1. Update of the Freight Rail Bottom Line Report: Continuing Study of Freight Rail Supply Meeting Demand Briefing for AASHTO
Joseph Bryan
WSP | Parsons Brinckerhoff
Boston, MA
November 13, 2016

2. Revisit Premises of 2002 AASHTO Freight Rail Bottom Line Report, Examine New Issues
AASHTO Premises
Private railroads are not responsible for solving national capacity issues. Railroads respond to market forces, which may not necessarily provide an incentive to add capacity at a pace to meet demand.
Rationing of capacity will impact some shippers worse than others
Public private partnerships are valuable capacity enhancing tools
State DOT’s can further develop and implement performance measures to ensure effective PPP’s
Conclusions of the 2002 Freight Rail Bottom Line Report are basically true, namely that relatively small additional investments in the freight rail system can be levered to provide relatively large public benefits

3. AASHTO Study Tasks and Status
Work Item 1: Critique of SCORT Study Proposal
Work Item 2: Review of the 2002 Freight Rail Bottom Line Report
Work Item 3: Analysis of Railroad Share of Freight Movement
Work Item 4: Impacts of Expected Railroad Share of Transport Market
Work Item 5: Industries most impacted by Rail Capacity
Work Item 6: Parameters for State-Railroad PPPs for Capacity Projects
Work Items 7 and 8: Draft and Final Report
We’re Here
Began
June 2015
End in
2017

4. Themes: Improved Class I Profitability
Class I Railroad Combined Operating Ratio (Operating Expense / Operating Revenue)
Source: Analysis of AAR Ten Year Trends

5. Railroads Covering Regulatory Cost of Capital
Class I Railroad Industry Rate of Return on Net Investment and STB Cost of Capital
Source: AAR Ten Year Trends

6. Railroad Investment More Than Doubles to 2013
Class I Railroad Capital Expenditure (Millions 2011 Dollars)
Source: AAR Ten Year Trends

7. Short Line Financial Growth Not as Strong
Results from American Short Line and Regional Railroad Association Survey
2002
2010
% Change
Carloads
9.4
7.8
-17%
Revenue (Millions)
$2,815
$3,289
17%
Revenue (2011$ Millions)
$3,461
$3,359
-3%
Miles
47,889
43,003
-10%
Carloads per Mile
195
181
-7%
Revenue per Mile
$58,782
$76,483
30%
Revenue per Mile (2011$)
$72,263
$78,114 8%
Railroad Cost Recover Index - Fuel
212.5
636.2
199%
Source: American Short Line and Regional Railroad Association

8. 2015/2016 Brings a Chill Wind, But no Return to 2002 Capacity Constraints
BNSF: “While this year’s overall plan is $1.5 billion less than we spent in 2015…”
UP: “Total volumes decreased 9 percent in the quarter, more than offsetting another quarter of solid core pricing gains…”
NS: “Railroad operating revenues declined 12 percent compared with fourth-quarter 2014…”
CSX: “With negative global and industrial market trends projected for 2016, full-year earnings per share are expected to be down compared to 2015”
These are excerpts from recent railroad news releases and earnings announcements. In general, volumes are down, but railroad pricing is still strong. Railroad financial performance is not as strong as it was in 2014 but is still much better than when the last Freight Rail Bottom Line Report was prepared

9. Continued Railroad Specialization – Larger Shipments Sizes
Source: Analysis of STB Public Use Waybill Sample

10. Unspectacular Growth in Markets Traditionally Served by Manifest Freight
Millions of Tons Moved by Rail – General Freight Products
Other commodities not shown also follow this trend. For example, shipments of chemicals outside of ethanol do not appear to have increased. Beyond sand, many categories of non metallic minerals are also flat or declining. Unfortunately, we don’t have detail beyond 2 digit STCC for what is shown.
Source: AAR Ten Year Trends

11. Ups and Downs of Unit Train Traffic
Millions of Tons Moved by Rail – Commodities often Shipped in Unit Trains
The economics of unit train are favorable to rail. If you can load a whole train and deliver it somewhere a reasonable distance, chances are that rail will be preferable. Because of the favorable economics of rail, modal competition is lower, and there can be potential to earn a higher return. The railroad mode creates more economic value, so there is more value available for the railroad to take for itself. Here, the performance of rail is more a function of the demand for the underlying commodity.

