North American Freight Rail Industry Transportation Research Board Washington, DC March 14, 2014
Railroads Help Keep Coal- Based Electricity BNSF CN CP CSX FXE KCS/KCSM NS UP Other RRs Freight Railroads in North America SLIDE 2
General Characteristics of North American Freight Railroads Vast majority privatelyowned 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 SLIDE 3
Total $69 billion 1.8 bil. tons U.S. Railroad Commodity Mix - Minerals & mineral products $4.3 bil., 176 mil. tons Coal $14.7 bil., 727 mil. tons *Some intermodal is also included in individual commodities. Data are Class I railroads only. Source: AAR (FCS) Petrol. & Chemicals $12.7 bil., 258 mil. tons 2012 Intermodal* $14.6 bil., 135 mil. tons Food $5.4 bil., 108 mil. tons Grain - $4.8 bil., 144 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 SLIDE 4
Railroads and the Economy Are Tightly Intertwined 104 100 96 92 88 84 80 76 72 68 64 Manuf. Output vs. Rail Carloads Excl. Coal & Grain 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 170,000 162,000 154,000 146,000 138,000 130,000 122,000 114,000 106,000 98,000 90,000 SLIDE 5
Total U.S. Rail Carloads + Intermodal Units 625,000 600,000 575,000 550,000 525,000 500,000 475,000 450,000 425,000 400,000 2006 (peak year) 2014 (average weekly originations) 2013 2011 2009 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Excludes U.S. operations of Canadian railroads. Source: AAR Weekly Railroad Traffic / Rail Time Indicators 2012 SLIDE 6
U.S. Rail Intermodal Traffic (Containers and Trailers) 270,000 260,000 250,000 240,000 230,000 220,000 210,000 200,000 190,000 180,000 170,000 2014 (average weekly originations) 2012 2013 2009 2011 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Excludes U.S. operations of Canadian railroads. Source: AAR Weekly Railroad Traffic / Rail Time Indicators SLIDE 7
U.S. Rail Carloads of Coal 160,000 150,000 (average weekly originations) 2008 (peak year) 140,000 130,000 120,000 110,000 100,000 90,000 2010 2011 2012 2013 2014 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec *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 SLIDE 8
Originated Carloads of Crude Oil on U.S. Class I Railroads 407,761 233,819 5,912 9,500 10,840 29,605 65,751 2007 2008 2009 2010 2011 2012 2013 *estimate based on first three quarters annualized Source: AAR SLIDE 9
Total Cost Volume Handled Volume Must be Carefully Managed to Maintain a Fluid Network As volume on rail networks approaches 100% of theoretical capacity, fluidity of the network deteriorates. 0% 75% 100% Theoretical Throughput Capacity 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. 0% 75% 100% Theoretical Throughput Capacity Both total and average unit cost increases rapidly after comfortable capacity is exceeded. SLIDE 10
Input Factor Cost History SLIDE 11
1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 1990-2011: Rail Production Input Factor Cost Trends 700.0 600.0 500.0 400.0 300.0 200.0 100.0 Labor Fuel M&S Equip. Rental Deprec. Interest Other 0.0 Source- R-1 Reports to STB; Rail Cost Recovery Index Publication SLIDE 12
Current Weight of Cost Components 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% Source- Quarterly RCAF Filing, Second Quarter 2014 SLIDE 13
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1990-2011: Rail Cost Adjustment Factor (All Inclusive Index) 2.50 2.25 2.00 1.75 1.50 1.25 1.00 Cost Index = Rail Cost Addjustment Factor (RCAF) 0.75 0.50 Source- R-1 Reports to STB; Rail Cost Recovery Index Publication SLIDE 14
Rail Cost Adjustment Factor (RCAF) vs. Consumer Price Index (CPI) 180 170 160 150 140 130 120 110 100 (Index 2000 = 100) RCAF CPI 90 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 *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 SLIDE 15
