Things are looking up on the rails. After about a year of stability (that is, limited growth), carload volume began to move up in the second quarter of 2018. According to data from the Association of American Railroads (AAR), North American carloads (excluding intermodal) were up 2.2 percent in the first half of 2018, but this figure masks an acceleration. In the first quarter of 2018, carloads were up only 0.3 percent year over year, but in Q2, they rose a solid 4.2 percent. Volume increased sequentially from Q1 to Q2 by 5.4 percent. The gains were broad-based, with only three of the 20 commodity groups included in the AAR data showing year-over-year losses in Q2.
The timing of the surge tells us something about what is and isn't happening. First, what isn't: Most likely the improvement is not coming from highway freight converting to rail carload. Truck capacity began to tighten up in Q4 2017, as the federal mandate that most trucks must be equipped with an electronic logging device (ELD) approached, and then got extremely tight after the mandate took effect in December. This situation remained through the first quarter of this year and persists today. Yet the tightening truck capacity did not affect carload activity, which remained very quiet in the first quarter. These days, there is little freight that can easily move between truck and rail. Rather, each mode has developed its own distinct market, and structural barriers inhibit easy shifts between modes.
Article Figures
[Figure 1] Four-week avg. merchandise train speeds: Total networkEnlarge this image
It's more likely that the improved rail carload picture in the second quarter represents an acceleration in the industrial economy. Gross domestic product (GDP) growth in Q1 was only 2 percent, roughly in line with prior performance over the course of the recovery. But all indications are that growth has moved up in Q2, and accelerating rail carload activity is one of the strands of evidence.
This growth in carload volume has been impressive given the continued decline in the use of coal for power generation despite the Trump administration's efforts to the contrary. (Coal has historically been the "bread and butter" of rail traffic.) The economic power of low-priced natural gas is simply too strong for coal generation to overcome. Coal carload activity in the first half of 2018 was unchanged from the prior year, mainly as a result of stronger coal exports offsetting for the moment the decline in utility coal.
The competition over operating ratio
The railroads continue to compete with each other to achieve the lowest operating ratio (OR), which is defined as expenses divided by revenue. A key method for driving down cost (and therefore improving OR) has been to lengthen trains, thereby increasing the number of cars and amount of freight handled by one crew. A critical tool in this effort has been the use of distributed power, in which unmanned locomotives located within or at the rear of the train are controlled remotely by the crew at the front of the train. Dispersing the locomotives reduces the forces generated within the train and also speeds up brake application, enabling the safe operation of much longer trains of 12,000 feet or more.
Another major recent influence on operating ratios has been the application of the concept of "precision scheduled railroading" (PSR) as promoted by the late E. Hunter Harrison, who was in the midst of implementing this operating philosophy on the CSX system at the time of his death after earlier stints at Canadian National and Canadian Pacific. While the PSR transformation involves lengthening trains, it also entails a wholesale revision of railroad operating plans, with reductions in yards, assets, and workforce in order to wring the maximum amount of efficiency out of the railroad infrastructure.
Cost reduction is only half of the operating ratio equation, however. The other means of reducing the operating ratio is raising revenue. In the absence of volume growth, this has meant continuing to raise rates at a pace exceeding that of the industry's cost inflation, a trend that has been in place for many years.
This transformation of operating practices, is not, however, evolving in a completely smooth manner. Train service has suffered. Figure 1 represents the four-week moving average of the composite merchandise train speeds of all the Class I railroads (except Canadian Pacific) as drawn from the weekly EP-274 reports the railroads make to the U.S. Surface Transportation Board. Merchandise trains are the mixed freight trains that carry the broad span of commodities handled by the railroads. The category excludes the unit trains of coal, oil, or grain, which are tracked separately, and excludes intermodal trains as well.
While average train speeds are a highly imperfect means of measuring service quality, they are useful indicators when the numbers move dramatically. Such is the case right now. Average merchandise train speeds have deteriorated substantially thus far this year, standing most recently at just 19.6 miles per hour (mph), down more than 5 percent from the same time last year and 8.7 percent lower than the average performance of the past five years. Much of the deterioration occurred during the first quarter in the absence of traffic growth, so while more volume may be contributing to the problem now, it certainly isn't the sole reason for the decline.
