Odd Lots - This Is What the Pandemic Did to the U.S. Rail System

Episode Date: September 27, 2021

The pandemic has obviously sent shockwaves throughout the supply chain. And, despite hopes of normalization, things might even be getting worse. The number of ships, for example, waiting to unload at the Port of Los Angeles has continued to grow. And it seems like every day another company talks about various shortages. So what does it mean for our commercial rail system? On this episode, we speak with Ian Jefferies, the President and CEO of the Association of American Railroads, to discuss the state of rail, how the industry has adapted, and the work it will take to get things back to normal.See omnystudio.com/listener for privacy information.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, and wherever you get your podcasts. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal.

And I'm Tracy Allaway. So Tracy, I mean, you know, it's actually been a little while, I guess, since we've done one of our pure logistics episodes. Earlier in the summer, we were doing a lot. We've done a lot all year. I just feel like, you know, we've probably gone at least three or four without coming back to what is, without a doubt, the story of 2020. one. When you say more than a little bit, or it's been a while, I mean, we did do the semiconductor

episode like the other week, which I kind of file under the shortages and bottlenecks umbrella. But I guess it's true. It is true. We haven't done a transport episode in a while, and there are some big ones that we haven't addressed just yet. And I'm thinking specifically of pallets and barges. But of course, the biggest transport mode that we have yet to talk about and the issues taking place there, it has to be rail. And it's come up quite a bit when we were talking to Gene Soroka, the head of the port of Los Angeles, for instance. Whenever we've been talking about gridlock in transport generally, we do tend to touch on rail and some of the issues there. But we haven't talked about it in depth yet. Right.

So we kind of have taken this, you know, end-to-end approach. We talked about factory issues that originate in Asia. We talked about the ships. Oh, you know, there's the bottlenecks at the ports. I think latest I saw there's like 72 ships just waiting to be undocked right now at the port of Los Angeles. Then the trucks talked a little bit about barges, although we need to talk a lot about more. But we have not talked about rail. So if we're going to be completest in our discussion,

of U.S. logistics. We have to talk about the rail part of the equation. Yes, indeed. I'm looking forward to this one. I am too. I'm very excited, and we have the perfect guest for it. We're going to be speaking with Ian Jeffries, president and CEO of the Association of American Railroads.

Ian, thank you so much for coming on Odd Lod. So, look, anyone who's picked up the newspaper or read the news knows about it. about all the disruptions, particularly around ship, particularly around ports, particularly around trucking, particularly about the lack of containers specifically. What do you just start by giving us the very big picture overview? And then we'll drill deeper,

but the very big picture overview in how pandemic-related disruptions have affected the flow of rail. Well, first of all, thank you Joe and Tracy so much for having me on this morning. And you've hit on Based on what you listed, you've hit on a lot of key, key issues and key sectors of the supply chain. So I'm thrilled to be able to add to that conversation. I think when you look at what we're seeing in the supply chain right now, which, as you know, is an incredibly sophisticated, integrated, complex process getting goods from Asia into the U.S., into the heartland of the U.S., and throughout, what we really are looking at,

that was something that really began about this time last year, even a little earlier in the summer, midsummer 2020, where once the economies of China and the U.S. started to, for lack of a better term, turn back on, you saw a pretty dramatic influx of goods. And I think it's a combination of a variety of things. If your houses or anything like mine, you got to know the the Amazon delivery person really well. Yeah. We saw such a massive surge of e-commerce as a portion of our economy. And not only that, given the rush to acquire goods, consumer goods from the stores,

the physical stores across the countries as well, combined with the shutdowns we saw in factories throughout the U.S., throughout Asia, you saw a really strong snapback in production and demand on the international side. And so really about last summer, I'd call it last July, last August, we saw a pretty dramatic uptick in international intermodal traffic. And that has really sustained itself and continued through this year to present day. And I think we're expecting to see it into at least Q1, if not Q2, of next year, based on comments that our CEOs have made in the public space.

And so what we're seeing is there are. certain parts of the supply chain where where there are some choke points and where there's one choke point. The supply chain's only as strong as its weakest link or it's as its most inefficient point. And that tends to comes to gum up the whole situation. And so rail is navigating that. I can tell you in the first six months of 2021, we moved more intermodal products, which is that container traffic, which consumer goods, either e-commerce or brick-and-mortar store. We moved more traffic in the first six months of 2021 than we ever had in our history during that same time period. So we are moving a colossal amount of traffic.

