Second of Two Parts

Railroads are all about moving freight quickly, efficiently and safely at a rate of compensation that the market will allow.  As shippers we “fit” into this network better if we understand a little bit of how the railroad thinks of our business.

By Darell Luther

In the February 2017 issue of Waste Advantage Magazine, I wrote an article titled “Railroad Think” where I covered how railroads think about rail rates, operating requirements and rail equipment (more specifically railcars). I ended that article promising to follow up on additional important railroad think items and specifically how railroads view logistics management, railcar maintenance and accessorial costs.

My background is comprised of an almost 10-year stint at two Class I railroads where I spent a varied amount of time in marketing, integrated network management, rail fleet management, rail operations, a special finance group, tariff and contracting, unit train operations, and railcar acquisitions and disposal. I’ve also spent the last approximately 20 plus years on the private shipper and car owner side and have also started and run two companies that focus on rail transportation at all levels. Needless to say, I’ve seen the viewpoint and lived the interpretation of logistics management of both a railroad and rail shipper/railcar owner. In addition I’ve had about five years (out of the 20 plus most recent years) where I had direct responsibility for three major railcar repair facilities, a minor repair facility and two mobile repair operations, so to the railcar maintenance viewpoint I add not only a railroad and railcar owner perspective, but also a private contract shop perspective.

Logistics management, railcar maintenance and accessorial costs aren’t as immediately hard hitting topics as in my first article that covered rail rates, operating requirements and rail equipment; however, for most shippers they can be like cells in the body—if taken care of and managed for health, the results are good. If ignored or not managed, they become cancerous, slowly eating away at profits. Railroads generally view these items from a different perspective than shippers.

Logistics Management

Logistics management is probably one of the most varied definitional subjects that there is in the transportation arena. If you’re managing truck, rail, barge and ship loadings, logistics management is more involved than just managing one or a small number of loadings or receipts of products. In the rail industry, logistics management focuses intently on rail but still encompasses the other three areas of concentration. Surprising, isn’t it?  If you think of truck, barge and ship loading locations, you can universally classify them as demand points for loaded or empty equipment.

The rail network is comprised of tens of thousands of miles of track infrastructure connecting millions of customers served by five U.S. and two Canadian Class I railroads and more than 500 regional and shortline railroads. The fact that it’s a complex network is an understatement, thus there needs to be a logistics management system in place to even have a chance of meeting customer railcar requirements.

When a railroad views logistics management there are generally two categories of business: carload and unit train. Carload business is generally more of a scheduled business enterprise where train starts are scheduled and then railcars are added to the trains until they are at maximum length for sidings or optimal size for the horsepower assigned to them. As an example, a local train, which by definition serves customers in a local geographic area, takes loads to customers and drops them off during a shift and, given sufficient time, picks up loaded railcars on the way back to the serving rail terminal or rail yard. This same local will spot empty railroad controlled railcars to customers to fulfill customer railroad system railcar orders. If the railcars to be spotted are empty private railcars, they will be automatically set out at the customer location. These railcars are then marshaled to a classification yard where they’ll be sorted by where they’re going to ultimately end up. They’ll then be placed on a manifest train to the next classification yard in their schedule. This will be repeated until they ultimately reach their destination and are placed on a local train for final delivery. In today’s environment, these manifest trains and local trains run on a set schedule. The railroads’ model, much the same blueprint as the airlines, uses a hub and spoke approach to distribution of railcar assets with set schedules, e.g., if you miss your flight or you miss your train’s scheduled departure, you get on the next available flight or train.

There is a significant difference on how railroad supplied equipment is viewed and private equipment is viewed by railroads. If a customer is using railroad supplied equipment (e.g., equipment owned, leased or otherwise organized by the railroad), then railcars are allocated and distributed by customer orders; if the equipment is assigned to the customer directly, the equipment is treated more like private equipment. In contrast, if private equipment (owned, leased or controlled by the shipper or receiver) is used, railcars are either assigned to a customer pool with reverse route instructions or, if not assigned to a pool, they will automatically reverse route unless otherwise diverted by the customer.

For example, let’s assume that five scrap metal customers each order 20 empty railroad supplied mill gondola railcars for loading during the same week. The local train crew will take the switch list (the list of which railcars are allocated to which customers) and place those empty railcars on the customers siding. The railcars will be distributed to the customers prioritizing the customer order date for the railcars, provided the customer has room for the equipment. If there are only 95 railcars available, the customer who last ordered for that week will be shorted five empty railcars until more empties are available. If there are 100 or more railcars available, the orders will all be filled. This is an oversimplification as there are a lot of potential variables that go into distributing railroad owned equipment, but it helps explain how the railroad thinks. The key takeaway for how railroads view their own carload equipment is that it is distributed based on orders or assignment. The benefit to the railroad is better use of equipment.

