MoreThe surge in business is good news for the railroads-provided they can handle it. But for shippers, that's a fair-sized 'if.' And the downside, if the railroads can't, is gridlocked supply chains. To be sure, the system hasn't collapsed, but there are lots of hard questions that need answers before it does: What is causing the short-term squeeze? What can be done about it? And, what can shippers do in the meanwhile to protect themselves?
The good news is that international shippers have the least to worry about. Class I railroads see international freight as their best arena for long-term growth, particularly when that freight moves by container. "We will take care of our international customers," says Rob Martinez, Vice President, Business Development at Norfolk Southern. "They're helped by the fact that their containers are more standardized, and easier to handle. We will take care of our regular customers. But," he adds, "if I were a shipper and didn't have a long-term contract with a railroad, I'd sign one."
Different pressures have clamped down to produce the capacity squeeze. There is, of course, the rising tide of imports from Asia, especially China. These reach the U.S. in greatest volume through the port complex of Los Angeles -Long Beach south to San Diego, where $60 billion worth of Chinese imports are expected this year. This influx has caused repeated delays at LA-LB, the nation's largest port, which handles 7 million containers a year.
But the larger story is domestic. The railroads simply did not anticipate the upsurge in stateside business. John Bromley, Director of Public Relations at Union Pacific, states: "In 2001, the prediction was that the year would be pretty flat, then turn up at the end. That didn't happen. [In] 2002, same prediction; same results. For 2003, we were really conservative. We didn't anticipate an uptick."
The rising economy caught a number of railroads by surprise. Several found themselves short-handed. Employment at the five largest roads fell from 177,000 in March 1999 to 147,000 this past March. In part, this drop reflects efforts to cut labor costs; further, new federal regulations that allowed those 62 years of age or over with 30 years service to retire with full benefits prompted substantial departures. For railroads, it is hard to quickly ratchet up the workforce; six months or more of training is required. On the equipment side, new locomotives-a $2 million item-are not sitting somewhere, ready to be driven off the lot. In the first half of 2004, manufacturers delivered 20,083 new locomotives, but during those months the number on order rose from 33,967 to 51,466.
The heaviest build-up is being done by Union Pacific, which in July found itself in the unwelcome position of having to actually turn away business-from rock and aggregate shippers in Texas, for example-while it faced congestion and ten percent slower operating speeds throughout its system. Union Pacific plans to hire 5,000 this year, up from 2,300 in 2003 (itself a high figure). As for locomotives, UP's Bromley states, "We are acquiring them as fast as we can get them. We have leased 350 locomotives; all told, we anticipated adding 745 to the fleet, which is 7,000 total." Other railroads are taking similar steps-Burlington Northern Santa Fe, for one, plans to hire 2,300 new crew members this year, and add 350 locomotives to its complement.
Quick fixes are one thing, but there is a larger question hovering above the industry: Will future demand level off at the record-breaking pace of 2004, or will that demand continue to rise? There's no universal agreement on whether volume will continue to grow or level off. Some industry people think many shippers chose to ship earlier this year." Another doubts that this year's 15 percent increase in imports from Asia will be repeated, but adds that one major importer of consumer goods has made plans on the assumption that it will. Nobody even pretends to know for sure.
The longer term equation is framed by one hard, cold fact. The transportation infrastructure-highways and rail beds-is not likely to get any bigger in the near future. As Roger Nober, chairman of the U.S. Surface Transportation Board, puts it, "We're not going to be laying more Interstates. Laying more rail is very difficult." The continuing challenge will be to raise the efficiency of the system as it exists.
When freight transit is viewed as a single system, the opportunity that stands out to vent off some of the pressure is intermodal. This year, intermodal will account for 20 percent of rail business, edging out coal as its top source of revenue. It has clear importance to the rail industry. One railroad spokesperson said, "Intermodal is where the opportunities lie to increase our market share. Otherwise, the rails just swap business back and forth, depending on who gets the contract. The big opportunity for increased business is traffic that is now being hauled by truck."
No 'build it and they will come'
The boom in intermodal-the final figure for 2004 will likely show a 10 percent increase-supports the thesis of Thomas Brown and Anthony Hatch, transportation analysts and co-authors of a major 2002 study, "The Value of Rail Intermodal to the U.S. Economy." The authors argue that America's supply chain must be viewed as a total system and that, when so viewed, the best route for improving overall performance lies in making a major public policy commitment to rail-based intermodal transport.In the U.S., they say, transportation planning has historically been focused on highway development. To that end, government at all levels in the 1990s spent $770 billion on highway construction and improvement. But, they question whether it is possible to "build our way out" of the growing congestion on the nation's highways. They assert that "freight rail in general, and intermodal rail specifically, represent a far more efficient and socially beneficial alternative." Indeed, they claim that rail intermodal is the transit of choice for shipments covering 750 miles or more. The pair roll out some impressive numbers to back their case. Rail is less expensive, with overall costs of 2.7 cents per ton/mile compared to 5.0 cents for truck. Rail is more energy efficient, providing 455 ton-miles of transport for each gallon of fuel, compared to 105 for trucks. And, rail has a significantly lower accident rate
So, what's the problem? Why isn't rail capacity increasing? The reason is that railroads themselves do not have access to sufficient capital to make the improvements necessary towards realizing the efficiencies of intermodal rail service. Consequently, Brown and Hatch conclude, "a dramatic expansion of rail intermodal, and the enormous public benefits it would provide, can occur only through the use of innovative public/private partnerships that should become an integral part of national transport policy."