And we're really the middle piece of the supply chain, the middle miles. We are navigating, I would call some challenges on both the port side and then the offloading side with our partners. But taking steps as others are to continue to work through this, to get back and get right-sized and get equilibrium and get this thing running as efficiently as possible. That was a great overview. And I want to dig in a little bit more into what role rail actually plays in the sort of transport and logistics network overall.

But before we do, can you maybe give us a little bit more color on the congestion issues that you're facing right now? Are there some numbers that you could throw out? So, for instance, Joe in the intro mentioned more than 70 ships waiting off the, you know, off L.A. port, I'm wondering if there are similar statistics for rail and how those might differ from normal times. Yeah, absolutely. So our primary role when it comes to the West Coast ports is, is containers are loaded on to our trains and brought into the middle of the country, much of them. So think about the key gateways up and down the Mississippi River, up and down the center

of our country. Primary being Chicago, approximately 25% of rail freight moves through Chicago, but also Memphis, New Orleans, St. Louis, Kansas City. So those are our primary gateways. But let's take Chicago, for example. And what we are seeing is in a lot of the international intermodal yards, so those are those are the locations that freight is offloaded from the train, put into a parking slot, and picked up by a truck for the, that last mile delivery to a warehouse or to a or to another location. So when the train brings in the containers that's referred to as ingating, and when the containers are picked up, it's referred to as outgating. And I can tell you that the ingates in certain locations are dramatically exceeding

the outgates. In other words, we have many more containers coming in that are getting picked up and taken out. And so you can understand how that begins to back things up. And so one of our railroads had over 20 intermodal trains. So think about that. That's 20 trains with approximately, we'll call it, give or take, 200 containers on it. So what is that?

4,000 containers sitting outside the Chicago terminal, waiting to get into the yard to unload, but can't do so because the outgates aren't being picked up. So local trucking isn't able to get that out. That just goes to show you how quickly, things can start backing up. I know they've made significant progress in driving the number of trains waiting down, but it's sort of akin to the boats waiting, the ships waiting off the coast of the ports of LA and Long Beach. And that causes kind of reverberating effects because when you have

trains sitting waiting to get into the yard, those are trains that should be unloading and should be on their way back to the west coast ports, but can't because our partners in the supply chain, our shipping partners don't have the capacity or ability to pick up the containers and get them out of the yard to create the space needed to unload. And so it's kind of a, it's a 24-7 operation for the railroads. And any part of that that gums up that 24-7 operation starts to have reverberating consequences back through the network. Just that stat was extremely useful and striking. How much of that capacity constraint is it, okay, with, I don't know what the term is. I mean, with ships, they talk about, okay, how many births there are at the port at any given time?

How much is it the sort of like physical space to unload or load a given 20 cars? And how much versus how much is it the labor and how much is labor itself contributing to some of the constraints and the slowness of these turnaround time? So I would say it's a combination depending on where you are. There are certain situations where railroads are hiring additional employees going through the process of hiring additional employees, but there are a variety of other situations where manpower employee numbers are not the issue in the least. And what we're seeing, again, is so if it's a labor issue, it might be a short haul trucker shortage issue or it might be a warehouse worker issue. Again, because if there are breakdowns and those pieces of the supply chain, that directly impacts the ability of a shipper to get their

goods, get their boxes out of the yard to create space for additional boxes. And so I can tell you, railroads have taken a number of steps that are far out of the norm than they normally would, which is literally creating additional capacity within their yards, paving over tracks in certain areas to allow for additional storage for containers, opening up long dormant intermodal facilities that haven't been used for quite some time to allow for additional capacity. And so we feel like we're taking numerous steps

and really we just need the system to flow. Again, we're bringing in trains of intermodal equipment 24-7. So seven days a week, that X times throughout each day, there are intermodal trains arriving that need to be unloaded. and some of our partners don't work in a 24-7 operation. The last-mile service, I think when you look at the data, when our yards or railroads look at the data in their yards, the volume of pickups, aka the outgating I was talking about,

drops pretty dramatically later in the day and drops pretty dramatically over the weekend and then starts to pick back up in the beginning of the week. And, of course, the challenge is that the trains keep coming in during all of that time. And so railroads are taking a number of operational, steps as well to try to alleviate that or offering incentives to our shipping partners to come get their goods on the weekend as well just to keep that throughput going and just to keep the spick it on, so to speak, so that we can keep bringing things in, pushing them out into the

