railroad capacity issues talking freight seminar

RAILROAD CAPACITY RAILROAD CAPACITY ISSUESISSUES

Talking Freight SeminarTalking Freight Seminar

By:Robert H. Leilich,Railroad Operations ConsultantSpringfield, VA(703) [email protected]

Washington, DCSeptember 21, 2005

Prepared by R. Leilich – 9/05

In 2000, the US freight system moved 14 billion tons of freight valued at $11 trillion, over 4.5 trillion ton-miles.

Uni

ts

Source: Cambridge Systematics, Inc.

Between 1990 and 2000, high price / service Between 1990 and 2000, high price / service modes grew the fastest. Between 2000 and modes grew the fastest. Between 2000 and 2020, total freight is forecast to grow by 2020, total freight is forecast to grow by 57%. Rail traffic grows, but still lags truck . 57%. Rail traffic grows, but still lags truck . Service appears to be worth the higher price.Service appears to be worth the higher price.

Source: Cambridge Systematics, Inc.


Congestion Hotspots - Freight Congestion Hotspots - Freight Analysis Framework (FAF) Analysis Framework (FAF)

Highways 1998Highways 1998


By 2020, It Only Gets By 2020, It Only Gets Worse In Every Section of Worse In Every Section of

the Country...the Country...


Railroads have similar problems and are even turning away some business

Major airports are at capacity with little or no room to grow


Our Nation’s Our Nation’s Transportation System Transportation System Is At Or Nearing CrisisIs At Or Nearing Crisis

Auto commuters in big cities spend 2 to 8 days a year stuck in traffic – and its getting worse.

Highways between major cities are heavily congested.


How much How much can the can the system system handle?handle?


On Railroads, As Traffic On Railroads, As Traffic Increases...Increases...

Train delays increase (average speed declines)

Recovery time decreases Productivity Suffers “Slots” to run extras or

new schedules decline Maintenance windows

decrease (and MofW costs increase)


40

60

80

100

120

140

160

180

200

220

240

260

280

300

320

YEAR

IiND

EX (1

982

= 10

0)

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

FREIGHT TRAIN MILESPER MILE OF ROAD

MILES OF ROAD OWNED

AVERAGE COMPOUND GROWTHRATE 1982 - 2003 = 4.3%

AVERAGE COMPOUND GROWTHRATE 1982 - 2003 = - 2.2%

REVENUE TON-MILESPER MILE OF ROAD

AVERAGE COMPOUND GROWTHRATE 1982 - 2003 = 5.6%

AVERAGE VELOCITY - MPH

How Bad Are the How Bad Are the Railroads Problems?Railroads Problems?Source: STB / ICC Transport Statistics and AAR Railroad Facts

(Almost Identical to Miles of Track)


Railroads are Railroads are Approaching the Limits of Approaching the Limits of

Practical CapacityPractical CapacityWhat are the choices?What are the choices? Build more trackBuild more track Change operating Change operating

practices and schedulespractices and schedules Drop least profitable Drop least profitable

traffictraffic


$$ for Reinvestment$$ for Reinvestment

0

5

10

15

Year

$$ -

Bill

ions

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Capital Expenditures

Funds Available for Reinvestment

Funds Shortfall

Even since railroads won economic Even since railroads won economic freedom in 1980, internally freedom in 1980, internally generated cash has been generated cash has been

insufficient to meet capital needsinsufficient to meet capital needs

Profits Don’t Cut ItProfits Don’t Cut ItThe Gap Persists

0%2%4%6%8%

10%12%14%

91 92 93 94 95 96 97 98 99 00 01

Railroad Cost of Capital

Railroad Return on Investment


Let’s Do Some Let’s Do Some Simple MathSimple Math

Facts (STB / ICC Transport Statistics): Average velocity 1990-1993 = 23.7 MPH Average velocity 2003 = 20.0 MPH Road train hours 2003 = 25,849,050 Freight train miles 2003 = 515,919,000 Total car-miles 2003 = 35,554,941,000 Loco unit-miles 2003 = 1,353,884,708


From These Facts, We From These Facts, We Derive…Derive…

2003 vs 1990-1993 extra train hours (due to average velocity difference) = 4,076,940

2003 average unit-miles / train mile = 2.62 2003 average car-miles / train mile = 68.9


Toss in Some Toss in Some Assumptions…Assumptions…

Extra train hours are related to capacity delays

Average loco unit value = $1,000,000 Average car value = $30,000 Cost of capital = 9 percent Idling fuel = 4 gal/hour at $1 per gallon

