Rail Director January 2025 - Embracing reinvention and risk

2024 brought some good news stories for increasing modal shift. Tesco increased its volumes and introduced its 10th rail service, Freightliner launched a new Tilbury-Trafford Park service, and DP World formally launched its modal shift scheme, offering financial incentives for customers to move intermodal boxes via rail instead of road - a scheme that has already achieved significant success. These achievements are a testament to the dedication of the individuals involved and show what can be done with the right ambition.

Last year, we also saw several long-standing flows come to an end. Notable among these were the Haverton bitumen, Scottish Ineos oil, South Wales steel, and the regular Ford Dagenham to Valencia service. The most high-profile exit, however, was Royal Mail - a rail freight customer for nearly 200 years - ceasing its rail operations entirely. This is especially striking given that volumes in the courier, express, and parcel sector have had an annual growth rate of 7.5 per cent since 2016, underpinned by ever increasing online retail sales. Royal Mail had previously withdrawn from rail in 2003, only for GBRailfreight to revive the services in 2004, however it had mainly been a DB Cargo account since then. This time round, however, the decision feels more final, with the Class 325 units already being sent for scrap.

Looking ahead, there are tectonic shifts on the horizon. Many industries are experiencing technological disruption and pressure from external forces, and the rail freight sector is no exception.

Track access charges for freight operating companies (FOCs) are set to increase by 20 per cent in nominal terms during Control Period 7, alongside rising energy and overhead costs. Meanwhile, advancements in HGV technology and evolving customer demands in the logistics sector are expected to exert significant pressure on the rail freight industry over the medium term. Emerging electric and autonomous vehicle technologies could dramatically reduce the cost base for road hauliers within the next decade. Whether this transformation occurs within a decade or sooner remains to be seen – but its arrival is inevitable.

In the intermodal sector, Maersk recently announced it will no longer use the Port of Felixstowe for larger vessels, opting instead to relocate part of its operations to DP World’s London Gateway from February 2025. This transition presents a significant challenge for freight operating companies(FOCs) and Network Rail. The already constrainedNorth London Lines, where freight services must be pathed between an intensive and fragile metro-style passenger timetable, may struggle to provide additional rail capacity to support such change. This could impede DP World’s ambitious goal of achieving a 40 per cent share of its on-rail volume by 2026.

Government-led net zero policies are driving a shift away from traditional, fossil fuel-intensive industries, forcing them to either adapt or face closure. As a result, the rail freight sector may be on the cusp of consolidation, with a growing reliance on intermodal and aggregates over the next decade and beyond.

Focusing on the new

This year, we will see the Stadler Class 93 enter service, with the 99s due towards the end of the year. These locomotives are designed to offer operators a step change in performance, reliability, utilisation and efficiency, however the industry is struggling to comprehend that new locos cost three times as much as a 66 to lease. To us, that’s like comparing a Douglas DC-3 against an Airbus A320Neo.

Whilst the FOCs and rolling stock companies (ROSCOs) are familiar with the 66’s, and have largely built their business models around its capability, they are approaching 25 years old. Some have had major engine rebuilds deferred; you only need to look at the national operations log before this is evident. The reliability of the older 66 variants is questionable, and whilst a 66 can move mountains (albeit slow), on a railway where the average age of passenger fleets is decreasing (avg age of 17 as of October 2024) - it is going to be a lot harder to find paths on some routes in future. We think this will ultimately hinder growth.

To address this threat, FOCs must make quantum leaps in both technology and operations. Simply introducing new locomotives won’t be enough to keep up with road technology advancements over the next decade and beyond: the whole rail freight sector must look to be more resilient, market-responsive, and future-oriented. In our view, there are five critical areas where FOCs could disrupt from the inside to help drive innovation and growth.