communities where the demand is so strong right now. So it's a combination. So could you maybe go back to that point that you briefly raised earlier about where rail actually sits in the wider supply or transport chain. So my understanding is, you know, stuff comes in through the ports, then it gets loaded onto rails. And basically if it's heading to, you know, the other side of the country or the interior, it's going to have to travel through rail. And it's probably going to have to travel through a limited number of hubs like Chicago and, you know, maybe Kansas or Memphis or something like that. So I guess my question is, you know, where does rail sit in the broader supply chain, but also, are there always going to be choke points of some sort, given that

goods have to travel through a limited number of hubs? So let's talk about, so right now we're just talking about this intermodal traffic, this container traffic. And I think we need to take a step back and look at Rails role in the kind of the overarching economy. And it's important to remember that rail is moving the goods economy, the tangible economy. So whether it's industrial products, whether it's agriculture products of all kinds, whether it's chemicals, whether it's automotive automobiles, rail moves about 75% of finished automobiles, not to mention a very high percentage of a lot of the components that go into automotives during the manufacturing process. Of course, going back to the challenges we're

seeing in the semiconductor area there impacting that. And then intermodal covers at this point, probably about half of rail traffic. That has changed over the years. Coal used to amount for approximately 25% of all rail traffic. I would say societal shifts, market shifts have dramatically reduced that. But what we've grown in place of that is this explosive growth in consumer goods and container traffic. So railroads are managing all of those different types of products that they're moving through their pipelines at any given time. And those different types of products need to be moved at different levels of pace based on customer demand. So there are certain commodities that can move at a more measured pace. But your premium products, your intermodal traffic, your UPS traffic,

UPS is the largest customer for the rail industry writ large, that stuff needs to move very quickly. And so railroads have designed their networks to allow for the staggering of different, different speed of traffic that's required to meet customers' needs. And so you hit on, you know, the relatively limited number of major gateways that rail traffic needs to flow to. And I would say that's what we're primary talking about that traffic that, again, comes from the West Coast and needs to disperse in the middle of the country. And so you mentioned Chicago. We talked about Kansas City, Memphis, New Orleans, St. Louis. Those are the main ones that come to mind, I can tell you that our railroads have built out over the years very efficient systems

that allow for a very speedy movement of goods from the West Coast into these gateways, and they're designed as such because those gateways are the ones that have the terminal capacity to sort, shift, and rebuild trains as needed, to hand off to the eastern partners, or, you know, we're not even talking about the East Coast, but we have a similar situation, inverse situation coming from the East Coast going west or into the Heartland as well. But I can tell you, these networks have been designed in a very methodical and very intentional way to allow for a very efficient movement of interline traffic into the middle of the country where it can then get dispersed as needed to its final destination.

On April 4, 2023, around 2 in the morning, a man was found stabbed multiple times on a side in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. So obviously, we are in the middle of some sort of negotiations going on in Washington, D.C., although they seem to be very muddled right now, about.

That's a kind way of putting it. To put it mildly about infrastructure and rail in theory, and I'm sure, as you're hoping for, is a part of that. It's interesting timing because we're talking about constraints on the economy due to supply-side disruption. And every form of transportation of goods is experiencing bottlenecks and so forth. What more could be done? And, you know, obviously, I'm sure your industry would like plenty of money to build out rail systems. But from a realistic standpoint, what more could be done in a more functional political system to build out railside capacity in a way that would be productive for the nation? So, Joe, I'm really glad you brought up the investment side of things and the infrastructure side of things.

because one fact that a lot of people don't necessarily realize is that our freight rail system is almost entirely privately owned and financed in the U.S. So what does that mean? That means our railroads are investing about $25 billion of their own cash back into their networks every year, which has resulted in, and this isn't me's talking, this is others, this is straight up fact. We have a freight rail system that's in via the rest of the world. It's the most efficient, safest, most advanced rail system, freight rail system in the entire world. And so you juxtapose that against the other types of infrastructure, other types of surface transportation infrastructure we have in this country, you know, the interstate highway system, which is at this point at least 50% subsidized by general taxpayer funds.

I think we've hit about $140 billion in general fund transfers to support that, a system that was historically. supported by by user fees, a lot of the gas tax and other fees. We've gotten away from that. We need to get back to that. Users of infrastructure need to pay for that. You look at our ports, again, largely publicly funded. I would argue, I would bet that the folks you've talked to in the port industry would say dramatically underfunded. There's significant investment needed there to increase efficiency, make use of technology to allow for a more efficient throughput of goods. And so rail, when we look at infrastructure legislation, we take a little bit of a different point of view. Yes, 100% agree that we need robust public investment into the nation's public infrastructure.

