Off the rails

The relationship between UPS Inc. and the nation's railroads goes back decades. Like all long relationships, it has been marked by high expectations, successes, disappointments, major investments of time and money, and a fair amount of tension. Through it all, UPS remains a core rail customer, though it is believed to no longer be the largest individual user, a status it held for many years.

The up-and-down marriage could face its severest test yet. The catalyst is language in a tentative five-year labor contract between Atlanta-based UPS and the Teamsters union that would divert traffic from the rails to an expanded network of two-person over-the-road sleeper teams run by UPS and staffed by union drivers. The contract's terms do not quantify the level of diversion, but the Teamsters have characterized it as significant.

In 2017, UPS moved 750,000 pieces of equipment, most of that 53-foot boxes, in intermodal service and spent about $1 billion with the rails, according to estimates from SJ Consulting, a consulting firm. UPS, which zealously guards its competitive data, would not disclose how much intermodal business it gives the railroads. It also would not comment on the contract's language because it was still in proposal form as of the end of August when this story was written. UPS's 256,000 unionized small-package workers are expected to vote sometime in October to ratify the five-year master contract, along with its numerous regional and local supplements and riders. None of the four major east-west railroads—Union Pacific Corp., BNSF Railway Co., CSX Corp., and Norfolk Southern Corp.—would comment for this story.

What is known is that UPS has pledged to recruit 2,000 drivers for the expanded sleeper network, starting with 200 drivers by the end of calendar 2019 and the remainder spread out, in one-quarter annualized increments over the contract's life, until the threshold is reached. Sleeper teams are not new to UPS, and each of the recent Teamster contracts has given the company more flexibility to deploy them, according to a source close to the company. This means UPS can improve its transit times through more direct routings and can do so in an economical fashion—no small feat in light of the cost headwinds of moving goods via truck versus rail. UPS is investing billions to expand and automate its domestic package-sorting hubs, giving it the ability to build loads more efficiently, according to the source. This could make additional sleeper teams valuable for increased point-to-point and hub bypass routings, the source added.

UPS has traditionally been one of the railroads' most lucrative intermodal customers. It has also been one of the most demanding. For its premiums, UPS has expected "priority" service on train loading, arrival, and unloading. That has not always come to pass, however. Rail reliability, though it has notably improved through the years, has not always been consistent. The notorious Chicago chokepoint, where all North American railroads converge, has long been a burr in the saddles of UPS and many rail customers.

Taking no chances, UPS would position its ground fleet almost at the railhead in order to be first in line for unloading. Many are the anecdotes of intermodal executives getting earfuls from UPS over service delays that would throw its highly calibrated network out of kilter.

UPS's frustration with rail service has been amplified in recent years as e-commerce delivery requirements put greater stress on provider networks and as Memphis, Tenn.-based FedEx Corp., UPS's chief rival, touts faster ground transit times in many U.S. lanes. In an environment with less margin for delivery error, UPS may feel it needs to boost its reliance on teams that can travel as far as 1,000 miles so it maintains better control over its deliveries and feels more confident about hitting its transit times.

"Railroads, on their best day, are competitive with single-driver trucks," said Ted Prince, chief operating officer of Tiger Cool Express LLC, an Overland Park, Kan.-based provider of temperature-controlled intermodal service for produce and food products. Prince said the contract language is UPS's form of tough love, noting the company values its rail alliances and wants the railroads to "get back to where they used to be."

THE AMAZON EFFECT (REDUX, REDUX)

The railroads can ill afford to lose a meaningful volume of UPS business. Not only is the traffic abundant and profitable, but UPS's consummate operating knowledge is an important tool in helping the railroads improve their network flow. The latter factor could be crucial as Amazon.com Inc. becomes a more prominent intermodal user—one with the potential to replace UPS in the pantheon of high-volume users. The Seattle-based e-tailer is investing billions of dollars to develop a transport and logistics network, and intermodal is seen as a key element of that strategy. However, Amazon is still climbing the logistics learning curve, and its relative lack of operating acumen, combined with its growing volumes and incessant price demands, adds unwanted friction to the intermodal chain, according to an industry executive who asked not to be identified.

There have been more than a few episodes where intermodal train speeds and dwell times have been gummed up by Amazon shipments that are brought late to origin ramps and by shipments that sit at destinations for days, and sometimes weeks, before they are picked up and hauled to a warehouse, the executive said. "Amazon is like an unguided missile" as far as service reliability is concerned, the executive said.

What's more, Amazon expects the type of high-end service that is normally reserved for a customer like UPS but wants access to the lower rates typically obtained by more traditional trucking firms that don't have such time-sensitive transit needs, the executive added. Amazon did not respond to a request for comment.

UPS'S CHALLENGES

UPS faces several challenges of its own in maintaining strong relationships with the railroads. It can build unit trains dedicated only to its loads and position the traffic to run on high-density rail lanes. However, consistently executing such a feat is difficult even for a business of UPS's prowess.

Another is doing business with railroads that may have become complacent in regard to intermodal and may not have an all-in attitude toward investment in the category. Of the six primary North American railroads—the four U.S. rails and Canadian carriers Canadian National Inc. (CN) and Canadian Pacific Railway (CP)—only BNSF, Norfolk Southern, and CN have demonstrated a willingness to invest "in a big way to secure intermodal growth in units of traffic," according to Jim Blaze, a long-time rail consultant and author. CSX, in particular, shows little interest in cultivating intermodal business, Blaze added.

Blaze said that UPS should focus its team-driver strategy on lanes where it "detects intelligence suggesting the rail carrier in a lane or two is just too profitable and happy with its current intermodal results."

With intermodal business strong in general so far this year, the ramifications of the UPS-Teamster contract language may not yet be on a railroad's radar. Rail executives may not say publicly that they are concerned by the threat of UPS's diversion. But costing experts deep in the rails' corporate bowels may be revising their spreadsheets to account for a possible hit from the loss of UPS traffic. Accustomed to seeing numbers that include dependable, high-volume, and high-margin traffic, they might start asking some questions and raising red flags. As one source said, "They don't want to lose UPS."