Rail Renaissance: Returns, Capital & Capacity

Slides:



Advertisements
Similar presentations
Rail Renaissance: Returns, Capital & Capacity AB HATCH The Transportation Conference Toronto September 2008 ::
Advertisements

Rail Renaissance: Returns, Capital & Capacity AB HATCH NG&F/MAUI!! March, 2010.
Rail Renaissance: Returns, Capital & Capacity
Rails 2012 & Beyond – Secular Growth in Uncertain Times AB HATCH 155 W68th St Suite 1117 NYC 10023
Railroads and Ethanol Association of American Railroads September 27, 2007.
Renaissance: Rails, Capital & Capacity Under Challenge Anthony B. Hatch – abh consulting 155 W68th Street NYC (212)
Freight Transportation Economic Regulation Transportation Logistics Spring 2009.
Moving the World: The Future of Freight Transportation Environment/Fuel Efficiency Panel Randy Mullett Vice President - Government Relations & Public Affairs,
Railroads & Economic Development: On Parallel Tracks? Page Siplon Executive Director Georgia’s Center of Innovation for Logistics.
Industry Challenges: 2015 January 22 nd, Fiscal Pressures across all service offerings  Driver shortage and retention  Regulations and hours.
Department of Economics and BusinessBIS Phuket
Randy Mullett Vice President - Government Relations & Public Affairs, Con-way Inc. FHWA Talking Freight Webinar February 16, 2011 Riding the U.S. and Global.
U.S. Railroad Industry Federal Railroad Administration U.S. Railroad Industry Federal Railroad Administration.
Future of Freight Rail National Association of Counties 2011 Rail Conference Commissioner Francis P. Mulvey April 28, 2011.
Canadian National Railway (CNI). Background Founded in 1918 by the Canadian gov’t Deregulation of 1980 Headquartered in Montreal, Quebec Largest railway.
Renaissance: Rails, Returns, Capital & Capacity Anthony B. Hatch – abh consulting 155 W68th Street NYC (212) Indiana.
Chapter 4 Global Economies 1 Section 4.2 Understanding the Economy Marketing Essentials.
October 13, 2012 Quarterly Stock Pick NYSE: NSC By: Justen Leicht.
Economic & Industry Update March 8, 2011 Bob Costello Chief Economist & Vice President American Trucking Associations.
The Challenge of Meeting Freight Infrastructure Demands: Public-Private Partnerships the Answer? Jim Hixon Exec. Vice President Law & Corporate Relations.
11. 2 Public Transportation’s Role in a Greenhouse Gas Reduction Strategy Kevin Desmond King County Metro Transit Division Seattle, WA On behalf of the.
Freight Productivity Impacts of Natural and Man-Made Disasters Paul Bingham Managing Director, Global Commerce and Transportation IHS Global Insight Talking.
6 th largest LTL (Less than truckload) -Founded Service Centers – 11,000 FT Employees –OD Domestic - Multi-regional, inter-regional, 48 state.
Rail Renaissance: Returns, Capital & Capacity AB HATCH 155 W68th St Suite 1117 NYC 10023
National Multimodal Freight Trends/Issues/Forecasts/ Policy Implications.
Talking Freight Promoting Economic Revitalization through Enhanced Freight Transportation Eric G. Madden Deputy Secretary for Aviation and Rail Freight.
Rail Renaissance: Returns, Capital & Capacity AB HATCH AREMA September ::
AASHTO Standing Committee on Rail Transportation Denver, Colorado September 2014.
1 Houston Economic Club May 18, 2009 Matthew K. Rose Chairman, President and CEO Transportation for Tomorrow.
1 Les Passa CSX VP – Strategic Planning. 2 Transportation marketplace supports long term rail growth Global market opportunities are increasing CSX’s.
Economic Significance of the Border: A Perspective at the Regional and National Levels for both Passenger and Freight Movements Bruno Penet HDR | Decision.
STRATEGIC CONSULTING SERVICES Update of the Freight Rail Bottom Line Report: Continuing Study of Freight Rail Supply Meeting Demand Briefing.
EQUIPMENT REVIEW RSTAC May 20,2014. Concluding Summary Equipment Review What the Future Holds  Continued rapid growth in goods movement with increasing.
Small Railroads: Big Agenda Inland Rivers Ports & Terminals, Inc. Annual Meeting Shreveport, LA April 30, 2015.
U.S. Freight Railroad Infrastructure: Current and Future Issues Craig F. Rockey Vice President - Policy and Economics Association of American Railroads.
Nate Asplund Director – Public Private Partnerships September 20, 2009 SCORT 2009 IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII.
I’ve Been Working on the Railroad... Marketing Opportunities.
© 2012 Cengage Learning. All Rights Reserved. May not scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter.
Freight Railway Integration Strategy For Inter-American Development Bank Transport Week 2009 by Transportation Technology Center, Inc. (TTCI) Subsidiary.
Industry Update for: FEI – St. Louis Chapter February 2012.
Economic Dynamics of Freight & Modes. The Trucking Industry.
Chapter 17 How External Forces Affect a Firm’s Value Lawrence J. Gitman Jeff Madura Introduction to Finance.
Status of the Rail Industry Presented to the General Services Administration Washington DC March 2015.
Unlocking the Benefits of High-efficiency Truck Operations
MGT 325 ASSIST Minds Online/mgt325assist.com
MGT 325 ASSIST Motivating Students to Learn/mgt325assist.com
MGT 325 ASSIST Master of Education in Teaching/mgt325assist.com
Review of 2018–2023 Strategic Budget Plan Development Process and
Update of the Freight Rail Bottom Line Report: Continuing Study of Freight Rail Supply Meeting Demand Briefing for AASHTO Freight States Alexander King.
The Current State of the Railroad Industry
10th Annual Global Transportation Conference
Sashikanth (Sash) Yenika Vanditha Ravindranath
Section 4 Lecture November 2016 Mr. Gammie
April 27, 2016 You need paper & pencil NO Test on Friday! 
2017 SCORT Conference Washington, DC
Capital Investment Capital investment spending has an important effect on both the demand and supply side of the economy. This presentation considers the.
Economy/Market Analysis
ASSOCIATION OF AMERICAN RAILROADS. ASSOCIATION OF AMERICAN RAILROADS.
ECONOMIC AND INDUSTRY ANALYSIS
AASHTO Spring Meeting Portland, Maine May 2017 Jennifer W
Access to Opportunity in the Global Economy of the 21st Century
Chapter 2 Measuring economic activity
Measuring economic activity
The 2007 MTBPS: short on detail
Balance of Payments Adjustment Policies
General Purpose Wagons : GPWIS Scheme & Potential
The Risks to Coal Plants in Coming Years
Spending $ to Make $ Freight Rail and the Power of Capex
Chapter 1 Test Review.
Global economic growth
Presentation transcript:

Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.com 155 W68th St Suite 1117 NYC 10023 www.abhatchconsulting.co Wisconsin RR Day October 2011

Strengths Challenges Opportunities Threats Rail Assessment Strengths Challenges Strong secular growth Favorable market structure Supply constraints Solid barriers to entry Limited alternatives Capital intensity Capacity bottlenecks Port congestion Reliability vs. trucks Opportunities Threats Pricing Volume Growth Service levels / productivity Modal shift Consolidation? Economic malaise Rising capital requirements Regulation Maritime trade flows 2

FY2010/H12011 – Recovery was not just an Eminem song Rails (all modes) surprised by the volume strength in H1/11 2010, H1/11 financial results exceed street expectations; yet slowdown approaching…. 2011 – guidance returns to some extent Capex numbers way (20%+) up – but so are overall free cash flows, DPS and repos 2012 - beyond recovery into growth? 2013?

Future Growth Potential Oil, Carbon, Infrastructure & Efficiency/5 Secular stories 1-Intermodal – International and Domestic 2-Grain – the world’s breadbasket 3-Coal? Exports – “legs”? 4-Shale to the rescue? 5-Chemicals The Manifest/Carload “Problem”/MSW (garbage), perishables, others Point-to-point vs. Hub & Spoke (or Southwest vs. United)

Railway Innovation CP – larger trains CN – alliances, routing protocols – the scheduled railroad! BNSF – grain “Shuttles”; JBHT&Domestic Intermodal NS – PPPs, JVs and “Corridors” KCS – little engine that can - Mexico CSX – MSW, RailEx, Trop Train, etc…. UP- Doublestacks, exploiting the carload franchise; the PRB All: Short line cooperation, Operating Plans, communications/IT/PTC, Disintermediation, operating excellence….

Intermodal Growth Drivers Domestic and International Globalization Trade Railroad Cost Advantages Fuel prices Carbon footprint Share Recovery From Highway Infrastructure deficit & taxes Truckload Issues; drivers

U.S. Railroad Intermodal Traffic (millions) 2010 = + 14% 2001 Cost of Capital = 10.2%. ROI = 6.85% Source: Association of American Railroads’ Weekly Railroad Traffic

Domestic Intermodal The real growth opportunity is the age-old goal of taking trucks off of the highway Driving down the LOH (requires very tight service standards) Corridor development (see NS’ “Crescent”); truck partnerships (see JBHunt) Fuel price, carbon footprint, infrastructre shortages and congestion, driver shortages (CSA 2010) Trailer (TOFC/”Piggyback”) the gateway drug” for containerization Opportunities in unitized carload as well

Carbon Footprint– from cocktail chatter to decision point 2003 – 221/F500 report on carbon; 409/F500 in ’09 Green supply chains enforcement by Wal-Mart (from $2B transport spend to $4B+ by ’11); GE, P&G, etc…. Anticipating future EPA regs and emissions law

Truck/Rail Intermodal Market Share Truck and Rail Intermodal in Markets 500 Miles and Greater Mileage Blocks Truck Rail Intermodal Total Market Truck Share Rail Share 500 to 749 17.8 1.2 19.0 94% 6% 750 to 999 10.1 2.3 12.4 82% 18% 1000 to 1499 7.7 2.0 9.7 79% 21% 1500 to 2000 3.7 2.1 5.8 63% 37% >2000 2.8 4.9 36% 64% Total 42.1 12.5 54.6 77% 23% Millions of units Source: Assessment of 2007 Commodity Flow Survey and 2007 Rail Carload Waybill Sample

Modal Shift Projection Current Rail Intermodal Market % of Market Share Projected Market Shift Current Truck Market 11

Truck/Rail Intermodal Market Share 2035 Status Quo Truck and Rail Intermodal in Markets 500 Miles and Greater Mileage Blocks Truck Rail Intermodal Total Market Truck Share Rail Share 500 to 749 22.0 1.5 23.5 94% 6% 750 to 999 12.4 2.8 15.2 82% 18% 1000 to 1499 9.4 2.5 11.9 79% 21% 1500 to 2000 4.6 2.7 7.3 63% 37% >2000 3.4 6.0 36% 64% Total 51.8 15.5 67.3 77% 23% Millions of units Source: Assessment of 2007 Commodity Flow Survey and 2007 Rail Carload Waybill Sample

Truck/Rail Intermodal Market Share 2035 50% Market Share Truck and Rail Intermodal in Markets 500 Miles and Greater Mileage Blocks Truck Rail Intermodal Total Market Truck Share Rail Share 500 to 749 14.3 9.2 23.5 61% 39% 750 to 999 8.1 7.1 15.2 53% 47% 1000 to 1499 6.1 5.8 11.9 52% 48% 1500 to 2000 3.0 4.3 7.3 41% 59% >2000 2.2 7.2 9.4 23% 77% Total 33.6 67.3 50% Millions of units One example of the dramatic benefits of shifting to rail intermodal is illustrated by the fact that just one long-distance, double-stack train between Chicago and Los Angeles can save 75,000 gallons of fuel by replacing 300 trucks, each traveling 1,983 miles. Source: Comparative Evaluation of Rail and Truck Fuel Efficiency on Competitive Corridors, ICF International, published by the Federal Railroad Administration (2009) Source: Assessment of 2007 Commodity Flow Survey and 2007 Rail Carload Waybill Sample