Because if rail is going to function, and we're seeing this right now, if rail's going to function at its highest level, we need a healthy integrated supply chain, a healthy integrated transportation network. So that includes ports, that includes transload facilities, that includes our highways. Again, we'd love for our trucking partners to have to pay for the infrastructure they operate over. but, you know, that's probably a debate for another day. But rail is looking at infrastructure legislation more as a vehicle to take advantage of our environmental performance, take advantage of our safety performance, take advantage of our inherently efficient operations, and really making sure that we create a framework, whether it's a legislative framework or a regulatory framework that allows rail to, one, earn the revenues necessary to invest back into the system

to meet current demand and future demand because freight demand is only going to grow in this country. But two, also allows us to innovate our operating models, to deploy new technologies, to create an even more efficient system with the infrastructure we have while also maximizing safety. And so to your second, the second part of your question, what can rail do in a, we have 147,000 miles of rail. infrastructure in the country. I don't think it's any secret that standing up a massive new freight railroad is probably not something you should expect anytime soon, given the challenges and getting right-of-way, et cetera. But railroads can make the investment within their right-of-way to maximize

throughput. So what does that mean? That means adding second, third, in some instances, even fourth lines of rail on the rights-of-way. It means extending sidings to allow for temporary parking of trains to allow those premium trains that need to get through, the space they need to get through, it means investing in our intermodal yards to deploy new technologies, increase automation that allows for a safer, more efficient throughput of goods. So between technologies, between maximizing the infrastructure we have and expanding within our rights of way, we have the ability to move the amount of traffic that's demanded. And quite frankly, all of our railroads are looking to grow the volumes that we're moving because it's good for the highways. It's good for the public. It's good for the

environment and it's good for business. So, you know, that's the focus right now. So in the interim, when, you know, it is very crowded on the railways, there's all this congestion. People are trying to manage it as best as they can. How do the rail companies actually apportion capacity? So one thing we learned from our shipping episodes is that like it doesn't necessarily come down to whoever is willing to pay the highest rate, it might come down to connections or whether or not you're a big customer, like a Walmart or an IKEA or something like that of a shipping company. And I'm wondering if it's a similar deal when it comes to rail. So, you know, I can't speak for each individual railroads, you know, marketing or decision-making

for how it determines which traffic is going to move. But I think overall the system is designed to move the most. traffic in the least amount of time with an emphasis put on that traffic that is paying for this premium more just in time type service. Again, you know, there are their industrial products, gravel, for example, does not normally need to move at the same pace as a train full of UPS packages. And so the system needs to be designed to meet those customers' needs or they're going to look elsewhere to move their goods. And that's the last thing we want is our industry. And so, again, I would just, I would have to point to each individual railroad and how they

manage that process. But at a macro level, that's how things get from point A to point B. So you mentioned the possibility of customers moving elsewhere. Is that something that you've seen over the past year or two, you know, given the situation, are there some people who just don't want to wait for railway capacity to get freed up and maybe they switch to some like trucking? Well, so I think the intermodal freight market, by its very nature, by its very name, it is hyper, hyper competitive. You know, that is that traffic that can flow on either trucks or can flow on trains. And whether it's coming out of the ports or domestically between points in the U.S., you know, the customer is very real options. And it could be, you know, it could be rail-to-rail

competition. It could be rail-to-truck competition. It could be choosing the, you know, potentially the port you want to go into to use a different type of a different form of transportation as well. And so absolutely, if a railroad isn't providing good service, you know, that business is going to go elsewhere. And when you look at the fact that rail has grown its intermodal offerings to, again, about 50% of overall rail traffic in today's mix, that shows you that rail is doing a continuously better job at providing a product that is appealing to, to that. customer that has a wide variety of options, again, whether it's another railroad, whether it's any number of trucking companies out there. And so railroads have done a good job in getting much

more predictable in their deliveries, decreasing the time it takes to make a delivery, and really shrinking the distance where rail can be viable. I think the general cutoff used to be a goods movement had to be at a minimum 500 miles in order for rail to ever be competitive. And I can tell you there are many instances around the country where due to operational changes, due to increased efficiency, rail can compete down south of that 500 mile number, sometimes significantly down south. And again, that's just the class one railroads. We have several hundred regional and what are known as short line railroads around the country as well. And on any given they, they are out there working to win traffic over as well.

