks - the ones we compete with - pay only 50% to 60% of the cost of road repairs and improvements. This issue needs to be addressed.

Much use has been made of advances in technology, including higher axleloads, double-stack and the widespread use of AC-drive locomotives, with new units replacing old on a three for two or even two for one basis. What other technical advances do you foresee in the next five to 10 years?

I believe that vehicle performance monitoring and inspection will be a breakthrough technology in the near future. It will involve trackside monitoring of the performance of all 1·5million wagons as they move across the North American system, and also automatic inspection as they arrive at or leave terminals. This will permit maintenance to move from a reactive to a preventive mode, and, in the process remove for preventive maintenance vehicles that would otherwise generate high track forces and stress on the infrastructure. In fact, North American railroads have begun an initiative to lower the ’stress state’ of the railroad through a combination of research, implementation of improved suspension system performance and through an initiative that is beginning to move the industry from reactive to preventive maintenance procedures.

Some trackside units are already deployed in significant numbers. These include wheel impact load detectors which identify wheels that are out of round and/or have flats or other surface defects, and truck performance detectors that detect poor performance of bogies in curves, and sometimes on straight track. Wheel profile detectors that use laser and/or video techniques are also starting to be used to measure the cross-sectional profile of each wheel as the train passes the monitoring station at speed.

Another system being deployed is the trackside acoustic bearing detector developed by AAR’s subsidiary Transportation Technology Center Inc. This uses an array of microphones at the trackside to monitor the acoustic signatures of the roller bearings that pass by. Through very sophisticated data-analysis techniques, the system is able to identify bearings with defects requiring immediate attention with 97% to 100% reliability.

Many other detectors continue to emerge and will continue to do so in the next few years to monitor and inspect wagons automatically. I fully expect to see automatic vehicle inspection stations becoming commonplace at yards and terminals before the end of this decade.

In the past the AAR and the major US railroads funded large research programmes, but this work appears now to be much reduced. To what extent is research into future technologies still going on, and is it being carried out by suppliers or not at all?

AAR continues to fund a significant research programme that is conducted on its behalf by its wholly-owned subsidiary, the Transportation Technology Center, Inc (formerly the AAR’s Research & Test Department). It is a very pragmatic research programme driven by economics, safety, improved customer service and timely research findings and deliverables. We also rely on our ’Affiliated Laboratories’ programme whereby universities, such as the University of Illinois and Texas A&M University, seek out and adapt technologies developed for other industries.

TTCI also conducts what it calls ’Consortium Research’ and ’Internal Research & Development’. In Consortium Research, projects are selected based on the desirability of including non-railway partners, such as supply companies, wagon owners and even overseas organisations, in the research. IR&D is, as the name implies, internally funded by TTCI. These research projects are important for TTCI’s longer-term future but also benefit railways in North America and around the world. A good example is the development of acoustic bearing detection technology and the national wagon performance database called InteRRIS