Railroads' Quest for Speed Cost Freight Shippers More Than $1 Billion Last Year

By Paul Ziobro 

Railroads are getting more efficient, and their customers are paying for it.

Large railroads such as Norfolk Southern Corp. and Union Pacific Corp. are moving quickly to streamline their operations, switching to fewer, longer trains that run on tighter schedules.

But shippers ranging from pasta giant Barilla America Inc. to small lumber distributors say they are having problems keeping up with the new timetable, causing late fees to accrue and cut into profits.

At issue is how quickly shippers return railcars back to service after unloading or loading cargo.

Railroads are giving customers only 24 hours to return empty railcars -- half the grace period they used to give -- and after that are charging a "demurrage" fee of $150 a day. The previous 48-hour window allowed shippers to earn credits by returning cars early, and then use the credits to offset fees when they had to hold onto a car for weekends or holidays.

The new rules were implemented earlier this year at Norfolk Southern, which operates in the eastern U.S., and at Union Pacific, which operates west of the Mississippi River. The largest U.S. railroads generated more than $1.4 billion in such charges in 2018 and are on pace to exceed that this year, according to data they submitted to the Surface Transportation Board, freight railroads' regulator.

Some shippers say there are often no quick adjustments they can make to their industrial operations, which can involve expensive upgrades and long construction, to meet the tighter delivery window.

Barilla last November completed a $9.3 million upgrade at its Ames, Iowa, plant, where it processes durum wheat into semolina. The upgrade enables the pasta maker to accept shipments of 110 cars at a time and unload them within 48 hours, thus avoiding additional fees based on the old rules in effect at the time. The project was done at the behest of and with approval from Union Pacific, a Barilla executive said in testimony submitted to the STB for a hearing on the new fees last week.

Barilla decided against spending an additional $1.2 million for larger unloading pits that would have allowed even faster turnaround, according to the testimony. Then, shortly after the expansion was finished, Union Pacific announced it would soon change its policy to require cars be returned in 24 hours.

In addition to deeper pits and upgraded wheat elevators and conveyors, Barilla says it will need to renegotiate a contract with the company that unloads its trains. Barilla, which is closely held, didn't disclose how many fees it has amassed but is challenging at least $22,100 in penalties assessed in February and March.

Steel giant ArcelorMittal said longer trains make it harder to unload trains fast enough at sites like its blast furnace in East Chicago, Ind. "We have constraints that in many cases take capital to improve, and we cannot just simply load or unload faster," Pete Georgeon, a general manager for ArcelorMittal's U.S. arm, wrote in testimony.

The railroads say the fees help shippers too.

"Our demurrage and accessorial program is designed to make sure we keep our network fluid, which benefits all of our customers and the entire supply chain," said Kenny Rocker, Union Pacific's executive vice president of marketing. A company spokeswoman said the railroad is evaluating customer feedback on the new rules and fees.

Alan Shaw, Norfolk Southern's chief marketing officer, said the railroad is incorporating customers' concerns "into our constant evaluation of the reasonableness and efficacy of our demurrage and accessorial programs."

Following the week's hearing, STB Chairman Ann Begeman said the board is considering changes to how the fees are applied. "None of us were convinced that the status quo is acceptable," she said.

Railroads have been under pressure from investors to speed up operations in the U.S. ever since CSX Corp. started implementing its turnaround plan in 2017, using the so-called precision scheduled railroading strategy developed by the late railroad executive Hunter Harrison.

Last year, Norfolk Southern, Union Pacific and Kansas City Southern, which operates a railroad that extends into Mexico, began adopting variations of the strategy, aiming to cut costs and get more use out of assets like railcars and locomotives.

Some smaller shippers said the fees were wiping out all of their profits and costing them customers. Harry Shea said his lumber distributor, Shea BrothersLumber Handling Inc. in Delanco, N.J., hadn't accumulated any significant demurrage fees over the past three decades. Last year, the company was hit with about $115,000 in fees by CSX and $33,000 by Norfolk Southern, erasing its profit.

Mr. Shea said the company unloads lumber shipments as fast as it always has, emptying nine railcars a day, but a quirk in the handoff from the railroad to his facility often means he starts paying a fee before he even gets the railcar.

"We were hoping that the railroads would come to their senses and realize that it was just not doable to pay these amounts," Mr. Shea said.

A CSX spokesman said the railroad is offering Shea Brothers credits to offset fees when they are deemed unfair. Broadly, CSX expects the fees it collects from shippers to decline over time as they get used to the new operating schedule, Arthur Adams, the company's vice president of sales, has told the STB.

Mr. Shea said his company has started to offset the fees, which hit nearly $54,000 in the first quarter of 2019, by charging its customers $225 per car starting in February. But that caused its third-largest customer to sever the relationship. "Our customers are not happy," he said.

Write to Paul Ziobro at [e-mail]

(END) Dow Jones Newswires

May 29, 2019 08:47 ET (12:47 GMT)

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