So the freight market is vibrant and hot, and freight's going to go where the price is right and where the service is. I want to pivot just a little bit. You know, when Tracy and I started this series, obviously the context was pandemic-related disruptions. And, of course, that is still the overarching context, and basically everyone has been affected.

Another phenomenon this year that certainly hasn't helped, has been the rise of extreme weather and whether it's associated with specific climate change or not. It doesn't change the fact that numerous stories have been written about rail lines being affected by whether it's flooding, the fires in California and so forth, fires in Canada, lingering effects from the hurricanes, Hurricane Ida. I'm curious, like, how much you think, how much of your thinking about the future of the industry is based on anticipation of more extreme weather events and how you're thinking about mitigating against some of those effects? Oh, absolutely. I mean, you're spot on with everything you just hit on and the impacts it's had on

on rail operations, whether the Western fires, specifically in certain parts of California, the Gulf Coast, again, you know, it's almost predictable that there are going to be extreme weather events every year at this point. And rail, you know, we've got to adjust for that. So you can do that a variety of different ways. You can do that by making your infrastructure more resilient. And so what does that mean? It means in low-lying areas in the Gulf, you're probably increasing the height of the rail, increasing the ballast so that you can withstand a decent amount of standing water, you know, out west with the fires. It's a little bit of a trickier situation,

but a lot of it is having alternative routing plans in place. It's having partnerships in place that allow you. If your line is damaged via fire, you have interline agreements or interchange agreements with other railroads that allow you to temporarily move your goods over their tracks and vice versa.

I know one of our biggest railroads out west had a bridge burned down on one of its main lines. And while they were, able to miraculously rebuild the bridge and I believe three weeks and have it back up and running, which is a stunning feat of engineering in and of itself. Goods had to keep moving during that time, so alternate arrangements have to be made. And so I can tell you that it is absolutely, call it climate change, call it anticipated, increased number of extreme weather events, absolutely being built into strategic planning, absolutely being built into how we're maintaining

our infrastructure, how we're planning our networks, and it's just a reality that we're all going to have to contend with. Now, I suppose on the positive side, if we're looking to address climate change, rail's environmental performance far exceeds any other form of surface transportation when it comes to emissions, when it comes to fuel usage, when it comes to overall environmental impact. And so, you know, our customers are cognizant of that. Rail can play a role in helping customers meet their overall environmental targets or emissions targets. But rail, all the Class 1 railroads have all committed to significantly reducing their emissions as well over the next several years and are using a variety of technologies to decrease fuel

usage, decrease emissions. We're exploring use of battery electric locomotives, use of hydrogen locomotives, biofuels, renewable fuels. All, you know, it's kind of an all hands-on deck because we're going to play a role in helping reduce this countries or those globes emissions and helping our customers reduce emissions, which to come full circle, hopefully, if society can achieve the overall goals, maybe we can make an impact on the extreme weather side as well. But in the meantime, resiliency is absolutely key. I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make

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And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. I have a slightly weird question, but is there any way that extreme weather and specifically drought might actually benefit rail? And the reason I'm asking is because I remember reading one story that said valet was transporting more iron ore by rail because of lower river levels. So I'm wondering if there are situations where it could be a good thing for the rail business. So I will say that rail is generally the most resilient form of transportation when it comes to extreme weather events, maybe, you know, the impasseh.

infrastructure burning down, notwithstanding. But, you know, after a hurricane, for example, rail is usually the first form of infrastructure backup in operation. After Hurricane Katrina, I know rail for quite some time was the only way to get goods into the New Orleans region. And so I would say that is all very temporary. Now, when you're talking about, you know, moving more iron because water levels have gotten low, we have the ability to get up and running more quickly than most and we'll take advantage of that. But, you know, in the example you brought up, I could see a situation where we're providing better service. Maybe we're providing a better rate. And you end up winning business out of that, sure. A lot of people, maybe they don't pay

attention to how the business of rail has done. But it's actually done like phenomenally well. And if you were to just go on the Bloomberg terminal right now and you were to pull up a chart of, say, Union Pacific and zoom it out, it looks like an internet stock. I mean, it's just a over the last, say, 30, 25 years or whatever, it's incredible. And I think that's the case with a number of these. For people who don't know what the story is, and I would admit, when I say people who don't know, I include that myself, but I pretend that I don't. What is the story?

Like, why is it, you know, 20 years ago, Rail was not thought to be like this particularly exciting, booming business. And years later, they just had just these, like, massive, massive industry success stories that have made investors a ton of money. So I'll do you one better. I want to only go 20 years ago. I'll go back 40 years. Okay, even better.

