Wall Street Journal, PAGE ONE
July 25, 2003

Battling Trucks, Trains Gain Steam
The Latest Strict Scheduling
Helps Win Business for Railroads


Delivery giant United Parcel Service Inc. owns and operates 88,000 trucks. So how is UPS speeding up deliveries between the East and West coasts? Trains.

Three weeks ago, railroads Union Pacific Corp. and CSX Corp. began operating trains for UPS between New York and Los Angeles that cross the country in just 63 hours. That shaves 12 hours from the fastest previous rail service and is competitive with team-driven trucks, which can make the trip in about 60 hours. The new trains allow UPS to guarantee deliveries between the nation's two largest cities in four business days, instead of five.

To make the express service work, the railroads are shunting aside slower freight trains and using new tracks that bypass some of the carriers' worst bottlenecks. "We're going to part the seas" to deliver for UPS, says John Childs, an assistant vice president of CSX.

The new trains and the new attitude are the latest signs of a revival at the nation's freight railroads. For decades, the railroads had been losing ground to trucks, which were more reliable and could go more places. A series of poorly executed mergers in the late 1990s further slowed deliveries and alienated customers.

Today, railroads are picking up steam. A new crew of executives is breaking a longstanding industry practice of waiting to move trains until they're full, which sometimes left loaded boxcars stranded in train yards for days. Now, railroads are putting trains on strict schedules and aggressively wooing customers.

Meanwhile, a growing number of state and local officials are funding rail projects, tempering the nation's 50-year preference for building new highways. One reason: People are sick of traffic jams and diesel fumes. Last month, the six major North American railroads announced a $1.5 billion plan to untangle their big Chicago rail hub, with about 85% of the money coming from the city, state and federal governments.

The changes are critical in an economy still trying to regain its footing. Transportation costs affect the price of virtually every product, from automobiles to breakfast cereal and washing machines. Reliable shipments help lower other costs by allowing businesses to carry less inventory.

In 1981, transportation and logistics costs accounted for 16.2% of the nation's economic output, according to the Eno Transportation Foundation, a nonprofit Washington-based research group. By last year, those costs had fallen to 8.7% of gross domestic product, thanks to deregulation, which lowered both truck and rail freight rates, and improved computer systems, which help businesses better track inventory.

Truckers notice the stepped-up competition. Railroads "are more focused on the customer and growing their business than I've ever seen," says Bill Zollars, chief executive of trucking giant Yellow Corp. in Overland Park, Kan.

He says Yellow and other truckers will stay competitive by combining into larger, more efficient companies and adopting improved computer systems that plot faster routes. As customers demand improved service, "that usually means trucks rather than trains," he says. Two weeks ago, Yellow agreed to buy its biggest competitor, Roadway Corp., for almost $1 billion in cash and stock.

Trains had been the nation's predominant way of moving freight since the 19th century. Because they can carry 100 or 150 cars together, freight trains are naturally cheaper and more fuel-efficient than trucks.

Beginning in the 1950s, however, trains began losing traction amid big shifts in the postwar economy. Manufacturing and distribution moved beyond the population centers of the East and Midwest to places not served by rail. At the same time, the federal government began building interstate highways, ideal for long-distance trucking, at taxpayer expense. That put railroads, which must acquire land, build and maintain their own tracks, at a competitive disadvantage.

In 1980, both industries were deregulated, giving them more freedom to set routes and rates. Truckers benefited first, as new, low-cost competitors entered the field. Trucks got another boost as businesses sought to cut inventory costs, because truckers offered more flexible, reliable deliveries.

Most freight railroads, meanwhile, still operated without precise schedules. Trains were dispatched only after enough boxcars, tank cars and flat cars had been assembled at a terminal to make a suitably long train, typically 100 cars or more. The railroads sought to save money by running fewer trains. But reliability suffered, and more customers defected to trucks.

For businesses, "it became more acceptable to pay a higher truck rate rather than be awash with inventory," says Bob Delaney, vice president of Cass Information Systems Inc., a freight-data company in St. Louis.

By 1986, less than 36% of the nation's intercity freight was shipped by rail, down from 61% in 1940. Trucks, meanwhile, had grown to carrying 25% of freight, up from 10% in 1940.

Railroads ripped up little-used tracks and postponed new investments, creating bottlenecks and additional delays. By the 1990s, most railroads had thrown up their hands, ceding much of their traditional general-merchandise cargo to truckers and focusing on bulky commodities, such as coal and grain. Trucks seemed so dominant that railroad employees themselves began referring to their lines by the interstate highways that they parallel, such as I-95, for the north-south East Coast route, and I-5 for the West Coast route.

Railroads' share of freight shipments began inching higher in the late 1980s, as utilities in the South and Midwest turned to low-sulfur coal from Wyoming to meet clean-air rules, and shippers increasingly put truck trailers on flatcars. The long economic slowdown has helped as well, as shippers seek to cut costs by using trains, which are cheaper than trucks. When sales are sluggish anyway, speedier truck deliveries seem less important.

