Rates keep going up, shippers weather 'merger fatigue'
By Brian Milligan -- Purchasing, 5/4/2000 2:00:00 AM
Rates are up-again. Manufacturers are paying more to ship their goods. And railroads keep merging with each other.
Meanwhile, those who use railroads say service suffers from many of the same problems that have plagued the mode for years. And every merger brings less competition and lower chances for better rates. Among shippers, there's a new name for the phenomenon: "Merger fatigue."
"Suppliers are very frustrated and tired of rail mergers, and all the promises that have not been actualized," says Maureen Healey, senior director of state government relations for the Washington-based Society of the Plastics Industry. "There has been such havoc following all these mergers, with absolutely billions of dollars in lost shipments and other costs incurred by shippers.
"With the captivity issue, and the shipper feeling he is getting poor service and paying higher rates, a lot of elements are going into this," Healey continues. "There is tremendous frustration."
That's the feedback shippers who use railroad service are giving today. The frustrated rail-shipping environment has been extra-charged as of late. The Surface Transportation Board halted for at least 15 months the proposed combination of Burlington Northern Santa Fe Corp. and Canadian National Railway Co. The combination would create the largest railroad system in North America, but the federal board has issued a moratorium on mergers of major railroads. The moratorium will hold until the board adopts new rules governing merger proceedings.
Burlington Northern Santa Fe representatives have asked the board to stay its decision pending a judicial review. They argue that the shipping community will be hurt by the moratorium, not helped by it.
The blockade of this merger is symptomatic of the industry's growing pains and subsequent negative feedback. Railroads desperately want to merge, but no one else wants this trend to continue.
At the crossroads
In many ways, the rail industry sees itself at a kind of crossroads. It is an industry that moves more than 40% of the nation's inter-city freight. Railroads carry 70% of vehicles from domestic manufacturers, 64% of the nation's coal, and 40% of its grain.
It is an industry that sees itself as being on the cutting edge of technology, having invested more than $247 billion since 1980 in operations. Much of this was on highly advanced signaling, communication and information technology.
Still, for every advance it makes, industry representatives are constantly reminded of railroads' controversial image in the shipping world. A 1997 public opinion survey conducted by the Association of American Railroads, for example, found that only 37% of those surveyed felt that railroads were up-to-date when it came to technology.
Bleaker still were the results of a December 1999 rail merger survey conducted by the Virginia-based National Industrial Transportation League. The survey asked for information on service on Norfolk Southern Railway Co., CSX Transportation Co., Union Pacific Railroad Co., Burlington Northern Santa Fe Corp. and Canadian National/Illinois Central Railroads. As a smattering of a lot of negative feedback, the survey revealed that:
- Of those using Norfolk Southern or CSX from November 1999 until the present, 63% found service to be poor for Norfolk Southern and 50% found CSX service to be poor.
- Of those using Union Pacific, 53% described the service as only fair.
The proposed merger between Burlington Northern Santa Fe and Canadian National has not helped this image problem. It has given manufacturers who use rail service a new focus. Many, irate over rate increases and troubled service from previously merged railroad entities, are fighting the merger tooth and nail.
Most worry about dwindling competition, and they have good reason to be concerned here. Since 1995 alone, Burlington Northern acquired Santa Fe, Union Pacific acquired Southern Pacific, Norfolk Southern and CSX each acquired a portion of Conrail, and Canadian National acquired Illinois Central. With each merger, shippers had fewer places to turn to for service, and many believe that fewer rail carriers means less competitive rates and an overall decline in service.
Rate problems
Rates are a particularly sticky point, but not in the fashion that is common in the transportation industry. Whereas shippers may complain about rising truck transportation rates, the same complaint in the railroad industry is more often than not tied to service.
"Our members don't complain as much about rates as they do about service," says Ed Rastatter, director of policy for NIT League. "What they are really tired of doing is paying for premium service and getting terrible service."
Rastatter recalls how this point was hammered home yet again when the league sponsored a meeting in January for manufacturers who use railroad transportation. Predictably, the manufacturers gave vent to their feelings.
"A shipper got up and said, You've been giving us terrible service now for seven months, and now our reward is a 5% across-the-board increase,'" Rastatter recalls. "It [the statement] was directed to Norfolk Southern, and it was a double-whammy. It summed up the attitude of a lot of shippers."
Bad service comes in the form of slow train speed, lost freight cars and generally late delivery of shipments. As of March, the average train speed for some of the major United States railroads was not flattering.
All trains for CSX had an average speed time of 17.6 mph as of March 24, down from 18.2 mph in February. But many trains, ironically, were showing signs of improvement by the end of March.
The average train speed for all Canadian National trains was 25 mph by March 24, up from 24.5 mph in February, according to the Association of American Railroads. The average train speed for all Union Pacific trains was 26 mph on March 24, just slightly less than the average speed of 26.1 mph in February. The average speed of all Norfolk Southern trains was 20.2 mph on March 24, up from an average speed of 19.9 mph in February.