Even 41. So in 1980, what's known as the Staggers Rail Act took what was a highly regulated, highly heavy-handed federal government interventionist regulatory regime and partially deregulated the rail industry. And at that time, approximately 20, 25% of railroads were in or facing bankruptcy. The infrastructure was in decrepit shape. The industry, quite frankly, was on the verge of collapse overall, literally.

And so what the Staggers Act did, it freed up railroads to operate in markets, to charge market rates, to rationalize their networks. In other words, the government used to force railroads to operate networks, whether the partner lines, whether there was traffic moving on it or not, whether there was any ability to ever earn any sort of return on your investment or profit based on that particular line. And the Staggers Act, it freed railroads to act as normal companies in markets. And what that did is a few different things. One, it allowed them the efficiency increased dramatically. Prices actually dropped dramatically. Today, when adjusted for inflation, rail rates writ larger,

about 45% less than they were in 1980, and revenues increased. And so it took about 20 years for rail to really hit its stride. So when you're using that 20-year number, I would say, you know, it took about 20 years for rail to really start to realize the benefits of staggers. And in the past 20 years, rail has been able to really spring forward in a very positive way. So, you know, we're moving colossal amounts of goods. We're doing it in a very efficient manner. We're maintaining our own infrastructure.

And we're charging rates that are dramatically less than they were before deregulation. So on rates, and this is something that I find to be an important thing to learn about with every one of these discussions, which is market power. And, you know, we talk about trucking. And I think I forget the stat exactly, but something like, you know, in the trucking world, by the time you start a podcast and finish the recording, like 10,000 new trucking companies have been formed in that hour. That's only a slight exaggeration. And so there is not a lot of, especially during the busts, there is not a lot of pricing power. Then you get these massive bankruptcy ways. You know, I'm looking at this chart here. Someone sent to me a company like Norfolk Southern is

the consolidation. Seven companies event over time became what is currently known as Norfolk Southern. Union Pacific, it looks like it's like 13 different companies over time, various mergers became what is now known as Union Pacific. Why has it been the case such that over the last 40 or 50 years, despite this massive consolidation, you would not expect to see more competitive pricing, you would expect the handful of big rail players, Norfolk Southern CSX, Union Pacific, and BNSF to enjoy incredible pricing power? because competition's very alive, real, and well. You know, you mentioned some of the mergers that created some of the bigger railroads today. Well, a lot of that is there were too many railroads back, you know, several decades ago. There were too many for the economy to support. And so by the mergers and acquisitions that have historically occurred, you've allowed rail to,

you have your, you know, your primary rail lines. throughout the country, again, that have been made much more efficient infrastructure is dramatically improved over the years. But then you have this entire economy of regional and short line railroads that are, call it, for lack of a better term, the feeder railroads to the bigger guys. And so the economy and the regulatory structure has allowed for rail to rationalize itself, which is inherently you have a smaller number of very large carriers, a significantly higher number of regional and smaller carriers that all can that can all excel at what they do.

And so rail-to-rail competition is very real, very live and well. Intermodal competition, as we've discussed, is even more alive and well. But there are other types of competition, whether it's a geographic competition, a company choosing to site a facility one place over the other. product competition, no better example of product competition than natural gas, almost entirely replacing coal as a fuel source, or not that's an overstatement, but dramatically eating into coal share being a fuel source. And so all of those issues have allowed for the market to maintain itself in a very healthy way. And on top of that, as a backstop, we have an economic regulator, the Surface Transportation Board, which is a backstop for shippers who feel that

They may not be being charged reasonable rates, and they can appeal to the surface transportation board who's an adjudicator there. So you do have that regulatory backstop that is an outlet for shippers that do have concerns about the rates they're being charged. So overall, that's created a very healthy ecosystem. And I'll just point out your comment about, you know, the number of trucking companies going in and out of business at any other time. You know, one thing I'm really proud of over the pandemic is that because of the healthy capitalization, of our companies, we were fortunate that we did not have to go to Capitol Hill to ask for any sort of bailout. Our members wrote it out on their own, and, you know, our traffic, we didn't

have the 90% drop in traffic that our airline friends did, for example, but we saw about a 30% drop in traffic at the trough during the pandemic. And it is that history and that ecosystem that we've discussed that allowed rail to ride it out without getting that that financial aid from the government. So I want to go back to where we started the conversation with the congestion issues. What's your sense of how long this might actually go on for? And what's it going to take to get an improvement? Based on comments that some of our executives have made and certainly folks in other parts of the supply chain, I think most folks think that these volumes or some of these constraints will last into the new year, potentially through Q1, if not into Q2. And that's, again,