Intermodal: opportunities and challenges
There is a sector where rail and truck compete fiercely for market share, and that's domestic intermodal. Intermodal consists of two distinct market segments, each roughly equal in size. The international segment involves the inland movement of ISO (or international) containers from overseas. This segment mainly responds to international trade trends and port routing decisions by ocean carriers and shippers. The domestic segment covers the movements of domestic containers and trailers, and it responds to the competitive posture of intermodal vs. truck. The aforementioned shortage of truck capacity has provided intermodal with a golden opportunity to take freight off the highway. Indeed, domestic intermodal is growing briskly, with volume up 8.6 percent year over year for the first two months of Q2 2018. But earlier during the shortage, growth was restrained by a shortage of domestic containers. Intermodal carriers are now working to right-size their fleets to meet the current demand.
Meanwhile, the old stalwart "trailer on flat car" (TOFC) is helping to fill the gap. Intermodal movements of trailers were up over 17 percent year to date through May and over 21 percent quarter to date. TOFC strength is coming from three sources:
1) Movement of smaller trailers (primarily 28-foot "pups") filled with e-commerce-related cargo by parcel and less-than-truckload (LTL) carriers,
2) "Safety valve" movements by shippers who can't find a domestic container, and
3) Trailer moves by over-the-road truckers who don't own domestic containers but are using intermodal to handle load volume for which they otherwise can't find enough drivers.
There are, however, sources of concern regarding the sector's ability to handle the demand. Intermodal trains have not been immune from the rail network's general slowdown. The delays have caused trains to bunch up, which greatly impedes terminal productivity and slows equipment velocity. Drayage, the short-haul highway movement of intermodal equipment, has also been a major disruptor. Long-haul drayage carriers are subject to the new electronic logging device (ELD) requirement if their hauls exceed 115 miles from the intermodal ramp, but short-haul carriers are not. This has caused many carriers to migrate towards shorter hauls. The result has been a shortage in "long-haul" dray capacity for moves of around 200 miles from the intermodal ramps, and rates have been skyrocketing.
While Q2 typically marks the seasonal peak for truckload carriers, intermodal traffic usually peaks closer to the holidays with October typically being the busiest month. In a normal year, October domestic intermodal volume is typically about 7 percent higher than in May. With the system already showing signs of strain, there is real concern over its ability to handle the increased volumes to come.
For the balance of 2018, carload growth will likely be determined by the path of the economy. Will the presumably strong performance of the second quarter endure? Or will increasing interest rates, federal deficits, and possible trade disruption prove to be a drag that brings growth back down to previous levels? Meanwhile, the railroads will find it difficult to recruit the manpower they need to meet increasing demand with unemployment at very low levels, so service recovery may prove difficult. Meanwhile, intermodal will have all it can handle through the balance of this year as tight truck capacity will lead to robust demand. Intermodal's growth will only be limited by its ability to accept it.
Generative AI (GenAI) is being deployed by 72% of supply chain organizations, but most are experiencing just middling results for productivity and ROI, according to a survey by Gartner, Inc.
That’s because productivity gains from the use of GenAI for individual, desk-based workers are not translating to greater team-level productivity. Additionally, the deployment of GenAI tools is increasing anxiety among many employees, providing a dampening effect on their productivity, Gartner found.
To solve those problems, chief supply chain officers (CSCOs) deploying GenAI need to shift from a sole focus on efficiency to a strategy that incorporates full organizational productivity. This strategy must better incorporate frontline workers, assuage growing employee anxieties from the use of GenAI tools, and focus on use-cases that promote creativity and innovation, rather than only on saving time.
"Early GenAI deployments within supply chain reveal a productivity paradox," Sam Berndt, Senior Director in Gartner’s Supply Chain practice, said in the report. "While its use has enhanced individual productivity for desk-based roles, these gains are not cascading through the rest of the function and are actually making the overall working environment worse for many employees. CSCOs need to retool their deployment strategies to address these negative outcomes.”
As part of the research, Gartner surveyed 265 global respondents in August 2024 to assess the impact of GenAI in supply chain organizations. In addition to the survey, Gartner conducted 75 qualitative interviews with supply chain leaders to gain deeper insights into the deployment and impact of GenAI on productivity, ROI, and employee experience, focusing on both desk-based and frontline workers.