Lower prices
And the Association of American Railroads also maintains that railroads are now moving freight at a lower cost than ever before. According to the association, it costs on average 26% less to move freight by rail than it did in 1981, and 57% less in inflation-adjusted dollars. The association maintains that these reductions have saved American consumers tens of billions of dollars.
But while some railroads say they do not have "general" rate increases, they selectively raise rates in certain areas, prompting a feeling of victimization for companies located there.
"They tell us service is going to be better, but the bottom line is service isn't better and rates are up," says a transportation director for a MidWest plastics company. The director asked not to be identified. "They are cutting back on infrastructure and not providing the services that they used to provide."
Railroads say this practice is only fair and understandable in a system based on capitalistic ideals.
"We take pricing opportunities where we can. It is a normal state of business,"
says John Bromley, spokesman for the Nebraska-based Union Pacific Railroad. "The marketplace drives us where we will go with that."
Shippers who use the service give a skeptical outlook on railroads and the way they raise rates. The NIT League survey, for example, shows that:
- Compared to the rates during the first half of 1996 on either Union Pacific or Southern Pacific, 50% of the surveyed customers say their rates were up by an average of 9.1%,
- Compared to the rates during the first half of 1995 on either Burlington Northern or Santa Fe, 49% of the surveyed customers say their rates on the merged Burlington Northern Santa Fe were higher by an average of 6.6%.
Rastatter says members are now seeing an average rate increase of between 6% and 8%.
Healey says rates for the plastics industry are particularly high. Rates for the industry should now run $2,500 to $5,500 per car per movement. But because they are "captive," Healey says plastics manufacturers can pay 15% to 60% above these. For the rail car movement of plastic pellets alone, 20% of every dollar pays for transportation.
Fighting the increases
Healey says plastics manufacturers feel powerless to fight the rate increases. Many are located in areas where it is impossible and implausible to search for alternative forms of transportation.
"Don't forget that the plastics industry is virtually the poster child for captive shippers, so we pay premium rates no matter what," says Healey. "It's [the increases] almost an exaggeration of something that is already exaggerated.
"We pay the highest rates and get the worst service," Healey continues. "Why should we get good service if we are captive to one railroad? We pay high rates, and they do nothing but go up. And it all leads back to the captivity issue."
Linda Morgan, chairman of the Surface Transportation Board, says she empathizes with shipper frustration over the increased rates.
"Shipper reaction to these increases is perfectly understandable given the service experience they are having," she says. "I caution the railroads about that issue. If you are raising rates when service is not up to par, the reaction is not going to be good even if it is justified on the cost increases."
The fallout from the mergers and resulting rate increases encouraged the Georgia-based United Parcel Service to speak out during the hearings for Burlington Northern Santa Fe and Canadian National. Tad Segal, a spokesman for UPS, says his company believes it's going to be another two to three years before railroads rebound from post-merger stress. Segal says UPS believes this will give the newly merged railroads a chance to absorb some of the merger-induced upheaval and seek answers to service and rate problems.
Unusual alliances
The hearings before the Surface Transportation Board brought together some unusual alliances and rooms full of people who say they have had it with railroad mergers. In some cases, manufacturers sided with the very railroads they have complained about, hoping that strength in numbers will convince the board to prevent the Burlington Northern Santa Fe/Canadian National merger.
"For once the shippers and carriers are on the same side," observes Healey. "It's an odd alliance, but there is a reason for it: Merger fatigue."
Healey says the alliances, in a strange way, are having some positive results. She says they are proving that shippers and their controversial carriers may be able to work together for common goals. She says the turnout may also encourage railroads to begin taking their customer complaints more seriously.
"It is like having to get along with your mother-in-law," she says. "It's someone who is going to be there the rest of your life, so you've got to make it work.
"That has brought another element in and made carriers realize the need to focus on service because the debacles after the mergers have alienated shippers," Healey says. "Mergers produce such drastic results, such negative results, that carriers were put on alert and had to do something."
But the anti-merger alliances weren't the only ones being formed. Indeed, more than 200 customers of Canadian National and Burlington Northern Santa Fe wrote to the Surface Transportation Board, urging it to give the proposed merger a fair hearing.
"These customers believe our combination should be judged on its merits," says Burlington Northern Santa Fe CEO Robert Krebs. "And they want the STB to focus on shippers' needs for consistent rail service-not the self-interests of competing railroads that want to delay the transaction."
Competing railroads
Those "competing railroads" came forward during the board's hearings and spoke against Burlington Northern Santa Fe and Canadian National's plans. One was Norfolk Southern Corp. The company's president, David Goode, told the board that this is an inappropriate time for another rail merger. "Today, our customers and investors clearly are telling us that the rail industry needs predictability, not uncertainty, stability not turmoil," Goode said. "A major merger like bnsf-cn could disrupt the entire industry for years."
More protests came from the Nebraska-based Union Pacific Railroad.
"We felt the timing of this proposed merger was poor because of the fact that the Conrail split up had not been settled yet," says Bromley. "The benefits of that merger have not been achieved, and we are well aware of our own service meltdown in 1997."
