Executives often respond that they now see “organic” growth since the precision scheduled railroading (PSR) promise of being the lowest cost provider is now in hand.
Yet, two obstacles remain:
- First, low productivity costs do not mean the lowest price for customers moving goods.
- Second, it is not clear what organic traffic actually means.
As for price, shippers buy on complex. internalized formulas that involve their total logistics and physical distribution costs. That includes their forward inventory adjustments because their goods shipped by rail are not always precisely delivered to their destination on time.
So far, there is little evidence of PSR price bargains to drive a modal shift from truck to rail. This price pattern might change. That could induce rail market growth.
As for organic growth, let’s straighten out the terminology. Organic growth is different from growth by acquisition, which involves the purchase of existing companies to expand the reach of your business.
Organic growth is slower. It is also a rather deliberate process that is customer-driven, yet adaptable to what a railroad has decided to stick with.
If innovative new rail cargo and service patterns are required, railroads might not be willing to either invest in or switch operationally toward those patterns. PSR has shown market exit tendencies.
Therefore, rail carrier profitability margin targets might not sync with organic targets. There is uncertainty here.
Organic growth once was coal and iron ore moved by rail. That is no longer the case. Organic growth today? E-commerce qualifies. Rail-centric? Not so far.
Organic businesses typically harvest a blend of existing – and some new – customers to push the growth.
PSR tactics would need to be incorporated into customer organic needs. Which rail company has demonstrated an excellent record of doing that?
To a customer, “organic” might not easily fit with a converging conveyor-belt PSR train dispatching service.
Organic growth models – the ones that customers like – require an element of relationship transactions between the “transport carrier” and the inventory managers and the floor space/e-commerce dispatchers.
That intense human connectivity is not yet typical as the PSR railroading business model output. It’s being taught at some university railroad programs (an example is the Michigan State University program). But Michigan State graduates are not yet today’s senior railroad leaders. Adoption could take time.
Social media is often used to both communicate and then evaluate customer feedback “organically.” To do that, most existing major railroad media platforms will need upgrading.
So, where are the opportunities for organic rail freight growth?
Here are a few.
1) Expand width dimensions.
Build upon the vertical and train linear length and axle load improvements already invested in and completed – the fundamental engineered and physically implemented innovations that gave customers stack-trains and heavy-axle long freight trains with lowered unit costs per ton-mile.
Add to that service suite the benefits of two to four feet of cargo-carrying capacity across at least the strategic core network. That could mark the final delivery of core dimensional freight high and wide organic capacity.
Costs for a 20% to 30% network coverage on a wider platform? Arguably about $7 to $10 billion – recoverable as a strategic asset balance sheet item.
• This amount is less than the roll-out capital expenditure of positive train control (PTC) dispatching at ~$12 billion.
• Perhaps twice the cost of double-locking the Panama Canal.
• About the same as the recent transfer of dollars from two of the six PSR railroads to shareholders in order to buy back shares?
Why not everywhere?
- Same economic logic for not offering 315,000-pound routes everywhere.
- Wider-load modern industrial products like air exchangers and new generators don’t go everywhere.
Figuring it all out strategically?
It is easy when organic is part of a railroad’s strategic planning. The railroad would integrate with the national electrical machinery and emergency response heavy manufacturing sector and also with the U.S. Department of Transportation and federal energy planners to set up a superior high/wide hub-and-spoke distribution network. Then finance it together.
Here’s the missed opportunity. None of them are customer/supplier/financier integrated yet in a plan that they all will pay into.
That could be fixed. Who will lead that? What senior railroader is so engaged? Because this represents organic growth additive to the still-active rail network.
2) Another organic growth opportunity is the often hidden intermittent storage functions of freight railroads.
Cargo often moves in a “fits and starts” pattern. In other words, freight movement does not happen continuously, but stops and then starts again many times. Cargo gets loaded – then stops en route. Some cargo is redirected to new destinations. Some cargo is loaded – but moves only a short distance and is then held. As in “parked.” Reasons for this include:
- Congestion en route
- No firm order or destination yet
Other loaded rail cars move forward to regional yards for “Storage in Transit.”
Here is a railroad company earnings opportunity. Execute a logical pre-positioning of high-value freight for subsequent quick replacement of “shelf stock” or alternatively just in time (JIT) manufacturing input.
The overall size of this storage and logistics “black box” market is big.
Rod Case of global management consulting firm Oliver Wyman is among a few touting this logistics black hole. Oliver Wyman proposes that if the railroads added logistics and inventory storage to the rail revenue mix it would provide multiple market opportunities.
Railroad revenues are in the ~$85 to $90 billion/year range. Logistics holding/processing/storage might add about ~$30 billion per year of new business billings. That’s calculated as a possible share of a $500 billion total all modes size of supply chain inventory management or storage costs.