Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, December 27, 1994 TAG: 9412280030
SECTION: EDITORIAL PAGE: A7 EDITION: METRO
SOURCE: DAVID R. GOODE
DATELINE: LENGTH: Long
The irony is that our story - one of the greatest comeback stories of the late 20th century - is also one of the best-kept secrets of American business. Ask anyone on the street about the railroad industry today, and you'll probably hear, "I like trains. It's too bad the railroads are dying." But in the very next breath, they're just as likely to complain about how often they have to wait at train crossings.
Fourteen years after deregulation, a lot of people still haven't got the news: We are in a new age of railroading.
It really isn't surprising that they wouldn't know. The railroad is one of the great invisible forces in our economy. Why should it matter to you whether the car or the computer you just bought moved from factory to market over steel rail or asphalt? Why should it matter to you that the beer you just pulled out of the refrigerator is cold only because a railroad has been hauling coal to your power company?
Yet such questions do affect the person on the street - a lot more than do the proceedings of the O.J. Simpson trial. The well-being of the nation's railroads have everything to do with our standard of living - and our nation's competitiveness. And to the degree that the industry is regulated, the well-being of our railroads is a public-policy issue.
We saw popular acknowledgment of that two summers ago, when a labor dispute shut down the nation's rail system for a couple of days. Congress reluctantly stepped in to settle the issue. A lot of noise was made about how crucial rail transport was to the economy, but as soon as the trains started rolling, the public quickly found other fascinations.
But in this short period, we did find some interesting things. For example, the chicken farmers of the Southeast, who rely on us for feed grain, work on the same just-in-time inventory principle as the auto manufacturers. More than a one- or two-day strike, and the chickens would starve just as surely as the auto plants would shut down. Our entire U.S. economy has come to depend on a low-inventory, just-in-time system based on transportation efficiency - rail, truck and air.
Why at this point in history are we seeing a renaissance of America's oldest industry?
At the industry's low point - the 1970s - nearly a quarter of the nation's rail mileage was being operated in bankruptcy. Parked freight cars were falling off the track in rail yards because the cash-starved railroads were deferring maintenance. This happened often enough to be given a paradoxical name: a standing derailment.
The industry got into that state because it operated under regulations written when the internal-combustion engine was a novelty. The world changed; the regulations didn't. Simply changing a rate or a route in answer to competition from the highway - or another railroad - was a months-long process. If it involved a court battle it could stretch into years. Meanwhile, truckers steadily siphoned freight off the rail.
And, as in all regulated industries, managers regarded regulation as another word for protection. We acted accordingly. Words like "customer service" and "quality" were not part of the railroad lexicon.
During all this, I am quick to add, Norfolk Southern's predecessors, the Norfolk and Western and the Southern railways, were notable exceptions. Norfolk and Western served a stable coal industry and the industrial Midwest. Southern served the growing economy of the South and developed a reputation for innovation. Both were tightly managed, cost-conscious railroads. Both made money.
The industry in general, however, had become a basket case. One railroad after another folded. In 1976, Congress created Conrail from the remains of some. There was talk of nationalizing the entire industry.
The turning point was the Staggers Act of 1980. It stripped away enough regulation to enable the railroads to act like businesses. It gave us much greater freedom to set prices, manage assets and offer new services. It also threw us into the caldron of competition. It was a shock, and many of us were forced to address competition - fast and hard - for the first time.
Fortunately, the railroads responded by acquiring the discipline that a competitive market demands. The industry restructured, shedding some 52,000 miles of road and a quarter million employees. Ton-miles per employee more than doubled. Labor rules were addressed - at a painfully slow pace, but they were addressed.
We passed these efficiencies on to customers. We had to. We were now in the marketplace and fighting for our lives. Since deregulation, inflation-adjusted rail rates have fallen by more than 30 percent. At the same time, traffic grew, revenues increased and the railroads prospered. Not all survived, but those that did became strong companies.
Think for a second about that rate curve. Since 1980, rail rates are down, while the product is significantly better. What would our political life be like if you could say the same for health-care costs?
In 1993, Class I railroads moved a record 1.1 trillion ton-miles of freight with 57 percent fewer employees, 30 percent fewer miles of track, 36 percent fewer locomotives and 48 percent fewer freight cars than in 1980 - a remarkable record.
There's a public-policy lesson to be learned from this: Deregulation is good. Do more of it. Resist attempts to reregulate.
If deregulation is so good, you might ask, why didn't it work similar wonders for other industries - the airline industry, for example?
One fundamental difference is that the airline industry was deregulated at a time when it was a growth industry, while the rail industry was mature and saddled with overcapacity.
Deregulation forced us into competition armed with a bloated plant and inefficient labor. Survival demanded managing for productivity increases. Those smart and tough enough to do it emerged as efficient, tough competitors.
The airlines, on the other hand, could seize growth almost without effort. Management emphasis was not on productivity, but growth. The airlines grew beyond their capability to meet the demand curve. It might be argued that they've now got themselves where the railroads were in 1980, and they may be digging out.
In the railroads' quest for efficiency, the low-hanging fruit has been picked. What's driving them now? In a word, service. The railroads gave scant attention to customer service in the dark days of regulation. Under conditions that made it unthinkable to compete with trucks in many markets, there wasn't much incentive to try.
As we emerged blinking into the glare of competition, we learned fast what we had to do to win back lost traffic and tap new markets. No longer could we afford to schedule trains at our own convenience and hope our shippers found it convenient, too. This is what led the railroads to embrace total quality management. Its emphasis on meeting customer expectations was exactly the focus we needed.
We're learning how to better tap the knowledge, talent and creative energy of our people to better serve the customer. In this industry, with its military tradition and emphasis on rules discipline, the opening of two-way communication channels in our work force has been a fascinating study in itself, and a continuing story that has much to do with productivity improvement.
It has made me a true believer in quality management. I've seen it work.
David R. Goode is chairman, president and chief executive officer of Norfolk Southern Corp. This article is excerpted from remarks earlier this year at the Massachusetts Institute of Technology Center for Transportation Studies.
by CNB