12. Strong Intermodal Growth Helped by Investment
Changes in Intermodal Tonnage
In general, intermodal has been a success story, growing faster than other types of rail traffic. This has been made possible by significant investment by railroads and the public sector. These three examples are all in the East. They have been provided because we can quantify them. But western improvements have also enabled major increases in intermodal traffic.
=====
If [Orig Name]="New York-No. New Jersey-Long Island, NY-NJ-CT-PA-MA-VT" or [Dest Name]="New York-No. New Jersey-Long Island, NY-NJ-CT-PA-MA-VT"
THEN "PANYNJ“
IF ([Orig Name]="Norfolk-Virginia Beach-Newport News, VA-NC" or [Orig Name]="Columbus, OH" or [Orig Name]="Roanoke, VA-NC-WV" or [Orig Name]="Chicago-Gary-Kenosha, IL-IN-WI" or [Orig Name]="Detroit-Ann Arbor-Flint, MI" or [Orig Name]="Cincinnati-Hamilton, OH-KY-IN") and ([Dest Name]="Norfolk-Virginia Beach-Newport News, VA-NC")
THEN "HC"
ELSEIF ([Orig Name]="Norfolk-Virginia Beach-Newport News, VA-NC") and ([Dest Name]="Norfolk-Virginia Beach-Newport News, VA-NC" or [Dest Name]="Columbus, OH" or [Dest Name]="Roanoke, VA-NC-WV" or [Dest Name]="Chicago-Gary-Kenosha, IL-IN-WI" or [Dest Name]="Detroit-Ann Arbor-Flint, MI" or [Dest Name]="Cincinnati-Hamilton, OH-KY-IN")
THEN “heartland corridor“
IF ([F33_Originating Territory]=1 and [F44_Destination Territory]=2) or ([F33_Originating Territory]=2 and [F44_Destination Territory]=1)
THEN “crecent corridor related"
Source: Analysis of STB Public Use Waybill Sample

13. Forecasts: Loss of Rail Share Due Slow Growth of Underlying Commodities
Rail Percent Modal Share by Tonnage
Ton-Mile Growth
2013
2019
2025
Rail Intermodal
1.2
1.4
1.8
Rail Non Intermodal
13.3
12.5
12.1
Total Rail
14.5
13.9
13.8
Total Truck
69.1
70.9
71.4
Source: American Trucking Associations Forecast, 2015
The table on the left is from TRANSEARCH, while the chart on the right is from FAF. Both generally have the same source, IHS Global Insight. Generally, these sources show rail losing market share to trucking as demand for the underlying commodities grows more slowly than that for commodities traditionally shipped by truck. Not, though that the trucking line follows the historic trend line, but the rail bends downward.
Source: USDOT Draft National Freight Strategic Plan

14. Mode Shift Scenarios
This is not a result of an analysis, but rather an input and assumption. These scenarios are the main variable driving the changes in the other variables.

15. 30 Year Savings – Discounted at 7%
1% Mode-shift
(Million $ in 2015)
3% Mode-shift
5% Mode-shift
Shipper Savings
$8,573
$25,720
$42,867
Pavement maintenance savings
$3,000
$9,000
$15,000
Marginal congestion savings
$1,073
$3,219
$5,366
Emissions savings
- CO2 emissions savings
$2,345
$7,034
$11,723
- NOX emissions savings
$14
$43
$71
- PM emissions savings
$520
$1,560
$2,600
- VOC emissions savings $0
Emissions subtotal
$2,879
$8,637
$14,394
Safety savings
- Injury crash savings
$888
$2,664
$4,439
- Fatality crash savings
$2,286
$6,859
$11,432
- Property damage only crash savings
$103
$308
$514
Safety subtotal
$3,277
$9,831
$16,385
Total Discounted Benefits
$18,802
$56,406
$94,011
Total Undiscounted Benefits
$55,488
$166,465
$277,442