It's a point the railroads themselves leap to share. Unlike highway construction, financed largely by public funds drawn from fuel taxes, railroads must find their own capital. Jeff Heller, Assistant Vice President, Marketing and International, at Norfolk Southern, states, "We can't financially justify everything we need to keep this freight moving." The railroads are highly capital intensive-over the past five years capital investment has taken 18.8 percent of total budget, compared to 3.8 percent in manufacturing. Historically, they are not particularly profitable either. Therefore, they tend to be conservative with their projections. As one spokesman put it, "There's not a lot of 'build it and they will come.'"
Public-private partnerships
The major public-private partnership now up and running is the $2.4 billion Alameda Corridor, a below-grade 20-mile rail express line that connects the Ports of Los Angeles and Long Beach with the rail network east of Los Angeles. Opened in April 2002, the Alameda Corridor has greatly speeded freight movement by eliminating some 200 rail and traffic crossing points.The largest comparable development pending is a $1.5 billion project in Chicago, known as CREATE-the Chicago Regional Environmental and Transportation Efficiency. Its five-year aim is to boost efficiency by unscrambling the rail lines in the nation's busiest rail gateway, which now handles 37,500 freights cars a day (the figure is expected to rise to 67,000 in 20 years). The plan will create five rail corridors, one being dedicated to passenger service. It will eliminate rail-rail "flyovers"-that is, points where lines cross, forcing one train to halt and wait for another-and provide grade separations at 25 rail/highway crossings. The six Class I freight railroads that service Chicago have committed $200 million to the project, with the rest coming from public sources expected to be committed this fall. The public expenditures are justified by expected speedier traffic flow for motorists, lessened air pollution, decreased highway construction costs and other benefits the project is expected to bring.
The project reflects a total systems view. As a rail hub, Chicago is "increasingly interrelated not just with Illinois and the Midwest, but with the rest of the United States and the international marketplace." Chicago sits at the crossroads of two major transportation lines, Los Angeles to New York City and Detroit to Mexico, and as such "has become critical to the competitiveness and efficiency of businesses throughout the nation."
Projects like the Alameda Corridor and CREATE are cumbersome undertakings. The Alameda Corridor involved two decades of planning, five years of construction and the sustained cooperation of the ports, governments at all levels and the railways. Such undertakings are also expensive. One study identifying the rail infrastructure needs in the Northeast came up with a $6.2 billion price tag. And, these undertakings have their critics. The Alameda Corridor, for instance, was designed to carry up to 150 trains a day, but averages between 35 and 40.
Cost and complexity, says the Association of American Railroad's Tom White, are two reasons why there are no other large-scale public/private partnerships pending. Ventures such as the Alameda Corridor and CREATE involve "a very complicated process" with multiple municipalities, highway authorities, planning bodies and the railroads themselves, each with its own agendas. "You have to develop pretty good numbers that demonstrate the benefits," White added, "both to justify the public portion and to determine who's going to pay what share." There could be another reason: one railway official pointed out that until 1980, the railroads were heavily regulated. The consequence, he added, was that they were "skittish" about partnership with their former masters.
If there seems limited promise for growth domestically, one alternative for railroads is to look world-wide for expansion opportunities. Trade is international, and public-private partnerships can be likewise. In June, Matt Rose, Chairman, President and CEO of Burlington Northern Santa Fe, traveled to China where he signed a five-year agreement with the Chinese Ministry of Railways, whereby BNSF will provide technical and other assistance to help develop China's railroads and, not incidentally, develop ties between China and BNSF.
BNSF's Asia-related business has doubled in the past six years, reaching $1.3 billion in 2003. About two-thirds of that growth has come from China. Nearly the size of the United States and with four times the population, China is woefully under-serviced by railroads, with only 45,000 miles of track, compared to 142,000 miles in the U.S. To address its shortcomings, China has committed the enormous sum of $242 billion to rail development between now and 2020.
Plans include major development of double-stack container capability. Rail intermodal has been slow to develop in China, said Fred Malesa, BNSF's Assistant Vice President for International Marketing, "because of infrastructure constraints-bridges, tunnels, lift facilities, difficulties in tracking containers." Among other tasks, BNSF will assist with the design of rail terminals and double-stack capabilities. The technical exchanges began this October, with key figures from China's Ministry of Railways for planning, discussions and a visit to BNSF's technical training center in Kansas City.