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1990-2011: Cost and Price Trends 2.50 2.25 Price measured as Revenue per Revenue Ton- Mile 2.00 1.75 1.50 RCAF 1.25 1.00 0.75 0.50 Revenue per Revenue Ton- Mile, All Commodities Source- R-1 Reports to STB; Rail Cost Recovery Index Publication, STB Waybill Sample SLIDE 16
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Why Use the Ton-Mile as the Primary Price Measure? 1.3 1.2 Average Length of Haul - up 26% 1.1 1.0 Average Freight Car Capacity - up 16% Average Car Capacity Length of Haul 0.9 Per Car Price Measure Ignores both increase in average capacity and increasing length of haul. Per Ton Price Measure Ignores increasing length of haul. 0.8 Source- R-1 Reports to STB; Rail Cost Recovery Index Publication, STB Waybill Sample SLIDE 17
Recent RR Rate Increases Largely a Function of Higher RR Input Costs 180 160 140 120 100 RR Cost Recovery Index* vs. RR Rates** (Index 2003 = 100) RR cost recovery index RR revenue per ton-mile 80 correlation = 99% 60 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 *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 SLIDE 18
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1990-2011: Commodity Price Trends 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 RCAF Metals Intermodal Petroleum Products Grain Price measured as Revenue per Revenue Ton- Mile Minerals Source- R-1 Reports to STB; Rail Cost Recovery Index Publication, STB Waybill Sample SLIDE 19
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1990-2011: Commodity Price Trends 2.50 2.25 Price measured as Revenue per Revenue Ton- Mile 2.00 1.75 1.50 1.25 1.00 0.75 RCAF Chemicals Paper Food Products Mineral Products Motor Vehicles 0.50 Source- R-1 Reports to STB; Rail Cost Recovery Index Publication; STB Waybill Sample SLIDE 20
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1990-2011: Commodity Price Trends 2.50 2.25 Price measured as Revenue per Revenue Ton- Mile 2.00 1.75 1.50 1.25 1.00 RCAF Wood Products Ore Coal Waste & Scrap 0.75 0.50 Source- R-1 Reports to STB; Rail Cost Recovery Index Publication, STB Waybill Sample SLIDE 21
Productivity: Key to Improved Rail Network Performance SLIDE 22
Overall Freight Railroad Productivity 50 45 40 35 30 25 20 15 10 5 0 (revenue ton-miles per constant dollar operating expense*) '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 *Using this measure, productivity can be negatively affected when railroad input costs (e.g., fuel) increase, as they have in recent years. Source: AAR SLIDE 23
Overall Freight Railroad Productivity Excluding Fuel 50 45 40 35 30 25 20 15 10 5 0 (revenue ton-miles per constant dollar operating expense*) '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 *excludes fuel. Source: AAR SLIDE 24
Class I Railroad Employment 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: AAR SLIDE 25
Revenue Ton-Miles Per Employee 12 11 10 9 8 7 6 5 4 3 2 1 0 (millions) '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Data are for Class I railroads. Source: AAR SLIDE 26
Sharp Increase in Rail Traffic Density 20 18 16 14 12 10 8 6 4 2 0 (millions of revenue ton-miles per mile of railroad) Up 238% '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Miles = route-miles owned Data are for Class I railroads. Source: AAR SLIDE 27
High Density* Rail Miles Have Increased 75,000 70,000 65,000 60,000 55,000 50,000 45,000 40,000 35,000 (miles) '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 *Track with freight density of at least 20 million gross ton-miles. Excludes way and yard switching tracks. Source: AAR SLIDE 28
Average Freight Train Load 3,800 3,600 3,400 3,200 3,000 2,800 2,600 2,400 2,200 2,000 1,800 1,600 The average freight train carried a near-record 3,458 tons of freight in 2012, up 56% since 1980 and up 18% since 2000. (tons) '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Data are for Class I railroads. Source: AAR SLIDE 29
