RAILROAD CAPACITY ISSUES Talking Freight Seminar By: Robert H. Leilich, Railroad Operations Consultant Springfield, VA (703) Washington, DC September 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. Units Source: Cambridge Systematics, Inc.

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

Prepared by R. Leilich – 9/05 Congestion Hotspots - Freight Analysis Framework (FAF) Highways 1998

Prepared by R. Leilich – 9/05 By 2020, It Only Gets Worse In Every Section of the Country...

Prepared by R. Leilich – 9/05  Railroads have similar problems and are even turning away some business Major airports are at capacity with little or no room to grow

Prepared by R. Leilich – 9/05 Our Nation’s Transportation System Is 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.

Prepared by R. Leilich – 9/05 How much can the system handle?

Prepared by R. Leilich – 9/05 On Railroads, As Traffic 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)

Prepared by R. Leilich – 9/05 How Bad Are the Railroads Problems? Source: STB / ICC Transport Statistics and AAR Railroad Facts (Almost Identical to Miles of Track)

Prepared by R. Leilich – 9/05 Railroads are Approaching the Limits of Practical Capacity What are the choices?  Build more track  Change operating practices and schedules  Drop least profitable traffic

Prepared by R. Leilich – 9/05 $$ for Reinvestment Even since railroads won economic freedom in 1980, internally generated cash has been insufficient to meet capital needs

Profits Don’t Cut It

Prepared by R. Leilich – 9/05 Let’s Do Some Simple Math Facts (STB / ICC Transport Statistics):  Average velocity = 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

Prepared by R. Leilich – 9/05 From These Facts, We Derive…  2003 vs 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

Prepared by R. Leilich – 9/05 Toss in Some 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

Prepared by R. Leilich – 9/05 Some More 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

Prepared by R. Leilich – 9/05 More Calculations From Facts and Assumptions Loco unit cost / service hr  Capital = $5.44  Cost of capital = $.49  Fuel (idling) = $4.00 Freight car unit cost / revenue service  Capital = $.20  Cost of capital = $.02 Average annual revenue per freight car = $24,886

Prepared by R. Leilich – 9/05 From All This We Get Annual Velocity Penalty (Capacity Delay) Costs… COST ITEM$(MILLIONS) Locomotive Capital & Capital Cost63.4 Fuel42.8 Labor407.7 Frt Car Capital & Capital Cost59.9 TOTAL573.8

Prepared by R. Leilich – 9/05 What $573.8 Million 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 on-duty hours / yr)  Equal to cost of adding 230 miles of new main line track million per mile)

Prepared by R. Leilich – 9/05 Now, Assuming Current 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 areas With little additional room on the highways or in the air – who’s going to handle the traffic?

Prepared by R. Leilich – 9/05 The Real Dilemma... If sunk (existing) infrastructure investment can’t earn the current cost of capital, it is even less likely that new infrastructure investment will. The revenue inadequacy of railroading is really clear when the need to invest exists.

Prepared by R. Leilich – 9/05 Let’s Look at a Sample Case  Cost - $3.5 million per mile to build an additional signaled main track o40 percent equity investment (18% pre- tax) o60 percent debt financing (9% pretax)  25 year life Under the above simple assumptions, the annuity capital cost is $465,800 per mile.

Prepared by R. Leilich – 9/05 What Does It Take to Recover 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

Prepared by R. Leilich – 9/05 If railroads are the low cost service provider, why is it they cannot price to earn their cost of capital? If laying rail adds more freight and passenger transportation capacity per dollar, why aren’t the economics there? Given the non-level playing field where competing rights of way are publicly provided, the market isn’t willing to pay the price.

Prepared by R. Leilich – 9/05 Whose job is it to resolve transportation capacity issues? Federal Local State Private / users All need to play a role to keep the stool standing

Prepared by R. Leilich – 9/05 While Public / Private Partnerships Are a Solution... While Public / Private Partnerships Are a Solution... Public Benefits + Private Benefits Public Investment + Private Investment = WIN / WIN

Prepared by R. Leilich – 9/05 There Are Often Misunderstandings  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

Prepared by R. Leilich – 9/05 Public/Private Rail Partnerships Require: Public/Private Rail Partnerships 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 examples of public partnerships that appear to work.