Taking opportunities where you find them
Back in North America, steps-not as large perhaps as CREATE, but certainly pointing in the right direction-are being taken throughout the system to eliminate obstacles and speed flow. The Port Authority of New York and New Jersey has opened the first phase of "Express Rail Port Elizabeth," which will raise lift capacity at that site from 230,000 to 350,000. Norfolk Southern is working to remove obstructions on its Norfolk-Columbus, Ohio line, to permit its use for double-stacked trains. Once accomplished, it will let freight that now travels through Harrisburg, Pennsylvania take a direct route to Chicago. BNSF is raising lift capacity at its Logistics Park, Chicago, to 500,000 units annually, and expanding capacity elsewhere.The Port of Los Angeles opted in July to add 3,000 new dockworkers to the site. Los Angeles-Long Beach ocean terminal operators-yielding on what had been a sore point with the railroads-extended their cargo operations into nights and weekends in an effort to reduce congestion. In August, the Board of Harbor Commissioners approved an Intermodal Rail Policy that will mean a major shifting of freight from truck to rail. The resolution notes that by 2010, cargo volume will exceed rail capacity by 1.7 million units a year. The Board decided that rail was the only way to manage that increase while meeting Los Angeles Mayor Jim Hahn's commitment to "no net increase" in air pollution from the port. Whether this package of immediate and long-term steps greatly reduces congestion at America's busiest port remains to be seen.
Still, shippers will take their opportunities where they find them. Northward up the West Coast, Port of Tacoma officials are not deeply troubled by an anticipated increase of from 1.7 million units a year to above 4 million in 2020. "We're the youngest major container port on the West Coast," said Doug Ljungren, Business Planning Manager for the Port of Tacoma. "Relative to our competition, we still have a lot of land left for expansion." That land is filling in-Evergreen Maritime is now completing a 171-acre terminal that will boast the ability to handle 860,000 units a year.
Seventy percent of Tacoma's imports head east by rail, either on Union Pacific or Burlington Northern Santa Fe. The current rail infrastructure-"in terms," Ljungren says, "of how the railroads operate with current technology"-is expected to hit capacity in 2010. But another decade of expansion can be managed on existing lines, according to Ljungren. How? If the railroads employed technologies that would allow them to run trains closer together and if they adopted one-way running, with designated east and westbound rail lines. Ljungren makes his point that there's another way to keep goods moving-capacity isn't fixed just by physical infrastructure, but by imagination as well.
Sidebar
Norfolk Southern: The Railroad That Decided Not To Be Little
While most major rail carriers scramble to stay in place, Norfolk Southern is riding the crest of the wave in freight shipments and posting industry-impressive financial results. As President and CEO David Goode recently told a Wall Street gathering, "We're very much open for business in an expanding economy, and we're looking forward to the opportunity as we continue to push capacity."For some railroads, 2004 entered like a lion, and remained one. At Union Pacific, second quarter profits dropped 45 percent as the cost of delays and a 10 percent drop in average speed cut into expected returns. At CSX, the second quarter showed a 6.3 percent drop. Norfolk Southern, on the other hand, saw second quarter profits jump 55 percent, to $213 million. Perhaps even more significant is that NS handled over 100,000 additional carloads without increasing the number of cars on its system and without slowing traffic.
Henry C. Wolf, Vice Chairman and CFO, compares the railroad's achievements overcoming obstacles to one of his favorite books as a small boy-"The Little Engine That Could."
'Little' might seem an odd appellation to apply to an enterprise with 3,468 locomotives and 101,095 railcars operating on 21,500 route miles of track in 22 eastern states, including the District of Columbia and Ontario, Canada.
Perhaps a better title would be, "The Railroad That Decided Not to be Little." A key move came in 1999, when Norfolk Southern reached agreement to acquire 58 percent of Conrail. Privatized in the mid-1990s, Conrail reached a tentative agreement to partner with CSX in an agreement, Norfolk Southern officials say, that would have reduced their line to a largely regional role. They contested the agreement and, after a lively bidding war, ended with over half of Conrail.
What accounts for Norfolk Southern's success? CEO Goode cites several factors. The economy, he says "has picked up at a good time for us." Persistently high energy costs were also favoring "the inherent efficiency of steel wheel on rail" over transport by truck. Troubles elsewhere have brought Norfolk Southern other advantages. The recurring backups at Southern California seaports is prompting more Asian shippers to ship their goods via a longer but often quicker way-through the Panama Canal to America's East Coast ports, which are well served by Norfolk Southern.
Shippers, said Jeff Heller, Assistant Vice President, Marketing and International, "didn't want to have all their eggs in the LA basket. It used to be," he added, "that freight would leave Hong Kong to LA, then go by rail to New York. Now, more goes direct to New York by water. The middle third of our network-places likes Columbus, Atlanta, Memphis-is now more largely supplied from the east." Heller expects the Asia-to-East Coast trend to continue.
Intermodal is another key to Norfolk Southern's strategy-and the source of nearly 35 percent of the railroad's second quarter jump in business. It operates the most extensive intermodal network in the east, with 52 intermodal terminals, and will be expanding facilities inland as well. Half that intermodal traffic is international.
The "little engine that could" continues to make tracks.
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