Industry experts offer up takes on recent White House EO and impact on rail and ocean sectors

The recent executive order issued by the White House late last week, focusing on promoting competition within the American economy, has brought no shortage of opinions from supply chain stakeholders.

As reported by LM, the freight railroad and ocean shipping sectors are both very much in the crosshairs of this EO.

For the railroad sector, the EO is encouraging the Surface Transportation Board (STB), an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers, to require railroad track owners to provide rights of way to passenger rail and to also strengthen their obligations to treat other freight companies fairly.”

It added that going back to 1980, there were 33 Class I railroads, whereas now there are seven, with four major rail companies that it said now dominate their respective geographic regions.

“Freight railroads that own the tracks can privilege their own freight traffic—making it harder for passengers to have on-time services—and can overcharge other companies’ freight cars,” it said.

That sentiment is closely aligned with the STB’s proposed reciprocal switching legislation offered up in 2016, which would allow a rail shipper to gain access to another railroad if the shipper makes certain showings. As defined by the STB, reciprocal switching is a situation in which a railroad that has physical access to a specific shipper facility switches rail traffic to the facility for another railroad that does not have physical access. And the second railroad compensates that railroad that has physical access in the form of a per car switching charge, with the shipper facility gaining access to an additional railroad.

On the ocean side, EO is encouraging the Federal Maritime Commission (FMC) to ensure vigorous enforcement against shippers charging American exporters exorbitant charges.

And it pointed to how the global shipping market has rapidly consolidated, citing how in 2000 the ten largest ocean shipping companies controlled 12% of the market, and fast-forwarding to 2021, that figure has jumped to more than 80% of the market. This has, in turn, let “powerful container shippers charge exporters exorbitant fees for time their freight was sitting waiting to be loaded or unloaded. These fees called ‘detention and demurrage charges’ can add up to hundreds of thousands of dollars.”

In recent conversations and correspondence with some industry contacts (they are also friends), I was able to get some interesting, and fresh, takes, on what it means for the railroad and ocean shipping sectors, respectively.

On the railroad side, Brooks Bentz, LM contributing editor and longtime supply chain consultant and practitioner, explained that this EO could be viewed as the continuing saga of shippers vs. railroads, which he noted will likely never abate entirely.

“If you buy the precept that the overall goal is to reduce the cost of transportation for shippers, then it would be beneficial to look at historical trends and see how things have played out,” said Bentz. “Deregulation in 1980 actually drove shipper rates down considerably for a sustained period, while at the same time rail profitability inched its way toward ROIC (return on invested capital) that would help sustain continued—and much needed—investment in infrastructure.”

Bentz also observed that consolidation was a natural outgrowth of the changing competitive environment, as deregulation also radically changed the trucking industry, making it much more competitive.  

“Railroads lost much of their higher revenue from what was generically classified as ‘Merchandise’ traffic as trucks captured greater and greater share,” he said. “The rail industry has morphed over time a greater reliance on bulk commodities, like coal, grain and chemicals and, of course, intermodal (the ‘new’ merchandise traffic).  Virtually all of these commodities benefit from longer single-line hauls and reduction or elimination of interchanges with other carriers.”

What’s more, Bentz cited how perspective is often lost in how and why things reached this point, adding that the other element frequently lost is, while everybody applauds competition, is it’s always much better when you’re referring to someone else’s business.  

“Very few railroads were in favor of deregulation and it took a while to sort out how to make it work to their advantage,” he said. “They ultimately did and it was the key driver of the so-called ‘Rail Renaissance.’ Competitive pressures are brought to bear beyond competing railroads. It’s not easy to find BCOs/shippers that don’t possess a single truck dock or loading/unloading facility. Intermodal competition has long been a fact of life, which becomes evident when comparing market shares between modes. The present kerfuffle over reciprocal or competitive switching is another difficult nut, where the net impact on each of the parties is unclear.  There’s not much question that it produces more competition, so perhaps giving it a try is worthwhile to find out if it’s as good (or bad) as many think. Some sort of pilot program may be in order before a wholesale change is adopted.”

Addressing the EO, as it relates to the ocean sector, Bentz acknowledges it is difficult to make the case that this is even approaching monopolistic behavior.  

“Sure, there’s concentration in the business, but the industry has finally—as did the railroads— started to make a bit of money,” he said. “I do think the steamship companies will find that the mega-ship concept may optimize liner operations, but at the expense of sub-optimizing port and inland operations and the over net benefit is nowhere near what they think it is, when you consider total landed cost.”

Chris Rogers, research director for global trade intelligence firm Panjiva, said that up until this EO was issued, the likelihood was that stemming from the FMC’s detention and demurrage review that there might be some requirements to post more information.

“If you take a literal reading of the [EO], that is all that is going to happen,” he said. “However, if the FMC feels more pressure act not just on the export side but also to look at import charging and the way the container lines carry out their business, particularly in regards to alliances, then they could see more significant upheaval.”

Interestingly enough, the FMC said on July 12 it has inked a Memorandum of Understanding with the Department of Justice to work more closely on antitrust matters, to foster increased cooperation and communication in their respective oversight and enforcement responsibilities of the ocean liner shipping industry and also established a framework for the FMC and the Antitrust Division to continue regular discussions and review law enforcement and regulatory matters affecting competition in the shipping industry. 

Rogers said that is akin to the premise that one does not knock on the door at the police station unless you think you have a crime to report, adding that may signal that the FMC is taking a more hawkish stance towards the sector.

“I would not try to pre-judge what the FMC is going to do or what it might find out, but I think clearly the container lines can pretty much do what they want so far, which is in a competitive market, and they will have to have more of an eye on regulation over the second half of the year,” said Rogers. “Nobody complains about the cost of shipping when the cost of shipping is falling.”

What happens next for both the freight railroad and ocean shipping sectors will be interesting, for sure, but, at the same time, one needs to remember that the EO did not include concrete mandates, or requirements, but that does not mean that things won’t be changing either, at some point. To what degree and level is what will be most interesting, it seems.