16. Main Points To Date & What’s Next
The railroad renaissance: Over the past decade, Class I’s have been better able to invest
Rail mode share is driven by performance of rail service
Slow growth in manifest
Ups and downs of unit train
Investment helps intermodal
Freight rail yields significant benefits
What’s Next:
Reboot central message of the 2002 Report
Freight rail projects can be good public investments
Going beyond
Help states be smarter about public/private partnerships
As we shift this project to the question of when public/private partnerships are appropriate and the role of state agencies in freight rail investments, several directions occur to us. One is that maybe the role of state agencies should not be a generic “let’s promote rail.” Rather, let’s promote specific rail services that the railroads, investments for which the railroads would not have funded or not have funded any time soon. There may be a difference in the need for state agencies to fund projects to promote bulk unit train v. intermodal v. manifest freight projects.

17. Next Steps Reflect Changes Since 2002 Freight Rail Bottom Line Report
Then
Now
Concept that small public investments in freight rail could yield large public benefits was new
Public benefits of freight rail are well established
Public investments in rail were primarily limited to corridor preservation
A range of investments (Intermodal, operational, port-related)
Freight traffic was growing rapidly
Traffic was just beginning to recover from the recession, when coal, other factors caused a decline
Capacity appeared to be a major issue
Short term capacity problems, but not as consistent a story
Railroad revenue per ton-mile was drifting downward, didn’t seem that industry earned enough to reinvest
Not as consistent a story

18. Next: Issues for Work Item 5
Which industries most likely to be impacted by rail issues/benefit most from resolving rail issues
Purpose
Provide guidance of industries that would benefit from public investment in rail infrastructure
Help states to communicate industry rail needs with stakeholders
Understand better the dynamics of rail service, what drives the level of service shippers receive in order to inform state decisions

19. Work Item 5 – Likely Hypotheses
Size matters – better service for larger shippers
Ease of serving matters
Unit train/big blocks of car require less cost/effort
Consistency of service matters – easier to be a conveyor belt than constantly reacting to surges
The future matters
Growing source of business
Stable/predictable
Direction of US trade and energy policy
Location matters
Underutilized portions of networks vs. mainline
Competition matters
How much is always a question

20. Approach to Evaluation
Interviewees
Trade associations
Shippers
Agriculture
Chemical
Intermodal marketing
Materials handling
Steel
Forest products
Automotive
Food
Oil and Gas
Short line industry
Types of Questions
Rail service issues
Shifts in the nature of rail service
Criteria for rail service
Railcar ownership
Determinants of rail service within industry
Usage of rail/truck modes, truck alternatives
Short haul intermodal usage
Volume shipped per shipper
Result: Matrix of Industries and Rail Issues, Differences between Industries in Terms Resource Intensity of Rail Service, Likely Parameters of Service

21. Defining the Parameters Public/ Private Partnership
Work Item 6: Parameters of State – Railroad Public/Private Partnerships
Defining the Parameters
What the public sector would invest in
What the private sector would invest in
Public/ Private Partnership
Opportunities

22. What the Public Sector Would Invest In
Drivers of Benefits
Volume of freight impacted
Likelihood of modal shift without project
Level of modal shift attributable to project
Drivers of Economic Impacts
Job creation
Number of businesses
Land development, tax revenues, local economic health
Other
DOT strategic plan, development strategy
Impacts on general public

23. What the Private Sector Would Invest in
Return on Investment
Revenue
Costs of service
Growth prospects
Cost reduction
Other Factors
Risks
Competing opportunities
Fit with existing service
Fit with corporate growth strategy
Corporate governance

24. Indications Railroads Might Invest Without Public Involvement
Size of project relative to volume of freight impacted
Risks of traffic not materializing
Likely outcome if project is not completed, i.e. extent to which project is on “core” network or part of long-term strategy
Additional maintenance burden from project
Typical hurdle rate
Relative balance of public and private benefits
Financial context
Other factors such as competing investment needs, limited funds , which create uncertainty

25. Closing Consideration
Railroads have system-wide network strategies that move markets and drive their investment
States programs mainly focus on their own back yards
Would public sector programs be more effective in supporting the right projects and generating benefits if we used regional network strategies?

26. Questions/Comments