Gartner’s data showed an increase in productivity from GenAI for desk-based workers, with GenAI tools saving 4.11 hours of time weekly for these employees. The time saved also correlated to increased output and higher quality work. However, these gains decreased when assessing team-level productivity. The amount of time saved declined to 1.5 hours per team member weekly, and there was no correlation to either improved output or higher quality of work.
Additional negative organizational impacts of GenAI deployments include:
Frontline workers have failed to make similar productivity gains as their desk-based counterparts, despite recording a similar amount of time savings from the use of GenAI tools.
Employees report higher levels of anxiety as they are exposed to a growing number of GenAI tools at work, with the average supply chain employee now utilizing 3.6 GenAI tools on average.
Higher anxiety among employees correlates to lower levels of overall productivity.
“In their pursuit of efficiency and time savings, CSCOs may be inadvertently creating a productivity ‘doom loop,’ whereby they continuously pilot new GenAI tools, increasing employee anxiety, which leads to lower levels of productivity,” said Berndt. “Rather than introducing even more GenAI tools into the work environment, CSCOs need to reexamine their overall strategy.”
According to Gartner, three ways to better boost organizational productivity through GenAI are: find creativity-based GenAI use cases to unlock benefits beyond mere time savings; train employees how to make use of the time they are saving from the use GenAI tools; and shift the focus from measuring automation to measuring innovation.
Business software vendor Cleo has acquired DataTrans Solutions, a cloud-based procurement automation and EDI solutions provider, saying the move enhances Cleo’s supply chain orchestration with new procurement automation capabilities.
According to Chicago-based Cleo, the acquisition comes as companies increasingly look to digitalize their procurement processes, instead of relying on inefficient and expensive manual approaches.
By buying Texas-based DataTrans, Cleo said it will gain an expanded ability to help businesses streamline procurement, optimize working capital, and strengthen supplier relationships. Specifically, by integrating DTS’s procurement automation capabilities, Cleo will be able to provide businesses with solutions including: a supplier EDI & testing portal; web EDI & PDF digitization; and supplier scorecarding & performance tracking.
“Cleo’s vision is to deliver true supply chain orchestration by bridging the gap between planning and execution,” Cleo President and CEO Mahesh Rajasekharan said in a release. “With DTS’s technology embedded into CIC, we’re empowering procurement teams to reduce costs, improve efficiency, and minimize supply chain risks—all through automation.”
And many of them will have a budget to do it, since 51% of supply chain professionals with existing innovation budgets saw an increase earmarked for 2025, suggesting an even greater emphasis on investing in new technologies to meet rising demand, Kenco said in its “2025 Supply Chain Innovation” survey.
One of the biggest targets for innovation spending will artificial intelligence, as supply chain leaders look to use AI to automate time-consuming tasks. The survey showed that 41% are making AI a key part of their innovation strategy, with a third already leveraging it for data visibility, 29% for quality control, and 26% for labor optimization.
Still, lingering concerns around how to effectively and securely implement AI are leading some companies to sidestep the technology altogether. More than a third – 35% – said they’re largely prevented from using AI because of company policy, leaving an opportunity to streamline operations on the table.
“Avoiding AI entirely is no longer an option. Implementing it strategically can give supply chain-focused companies a serious competitive advantage,” Kristi Montgomery, Vice President, Innovation, Research & Development at Kenco, said in a release. “Now’s the time for organizations to explore and experiment with the tech, especially for automating data-heavy operations such as demand planning, shipping, and receiving to optimize your operations and unlock true efficiency.”
Among the survey’s other top findings:
there was essentially three-way tie for which physical automation tools professionals are looking to adopt in the coming year: robotics (43%), sensors and automatic identification (40%), and 3D printing (40%).
professionals tend to select a proven developer for providing supply chain innovation, but many also pick start-ups. Forty-five percent said they work with a mix of new and established developers, compared to 39% who work with established technologies only.
there’s room to grow in partnering with 3PLs for innovation: only 13% said their 3PL identified a need for innovation, and just 8% partnered with a 3PL to bring a technology to life.
Even as a last-minute deal today appeared to delay the tariff on Mexico, that deal is set to last only one month, and tariffs on the other two countries are still set to go into effect at midnight tonight.
