Crisis On The Rails: Pilot Flying J CEO on Rail Mandates & Fuel Costs

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  • Source: UncoverDC
  • 09/19/2023

The ongoing "crisis on the rails" has paralyzed farmers, leaving them literally "hours away from depopulating herds." The rail crisis, which is "harming the nation's economy," impacts the supply chain of U.S. agriculture, energy, and shipping across the board. To address the severe situation, the Surface Transportation Board (STB) held a hearing in late April, giving those affected the opportunity to speak. Pilot Flying J CEO Shameek Konar spent his time during the extensive testimony revealing the unprecedented difficulties his company faces following unheard-of restrictions imposed by Union Pacific Railways.

Operating the largest network of travel centers in the United States, Pilot Flying J was founded by James A. Haslam II in 1958. Headquartered in Knoxville, TN, the company accounts for nearly 20 percent of the nation's over-the-road diesel supply and 30 percent of the diesel exhaust fluid (DEF) supply. Threatened by a severe reduction in rail service allocations, the company heavily relies on the railroads to deliver its product.

Rail Restrictions Imposed on Pilot Flying J by Union Pacific

At the Apr. 26 & 27 hearing, Konar explained that on Apr. 13, Pilot Flying J was informed by Union Pacific Railways (UP)—whose largest shareholders are Vanguard and Blackrock—that the company was "required to reduce shipments by 26 percent." Then, in subsequent conversations, UP asked them to reduce rail shipments even further by 50 percent or face embargoes. According to Konar, no other companies are being instructed by UP or any other railroad to reduce their shipments to the extent that UP demands Pilot Flying J. 

Executives from major U.S. railroads also attended the hearing. Union Pacific Railway Company (UP), BNSF Railway Company (BNSF), CSX Transportation (CSX), and Norfolk Southern Company (NS) made clear that higher volumes and labor constraints presented obstacles to providing better rail service. With long-standing complaints from shippers of extensive delays, unfilled orders, and other significant and rising disruptions, the railway carriers stated individual strategies to build up the industry workforce and restore service.

Concerned over the workforce shortage, on Apr. 7, when announcing its upcoming hearing (download Notice of Public Hearing here), STB underscored that over the last six years, Class I railroads have collectively reduced their workforce by 29 percent—cutting nearly 45,000 employees from the payrolls. Board Chairman Martin J. Oberman commented on the impact of the significant cuts. He remarked:

"In my view, all of this has directly contributed to where we are today—rail users experiencing serious deteriorations in rail service because, on too many parts of their networks, the railroads simply do not have a sufficient number of employees."

Screenshot / Class I Railroads / Researchgate

Union Pacific, which plans to remove anywhere from 2% to 4% of its cars from the network, reported at the hearing that it is asking shippers with the highest impact on its network, including Pilot Flying J, to reduce inventory as the railroad is dealing with over 20,000 excess cars on its grid. With a forecast of "the better half of the year to de-congest the network," Eric Gehringer, executive vice president of operations at UP, noted:

"We are taking an aggressive approach to reducing operating inventory—more aggressive than in the past."

Still, Konar remarked that, based on conversations with UP, the heavy restrictions imposed on Pilot Flying J do not "fairly and proportionately" allocate the supply issues because Pilot has not increased the total number of cars it received every month since January. Instead, Konar said UP's numbers are "based on a simplistic approach of looking at those shippers who have increased their numbers of shipments between January 2022 and March 2022." He said this does not consider the overall number of shipments received at Pilot's facilities, which have "remained static over this period." Noting the total number of cars has stayed the same, Konar stated:

"What has actually happened is Pilot has become a shipper for some cars that we were not shippers before. So our facilities are still receiving the same number of cars. It's just the name of who's shipping has changed because we've taken control over some of the cars because of the issues we've had with the railroads, so that we have the optionality to deliver these cars and markets that they can pay.

We understand and appreciate that the current market conditions are imposing significant constraints on the railroads, and we're committed to help ease this congestion. However, 26 to 50% reduction in our allocations will have substantial consequences for the markets."

Consequences of Union Pacific Mandate on Fuel Supply & Prices

Konar pointed out that Union Pacific's mandate will significantly impact the availability of fuel and fuel prices. As previously mentioned, Pilot Flying J supplies roughly 30 percent of the DEF in the country. The trucking sector of our economy depends on DEF—all trucks manufactured after 2010 cannot operate without it. He noted Pilot J operates, "if not the largest, one of the largest DEF supply networks in the country." After investing millions to supply DEF at its diesel pumps over a decade ago, Konar said it has 23 rail-served facilities that make the DEF and 18 trans-loaders. 