(Remember – this is 2003!) Labor value = $100 per hour


Some More Some More Assumptions…Assumptions…

Annual in-revenue-service loco unit hrs (70% utilization) = 6,132 hrs/yr

Annual in-revenue-service freight car hrs (50% utilization) = 4,380 hrs/yr

Loads per car per year (22 day cycle) = 16.6 loads

Average revenue per load = $1,500


More Calculations More Calculations From Facts and From Facts and

AssumptionsAssumptions

Loco unit cost / service hr Capital = $5.44 Cost of capital = $.49 Fuel (idling) = $4.00Freight car unit cost / revenue service Capital = $.20 Cost of capital = $.02Average annual revenue per freight car =

$24,886


From All This We Get Annual From All This We Get Annual Velocity Penalty (Capacity Velocity Penalty (Capacity Delay) Costs…Delay) Costs…

COST ITEM $(MILLIONS)Locomotive

Capital & Capital Cost

63.4

Fuel 42.8Labor 407.7

Frt Car Capital & Capital Cost

59.9

TOTAL 573.8


What $573.8 Million What $573.8 Million Translates To…Translates To…

11 percent of 2003 NROI “Loss” of 1,750 locomotive units “Loss” of 64,150 freight cars “Loss” of $1.6 billion in revenue “Loss” of 5,400 operating employees

(@1500 on-duty hours / yr) Equal to cost of adding 230 miles of

new main line track (@$2.5 million per mile)


Now, Assuming Current Now, Assuming Current Trends…Trends…

Freight train miles will double by 2020 – and double again by 2036 (four times 2003 levels) – even counting continuing productivity improvements

And… The analysis does not count passenger or

commuter traffic The greatest demand for capacity is in

and around major metropolitan areasWith little additional room on the With little additional room on the highways or in the air – who’s highways or in the air – who’s going to handle the traffic?going to handle the traffic?


The Real Dilemma...The Real Dilemma...If sunk (existing) If sunk (existing) infrastructure investment infrastructure investment can’t earn the current cost can’t earn the current cost of capital, it is even less of capital, it is even less likely that new likely that new infrastructure investment infrastructure investment will. The revenue will. The revenue inadequacy of railroading is inadequacy of railroading is really clear when the need really clear when the need to invest exists. to invest exists.


Let’s Look at a Sample Let’s Look at a Sample CaseCase

Cost - $3.5 million per mile to build an additional signaled main tracko 40 percent equity investment (18%

pre-tax)o 60 percent debt financing (9% pretax)

25 year life

Under the above simple assumptions, the Under the above simple assumptions, the annuity capital cost is $465,800 per mile.annuity capital cost is $465,800 per mile.


What Does It Take to Recover What Does It Take to Recover That Cost?That Cost?**

Revenue – $2.12 per loaded car-mile Profit margin (EBIT) – 15% Ratio – loaded / total car-miles - 61% Train size – 90 cars (assumption) Loaded cars/train – 54 "Profit" / train- mile – $17.46 Number of additional trains required to earn annuity

– 26,680 Additional trains per day – 73 – THIS WON’T FLY

*Averages from Year 2000 STB data


If railroads are the low cost If railroads are the low cost service provider, why is it they service provider, why is it they cannot price to earn their cost cannot price to earn their cost of capital? If laying rail adds of capital? If laying rail adds more freight and passenger more freight and passenger transportation capacity per transportation capacity per dollar, why aren’t the dollar, why aren’t the economics there?economics there?

Given the non-level playing Given the non-level playing field where competing rights of field where competing rights of way are publicly provided, the way are publicly provided, the market isn’t willing to pay the market isn’t willing to pay the price.price.


Whose job is it to resolve Whose job is it to resolve transportation capacity transportation capacity

issues?issues?

FederaFederall

Local

StateState

Private Private //

usersusers

All need to All need to play a role play a role to keep the to keep the

stool stool standingstanding


While Public / Private While Public / Private Partnerships Are a Partnerships Are a

Solution...Solution...

Public Benefits + Private Benefits

Public Investment + Private Investment

=

WIN / WIN


There Are Often There Are Often MisunderstandingsMisunderstandings

Railroads often do not offer convincing evidence of the public benefits of adding capacity

The basis for sharing capital costs are difficult to establish Indirect benefits (such as safety) are difficult to quantify

and justify When traffic corridors near capacity limits, the value of

existing infrastructure increases New services may require additions to capacity - not

necessarily just when the limits of practical capacity are reached

Railroads want to reserve excess capacity for their future use


Public/Private Rail Partnerships Public/Private Rail Partnerships Require:Require:

Clear understanding of public benefits Clear understanding of private benefits Preservation of private rail management

rights Private sector commitment Political constituency Public involvement and support

Commuter rail and the Alameda Corridor are Commuter rail and the Alameda Corridor are examples of public partnerships that appear to work.examples of public partnerships that appear to work.

railroad capacity issues talking freight seminar

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