Dwindling dwell: How Class I railroads are addressing supply chain congestion

Improving train speeds and communicating more closely with the ports are some of the ways the Class I railroads are seeking to relieve the delays plaguing the freight supply chain, according to comments made by executives at recent investor conferences.

The “systemwide” delays brought about by labor shortages, a lack of available equipment and persistently elevated volumes are affecting drayage and warehousing operations, which in turn slow down the pace that the railroads can deliver goods.

Alan Shaw, Norfolk Southern’s (NYSE: NSC) chief marketing officer, said the lack of fluidity at the warehouses and for drayage has caused Norfolk Southern’s (NS) street dwell on its chassis to increase by 20%. NS is seeking to increase its train speeds and work with terminal contractors to improve terminal fluidity, and it is looking at how it loads and its intermodal trains and whether it can improve efforts to double stack, according to Shaw.

As fluidity improves with the drayage and warehouse communities, that will improve chassis street dwell, which then provides better turns on equipment, Shaw said.

“There are a number of things everyone in the supply chain ecosystem is focused on,” Shaw said at a UBS investor conference last Tuesday. “We’re very, very fortunate to be aligned with the best channel partners in the business. … They know what to do with the interface with us and the BCOs, and we know what we need to do.”

The labor force participation rate within the supply chain is also low, Shaw said. “Everyone is dealing with labor issues right now.”

Union Pacific (NYSE: UNP) acknowledged that it has been applying significant surcharges on its container pool as a means to protect customers that have committed to a company program that seeks to ensure container availability. Although recent surcharges aren’t as high as they’ve been, the higher rates point to strong demand, according to Kenny Rocker, Union Pacific’s (UP) executive vice president for marketing and sales.

Still, “the one thing we would change if we could is the amount of dwell that’s out there in the marketplace,” Rocker said at last week’s UBS conference.

To improve system fluidity, UP has increased the number of trains and engaged with intermodal and domestic partners so that UP can make more at its terminals for containers that might not need to move as quickly.

“The more reliable and the more time we are making that box available, the better chance we have of that customer thinking of that box on a timely basis,” said UP CFO Jennifer Hamann at the conference. “And so, to the extent that they know a box availability is 10 a.m., and I can have a driver there at 10 a.m., that’s going to be efficient for them. That’s going to help the whole process.”

The railroad has also been talking with the ports to see how UP can help to reduce dwell, according to Rocker.

“We work with the ports pretty closely. I would say that they have reacted and put more resources in place,” Rocker said. “And so, you have seen the backlog or shifts that were out there, waiting to get in, which is encouraging.”

Longer term, the ports should put additional resources to develop technology aimed at improving supply chain visibility for itself and its partners, including UP, according to Rocker.

As the peak season approaches for retail and grain approaches in the second half of the year, issues with supply chain fluidity could persist through the end of this year.

“I think you can improve over that time period — absolutely. But my guess in terms of getting back to what I’ll call ‘historical fluidity,’ that’s probably a few months off and probably not something next year,” Hamann said.

CSX (NASDAQ: CSX) acknowledged that its service metrics have been struggling this year amid increased demand for transportation services, not just for rail but also for trucks, CSX CEO Jim Foote said earlier this month.

CSX’s lower service metrics come amid concerns from chemicals shippers that service has been lagging in the Southeast and Gulf Coast. The American Chemistry Council recently expressed those concerns to the Surface Transportation Board.

An influx in COVID cases in the late fall and early winter contributed to a higher number of employees being unavailable for work, which in turn affected CSX’s terminal dwell and velocity, Foote said at the Bernstein investor conference on June 3. While CSX is experiencing a much lower COVID caseload and workforce availability is more stable, CSX has been hiring more employees to ensure adequate staffing levels for 2022 and 2023, according to Foote.

At the Wolfe investor conference in May, CSX CFO Kevin Boone noted that CSX is getting ready for fall peak and adding and redistributing headcount to needed areas, such as in the Gulf.

“We want to be there when the volume comes,” Boone said in May.

Even though CSX has never shut down its intermodal terminals and it has the yard and terminal capacity to handle volumes, the challenges in securing chassis and finding drivers in the dray community have exacerbated delays in the supply chain, Foote said.

“We have to have a better relationship with that piece of the business,” said Foote, talking about CSX’s relationships with its channel partners, including international partners such as vessels and BCOs. “It’s a cultural change and a mindset change.”

CSX has also been communicating with the dray community “more than we ever have before,” Foote said.

UP noted that it has been having challenges with the eastern portion of its network because there haven’t been enough chassis available, Hamann said at the Wolfe investors conference in May.

“It’s interesting times — challenging times — for everybody in the logistics business,” Foote said.

FreightWaves reported last Thursday that the number of empty containers leaving Chicago is up by 62% year-over-year, indicating the strong demand for empty containers to head back to the coastal ports and out to sea. But loaded containers coming out of Chicago are down by 4% in the same time frame, according to FreightWaves SONAR data.

Meanwhile, both East and West Coast ports reported record volumes in May, and those high volumes could persist through the remainder of 2021.

Those expectations come as the National Retail Federation (NRF) last week upped its forecast for retail sales to total between $4.44 trillion and $4.56 trillion in 2021, compared with an earlier forecast of $4.33 trillion made in February.

“We are seeing clear signs of a strong and resilient economy,” NRF Chief Economist Jack Kleinhenz said in a release. “Incoming data suggests that U.S. economic activity continues to expand rapidly, and we have seen impressive growth. Most indicators point toward an energetic expansion over the upcoming months and through the remainder of the year.”

Railroads brace for higher volumes in second half of 2021

Class I railroad executives expect continued strength for intermodal traffic and for commodities such as lumber and metals.

“The slow start of the year has not dampened our expectations,” Hamann said.

Grain volumes could also be strong in the second half of the year, although the railroads could be facing tougher year-over-year volume comparisons, according to UP’s Rocker.

The semiconductor shortage looks likely to persist and affect automotive volumes until the third quarter, but that timeline could change as the third quarter nears, executives said.

“We believe that we should get close to normalized sometime at the beginning of the third quarter, but that’s still then kind of a wait-and-see scenario,” Rocker said.

Meanwhile, it will take one to two years for some chemicals and plastics production facilities to return to normalized inventory levels because of February’s winter storms, Boone said last month. About 75% of those plants CSX serves experienced or were affected by supply shortages.

“It’s a long, long path for them to replenish inventories,” Boone said.

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Railroads brace for higher volumes in second half of 2021

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