just based on public comments I've seen. How are we going to get out of this? We're going to get out of it by every part of the supply chain operating at a high level of efficiency and a high level of optimization. And so, again, I talked about Rails 24-7. way of doing business, the ports don't operate like that. Now, I did see news recently that some of the West Coast ports are going to be expanding hours for longshoremen shifts, are going to be expanding hours for truck pickup, which is a good sign. It's a good step forward, and we'll see what sort of impact that has. On the other side of the supply chain, this last mile delivery, as we talked about, the shippers getting their goods out of the intermodal yards to allow for throughput to continue,

you know, that might be a much trickier issue because it's a very localized challenge as far as drage trucker availability, as far as warehouse capacity, warehouse worker. You go out to Chicago land right now. The millions of square feet of warehouses, practically every one of them has a four-hire sign. You go to some of those warehouses, which are completely full, and they're storing containers on chassis in their parking lots. So what's the problem with that? Well, that's taking up a chassis that could be brought back to the intermodal yard, picking up another container and getting it out of the yard. So until we can work through some of these issues and smaller parts of the supply chain, I think, you know, it's going to be a challenge for us to hit max capacity and max efficiency.

And it's something we need to do because, you know, on the bright side, the economy, the consumer continues to seem to have cash to spend. And, you know, hopefully we can keep this strong demand going for a while. we just need to be able to support it as an overall supply chain and as an economy. Can you talk a little bit about hiring right now at the rail companies? I mean, every industry seems to be having trouble hiring. Rail jobs, I think, are considered to be pretty good jobs, union jobs. They seem to be less physically taxing, less stressful on families than, say, truck driving jobs, which sound extremely difficult from a lifestyle perspective.

Can you talk a bit about where the industry is in terms of its staffing goals? Sure. So, one, you hit on a few key points. We are almost an entirely collectively bargained industry and have very productive work in relationships with our unions. Average wages and compensation for a rail worker are roughly $120,000 to $130,000. So these are very good paying jobs in the manufacturing slash industrial sector, specifically. That's why you have multi-generations working in rail. There are areas where

railroads are looking to hire, and there are areas where, you know, where staffing levels are or where we want them to be. And yeah, I mean, you hit the nail on the head that I think every industry is trying to bring people on board right now. And railroading, look, it's a challenging job. It's a 24-7 operation. It's a 140,000, 47,000 mile outdoor factory floor. So it takes a certain type of person who has that interest. But I think on the bright side, we've seen once people get into the industry, they stay in the industry because it is. It's a highly compensating industry. You see what you're doing. It's very tangible. You're literally moving the economy. And so while there may be some temporary challenges and pockets around the country, you know, we'll work through that.

And railroads, railroading always has been and always will be a really good place to work and a place where somebody can earn a living and support their family. And so that attraction at the end of the day is going to be what keeps us having the high quality people we have out on the railroad. You know, you're thinking about disruption and there are people who fantasize and more than just fantasize are actively working on the idea of one day fleets of self-driving trucks. And of course, self-driving trucks would be more efficient than normal trucks and presumably could have a lot of competitiveness with rail itself. What's your thoughts on sort of like out there technologies, I don't know, maybe 10, 20 years from now? Do you keep tabs on these? Do you worry about them?

Could that be something that in the medium to long term of the industry is a, becomes a meaningful threat? Oh, it's absolutely a competitive issue. I think there are almost as many autonomous trucking companies that start up every day as other trucking companies. But look, that is a huge focus. You're seeing progress in the trucking industry. It's not going to happen tomorrow, but it is something that's midterm, I would say. And railroads got to compete with that. Now, when you think about autonomous technology, railroads operate on a fixed guideway in a largely closed network.

You know, a truck on the highways interacting with motorists at every direction. A railroad other than, you know, going across at-grade crossings, is really not interacting with the public. And so to us, rail is a very natural place for automobiles. technologies. And we just at the end of last year recently completed a nationwide buildout of a technology called Positive Train Control, which really is an automated system that will override the engineer if he or she breaks work rules. It will automatically stop the train for overspeed or incursion into work areas, things along those lines. We've also been deploying technology that acts as almost a cruise control or a fuel management system on the locomotive as well.

