“Pivot to Growth” – What do we mean by “growth”?

Railroad Weekly published some discussions from the Norfolk Southern (NS) investor day on how the company would focus on “growth,” with operating ratio no longer a singular focus. Other railroads have made similar comments, and “growth” is the new buzzword. The wording is usually something like “smart and sustainable growth.” These statements usually indicate: no new train starts, no new service, no new capacity, taking business in selected lanes where they perceive they have capacity, and the same service they provide to their current customers. It also generally means prices similar to the business they currently have.

This isn’t really a growth strategy. They are hiring crews now to expand capacity, and maybe they will keep some of these people when volume drops. This is a good start, but it only means they can handle more of the volume their current customers want to ship. Most other businesses would not call that a growth strategy.

Railroads also indicate that they will grow volume because more companies will move production from China or other places to North America — a trend that would advantage railroads. But will those companies really locate plants at points captive to one railroad? Or build supply chains that rely on rail service that has little resilience, experiences year-long service meltdowns every few years, and offers no service commitments? Probably not. Even taking advantage of a trend to more onshoring (if that actually turns out to be a thing) will likely take better service than is being provided now.

Almost all railroads say they will benefit from companies looking to improve their ESG credentials. They will shift volume from truck to rail to accomplish this. Is the assumption that these companies will trade off a well-performing truck-based supply chain to improve ESG scores? That just doesn’t seem realistic. Some might, but the service world most companies are living in is far different than one with a rail based supply chain. For railroads to take advantage of a trend toward shippers looking to improve their ESG will likely require better rail service than they provide now.

Another trend cited as a growth opportunity is a shortage of truck drivers. The truck driver shortage has been discussed for years. Larry Gross, in his talk for IANA on December 13, showed that since 2018, growth in rail intermodal has trailed overall GDP, while truck greatly outperformed both GDP and rail intermodal. Truckers find a way to add capacity when there is demand. Intermodal has been short of capacity now for several years. As for rail volume benefitting in any meaningful way from a truck driver shortage — in Larry’s word, “fahgettaboudit.”

NS also said the sweet spot for truck conversion is about 600 miles, which is their average distance for industrial shipments. These short haul lanes are the biggest opportunity for capturing market share because this is the distance of most freight in the US. These are 1-2 day truck lanes with on time performance in the 90% range. The prices are already higher than rail but they are constrained by competition which also drives service performance. Railroads don’t have intermodal products for many lanes of this length. Carload service is an inconsistent 3-5 days.

For railroads to increase market share and really grow volume will require new services and a very different mentality on service performance. Between my jobs at two different Class I railroads, I spent four years in marketing and sales at a regional LTL trucking company. Early in my time with that company I expressed concern to the Senior VP Operations about whether we had the capacity to handle a new piece of business we were targeting. He said, “Don’t worry about it — you find the business and we will figure out a way to make money at it.” When you hear a railroad talk like that, you will know they are pursuing growth.