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RAILROAD CAPACITY ISSUES Talking Freight Seminar

RAILROAD CAPACITY ISSUES Talking Freight Seminar. Washington, DC September 21, 2005. By: Robert H. Leilich, Railroad Operations Consultant Springfield, VA (703) 941-0560 Rleilich@cox.net. Source: Cambridge Systematics, Inc.

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RAILROAD CAPACITY ISSUES Talking Freight Seminar

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  1. RAILROAD CAPACITY ISSUESTalking Freight Seminar Washington, DC September 21, 2005 By: Robert H. Leilich, Railroad Operations Consultant Springfield, VA (703) 941-0560 Rleilich@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 Nation’s 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 Don’t Cut It

  14. Let’s 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…

  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 (@1500 on-duty hours / yr) • Equal to cost of adding 230 miles of new main line track (@$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 – who’s going to handle the traffic?

  22. The Real Dilemma... If sunk (existing) infrastructure investment can’t 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. Let’s 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 WON’T 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 aren’t the economics there? Given the non-level playing field where competing rights of way are publicly provided, the market isn’t 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. Public Benefits + Private Benefits Public Investment + Private Investment 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.

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