IFRS Foundation
March 14, 2017

What’s the Price of Safety? One Rail Company Assigns a Dollar Value

Transportation Sector Analyst, SASB

A rail company offersdiscounts for shippers using safer train cars. Will it incentivize shippers to make the switch?

8377057876_2dcf874fed_bBNSF eastbound empty oil train at Essex MT. Photo credit: Roy Luck

Starting in April, BNSF Railway Co will start offering a $300 discount per carload to ethanol shippers that use newer, safer train cars. By regulation, ethanol shippers are not required to upgrade train cars until 2025, but reducing the risk of punctures and accidents appears to have a monetary value to BNSF. The company is willing to forgo $300 of revenue per carload for a lower risk of accidents. While no other major rail companies are offering similar discounts, BNSF stated that it is willing to increase the discount, if the current level does not provide enough incentive to switch to newer cars.

Improved Technology is Worth the Cost

The older train cars, DOT 111s, have been involved in 16 accidents, numerous fires, and 48 fatalities in the past decade in the U.S. As of September 2016, newer cars accounted for only 6 percent of the 35,000 plus ethanol fleet. Newer cars are more expensive to lease, costing about $450 more per month than DOT 111 cars. At the current rates, switching to newer cars could be cost-beneficial for ethanol shippers using BNSF rail, if cars are used for just more than one trip in a month.

The Human Element in Improving Rail Safety

The safety of rail cars is only one of the many factors that have an impact on accident risk. The health and well-being of workers in the industry are also linked inextricably to the safety performance of the company. Rail workers are likely to be impacted by accidents, e.g. in 2016, there were 14 worker fatalities in the rail industry. Additionally, the Federal Rail Administration found that human factors were responsible for 38 percent of U.S. train accidents in 2015. Maintaining miles of railroad tracks and equipment to the highest standards of safety presents additional safety governance challenges to the industry.

A healthy workforce, strong safety culture, a thorough and systematic approach to safety, risk management (including emergency preparedness and response), and operational integrity at all levels of the organization can help lower the probability and magnitude of rail accidents.

Transparency on Performance

SASB has identified the following leading and lagging indicators to illustrate safety performance of rail companies:

  • Number of accidents and incidents
  • Total recordable injury rate, (2) fatality rate, and (3) near miss frequency rate
  • Number of (1) accident releases and (2) non-accident releases (NARs)
  • Number of Federal Rail Administration (FRA) Recommended Violation Defects
  • Frequency of internal railway integrity inspections

Among top U.S.-listed companies, only about half used any kind of quantitative metric to describe their safety performance in annual financial filings; the rest used qualitative narratives. In other words, there is no measure of risk exposure for half of the top companies; and the metrics used by the rest are not necessarily comparable.

Disclosure on recommended metrics would address this pain point for investors by allowing them to benchmark performance and compare safety risk exposures.

Nashat Moin is SASB’s Transportation sector analyst.