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Boston, MA November 13, 2016

Update of t he Freight Rail Bottom Line Report: Continuing Study of Freight Rail Supply Meeting Demand Briefing for AASHTO. Joseph Bryan WSP | Parsons Brinckerhoff. Boston, MA November 13, 2016. Revisit Premises of 2002 AASHTO Freight Rail Bottom Line Report, Examine New Issues.

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Boston, MA November 13, 2016

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  1. Update of the Freight Rail Bottom Line Report: Continuing Study of Freight Rail Supply Meeting DemandBriefing for AASHTO Joseph Bryan WSP | Parsons Brinckerhoff Boston, MA November 13, 2016

  2. Revisit Premises of 2002 AASHTO Freight Rail Bottom Line Report, Examine New Issues AASHTO Premises • Private railroads are not responsible for solving national capacity issues. Railroads respond to market forces, which may not necessarily provide an incentive to add capacity at a pace to meet demand. • Rationing of capacity will impact some shippers worse than others • Public private partnerships are valuable capacity enhancing tools • State DOT’s can further develop and implement performance measures to ensure effective PPP’s • Conclusions of the 2002 Freight Rail Bottom Line Report are basically true, namely that relatively small additional investments in the freight rail system can be levered to provide relatively large public benefits

  3. AASHTO Study Tasks and Status We’re Here Began June 2015 End in 2017

  4. Themes: Improved Class I Profitability Class I Railroad Combined Operating Ratio (Operating Expense / Operating Revenue) Source: Analysis of AAR Ten Year Trends

  5. Railroads Covering Regulatory Cost of Capital Class I Railroad Industry Rate of Return on Net Investment and STB Cost of Capital Source: AAR Ten Year Trends

  6. Railroad Investment More Than Doubles to 2013 Class I Railroad Capital Expenditure (Millions 2011 Dollars) Source: AAR Ten Year Trends

  7. Short Line Financial Growth Not as Strong Results from American Short Line and Regional Railroad Association Survey Source: American Short Line and Regional Railroad Association

  8. 2015/2016 Brings a Chill Wind, But no Return to 2002 Capacity Constraints • BNSF: “While this year’s overall plan is $1.5 billion less than we spent in 2015…” • UP: “Total volumes decreased 9 percent in the quarter, more than offsetting another quarter of solid core pricing gains…” • NS: “Railroad operating revenues declined 12 percent compared with fourth-quarter 2014…” • CSX: “With negative global and industrial market trends projected for 2016, full-year earnings per share are expected to be down compared to 2015”

  9. Continued Railroad Specialization – Larger Shipments Sizes Source: Analysis of STB Public Use Waybill Sample

  10. Unspectacular Growth in Markets Traditionally Served by Manifest Freight Millions of Tons Moved by Rail – General Freight Products Source: AAR Ten Year Trends

  11. Ups and Downs of Unit Train Traffic Millions of Tons Moved by Rail – Commodities often Shipped in Unit Trains

  12. Strong Intermodal Growth Helped by Investment Changes in Intermodal Tonnage Source: Analysis of STB Public Use Waybill Sample

  13. Forecasts: Loss of Rail Share Due Slow Growth of Underlying Commodities Ton-Mile Growth Rail Percent Modal Share by Tonnage Source: American Trucking Associations Forecast, 2015 Source: USDOT Draft National Freight Strategic Plan

  14. Mode Shift Scenarios

  15. 30 Year Savings – Discounted at 7%

  16. Main Points To Date & What’s Next Main Points: • The railroad renaissance: Over the past decade, Class I’s have been better able to invest • Rail mode share is driven by performance of rail service • Slow growth in manifest • Ups and downs of unit train • Investment helps intermodal • Freight rail yields significant benefits What’s Next: • Reboot central message of the 2002 Report • Freight rail projects can be good public investments • Going beyond • Help states be smarter about public/private partnerships

  17. Next Steps Reflect Changes Since 2002 Freight Rail Bottom Line Report

  18. Next: Issues for Work Item 5 • Which industries most likely to be impacted by rail issues/benefit most from resolving rail issues • Purpose • Provide guidance of industries that would benefit from public investment in rail infrastructure • Help states to communicate industry rail needs with stakeholders • Understand better the dynamics of rail service, what drives the level of service shippers receive in order to inform state decisions

  19. Work Item 5 – Likely Hypotheses • Size matters – better service for larger shippers • Ease of serving matters • Unit train/big blocks of car require less cost/effort • Consistency of service matters – easier to be a conveyor belt than constantly reacting to surges • The future matters • Growing source of business • Stable/predictable • Direction of US trade and energy policy • Location matters • Underutilized portions of networks vs. mainline • Competition matters • How much is always a question

  20. Approach to Evaluation Interviewees • Trade associations • Shippers • Agriculture • Chemical • Intermodal marketing • Materials handling • Steel • Forest products • Automotive • Food • Oil and Gas • Short line industry Types of Questions • Rail service issues • Shifts in the nature of rail service • Criteria for rail service • Railcar ownership • Determinants of rail service within industry • Usage of rail/truck modes, truck alternatives • Short haul intermodal usage • Volume shipped per shipper Result: Matrix of Industries and Rail Issues, Differences between Industries in Terms Resource Intensity of Rail Service, Likely Parameters of Service

  21. Work Item 6: Parameters of State – Railroad Public/Private Partnerships Defining the Parameters Public/ Private Partnership Opportunities

  22. What the Public Sector Would Invest In Drivers of Benefits • Volume of freight impacted • Likelihood of modal shift without project • Level of modal shift attributable to project Drivers of Economic Impacts • Job creation • Number of businesses • Land development, tax revenues, local economic health Other • DOT strategic plan, development strategy • Impacts on general public

  23. What the Private Sector Would Invest in Return on Investment • Revenue • Costs of service • Growth prospects • Cost reduction Other Factors • Risks • Competing opportunities • Fit with existing service • Fit with corporate growth strategy • Corporate governance

  24. Indications Railroads Might Invest Without Public Involvement • Size of project relative to volume of freight impacted • Risks of traffic not materializing • Likely outcome if project is not completed, i.e. extent to which project is on “core” network or part of long-term strategy • Additional maintenance burden from project • Typical hurdle rate • Relative balance of public and private benefits • Financial context • Other factors such as competing investment needs, limited funds , which create uncertainty

  25. Closing Consideration • Railroads have system-wide network strategies that move markets and drive their investment • States programs mainly focus on their own back yards • Would public sector programs be more effective in supporting the right projects and generating benefits if we used regional network strategies?

  26. