north american freight rail industry - transportation...

North American Freight Rail Industry

Transportation Research Board Washington, DC March 14, 2014

Railroads Help Keep Coal-Based Electricity

SLIDE 2 ASSOCIATION OF AMERICAN RAILROADS

BNSFCNCPCSXFXEKCS/KCSMNSUPOther RRs

Freight

Railroads in

North

America

General Characteristics of North American Freight Railroads

Vast majority privately-

owned

Typically, the same

company owns the track

and operates trains over it

One railroad does not have

automatic access to

another railroad’s tracks

Little government funding;

income is from freight

revenue

Don’t carry passengers


ASSOCIATION OF AMERICAN RAILROADS SLIDE 4

Coal

$14.7 bil.,

727 mil.

tons

Intermodal*

$14.6 bil.,

135 mil.

tons

Petrol. &

Chemicals

$12.7 bil.,

258 mil.

tons Grain - $4.8 bil. ,

144 mil. tons

Food $5.4 bil.,

108 mil. tons

Lumber & paper

$3.8 bil.,

59 mil. tons

Ores & metals

$3.3 bil.,

125 mil. tons

Autos & auto parts

$4.9 bil.,

26 mil tons

Total

$69 billion

1.8 bil. tons

Minerals &

mineral products

$4.3 bil.,

176 mil. tons

U.S. Railroad Commodity Mix -

2012

*Some intermodal is also included

in individual commodities. Data are

Class I railroads only. Source: AAR (FCS)

90,000

98,000

106,000

114,000

122,000

130,000

138,000

146,000

154,000

162,000

170,000

64

68

72

76

80

84

88

92

96

100

104

bars = manuf. output (2007=100, left scale)

line = rail carloads (right scale)

2007 2008 2009 2010 2011 2012 2013

*Data are seasonally adjusted. Source: Federal Reserve, AAR

Manuf. Output vs. Rail Carloads Excl. Coal & Grain

Railroads and the Economy Are Tightly Intertwined


400,000

425,000

450,000

475,000

500,000

525,000

550,000

575,000

600,000

625,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009

2011

2013

2014

Total U.S. Rail Carloads + Intermodal Units


2006 (peak year)

(average weekly originations)

2012

Excludes U.S. operations of Canadian railroads.

Source: AAR Weekly Railroad Traffic / Rail Time Indicators

170,000

180,000

190,000

200,000

210,000

220,000

230,000

240,000

250,000

260,000

270,000


2009

2011

2013 2014

U.S. Rail Intermodal Traffic (Containers and Trailers)



2012

Excludes U.S. operations of Canadian railroads.

Source: AAR Weekly Railroad Traffic / Rail Time Indicators

90,000

100,000

110,000

120,000

130,000

140,000

150,000

160,000


2010

2011

2013 2014

U.S. Rail Carloads of Coal


2008 (peak year)


2012

*Chemicals; paper; metal products; autos; crushed stone & gravel; metallic ores; and stone & glass

products. Excludes U.S. operations of Canadian railroads. Source: AAR Weekly Railroad Traffic


5,912 9,500 10,84029,605

65,751

233,819

407,761

2007 2008 2009 2010 2011 2012 2013

*estimate based on first three quarters annualized Source: AAR

Originated Carloads of Crude Oil on U.S. Class I Railroads

Volume Must be Carefully Managed

to Maintain a Fluid Network


Theoretical Throughput Capacity

Theoretical Throughput Capacity

To

tal

Co

st

Vo

lum

e H

an

dle

d

0% 75% 100%

0% 75% 100%

• As volume on rail networks

approaches 100% of

theoretical capacity, fluidity of

the network deteriorates.

• If volume offered exceeds

100% of theoretical capacity,

maximum throughput

capability actually declines.

• “Comfortable” capacity is

generally about 70% to 80% of

maximum theoretical capacity.

• Both total and average unit

cost increases rapidly after

“comfortable” capacity is

exceeded.


Input Factor Cost

History

1990 - 2011: Rail Production Input

Factor Cost Trends

Source- R-1 Reports to STB; Rail Cost Recovery Index Publication


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

19

90

Q1

1991Q

1

1992Q

1

19

93

Q1

19

94

Q1

19

95

Q1

19

96

Q1

19

97

Q1

19

98

Q1

19

99

Q1

20

00

Q1

20

01

Q1

20

02

Q1

20

03

Q1

20

04

Q1

20

05

Q1

20

06

Q1

20

07

Q1

20

08

Q1

20

09

Q1

20

10

Q1

20

11

Q1

20

12

Q1

20

13

Q1

20

14

Q1

Labor

Fuel

M&S

Equip. Rental

Deprec.

