RAILROAD CAPACITY ISSUES Talking Freight Seminar

1
RAILROAD CAPACITY ISSUESTalking Freight Seminar
Washington, DC September 21, 2005
By Robert H. Leilich, Railroad Operations
Consultant Springfield, VA (703)
941-0560 Rleilich_at_cox.net
2
Source Cambridge Systematics, Inc.
In 2000, the US freight system moved 14 billion
tons of freight valued at 11 trillion, over 4.5
trillion ton-miles.
Units
3
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.
4
Congestion Hotspots - Freight Analysis Framework
(FAF) Highways 1998
5
By 2020, It Only Gets Worse In Every Section of
the Country...
6
Major airports are at capacity with little or
no room to grow

• Railroads have similar problems and are even
  turning away some business

7
Our Nations 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.

8
How much can the system handle?
9
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)

10
How Bad Are the Railroads Problems?
Source STB / ICC Transport Statistics and AAR
Railroad Facts
(Almost Identical to Miles of Track)
11
Railroads are Approaching the Limits of Practical
Capacity

• What are the choices?
• Build more track
• Change operating practices and schedules
• Drop least profitable traffic

12
for Reinvestment
Even since railroads won economic freedom in
1980, internally generated cash has been
insufficient to meet capital needs
13
Profits Dont Cut It
14
Lets Do Some Simple Math

• Facts (STB / ICC Transport Statistics)
• Average velocity 1990-1993 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

15
From These Facts, We Derive

• 2003 vs 1990-1993 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

16
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

17
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

18
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

19
From All This We Get Annual Velocity Penalty
(Capacity Delay) Costs
COST ITEM (MILLIONS)
Locomotive
Capital Capital Cost 63.4
Fuel 42.8
Labor 407.7
Frt Car Capital Capital Cost 59.9
TOTAL 573.8
20
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 (_at_1500
  on-duty hours / yr)
• Equal to cost of adding 230 miles of new main
  line track (_at_2.5 million per mile)

21
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 whos going to handle the traffic?
22
The Real Dilemma...
If sunk (existing) infrastructure investment
cant 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.
23
Lets Look at a Sample Case

• Cost - 3.5 million per mile to build an
  additional signaled main track
• 40 percent equity investment (18 pre-tax)
• 60 percent debt financing (9 pretax)
• 25 year life

Under the above simple assumptions, the annuity
capital cost is 465,800 per mile.
24
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 WONT FLY

Averages from Year 2000 STB data
25
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
arent the economics there? Given the non-level
playing field where competing rights of way are
publicly provided, the market isnt willing to
pay the price.
26
Whose job is it to resolve transportation
capacity issues?
Federal
All need to play a role to keep the stool standing
State
Local
Private / users
27
While Public / Private Partnerships Are a
Solution...

WIN / WIN
28
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

29
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.