1: A focus on developing new products and services‍

Imagine a railway that could operate 90mph+intermodal services hauled by modern, state-of-the-art electric locomotives and wagons with distributive power. In 2024, Network Rail’s advanced timetable team undertook some fantastic horizon scanning on key freight routes and found enough white space on the graph for an additional two trains per hour... if faster freight was a reality. This is just one example where advancement in historic operating procedures might lead to a step change in asset utilisation — thus reducing the cost of rail freight operations and opening up new opportunities. Combined with new solutions and technology that reduces transshipment times at terminals, rail certainly has the ability to penetrate mature and high-volume markets such as express parcels, pallet networks and cold chain logistics. This will, of course, require both public and private sector investment. If the rail sector is serious about achieving growth, we have to look beyond what we’ve always done.

2: Claim more of the supply chain‍

FOCs are used to doing one thing well - that is moving trains from A to B over long distances. Their presence in other links of the supply chain is often limited, and as a result, margins are extremely low (circa3-5 per cent). Instead, freight forwarders manage intermodal shipments, while other independent road hauliers manage first and last-mile services. It might be time for FOCs to get out of their operational comfort zone to pursue higher margins and improve profitability. For example, a FOC could diversify into the management of rail freight terminals, associated warehousing, and road haulage to offer an integrated port-to-door service. We are already seeing shipping lines making similar moves. Last year,MSC acquired UK haulier Maritime and iPort rail freight terminal in Doncaster. Prior to this, Medway (a subsidiary of MSC) made a series of strategic investments including the acquisition of Portuguese rail freight operator, CP Carga.

3: Prepare to embrace automation

‍Autonomous freight is getting closer every day. Major UK port owners such as Hutchinson at Felixstowe have already deployed fleets of autonomous tractor units to work quayside. Platooning, in which one driver controls several following trucks, is being tested in multiple locations and may soon be a commercial reality. Automated rail wagons are equally possible; the US and Europe are halfway there. ParallelSystems, a US company founded by former SpaceX engineers, is developing battery electric automated rail vehicles to remove the need for a locomotive at the front. Nevomo in Europe, which recently signed its first contract to retrofit existing wagons with linear motor drive technology, is also aiming to automate rail freight operations in yards. Even if regulation or industrial relations aren’t there yet, FOCs can start getting ready for this shift.

4: Replace assets faster‍

The lifecycle of the average commercial HGV is circa four to five years. This means less maintenance overall and the ability to realise technological advancement much faster. By comparison, locomotives are engineered to last 35 years and wagons 50, meaning they need increasing maintenance as they age. And while they last a long time (great for financiers),they don’t get any better. Perhaps we should replace assets more frequently, to take advantage of the breakthroughs that could cut both operational and maintenance costs.

5: Embrace the introduction of key technologies such as AI and Quantum

‍Artificial intelligence (AI) is already enhancing decision-making by analysing historical and real-time data to predict maintenance needs, optimise train performance, and adjust operations dynamically. RailX, a UK-based digital marketplace to buy and sell intermodal rail freight and associated logistics, can predict when vessels are likely to be delayed, and automatically rebook containers onto alternative rail freight services without human intervention, all powered by AI. Similarly, Quantum computing is another emerging technology for logistics that is being built to process vast amounts of data at unprecedented speeds, enabling operators to tackle complex scheduling, resource allocation, and route planning problems that traditional systems struggle to address. That said, quantum computing is still an unproven technology in many practical applications and remains several years away from being commercially viable. While AI is more mature and already demonstrating value in other industries, its full potential in the rail freight sector is still emerging.

As we reflect on the successes and challenges of the past year, the rail freight sector needs to be more dynamic in a rapidly evolving logistics sector. Strategic planning and rapid innovation will be essential to ensuring a sustainable future and improved margins over the medium term. In short, by embracing reinvention and risk, FOCs can stay relevant now and into the future, and take advantage of the undoubted potential that we all want to see.

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This article was published in Rail Director, January 2025 edition. The full article can be viewed here:

https://issuu.com/raildirector/docs/rdjan25/36