Interest

Other

Current Weight of Cost

Components

Source- Quarterly RCAF Filing, Second Quarter 2014


Cost Component Weight

Labor 31.2%

Fuel 22.3%

Materials & Supplies 4.9%

Equipment Rents 5.6%

Depreciation 11.9%

Interest 2.0%

Other 22.1%

1990 - 2011: Rail Cost Adjustment

Factor (All Inclusive Index)

Source- R-1 Reports to STB; Rail Cost Recovery Index Publication


0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Cost Index =Rail CostAddjustmentFactor(RCAF)


90

100

110

120

130

140

150

160

170

180

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

CPI

Rail Cost Adjustment Factor (RCAF)

vs. Consumer Price Index (CPI)

*The RCAF measures changes in the price levels of inputs to railroad operations. Data are

averages of quarterly values for each year. Source: AAR, BLS

(Index 2000 = 100)

RCAF

1990 - 2011: Cost and Price Trends

Source- R-1 Reports to STB; Rail Cost Recovery Index Publication, STB Waybill Sample


0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

RCAF

Revenue perRevenue Ton-Mile, AllCommodities

Price measured as

Revenue per

Revenue Ton- Mile

Why Use the Ton-Mile as the

Primary Price Measure?



0.8

0.9

1.0

1.1

1.2

1.3

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

Average CarCapacity

Length of Haul

Average Length of Haul - up 26%

Average Freight

Car Capacity - up 16%

Per Car Price Measure – Ignores both increase in average capacity and increasing length of haul.

Per Ton Price Measure – Ignores increasing length of haul.


60

80

100

120

140

160

180

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

RR revenue per ton-mile

correlation = 99%

Recent RR Rate Increases Largely a

Function of Higher RR Input Costs

*The Railroad Cost Recovery Index measures changes in the price levels of inputs to

railroad operations. Data are averages for all commodities for Class I railroads.

**As measured by average revenue per ton-mile for all commodities. Source: AAR

RR Cost Recovery Index* vs. RR Rates** (Index 2003 = 100)

RR cost recovery index

1990 - 2011: Commodity Price

Trends



0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

RCAF

Metals

Intermodal

Petroleum Products

Grain

Minerals

Price measured as

Revenue per

Revenue Ton- Mile


Trends

Source- R-1 Reports to STB; Rail Cost Recovery Index Publication; STB Waybill Sample


0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

RCAF

Chemicals

Paper

Food Products

Mineral Products

Motor Vehicles

Price measured as

Revenue per

Revenue Ton- Mile


Trends



0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

RCAF

Wood Products

Ore

Coal

Waste & Scrap

Price measured as

Revenue per

Revenue Ton- Mile


Productivity:

Key to Improved Rail

Network Performance


0

5

10

15

20

25

30

35

40

45

50

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Overall Freight Railroad Productivity

*Using this measure, productivity can be negatively affected when railroad input costs (e.g., fuel)

increase, as they have in recent years. Source: AAR

(revenue ton-miles per constant dollar operating expense*)


0

5

10

15

20

25

30

35

40

45

50

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Overall Freight Railroad Productivity Excluding Fuel

*excludes fuel. Source: AAR

(revenue ton-miles per constant dollar operating expense*)


0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Class I Railroad Employment

Source: AAR


0

1

2

3

4

5

6

7

8

9

10

11

12

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Revenue Ton-Miles

Per Employee

Data are for Class I railroads. Source: AAR

(millions)


0

2

4

6

8

10

12

14

16

18

20

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Sharp Increase in Rail Traffic Density

Miles = route-miles owned Data are for Class I railroads. Source: AAR

(millions of revenue ton-miles per mile of railroad)

Up 238%


35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

High Density* Rail Miles Have Increased

*Track with freight density of at least 20 million gross ton-miles. Excludes way and yard

switching tracks. Source: AAR

(miles)


1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

3,600

3,800

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Average Freight Train Load


(tons)

The average freight train carried

a near-record 3,458 tons of

freight in 2012, up 56% since

1980 and up 18% since 2000.