Once new U.S. tariffs go into effect, those other countries are widely expected to respond with retaliatory tariffs of their own on U.S. exports, that would reduce demand for U.S. and manufacturing goods. In the context of that unpredictable business landscape, many U.S. business groups have been pressuring the White House to pull back from the new policy.
Here is a sampling of the reaction to the tariff plan by the U.S. business community:
American Association of Port Authorities (AAPA)
“Tariffs are taxes,” AAPA President and CEO Cary Davis said in a release. “Though the port industry supports President Trump’s efforts to combat the flow of illicit drugs, tariffs will slow down our supply chains, tax American businesses, and increase costs for hard-working citizens. Instead, we call on the Administration and Congress to thoughtfully pursue alternatives to achieving these policy goals and exempt items critical to national security from tariffs, including port equipment.”
Retail Industry Leaders Association (RILA)
“We understand the president is working toward an agreement. The leaders of all four nations should come together and work to reach a deal before Feb. 4 because enacting broad-based tariffs will be disruptive to the U.S. economy,” Michael Hanson, RILA’s Senior Executive Vice President of Public Affairs, said in a release. “The American people are counting on President Trump to grow the U.S. economy and lower inflation, and broad-based tariffs will put that at risk.”
National Association of Manufacturers (NAM)
“Manufacturers understand the need to deal with any sort of crisis that involves illicit drugs crossing our border, and we hope the three countries can come together quickly to confront this challenge,” NAM President and CEO Jay Timmons said in a release. “However, with essential tax reforms left on the cutting room floor by the last Congress and the Biden administration, manufacturers are already facing mounting cost pressures. A 25% tariff on Canada and Mexico threatens to upend the very supply chains that have made U.S. manufacturing more competitive globally. The ripple effects will be severe, particularly for small and medium-sized manufacturers that lack the flexibility and capital to rapidly find alternative suppliers or absorb skyrocketing energy costs. These businesses—employing millions of American workers—will face significant disruptions. Ultimately, manufacturers will bear the brunt of these tariffs, undermining our ability to sell our products at a competitive price and putting American jobs at risk.”
American Apparel & Footwear Association (AAFA)
“Widespread tariff actions on Mexico, Canada, and China announced this evening will inject massive costs into our inflation-weary economy while exposing us to a damaging tit-for-tat tariff war that will harm key export markets that U.S. farmers and manufacturers need,” Steve Lamar, AAFA’s president and CEO, said in a release. “We should be forging deeper collaboration with our free trade agreement partners, not taking actions that call into question the very foundation of that partnership."
Healthcare Distribution Alliance (HDA)
“We are concerned that placing tariffs on generic drug products produced outside the U.S. will put additional pressure on an industry that is already experiencing financial distress. Distributors and generic manufacturers and cannot absorb the rising costs of broad tariffs. It is worth noting that distributors operate on low profit margins — 0.3 percent. As a result, the U.S. will likely see new and worsened shortages of important medications and the costs will be passed down to payers and patients, including those in the Medicare and Medicaid programs,” the group said in a statement.
National Retail Federation (NRF)
“We support the Trump administration’s goal of strengthening trade relationships and creating fair and favorable terms for America,” NRF Executive Vice President of Government Relations David French said in a release. “But imposing steep tariffs on three of our closest trading partners is a serious step. We strongly encourage all parties to continue negotiating to find solutions that will strengthen trade relationships and avoid shifting the costs of shared policy failures onto the backs of American families, workers and small businesses.”
In a statement, DCA airport officials said they would open the facility again today for flights after planes were grounded for more than 12 hours. “Reagan National airport will resume flight operations at 11:00am. All airport roads and terminals are open. Some flights have been delayed or cancelled, so passengers are encouraged to check with their airline for specific flight information,” the facility said in a social media post.
An investigation into the cause of the crash is now underway, being led by the National Transportation Safety Board (NTSB) and assisted by the Federal Aviation Administration (FAA). Neither agency had released additional information yet today.
First responders say nearly 70 people may have died in the crash, including all 60 passengers and four crew on the American Airlines flight and three soldiers in the military helicopter after both aircraft appeared to explode upon impact and fall into the Potomac River.
Editor's note:This article was revised on February 3.