Morgan says the board continues to invite the shippers' input here and hopes it will help blanket the emotional hearings with a sense of fairness.
"In terms of alliances, the more communication that goes on among the various sectors in the rail community on issues like this the better," Morgan continues. "I've seen in the past couple of years an unhealthy breakdown in healthy communication in the private sector in terms of the rail."
Morgan says some good will come from all this attention on the proposed merger. She says the previous mergers and their aftermath have helped the board to concentrate for the past few years on customer service.
"The board has been focused on customer service for the past couple of years in a very firm and strong way, and our recent decision further indicates the board's concern for customer service and our interest in making sure that everyone is focussed on it," says Morgan.
Service failures
If this is true, Segal says the focus can't come soon enough. He says UPS experienced service failures on most of the newly merged railroads. This encouraged the company to speak before the Surface Transportation Board.
But unlike many other companies that spoke, UPS did not encourage the board to block the merger. Instead, UPS representatives simply talked about their shipping experiences. Segal says UPS worries that if this merger is approved, it could spark yet more mergers between other railroads, leading again to decreased competition. UPS hopes the board would take this information as food for thought, Segal says.
"One of the things we are concerned about is should this particular merger be approved, it could lead to significant pressure on other rails to do the same and further consolidate," Segal says. "It could start a merger binge, if you will, and this is a significant concern because of the service failures and pricing issues we are facing elsewhere."
"We've experienced significant problems with service as a result of the prior mergers," Segal says. "Our biggest problem is the issue of service."
It is this very attitude that has both Burlington Northern Santa Fe and Canadian National crying foul. Both railroads say it is unfair and unbusinesslike to punish a company for the mistakes of others.
"Our position is we do not believe Canadian National and Burlington Northern should be penalized for the failure of other carriers," says Mark Hallman, spokesman for Canadian National. "They [other railroads] caused that mess themselves, and we should not be saddled with that."
Dropping the moratorium
This determination has prompted Canadian National and Burlington Northern Santa Fe to go before the board and try to persuade it to drop its 15-month merger moratorium. Central to both railroads' arguments are what they call the successful mergers of some railroads, including those of Illinois Central and Canadian National in 1999, and Burlington Northern and Santa Fe in 1995. And both Burlington Northern Santa Fe and Canadian National say they have watched and learned from the troubled mergers of some railroads. They don't intend to go down the same path. "We are not pursuing the same strategy as the other carriers," Hallman says.
But once again, service isn't the only problem UPS has with the railroads. Segal says UPS can count on 3% rate increases per year. These are coming, he says, despite railroad promises that there will be reductions in costs. It's a juxtaposition that once again only causes shipper frustration, Segal says.
"A 3% rate increase per year is to be expected," Segal says. "But when you are promised reductions in pricing, an increase is going in the opposite direction."
Like so many other shippers, UPS often finds itself powerless to turn to other means of transportation. UPS in recent years has taken up to 50% of its shipping load and moved it onto its own trucks. But this was done at tremendous cost, not to mention the fact that it increased truck traffic along the nation's highways.
"When you do that, you incur significant additional costs, and it tends to disrupt your transportation network," Segal says. "There are significant consequences when you pull traffic off of rails and transport it by truck, and it's not something we will lightly do."
And so, Segal says he can identify with Morgan's view that shippers today are suffering from merger fatigue. "It makes sense," he says.
The total picture
But Hallman says shippers who are balking at railroad rate increases are not seeing the total picture. And he maintains that railroads like Canadian National are being overly understanding in the day and age of fuel price increases. Many, he argues, are trying hard not to saddle customers with fuel surcharges. "Yes, you can take select areas and increase the rates by 1% or 2%," he says. "But we have not imposed a fuel surcharge, and our volume is up 15%. Obviously, it is paying off."
Hallman's argument, though, is not persuasive to institutions located in the "select areas" that routinely see the rate increases. And Healey says plastics manufacturers don't consider the planned merger of Burlington Northern Santa Fe and Canadian National an isolated event. Instead, she says the troubled merger of Union Pacific and Southern Pacific and spotty service following the division of Conrail to Norfolk Southern and CSX, have fueled shipper pessimism. "Taken collectively, these have gone a long ways toward shaking shipper confidence," Healey continues. "These are producing the merger fatigue issue."
Morgan says parties on all sides have a lot of work ahead of them.
"The board has been very active right along in working with carriers and shippers in resolving these difficulties," Morgan says. "We need to get confidence back into the rail sector and get customer service to where it should be. We've made progress, but it's still not good enough."
Morgan also hopes that the new rules the board will work on during the 15-month period will force railroads to focus on customer service.
"I think it's fair to say our recent decision related to mergers clearly indicates the view of the board that we need to focus very heavily on customer service and not have anything going on that could distract the carriers from continuing to focus on the service they provide to customers," Morgan continues. "That's been the focus of the board in the past, and it will continue to be."
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