Railroads will expect the customer to load or unload the railcars ordered, generally within two days, and make them available for pickup by the next switch thereafter.  If the railcars are not available for pickup by the allotted time, then the railcars will be subject to demurrage (which we’ll address in the Accessorial section of this article). The key to understanding the railroad viewpoint at the customer level is that the railroads expect customers to quickly load or unload railcars within an allocated time or pay a penalty for the delay to the railroads assets.

Another interesting nuance of the shipping carload business from a railroad perspective is that oversight of the managing carload business is generally divided amongst departments. The railcar distribution team distributes empties. They have knowledge of all empties under their control (railroad owned equipment and private assigned equipment) from time of empty release to time of empty placement with a customer. Operations is responsible for distribution of loads to customers and have performance measures on how they’re doing. Marketing and sales counts carloads as they’re released to track revenue and trends.  It should be noted that there is a potential disparity in managing your loaded shipment and empty railcar supply as a customer.  Here’s where you make a note to self—pay attention to your complete railcar cycle to be sure you get empty railcars to load and your loaded railcars get to your customers.

Unit train management is an entirely different animal. Whereas the carload business is largely scheduled, the unit train business doesn’t lend itself to being easily scheduled. Schedules on unit trains generally start at the departure of the loaded trains and resources (locomotives and crews) and are allocated through the trip plan. A trip plan is generally how a train is expected to run from origin to destination and back. Trains either run in dedicated service (e.g., intermodal container loads from Long Beach, CA to Chicago and return with empty containers) or in regional service (e.g., grain trains serving multiple regional elevator origins to domestic feeders in the same geographic region or possibly to ports for export). Railroads pay close attention to both the loaded and empty side of unit trains simply because they don’t lend themselves to a fixed schedule and require more management focus. Railroads generally favor unit train operation because of its more simplistic processes and generally provide economic incentives to unit train shippers whose carload shippers are not offered.

Railcar Maintenance

Railroads have a set of rules and regulations they are required to follow in order to safely maintain railcars. One set is through the Association of American Railroads (AAR), which encompasses the AAR Field Manual and corresponding AAR Office Manual. The Federal Governments’ Federal Railroad Administration (FRA) governs the other set. In very general terms, the AAR rules and regulations cover running repair and set forth private railcar owner responsibilities and railroad responsibilities.  FRA rules generally cover safety appliances such as hand holds, cross over platforms, clearance issues and they set final condemning limits to AAR rules and the like.

Railroads following FRA rules and guidelines typically inspect railcars every 1,000 miles. As with any situation, there are a few exceptions to this rule. If a customer is running new railcars in a unit train or crew districts support it and a petition is completed, inspections can sometimes be pushed to 1,500 miles. The inspection is generally a roll by inspection where the car inspector (generally an employee of the railroad or otherwise contracted by the railroad) is knowledgeable in AAR and FRA rules and gives the train a cursory look to be sure there aren’t any AAR and/or FRA rule violations. In addition, railroads have adapted new technology and have wayside detectors for wheel wear (KIPS) truck hunting, and hotbox detectors for bearings. These technological advances each come with their own set of rules governing repair or replacement.

In the event a rule violation is detected during this inspection, railroads have the option, but not the obligation, to repair a defect unless the violation impedes the safe movement of the railcar; however, railroads will fix FRA repairs when they occur—that is one agency that railroads don’t mess with since the rules and regulations are all about safety. On the other hand, if the AAR repairs don’t impede the safe operation of the train or railcar in the train, they may be taken care of at the individual railroad’s discretion or cast back to the railcar mark owner for repair.

Railroads have the option of completing repairs on any railcar that isn’t their own if it requires an estimated 25 hours or less of repairs excluding trucks, or 36 hours or less of repairs that includes the trucks. Trucks are the infrastructure of the railcar that support each end of the railcar and connects with the wheels. If the repair hours are estimated to exceed the figures mentioned for foreign and private railcars, a Damage and Defective Car Tracking (DDCT) notice is sent to the railcar mark owner and the railcar mark owner must provide Railinc with shopping instructions. In the event the railcar mark owner does not provide shopping instructions within the allocated timeframe, the railroad may ship the railcar to the shop of its choosing.

