The industry is being transformed by its adoption of the Precision Scheduled Railroading philosophy. Traffic is down thus far in 2019, but is a foundation being laid for growth?
For the North American freight rail system, 2019 has, thus far, been a year of mixed signals. Railroads are recording record profitability, and operating ratios (operating expenses as a percent of net revenue) were lower than ever in Q2. Yet during the second quarter, carload volume was down 1.6% year-over-year even as U.S. gross domestic product (GDP) grew by 2.1%. Why did this significant shortfall in rail carloads occur, and what does this mean for the industry's future?
One reason for the seeming discrepancy is that the industry is in the midst of change, and the effects are being felt across the system. Of the seven U.S./Canadian large Class I railroads, all but one (BNSF) have initiated or completed the transition to a new operating philosophy known as "Precision Scheduled Railroading" or PSR. What exactly is PSR? There is no precise definition, but in general PSR, as pioneered by the late Hunter Harrison, includes a streamlining of railroad operations while at the same time working to increase their consistency and reliability. These operational changes may include efforts to reduce the sorting of railcars, create longer trains, make cost and headcount reductions, and increase asset utilization.
One of the core concepts of PSR is a relentless focus on identifying those markets that play to the railroads' strengths. Freight that introduces too much complexity and requires too many "touches" on the journey from origin to destination is viewed as undesirable. As this undesirable volume is shed, the operation will become simpler, and speed and consistency theoretically will improve.
The adoption of PSR has incontrovertibly led to improved financial performance for the rail industry. But, in the near term, it has also led to lower volumes in spite of a growing economy. PSR advocates maintain that this traffic loss is a necessary prerequisite for tuning up the rail network and that the process is setting the stage for future growth as the quality of rail service improves. Detractors claim that PSR is actually just a short-term cost-cutting exercise being driven by and for the railroads' investors at the expense of long-term volume and growth. Who's right? We won't know for quite some time.
The transition to PSR has not always gone smoothly. Some railroads opted for a "big bang" approach that attempted to compress the changes into a short period of time. Service disruptions led to shipper dissatisfaction, which in turn got the attention of the U.S. Congress and the Surface Transportation Board. More recently, railroads making the transition to PSR have adopted a more measured pace which has reduced, but not eliminated, such issues. While the situation has improved somewhat this year, there is still a long way to go to fulfill the promise of "precision railroading."
But in fairness, looking only at the broad system averages for service obscures signs of real progress on the part of some PSR adopters. The system average speed for "merchandise" trains (those trains carrying general classified freight that pass through yards) stands at roughly 20.4 mph at the time of this writing (mid-year). This speed is more than 3% better than the prior year, although 3.4% lower than the average performance over the previous five years. Perhaps a better measure of progress is "yard dwell"—the average time that railcars spend in a yard waiting to be placed on the next outbound train toward their destination. In 2019, yard dwell is running about 10% below the prior year and the long-term average. This metric indicates that service has improved, as railcars are spending less time sitting in yards and more time on the move.
Larger economic issues at play
Before concluding that PSR is the leading cause of the reduction in volume, however, it is important to consider other factors that could be affecting rail volume. A good deal of railroad carload volume is made up of key commodities. Whether the volume of these commodities is rising or falling often depends on macroeconomic factors well outside the control of the railroads. To determine the true effect of PSR on rail performance, the effect of these commodities must also be taken into account.
For example, coal has continued to decline due to broad competition from natural gas and renewables, despite the Trump Administration's attempts to prop up the industry. Conversely, movements of crude oil by rail (CBR) have recently been growing strongly as world oil prices have shifted (at least for now) in favor of U.S. sources. However, despite increasing U.S. oil production, shipments of frac sand (a growth star in recent years) have recently declined, as drillers have shifted more toward the use of locally sourced, inexpensive "brown sand" versus the gold standard "white sand" that needs to be railed long distances from mines in the upper Midwest to drilling sites such as the Permian Basin of Texas. Shipments of grain are also down due to both weather and trade tensions.