CS: Future Corridor Volumes Compared to Current Corridor Capacity (Cambridge/AAR) - 2007 2035 without improvements Below capacity Near capacity At capacity Above capacity

DOT: Future Demand for Freight Transportation Will Continue to Grow Billions of Tons of Freight Transported in the U.S. p – U.S. DOT projection 15

S0 -What is the growth rate? Great studies done – in 2007/ New ones- “any day now….” Is there a “Great Re-set”? (paper, autos, retail, coal) Or do we look past 2035 and simply add a few “lost” years? (the emerging consensus save for the coal question) AAR new assumptions suggest coal is flat from DOT projections while the rest reaches 2025 targets despite Great Recession impact (ie; future intermodal/carload growth is higher than recent studies…) Will the government policy help to increase modal share by 10%?

Rail Intermediate term volume prospects ABOVE GDP ABOVE GDP Intermodal – Domestic (++) Intermodal - International Agricultural products Export Coal Ethanol Chemicals! GDP-GROWTH Autos Lumber Aggregates Metals UNCERTAIN Domestic Coal BELOW GDP Paper Auto Parts (?) 17 17

Growth is Expensive Huge Capex - $50B in the last 5 years in the US – through the Great Recession! AND: Comeback of the share repo/DPS? EPS beat the Street consistently, yet: Uneven returns in the Modern Age Recent improving trend line Threats to ROIC threaten capacity Street begins to call for capex reduction? Suppliers 2012 looks solid – can they hold on till true recovery?

Railroad Rates- the old story Class I Railroads, Revenue Per Ton-Mile – another (related) New Paradigm Cents Constant $: Down 54% since 1981 Current $: Up 5% since 1981 Source: Railroad Facts, AAR

Rail Rates Began to Rise % Change in Avg. Inflation-Adjusted Rail Rates* First meaningful increases since 1980, with much of it tied to higher fuel costs *Revenue per ton-mile Source: AAR

Finally, Railroads Making Decent Money... Net Income Source: AAR

Regulatory Review/Discussion Staggers (1980) and predecessor Acts Freedom to set rates Freedom to sell/abandon low density track (growth of short line industry) Freedom to exit passenger business Impetus to cut costs, divest massive non-rail holdings & become “pure” rail plays

The Staggers Act: An American Success Story This chart shows how the industry has performed since 1981: Productivity (white line = revenue ton-miles per constant dollar operating expense) is up 144%. RR productivity improvement has been among the highest of all U.S. industries. (Drop since 2005 mainly due to big increase in fuel costs that increased total rail expenses.) Volume (green line, = revenue ton-miles) is up 95%. Revenue (inflation-adjusted operating revenue, red line) is down 4%. And rail prices or rates (yellow line, = inflation-adjusted revenue per ton-mile) are down 49%, even after an increase in average rates since 2005. However, despite the severe harm regulation caused and the huge benefits since Staggers passed, some shippers and their allies want to again give regulators wide control over crucial areas of rail operations. Their proposals would result in sharply lower rail revenues and earnings. RRs would be unable to cover their costs and meet the transportation needs of our nation. Ultimately, under reregulation, the only realistic alternative to wholesale disinvestment of our nation’s rail network would be for the government to step in and subsidize railroads on a massive scale. Productivity decline due mainly to fuel price volatility. (Index 1981 = 100) Productivity Volume Staggers Act Passed Oct. 1980 Revenue Price Source: AAR

RR CoC vs. ROIC – RR Stocks have done well but… they still trade at a discount to all stocks Effective with the 2006 proceeding, the method for calculating the cost of equity was changed from a Discounted Cash Flow method to a Capital Asset Pricing Model. Effective with the 2008 proceeding, the method for calculating the cost of equity was changed from a Capital Asset Pricing Model to a simple average of the Capital Asset Pricing Model and a Multi-Stage Discounted Cash Flow model. Source: Surface Transportation Board 2010p Cost of Capital is AAR filing, not decided by STB Note: Cost of equity estimation method changed by Board effective 2006 and 2008.