0

10

20

30

40

50

60

70

80

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Revenue Ton-Miles

Per Locomotive


(millions)


175200225250275300325350375400425450475500

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Freight Rail Fuel Efficiency Is Up 102% Since 1980

Source: AAR

(revenue ton-miles per gallon)


0

25

50

75

100

125

150

175

200

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

RR Fuel Consumption*

RR Volume

Fuel Use vs. Volume Handled

*in freight service volume = revenue ton-miles. Source: AAR

(1980 = 100)

How Have the Productivity

Benefits Been Distributed?

Source- B. Kelly Eakin & Philip E. Schoech, The Distribution of the Post-Staggers Act Railroad Productivity Gains,

Christensen Associates, Madison, Wisconsin, December 2010.


1980 –

1986

1986 –

1996

1996 –

2004

2004 –

2008

1980 –

2008

Customer

Share 161% 74% 127% -37% 85%

Railroad

Share -61% 26% -27% 137% 15%


Profitability and

Investment


Return on equity = net profit / shareholders' equity. Source: AAR, Fortune magazine

0%

2%

4%

6%

8%

10%

12%

14%

16%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Class I RRs Median Fortune 500

Return on Equity: Freight RRs vs. Fortune 500

Rail Profits – Only Recently Becoming Average


UPS vs. 4 Largest U.S. Freight Railroads

The four largest U.S. freight

railroads combined need an

asset base more than five times

that required by UPS to

generate only moderately more

revenue. In order for the four

railroads to have been as

profitable as UPS (measured by

return on assets) in 2013, their

net income would have needed

to be $22.8 billion.

UPS RRs

Revenue $55.4 $67.2

Net income $4.4 $12.0

Avg. total assets $36.2 $189.0

Profit margin 7.9% 17.8%

Return on assets 12.1% 6.3%

Data are 2013. Source: company 10-Ks

UPS vs.

($ billions)

Four Largest U.S. Freight RRs


Close Correlation Between RR

Earnings and Reinvestments

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11

$12

$13

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

$15

$16

$17

$18

$19

$20

$21

$22

$23

$24

$25

$26

Rail spending on infrastructure and

equipment* (right scale, $ bil)

*Capital spending plus maintenance expenses.

Data are current dollars and are for Class I railroads. Source: AAR

Net income (left scale, $ bil)


$16.7

$19.3 $20.2

$21.5 $20.2

$20.7

$23.3

$25.5 $25.6 $26.0+

2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e

Railroad Spending on Infrastructure and Equipment*

($ billions)

Record Investments in Recent Years Despite the Economy

*Capital spending + maintenance expenses. Data are for Class I railroads. Source: AAR


$0

$2

$4

$6

$8

$10

$12

$14

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Roadway and Structures

Equipment

Railroad Capital Spending ($ billions, current dollars)



$4.6 $4.9 $5.4

$7.0 $6.9 $7.9

$7.4 $7.9 $7.9

$9.2

$3.4 $3.7 $3.4 $3.6 $3.7 $4.0 $3.7 $4.2 $4.6 $4.8

$8.0 $8.6 $8.8

$10.6 $10.7

$11.9 $11.1

$12.1 $12.5

$14.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Capital spending

Total

Total spending

($ billions)

Spending by U.S. Freight Railroads on Infrastructure


Maintenance expenses


$1.3 $1.3 $1.0 $1.5

$2.2 $2.3 $2.6 $1.9 $3.7

$4.3

$6.3 $6.8 $6.9 $7.2 $7.3 $7.3

$6.5 $6.8 $7.2 $7.2

$7.6 $8.1 $7.9

$8.7 $9.5 $9.7

$9.1 $8.7

$10.8 $11.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total spending

Maintenance expenses

($ billions)

Spending by U.S. Freight Railroads on Equipment


Capital spending


Net Results

Source: AAR

0255075

100125150175200225250275300

'64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12

Revenue – up 3%

Volume – up 88%

Productivity – up 135%

Rates – down 42%

Staggers Act Passed Oct. 1980

Staggers Act: An Unqualified Success

(index 1981 = 100)



Finally Closer to Earning Cost of Capital

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12p

RR Cost of Capital

RR Return on Investment

Class I RR Cost of Capital vs. Return on Investment

Note: In 2006, the Surface Transportation Board significantly changed the method by

which it calculates the rail industry cost of capital. p – preliminary Source: STB

Association of American Railroads

www.aar.org


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