Taking these volatile commodities out of the equation gives us a better idea of railroad performance in the single-car freight network that is a major focus of PSR. (See Figure 1.) Volume for the remaining commodities through the first half of 2019 was down 1.2% year-over-year. Performance in Q2 was similar but slightly weaker at -1.5% year-over-year. At the same time, Q2 GDP growth has been estimated at 2.1% according to the initial estimate. So even after eliminating the special commodities, rail carload growth continues to lag that of the economy as a whole.
But there are other items to consider as well. While GDP is growing, 70% of U.S. GDP lies in the service sector. The goods sector, which provides all the volume to the nation's freight haulers, has probably not been growing as strongly as the GDP numbers would indicate. Yet, truck volume has continued to show gains, while rail has not. There are good indications then that rail has been losing share to highway and not due to an overall economic slowdown.
Intermodal's story
Rail's primary point of competition with highway is the intermodal sector. This sector has also been the recipient of the PSR philosophy. Most railroads have simplified their intermodal networks and eliminated many city-pairs. For example, "steel-wheel" interchange services between connecting railroads have been eliminated in key junction points such as Chicago. Users have instead had to switch to what is known as "rubber-tire" interchanges, where the inbound intermodal load is grounded on one side of town and driven across the city to the connecting railroad's terminal to resume the intermodal journey. Trailer-on-flat-car (TOFC) services have also been reduced as the industry strives to standardize operations on international and domestic containers.
The intermodal business is composed of two equal-size sectors: international and domestic. The International sector involves the movement of ISO containers to and from ports. This segment has been subjected to dramatic push-pull effects as the ongoing international trade tensions and tariffs have altered the normal timing of when import freight hits our shores. While this has not yet affected overall volume, it has distorted the year-over-year comparisons and caused a great deal of congestion and added costs.
The domestic sector consists of 53-foot containers and trailers moving primarily domestic freight along with some transloaded import cargo. This sector is the cutting edge of the competition between rail and highway. Through June of 2019, year-to-date domestic intermodal volume was down a full 6.0% versus 2018. This decline is comprised of a drop of more than 10% in TOFC volume and, more importantly, an unusual 5.2% decline in domestic container activity. The decline in TOFC loads is not surprising because 2018 was an especially strong year for this segment, as the shortage of truck drivers and tight capacity pushed some shippers to shift part of their volume to rail. The TOFC segment is also a rather small piece of the intermodal pie these days. The decline in domestic containers, however, is more significant in that all indications are that truck traffic has continued to rise thus far this year. Hence domestic intermodal appears to be losing share.
At least some of the volume decline is the calculated result of railroad companies "de-marketing" services and lanes that are now regarded as too complex and high cost to achieve the desired level of profitability. Again, PSR advocates argue that shedding less desirable volume will allow the railroads to focus on improving service speed and reliability across the remaining core system. These service improvements will theoretically lead to greater market penetration in desirable freight categories that will, in time, meet or exceed the current volume lost to these actions.
A focus on profitability
Inherent in the PSR revolution is a relentless focus on the railroad operating ratio as one of the most significant measures of efficiency and profitability. The railroad operating ratio is a function of both costs and revenue. While the PSR revolution is focusing on operations and costs in the near term, another facet of current railroad financial performance is what the industry terms "focused pricing discipline." In practice this has meant that the rates that the railroads have received for their services have generally exceeded the rate of inflation in rail cost inputs. Even as economic growth slows, railroads are displaying a strong desire to maintain and even drive pricing, especially in the domestic intermodal arena.
It seems clear that the railroad industry's focus in the near term will be on profitability and not volume. History says that such swings of the pendulum are often followed by a return to more "normal" volume-driven behavior, including more pricing flexibility. Whether that will happen this time around is a question that we will be able to be answer with greater clarity in another year or two.
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.