So it's maximizing the fuel efficiency throughout the trip. And so you pair that with a number of other either on-train or on-track technologies that rail has deployed or is deploying. And we're at a position where, you know, the train is moving in a highly automated state already. And so we're fully prepared to engage in that battle. The important thing for us is that we need the federal government, whether it's the legislature or whether it's the Department of Transportation, to allow trucking and rail to operate on equal footing when it comes to technology deployment, automated technologies, et cetera. And you can imagine, you know, we have some folks who have a vested interest in making sure the number of employees on a train is held constant,

regardless of the technological advancements. And we think there needs to be some flexibility there because technology is only moving forward, not only in the rail and trucking industry, and every industry around the economy. And we need regulations and rules that allow for that to happen because not only are their business benefits, there are dramatic safety benefits as well,

and that should be the focus of everybody. Ian Jeffries, thank you so much for coming on. I learned a ton about the rail industry from you and really appreciate you coming on, odd lot. Thank you for having me. I really enjoyed it. Thanks, Ian. Cheers. Yeah, that was fun. Thanks, Ian. So, Tracy, you asked what, you know, what was probably like the most important question, which is like, okay, when is this all going to ease?

And, you know, we've been asking, we've been asking some version of that question now for like six months, I would say, if not longer. Yeah. I feel like everyone is sort of like settling on this after the lunar, new year kind of idea. Like, that seems to be the consensus, like, after early next year, hopefully things will start to ease. So I guess we should, like, mark that in our diary is that if things don't seem to be improving shortly after early February, then we may have these problems for a long while. Yeah. Let's mark that down as a point where we're going to hope. But on the other hand, like, by and large, and everyone once in a while, it's like, there have been these tentative signs of easing, like, there'll be like a week where, like, the prices of shipping rates go down

or the number of ships waiting in the L.A. Harbor go down. But by and large, things keep getting worse. And it's just so clear that, like, all of these different industries which intersect are compounding. And when we, when Ian talked about sort of like the wait times that exist for the rail yards in Chicago, and that sounded so much like some of the things that Gene Serocca was saying about some of their issues with getting. the actual car containers back to ships in L.A. I just don't feel like, I do think things will ease at some point, but I've like becoming more pessimistic.

I guess I would say that there's like any sort of like natural mechanism for it to ease because it's also like interlocked. Yeah. I mean, well, Ian touched on this as well. You get this sort of cascade effect. So, you know, even talking about like one problem in one rail system is going to end or in one part of the railway system is going to end up affecting all of it. But then a problem on the rail system itself is going to end up affecting what's going on at the ports or the barges like Gene spoke about earlier this summer.

There's something also interesting about rail as, and of course, Ian is biased. But there's something interesting about rail as an industry that sort of seems to work very well from a sort of like, public goods perspective, like, okay, rail shareholders have done very well. We know that. You look at the stocks. Rail employees seem to be doing well. It's a heavily unionized industry with a high level of pay. Rail customers seem to be doing well because despite the consolidation in the industry from dozens of different rail lines to really just four big national rail lines, according to Ian, you know, pricing power remains competitive. I feel like there must be so, some lesson in there from like a regulatory perspective about how you can have an industry that I don't know like it kind of seems like the various stakeholders of this customers, employees and shareholders all seem to be doing well and I'm trying to like figure out what the catch is. I'm sure there is one. I'm trying to compare and contrast the U.S. rail system with like the rail system in the UK, which maybe we should do a UK rail system episode at some point.

Do you know I used to cover rail for Bloomberg in London? I probably do. No, I only knew you covered airlines. Yeah, I covered all transport. I did airlines, airports, cars, and rail. But anyway, maybe we should do, maybe we should branch out from our transport series and start doing transport around the world, not just different modes of transport, but, you know, rail in the U.S. versus rail in the UK. Actually, you know what we really need to do soon is a European power episode.

Oh, yeah, let's do it. That's a good one. No, it's serious, because it's like, I keep reading about all this. I get the wind isn't blowing and natural gas prices. So let's get that on the agenda, too. Yeah, let's do it. Okay, shall we leave it there? Let's leave it there. All right.

This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. you can follow me on Twitter at the stalwart. Follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today.

And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. April 29th and 30th, Bloomberg House arrives in Miami at the Formula One Grand Prix. Set against one of the world's most electrifying sporting events, Bloomberg House brings business, investment and culture together. Powered by Bloomberg Journalism, Real-time data and forward-looking conversations. From on-stage discussions to exclusive networking with global leaders, this is where ideas connect. Bloomberg House Miami, presenting sponsor, Coriant, supporting sponsor, Octa. Learn more at BloombergLive.com slash Bloomberg House Miami.