"Taking the extra time and using rail is more viable with a slower economy," says Paul Bergant, executive vice president and chief marketing officer of J.B. Hunt Transport Services Inc., a Lowell, Ark.-based trucking company.

Freight railroads still face a host of challenges. Trucks command a premium for their services because of their greater flexibility. Trucks brought in 73% of the $423 billion spent on intercity freight shipments last year, compared with 8.7% for trains.

Moreover, most railroads aren't making enough money to invest in new tracks and equipment, making it hard to unclog bottlenecks. Many places are served by a single track, meaning trains have to wait for others to pass. Even where trains work well, shippers typically need trucks to pick up and deliver goods.

But a new generation of leaders is injecting life into long-overlooked railroads. The changes are most evident at Canadian National Railway Co., a once-sleepy government-owned railroad that quietly has become the most efficient carrier on the continent. Despite its name, Canadian National controls a key line from Chicago to New Orleans, and is the U.S.'s fifth largest railroad.

In 1998, E. Hunter Harrison, then Canadian National's chief operating officer, did something revolutionary in the stodgy rail business: He posted schedules, both for trains and for individual shipments, and promised to stick to them. Trains began to depart and arrive on time with whatever freight was available.

"People got into sloppy practices, and we had to make changes," says Mr. Harrison, a 58-year-old Tennessee native who became Canadian National's chief executive in January. He says the schedules reduce costs, by keeping cars and locomotives moving, and making better use of assets.

The company is hauling 20% more freight with 882 fewer locomotives than it had in 1998. It's carrying a growing share of Canada's massive lumber shipments. Equally important, after two decades of declining rates, Mr. Harrison is using service improvements to justify holding the line on rates, and even occasional increases. Net income at Canadian National quadrupled between 1998 and 2001, before sliding last year as the company set aside more money to cover injury claims.

The changes have "helped restore our faith in rail," says Alain Lalonde, corporate director of logistics for Abitibi-Consolidated Inc., the world's biggest newsprint maker. Blaming inconsistent deliveries, the Montreal-based company had cut back on its use of rail in the late 1990s. In 1999, less than 30% of its Canadian paper shipments to North America went by train. Last year, taking advantage of Canadian National's scheduled service and similar efforts by connecting U.S. carriers, Abitibi shipped nearly 60% of its Canadian paper by rail, cutting transportation costs by roughly C$10 million (US$7.1 million).

Competitors are copying Canadian National's approach. CSX and Norfolk Southern Corp., the U.S.'s third- and fourth-largest railroads behind Union Pacific and Burlington Northern Santa Fe Corp., are reconfiguring trains and using schedules. In an unusual move, CSX last year sent seven executives to visit Canadian National's operations center in Edmonton, Alberta.

The trip reflected the changing views of CSX's former chief executive John Snow, who became U.S. Treasury Secretary in February. In 1999, CSX was plagued by long delays, the result of holding freight shipments to build long trains. In 2000, however, Mr. Snow installed new managers who preferred tighter schedules, reducing backlogs and restoring confidence among customers.

Railroads' increasingly disciplined operations force customers to adjust. For years, Canadian National yards in Quebec were clogged with boxcars because customers often failed to complete the "waybill," which lists a car's contents, destination and routing instructions. Then, in 2000, the railroad instituted a C$400 fee for incomplete paperwork, cutting the number of delinquent cars to just a few a day from hundreds. Some shippers using the busy rail line between Toronto and Halifax, Nova Scotia now must reserve places on Canadian National trains.

Railroads also are benefiting from reluctance among some government officials to tackle the lengthy, complex process of building more roads. Delaware recently opened a 47-mile stretch of highway that took 20 years to complete. "States are coming to the conclusion that they have to look beyond highways to also consider freight rail," says John Horsley, executive director of the American Association of State Highway and Transportation Officials, which represents state transportation departments.

About a dozen states are helping railroads fund improvements to relieve bottlenecks. In California, local, state and federal governments financed the $2.4 billion Alameda Corridor, a 20-mile rail line connecting the ports of Los Angeles and Long Beach to the national rail system at a hub east of downtown Los Angeles. The state of Missouri helped finance a three-mile-long rail overpass in Kansas City that enables long-distance trains, including the new UPS service, to avoid congested switches and hubs.

In Brandon, Vt., some residents are supporting a $24 million plan to build a railroad track to a nearby marble quarry in hopes that the steady stream of trucks rumbling through the picturesque village can be shifted to rail. Among the most vocal supporters of the rail project is the Brandon Inn, which has spent more than $200,000 to enclose its outdoor front porch and sound proof the facade of the building to shield guests from the noise, dust and vibrations of the trucks.

"They come to Vermont for peace and quiet and get what they thought they had left behind," says Sarah Pattis, co-owner of the inn.

In the Northeast, railroads are seeking $6.2 billion in government funding to unclog bottlenecks from Virginia to New Jersey. Delaware is spending $13 million to restore the Shellpot Bridge, a dilapidated rail crossing of the Christina River in Wilmington that has been closed for more than eight years. Officials hope the reopened rail line will take some trucks off congested I-95. Norfolk Southern will reimburse the state for most of the money by paying tolls on every freight car that crosses the bridge.