Moreover, of the 300-plus million gallons of DEF that Pilot supplies to the industry every year, 74 percent is moved by rail. According to Konar, UP's restrictions will prevent Pilot Flying J from keeping many markets adequately supplied with DEF, causing shortages that will sideline trucks and diminish trucking capacity.

Konar explained that a single rail car carries 21,500 gallons of DEF on average, with each truck generally adding 7 gallons of DEF every time it fills the tank. Thus, each rail provides "3000 trucks worth" of DEF which means every rail car that gets missed in terms of DEF delivery will reduce trucking potential by 5 million miles. He clarified further, "because you've got 3,000 fills (trucks) and DEF blends with diesel at a ratio of 2.7% per hundred gallons—so 2.7 gallons of DEF allows a truck to use 100 gallons" of fuel.

And the significant supply chain issues don't stop with the rail cars. A reduction in Pilot Flying J freight transported by UP's rails will add further pressure on the trucking sector in general, which relies on DEF. Likewise, a reduction in rail service would impact fuel availability and pricing. On top of that, U.S. diesel inventories are currently 10 to 15 percent below what they have been in the last five years at their lowest point, with some markets in the country in worse shape than others. And, Konar added, with no pipeline alternatives, renewable fuels like biodiesel and renewable diesel move exclusively on rail, ships, or trucks. Fifty percent of Pilot's renewable diesel is transported on rail. Cutting the company's capacity by 50 percent would increase fuel prices in many states and potentially cause some to run out.

Screenshot / Capital Reman / Diesel Exhaust Fluid diagram

UP Reduction and Its Impact Specifically on Gasoline for Cars

For gasoline used in cars to meet the octane requirements by engines needing 87 to 93 octane, gasoline is blended with ethanol to reach the proper octane level. Like biodiesel and renewable diesel, ethanol moves predominately on trucks, ships, or rail. Konar commented in specific markets, like parts of AZ and NV, Pilot has developed ethanol unloading facilities in partnership with Union Pacific. With 70,000 trucking fleet customers, Pilot also serves the majority of these markets. According to Konar, cutting the company's ability to ship ethanol from its plant in Nebraska to these markets by 50 percent would "substantially reduce the amount of gasoline available in these markets because we can't blend ethanol into the gasoline." With gasoline prices up 48 percent since Apr. 2021, this move would result in additional increases. 

Wrapping up his 8-minute testimony, Konar reiterated that Union Pacific's "disproportionate and flawed" logic would wreak havoc on DEF supply, stranding countless trucks. Furthermore, the negative impact on diesel and gasoline supply and high fuel prices, coupled with an already challenged supply chain, would occur "during times that we cannot afford it."

Results of the Surface Transportation Board Hearing

Leary of the railroads' plans to fix the "crisis on the rails," federal regulators remained skeptical at the April hearing on whether to take further steps to intervene and provide relief for shippers. STB Chairman Oberman questioned whether the railroads were sufficiently prepared to handle a surge in demand after years of cuts to the workforce, including just as the pandemic started. Following Union Pacific's testimony, Oberman said:

"I'm having a lot of trouble with this—that you've dropped thousands of employees when the pandemic began, apparently without any notion that you might have to gear up."

Ten days after the hearing, the STB announced it would direct certain railroads—BNSF, CSX, Norfolk Southern (NS), and Union Pacific (UP)—to submit service recovery plans as well as provide additional data and regular progress reports on rail service, operations, and employment. The decision "Urgent Issues in Freight Rail Service-Railroad Reporting" (download here), which requires all Class I carriers to submit several specific reports, also requires BNSF, CSX, NS, and UP to hold bi-weekly conference calls with Board staff. The carriers must submit recovery plans, progress reports, and historical data in the calls.

Prior to the April hearing, the Board heard several reports from the Secretary of Agriculture, Senator Shelley Moore Capito (R-WV), and other stakeholders about the "serious impact of these [unreliable rail] service trends on rail users, particularly shippers of agriculture and energy products." Chairman Oberman indicated other measures might follow in a press release announcing the Board's immediate decision on the serious rail crisis, declaring:

"Our freight rail service hearing highlighted the grave concerns of shippers and others regarding freight rail service. While the railroads have faced certain challenges over the last few years, the evidence produced at last week's hearing is overwhelming that the railroads' long-standing practice of reducing operating ratios by cutting employment levels, mothballing locomotives, and eliminating other essential resources are the central reasons why farmers have been hours away from depopulating herds, manufacturing facilities have reduced operating hours, and shippers cannot get their products to market on time or receive essential raw materials for their companies. These failures are harming the nation's economy and, in my view, are contributing to the inflationary forces affecting food and fuel in particular."

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