Class I Railroad Capital Spending vs. Net Income (Current Dollars) Capital Spending Net Income Source: Association of American Railroads

Railroad Capital Expenditures Class I Railroads Billions 2008 preliminary number is $10,221,278 Source: Railroad Facts & Analysis of Class I Railroads, AAR

What is covered by the STB Regulated traffic constitutes about 20% of the rail total (and a higher % of OPI) Non-competitive, “Captive Shipper” traffic (ie; not intermodal, lumber, etc) Contract traffic is voluntarily exempted (so % could increase – to a third? - if one side or the other saw the advantage in moving to tariff) Greater impact on the east (exact margin/contribution etc data unknown – even to carriers themselves?)

Positive Train Control (PTC) “Unfunded Mandate” – part of 2008 safety bill Overseer is FRA – who puts cost/benefit ratio at 22:1 Rails have put cost of installation and maintenance at $10B – and rising (UP, CSX have increased 2011 capex based in PTC) Possible benefits in capacity, velocity, fuel consumption as well as safety; many of those captured by other technological advances Covers all rail interaction with passengers and TIH as of 2008; short lines exempted Technology proven only in limited scope (BN/Wabtec: ”ETMS”) Initiated after Chatsworth accident – obvious public benefits Contrarian viewpoints exist – the new “Digital Railway” Efforts to reduce footprint, extend deadline….

Railroad Employee Productivity Class I Railroads, Ton-Miles Per Freight Service Employee Millions 2007 = 10.624, 2006 = 10.609, 2005 = 10.48098, 2004 = 10.5799 Note that employee productivity is going up for 2008, while the 4-line chart shows overall productivity going down for 2008. The 4-line chart uses ton-miles per constant-dollar expense, and the GDP-deflator may be an inadequate deflator for the railroad industry when fuel expenses are extremely volatile. Therefore, railroad productivity might not have declined in 2008. Source: Railroad Facts, AAR

Rail Service Cycles Is the recent improvement in the metrics sustainable? Systemic? Is it a product of huge capex injection and IT? Or, is it merely a product of lower volumes/less stress on the network…

Service will be the Key to the Next Cycle Service at all time highs $40B spend in last 5 years (service ought to be better!) Putting increased traffic back on at current velocity means: Higher asset utilization, more market share gains, greater operating leverage (perfect circle affects all stakeholders) Implications for equipment fleets

Freight Train Speed (Class I Railroads) Source: Analysis of Class I Railroads, Association of American Railroads (Freight train miles per freight train hour)

Current Issues Rails in the Recovery – or in another slowdown? Is there a peak season in 2011? What’s true? RR (cyclical) traffic or business headlines? Capex – Strategic or Tactical plans prevail? After the Rereg Fight what? STB? TSW? Govt role –partner? Or preoccupied &broke? The Green mantle – two-edged sword…. PE &Infrastructure funds – back for good? New “Golden Age”? Service

Street influence on RRs – and Why that affects ALL stakeholders Battle for cash Management’s reactions to pressures Investors, competitors, regulators, politicians, labor – oh, yes, and customers Rare Industry: Short term decisions (current economic outlook)/long term consequences (40+ year life of a locomotive) Remember 2004! (?) – rails unprepared for volume; embargoes Which “bucket” (Capex, share repo, DPS) will they place their chips?

Simple Math Rates Returns Capital Expenditures Capacity Service ARE ALL CONNECTED! Virtuous Circle (’03-07) or Disinvestment?

Developing website RailTrends 2011 November 1-2 www.abhatchconsulting.com TopShipper Survey RailTrends 2011 November 1-2

Warren’s $44B “all-in” bet Advantages of going private? (capex cycle) – will we see now? Influence in DC - “Robber Baron” vs. “Sage” Bets not (just) on economy – rereg, coal, western intermodal Bought on the cheap! – How does the investment look today, folks?