In our experience there are three different approaches that Class I and shortline and regional railroads take to these optional repairs:

  1. One set of railroads has downsized their mechanical forces to the point where they have just enough personnel to take care of their own rail equipment and meet the FRA requirements for private or foreign rail equipment. These railroads tend to “home shop” or issue DDCT notices on railcars for repairs that others would complete to keep railcars in train and running. They also tend to use the most costly option when repairing railcars, requiring railcar owners to solicit private railcar repair options, if available.
  2. Another set of railroads has taken the opposite approach, repairing everything possible to the point of considerable delay and consternation of railcar owners. These railroads tend to focus on every repair, making railcar parts exchange and general railcar repairs a business line in and of itself.
  3. The third set of railroads strike an even balance between what’s required and what’s optional, working with railcar owners to find the best and most economical repair option while maintaining a fluid rail operation.

The more you delve into railcar maintenance, the more complex it becomes. There are approximately 746 pages in the Field Manual and several hundred pages in the Office Manual that govern AAR rules and regulations. There are several hundred locations where a railcar can be repaired under the railroad operating scenario. There are also several private railcar repair shops and railroad agent shops that repair railcars that require certifications and training to be in compliance with the AAR and FRA rules and regulations. They all require the same interpretation of the rules.

Safe operations of railcars are ultimately the joint responsibility of the railcar owner and the operating railroad. Intensive repair management is required to keep railcars running smoothly, safely and within a reasonable cost structure.

Accessorial Costs

Accessorial costs are like tax statements—they show up when you least expect them and usually don’t bring good news. It is important to not forget accessorial cost potential when planning your shipments.

Railroads have gradually moved from an all-inclusive pricing structure to an a la carte pricing structure that is often maddening to customers and difficult to understand. Railroads, rightfully so, provide a host of services that are specifically tailored to individual shippers and receivers.  There are many options with corresponding pricing for managing your movements. These options and pricing include, but are not limited to, the following:

  • Being able to have the railroad hold your load or empty on their tracks and then be able to order them in when you’re ready for them
  • Electronic billing
  • The ability to divert loads and empties en route to other destinations
  • Weighing of railcars
  • Out of route movements
  • Handling overloaded railcars
  • Special rates for specific destinations or ports that do not subscribe to the handling lines pricing
  • Railcars release to the carrier without final billing
  • Demurrage

Railroads have built-in pricing for customer non-compliance with their method of operations.  Railroads want customers to load, unload and properly bill (waybill) their equipment. Railroads also want clear electronically submitted instructions within their system or within a system that is compatible with their system. The old days of faxes and e-mails are pretty much over and shipper and receiver exception management to railroad standard operations can be expensive to both the railroad and to the shipper.

Demurrage

Demurrage deserves its own focus. From a railroad’s viewpoint, demurrage is the penalty assessed to the inability of a customer to take equipment (loads or empties) when offered by the railroad. There can be several reasons for this inability to take equipment such as bunching of empties on orders, congestion in the facility, a railroad’s failure to pull the interchange track when offered by the customer, electronic release of loads or empties by the customer but not placing them on the interchange track, over ordering of railcars by customer, private equipment bunching due to railroad operations impediments such as floods and severe winter weather, etc. Whatever the reason, it behooves a shipper or receiver to monitor and manage their equipment requirements to minimize demurrage charges.  If the problem persists, it truly may be an issue of the shipper or receiver not having enough track or not proactively managing their shipments or receipts and deserves study, analysis and remedy.

Each railroad has a tariff outlining the situations under which accessorial and demurrage are applicable and corresponding costs. I highly encourage you to review those “ghosts in the darkness” before shipping to better understand the complete railroad view of handling your business.

Fitting Into the Network

Railroads are all about moving freight quickly, efficiently and safely at a rate of compensation that the market will allow.  As shippers we “fit” into this network better if we understand a little bit of how the railroad thinks of our business.

Darell Luther is CEO of Tealinc, Ltd. (Forsyth, MT), a railcar operating lessor, transportation consulting company and broker of freight railcars and rolling stock. He can be contacted at (406) 347-5237 or via e-mail at darell@tealinc.com.

For additional comments on the railcar repair world see the Tealinc Touchbase Newsletter and look for the monthly “Mechanical Brief” written by Steve Christian, Manager Value Creation – Operations for Tealinc.

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