The rail service crisis rose to a new level of awareness last week when members of Congress heard a panel of shippers describe the current sorry state of freight railroad operations.
About the same time, a Surface Transportation Board shipper task force suggested changes designed to streamline the rail rate review and appeal process. (See next issue for further details).
On July 25, Rep. Dan Lipinski (D-IL), chairman of the House Subcommittee on Railroads, Pipelines and Hazardous Materials, termed the Capitol Hill session “a shipper roundtable” instead of a formal hearing, where eight rail shipper executives spoke but no executives or representatives of the railroads.
Lipinski said the session was convened because members have been hearing from shippers about the serious problems they’ve had to endure because of demurrage fees, accessorial charges and generally poor service reliability and quality in recent years.
One thing the hearing would not be about, he stressed, was overturning many of the positive changes created by the 1980 Staggers Rail Act, which substantially deregulated the industry. “The railroad industry has changed a lot since 1980, especially over the past five years,” Lipinski noted. “Efficient and cost-effective shipping is key to American companies’ ability to compete and grow in the global economy.”
Veteran House leader Rep. Pete DeFazio (D-OR), who is chairman of the subcommittee’s parent body, the Transportation & Infrastructure Committee, was a bit more emphatic when he spoke.
“I am very concerned about the legacy of the now-departed Hunter Harrison and what he did to CSX with Precision Scheduled Railroading [PSR] and which is now being adopted by Union Pacific,” which DeFazio pointed out is now routinely running trains at least three miles long.
“I do not want the vultures on Wall Street destroying the precious asset that is rail transportation in the United States,” DeFazio declared. “It is the envy of much of the world, but we shouldn’t let a bunch of jerks on Wall Street just trying to improve short-term profitability ruin it.”
Many of the horror stories the shippers relayed to the subcommittee paralleled those that were heard by the STB during two-days of hearings it held on the crisis in May (AA, 6-15-19, P. 1). PSR has spread like a plague throughout most of the other Class 1 railroads, shippers said, damaging service quality everywhere the scheme has been imposed.
“A combination of poor service and rising costs over the last few years is not only unacceptable; it falls in the category of unimaginable,” said Mike Amick, senior vice president for Paper the Americas, International Paper.
On occasion production lines at plants he manages have shut down due to unmade deliveries, and the threat it will happen again is a constant worry.
The demurrage fee hikes also are a significant problem, Amick added. “Since the adoption of PSR, IP has seen our demurrage more than double to over $7 million. At one of the facilities I manage, that number has gone up 39 times.”
Ross Corthell, vice president, transportation for the Packaging Corporation of America, also blamed the regional monopolies enjoyed by Class 1 railways. “The extreme consolidation has fostered unreasonable practices, significant rates, and lack of attention to service, particularly at the local level.”
Randy Gordon, president of the National Grain and Feed Association, laid the blame squarely on PSR, designed expressly to slash costs to the bone in order to maximize profits reaped by investors.
“Some have said PSR means doing less with less. For our sector, PSR has resulted in increasingly arbitrary, abrupt and disruptive changes to our operating plants and service schedules, often negating tens of millions of dollars in customers’ investments in their facilities, track space and other infrastructure that the railroads insisted that they make in order to continue to have rail service.”
Rep. Eleanor Holmes Norton (D-DC) posed a pertinent question to the shippers: “What do you want Congress to do?”
The answer is that Congress needs to provide strong support to the STB and support the actions it eventually takes, Gordon said.
“I think the board members are genuinely committed to trying to change and address some of these issues – to the degree you can be supportive of the board fulfilling its statutory function, is greatly appreciated.”
STB Chairman Ann Begeman and several other board members were present at the session, and it can only be hoped that what they heard reinforced their willingness to take such decisive actions.
3PLs to Continue Growth Pattern
The unprecedented growth of third-party logistics services in 2018 is expected to endure until at least the end of this year, according to a report from Armstrong & Associates.
Armstrong estimates 3PL market net revenues (gross revenues less purchased transportation) grew 12.1% to $86.4 billion and overall gross revenues increased 15.8%, bringing the total United States 3PL market to $213.5 billion in 2018.
“The last time the U.S. saw this level of 3PL gross revenue growth was in 2010 when the 3PL market bounced back 19% from its 16% decline in 2009 during the great recession,” the 3PL market research and consulting company notes.
Even with the import tariff inventory builds, Value- added Warehousing and Distribution (VAWD) had the lowest rate of growth in 2018 compared to its transportation management-related brethren 3PLs.
However, VAWD’s gross revenue growth of 8% to $43.3 billion was the best it has realized since 2011 when it saw an 8.3% increase, Armstrong reported. In terms of year-over-year net revenue growth, VAWD net revenues grew 6.3% to $33.1 billion,.
The non-asset-based Domestic Transportation Management segment – which consists primarily of freight brokerage services and to a lesser extent managed transportation, and digital freight matching companies/digital freight brokers – led all other 3PL segments with overall gross revenue increasing a whopping 20.7% to $86.5 billion.
“To find a better growth year, we have to go back to 2005 when the DTM segment had year-over-year growth of 21.2%,” Armstrong points out.
DTM providers’ top-line revenues benefited from heavy port-to-warehouse and warehouse-to- warehouse moves, a strong economy, rising carrier rates, increasing fuel surcharge revenue and continued outsourcing amongst shippers.
Air and ocean freight forwarding services posted 15.4% gross revenue growth in 2018 to $61.9 billion, their best showing since 2010.
CA Meal Break Denied by Court
The exemption of interstate truck drivers from California’s meal and rest break rules was upheld by a federal district court located in that state.
The court recently dismissed a truck driver’s claims that trucking company U.S. Xpress failed to provide a class of drivers with legally required meal and rest periods, in compliance with California law.
The court agreed with U.S. Xpress that it did not possess the authority to review the merits of the case since the Federal Motor Carrier Safety Administration in December 2018 had determined that federal law preempts the California state law.
FMCSA reasoned that California’s meal and rest break rules, although more stringent that federal regulations, provided no additional safety benefits. The agency also said the California rules were incompatible with federal hours of service regulations and imposed an unreasonable burden on interstate commerce.
FMCSA’s preemption determination and this ruling represent a huge win for the trucking industry, and provide the industry with increased clarity as to regulatory standards applicable to interstate carriers in California, say attorneys Corrine Hays and Paul Cowie of the law firm of Sheppard Mullin Richter & Hampton.
The decision also effectively shields truckers from “draconian penalties” for violations of the California meal and rest break rules, they observe.
The FMCSA determination is currently being challenged in the Ninth Circuit U.S. Court of Appeals by the California’s Attoney General and Labor Commissioner, along with the Teamsters union. However, it is expected to be many months before the Ninth Circuit renders its decision.
“Until then it appears that interstate motor carriers in California are in an excellent position to challenge the merits of thousands of pending wage and hour class actions filed by commercial vehicle drivers for violations of the California Labor Code’s meal and rest break rules,” say Hays and Cowie.