What’s next for freight rail: Looking toward the future with focus

Has PSR reached the end of the line?

Over the past decade, PSR generated substantial benefits for Class I railroads and their investors. While it increased operational efficiency and short-term profits, these improvements are approaching their maximum thresholds. Implementation of PSR has led to constrained network capacity, limited flexibility, and loss of market share to trucking. Continued pressure from regulators and service-level demands from shippers may force long-term change. What’s next for the freight rail industry?

Navigating long-term success amid sector-wide challenges

Railroads must determine “what is next” to solve their operational and financial challenges, as PSR will likely be less effective in the future. As executives look for answers, they should keep the following questions in mind:

• What actions are required to shift investor expectations from lower operating ratios to higher EBITDA?
• How can railroads develop needed network capacity infrastructure for the long term and regain market share?
• As calls for onshoring production in North America rise, how can the rail industry position itself to take advantage?
• How should the rail industry take opportunity of the industrial production growth in Mexico?
• Will the demand change knowing that rail is less-carbon intensive than trucking and technology is being developed to reduce rail carbon intensity through biodiesel, hydrogen, and electrification of locomotives?
• How can railroads play a larger role in e-commerce and other third-party fulfillment? With the rise of big-box stores and online sellers controlling their own fulfillment, can railroads explore industrial partnerships?
• How can railroads look to attract factories, port facilities, and warehouses to railroad-adjacent real estate?

What will drive the future success of freight rail?

Railroads should chart a challenging path to increased service levels while maintaining low-cost profiles. To gain economies of scale, use investor capital efficiently, and increase commercial opportunities for their businesses, executives should consider the potential paths forward:

• Railroads and third parties working in concert
  Class I railroads need to take a more holistic view of rail transportation and realize that collaborative solutions may be necessary for long-term prospects of freight rail. In North America, carriers are negotiating commercial agreements to share infrastructure, collaborate to create network fluidity, and increase shipper service. Additionally, carriers may be able to collaborate with government agencies to reduce operational bottlenecks at borders, port areas, and interchanges.
• Railroad industrial parks and third-party switching
  Increased use of shortlines, third-party switching, and industrial terminals could allow railroads to focus on the “hook and haul” business and allow third-party switching for first- and last-mile services. By letting each segment of the industry focus on its specialty, infrastructure investment into network capacity can be allocated most efficiently:
  • To increase the focus and service given to shippers, shortline and terminal railroads can take on the shipper “retail” segment in a hub-and-spoke model by developing “rail industrial parks”
  • Third-party logistics terminals operated by switchers could improve network fluidity in congested rail corridors, adding capacity and services to the network
  • Large industrial parks and terminal railroads can provide a low-cost solution to maintain margins, a customer focus to grow business, and a longer-term multimodal solution.

• Technology enablement
  Technology alone won’t be able to solve all the current issues facing railroads, but it may help alleviate some pressures. Technology can contribute to lowering costs through automation. It can also be used in managing growth though more advanced demand forecasting.