Revenue Ton-Miles Per Locomotive 80 70 60 50 40 30 20 10 0 (millions) '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Data are for Class I railroads. Source: AAR SLIDE 30
Freight Rail Fuel Efficiency Is Up 102% Since 1980 500 475 450 425 400 375 350 325 300 275 250 225 200 175 (revenue ton-miles per gallon) '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: AAR SLIDE 31
Fuel Use vs. Volume Handled 200 175 150 125 100 75 50 25 0 (1980 = 100) RR Fuel Consumption* RR Volume '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 *in freight service volume = revenue ton-miles. Source: AAR SLIDE 32
How Have the Productivity Benefits Been Distributed? 1980 1986 1986 1996 1996 2004 2004 2008 1980 2008 Customer Share Railroad Share 161% 74% 127% -37% 85% -61% 26% -27% 137% 15% Source- B. Kelly Eakin & Philip E. Schoech, The Distribution of the Post-Staggers Act Railroad Productivity Gains, Christensen Associates, Madison, Wisconsin, December 2010. SLIDE 33
Profitability and Investment SLIDE 34
Rail Profits Only Recently Becoming Average 16% 14% 12% 10% 8% 6% 4% 2% 0% Return on Equity: Freight RRs vs. Fortune 500 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Class I RRs Median Fortune 500 Return on equity = net profit / shareholders' equity. Source: AAR, Fortune magazine SLIDE 35
UPS vs. 4 Largest U.S. Freight Railroads UPS vs. Four Largest U.S. Freight RRs ($ billions) 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 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. SLIDE 36
Close Correlation Between RR Earnings and Reinvestments $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 Net income (left scale, $ bil) Rail spending on infrastructure and equipment* (right scale, $ bil) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 *Capital spending plus maintenance expenses. Data are current dollars and are for Class I railroads. Source: AAR $26 $25 $24 $23 $22 $21 $20 $19 $18 $17 $16 $15 SLIDE 37
Record Investments in Recent Years Despite the Economy Railroad Spending on Infrastructure and Equipment* ($ billions) $23.3 $21.5 $20.2 $20.2 $20.7 $19.3 $25.5 $25.6 $26.0+ $16.7 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e *Capital spending + maintenance expenses. Data are for Class I railroads. Source: AAR SLIDE 38
Railroad Capital Spending ($ billions, current dollars) $14 $12 $10 Roadway and Structures Equipment $8 $6 $4 $2 $0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Data are for Class I railroads. Source: AAR SLIDE 39
Spending by U.S. Freight Railroads on Infrastructure Total spending Total $8.6 $8.8 $8.0 $10.6 $10.7 ($ billions) $11.9 $11.1 $7.9 $7.0 $6.9 $7.4 $4.6 $4.9 $5.4 Maintenance expenses $3.4 $3.7 $3.4 $3.6 $3.7 $4.0 $3.7 $14.0 $12.1 $12.5 $9.2 $7.9 $7.9 Capital spending $4.2 $4.6 $4.8 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Data are for Class I railroads. Source: AAR SLIDE 40
Spending by U.S. Freight Railroads on Equipment $7.6 Total spending $8.1 $7.9 $8.7 ($ billions) $9.5 $9.7 $9.1 $8.7 $10.8 $11.5 $6.8 $6.9 $7.2 $7.3 $7.3 $6.3 $6.5 $6.8 $7.2 $7.2 Maintenance expenses $2.2 $2.3 $2.6 $4.3 $1.9 $3.7 $1.3 $1.3 $1.5 $1.0 Capital spending 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Data are for Class I railroads. Source: AAR SLIDE 41
Net Results SLIDE 42
Staggers Act: An Unqualified Success 300 275 250 225 200 175 150 125 100 75 50 25 0 Staggers Act Passed Oct. 1980 '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 Source: AAR (index 1981 = 100) Productivity up 135% Rates down 42% Volume up 88% Revenue up 3% SLIDE 43
Finally Closer to Earning Cost of Capital 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Class I RR Cost of Capital vs. Return on Investment RR Cost of Capital RR Return on Investment '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12p 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 SLIDE 44
Association of American Railroads www.aar.org SLIDE 45