Rail Industry Trends: An External View

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Rail Industry Trends An External View

• Presentation to the Northern Transportation
  Conference Freight Rail in B.C.21 November
  2002
• Mike TrethewayVice President Chief
  EconomistInterVISTAS Consulting Inc.

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Productivity Up, Rates Down
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Productivity Up, Rates Down

• Since the US 1980 Staggers Act
• Rail productivity has increased by 250
• Rates have declined by 50 in real terms
• Traffic has increased 50
• Carriers are more profitable
• accidents down 70
• Similar trends in Canada

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Canadian Rail Productivity CP
Input prices
Output Prices
Source Tretheway Waters, UBC
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Canadian Rail Productivity CP
Price ProductivityInput prices/output prices
Total Factor Productivity
The gap indicates rail prices have fallen faster
than its productivity has grown
Source Tretheway Waters, UBC
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Canadian Rail Productivity CN
Price ProductivityInput prices/output prices
Total Factor Productivity
The gap indicates rail prices have fallen faster
than its productivity has grown
Source Tretheway Waters, UBC
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Transfer to Short Lines

• Many miles of road have been retained by
  conversion from uneconomic Class I operation to
  high productivity Short Lines
• 29 of mileage now non-Class I

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What is a Short Line?

• US Definitions
• Class I railroad (9 US 2 Cdn)
• Annual revenues above 260 million
• Class II railroad regional railroad (36)
• annual revenues 40 - 260 million
• Short Line local railroad (510)
• under 40 million
• linehaul shortlines
• switching terminal short lines
• ignored here

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Transfers to Regional/Short Line

• The shedding of lightly used rail lines by Class
  I railroads has provided local economic
  opportunity through the creation of smaller short
  line and regional railroads
• National Governors Associationpolicy position
  16.2.1

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What is a Class II/Regional ?

• A collection of short lines whose aggregate
  revenues exceed 40 million?
• A mini-class I ?
• same overheads but smaller traffic base
• is this a viable model?
• Will the Class II either be integrated into a
  Class I
• or be farmed out to shortline operation?

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Transfer to Short Lines

• Canada
• shortline share of carloads increased from 15 to
  30 industry share in 10 years
• source RAC
• more track has been transferred than discontinued
• Regional/short line share of route kms
• now approaching CP Share

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Less Track Owned

• Class I
• miles operated down 10
• miles owned down 23
• Short Line
• miles operated up 11
• miles owned unchanged
• Regional
• miles operated up 16, owned up 8

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Strong Marketing Focus

• Customised services contract
• not generic, regulated services
• Focusing on broader logistics needs
• through rates, interchange, etc.
• Have stemmed the loss of market share

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Extending Market Reach

• Investment in other carriers
• ex) CN investment in ICG, WC
• Alliances with other carriers
• ex) CP alliance with UP (CanAm brand)access into
  US West SW

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Regional/Short Line Challenge

• US Short lines
• 29 of miles
• 13 of tonnage
• 10 of revenues
• Can the regiona/short line operators pay for
  required capital investment?
• 10 billion unmet capital spending need
• Am Asso State Highway Transport Officials

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Regional/Short Line Challenge

• Aging fleet challenge
• 93 of motive power more than 20 years old
• 56 of car fleet more than 20 years old
• 286 challenge (grain, lumber, paper)
• can shortlines handle the axle loads?

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Relative Employee Productivity

• Changes 1990-99 (US)
• Class I down 16
• Regional down 2
• Shortline down 24
• Regionals have not shed labour at the same rate
  as the Class I or short line carriers

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US Revenue per Employee
16 Gap
Both Class I and Regionals have higher
productivity
Source AAR 10 year trends
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Future of Class II Rail Carriers?

• Class I
• High productivity
• High density

?
Class II
?
S

• Short Line
• Low cost
• Low density

D
Economics will drive the future of the Class II
carriers
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Class II Trends

• Wisconsin Central
• purchased by CN Rail
• integrated in CN operations/marketing
• the Wisconsin Central Division
• Rail America
• regional operator
• actually revenues are 335 million
• but actually a collection of 49 short lines

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The Future

• North American Rail Industry
• achieved remarkable productivity gains
• improved financial performance
• stronger customer focus
• significantly reduced tariffs
• Class II carriers
• difficult to fit into these trends
• economics will determine their role

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Thank You !