Issues Facing the

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Issues Facing the U.S. Freight Railroad
Industry National Stone, Sand Gravel
Association Pulverized Minerals
Division September 12, 2006 Mike Darragh CSX
Transportation
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North Americas Rail Network Extensive,
Efficient Integrated
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Class I Railroad Traffic in 2005 (Gross Freight
Revenue)
Intermodal - 10.1 bil
Coal - 9.4 bil
Chemicals - 5.4 bil
Transportation equipment - 4.0 bil
Farm products (mainly grain) - 3.6 bil
Food - 3.3 bil
Lumber wood - 2.3 bil
Pulp paper - 2.0 bil
Primary metal products (e.g., steel) - 1.7 bil
Stone, clay glass products (e.g., cement) -
1.5 bil
Nonmetallic minerals (e.g., sand, gravel) - 1.3
bil
Source AAR Estimated. Some intermodal
revenue is also included in individual
commodities.
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Rail Transportation of Calcium Carbonate in
2004 Summary
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Rail Carloads of Calcium Carbonate 1982-2004
Trendline
Includes Crushed agric. limestone (STCC 3295948,
50, and 53) crushed limestone not for
agriculture (STCC 3295960) limestone slurry
(STCC 3295956) solid calcium carbonate (STCC
2812630) calcium carbonate slurry (2812668) and
untreated limestone (STCC 14211) Source STB
Waybill Sample
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Rail Tons of Calcium Carbonate 1982-2004
(Millions of Tons)
Trendline
Includes Crushed agric. limestone (STCC 3295948,
50, and 53) crushed limestone not for
agriculture (STCC 3295960) limestone slurry
(STCC 3295956) solid calcium carbonate (STCC
2812630) calcium carbonate slurry (2812668) and
untreated limestone (STCC 14211) Source STB
Waybill Sample
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Rail Carloads of Calcium Carbonate 1982-2004
Calcium carbonate slurry, calcium carbonate
solid, untreated limestone
Source STB Waybill Sample
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RR Revenue Per Ton-Mile 1982-2004 (Constant 2004
)
Source STB Waybill Sample
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2005 Was a Good Year for Railroads...
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...But Even in 2005,Rail Profitability Was
Substandard
Fortune 500 Return on Equity Selected
Industries, 2005
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Median Return on Equity SP 500 2005
SP 500 Data Tell the Same Story Rail Earnings
Were Still Subpar in 2005
BNSF, CSX, NS, and UP
Source Business Week
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RR Profitability Has Consistently Lagged Most
Other Industries
of Industries With Median ROE Higher Than RRs
of Industries With Median ROE Lower Than RRs
Source Fortune 500
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Historically, RRs Have Not EarnedTheir Cost of
Capital
Class I RR Cost of Capital vs. Return on
Investment
RR Cost of Capital
RR Return on Investment
e preliminary AAR estimate Sources
AAR, STB
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Return on Investment is Crucial
ROI
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Record Rail Traffic Has Stressed Capacity
U.S. Rail Traffic Change From Previous Year
Q1-01 to Q2-06
Intermodal
Carloads
Source AAR Weekly Railroad Traffic
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Rail Traffic Density Has Been Rising
Millions of Class I Ton-Miles Per Mile of Road
Owned
Source AAR
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Railroads Have Been Increasing Spending for a
Long Time...
Class I Spending on Infrastructure
Equipment Per Mile of Road Owned
Trend line
Capital spending maintenance expenses -
depreciation Source AAR
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What Are Railroads Doing To IncreaseCapacity and
Enhance Service?

• Stepped-up spending on equipment and
  infrastructure
• Aggressive hiring
• Infusion of technology
• New operating plans
• Cooperative alliances
• Working with customers

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...And Are Poised to Spend Even More
Class I RR Capital Expenditures ( Billions)
e AAR estimate Source AAR
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Railroading is Far More Capital Intensive Than
Other Industries
Capital Expenditures as of Revenue Avg.
19952004
Class I RRs
Computers
Petrol. Coal Prod.
Avg. All Mfg.
Plastics
Transp. Equip.
Nonmet. Minerals
Food
Wood Prod.
Chemicals
Paper
Sources Census Bureau, AAR
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As demand increases, the railroads ability to
generate profits from which to finance new
investments will be critical. Profits are key to
increasing capacity because they provide both the
incentives and the means to make new
investments. Congressional Budget Office
(Jan. 2006)
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Capacity is Strained Across All Modes...
Sadly, for millions of Americans gridlock has
become a daily fact of life. Traffic jams.
Freight tie-ups. Airport delays. All waste
energy, reduce air quality and rob families of
precious time together. -DOT Secretary Norm
Mineta
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...And Will Get Worse Unless We Do Something
About It
Billions of Tons of Freight Transported in the
U.S.
p projected Source U.S. DOT - Freight
Analysis Framework
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Sound Policy Demands That RRs Be a Major Part of
the Solution
If improvements are not made in the freight-rail
system, the nations freight transportation
system will weaken and shippers, highway users,
and communities will pay the social, economic,
and environmental costs. ? AASHTO

• Cost effectiveness
• Fuel efficiency
• Congestion and highway costs
• Environment
• Safety

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Tax Incentives for RailroadCapacity Expansion
are a Solution

• 25 tax credit for projects that expand rail
  capacity
• Expense other infrastructure capital expenditures
• Leverage private investment

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Public-Private Partnerships Can Help With Capacity

• Best used for projects whose main purpose is to
  meet public needs.
• RRs pay for their benefits and public pays for
  public benefits.
• Not subsidy to RRs.

Relatively small public investments in the
nations freight railroads can be leveraged into
relatively large benefits for the nations
highway infrastructure, highway users, and
freight shippers. -AASHTO
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U.S. Railroad Performance 1964-2005(Index 1981
100)
Productivity
Volume
Staggers Act Passed Oct. 1980
Revenue
Price
Source AAR
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S. 919/H.R. 2047 Would Mean Reduced Capacity and
Service

• ? Goal lower rail rates for certain shippers
• Result lower rail revenue, capital drain,
  disinvestment.
• S. 919/H.R. 2047 would mean less rail capacity
  when we need more.

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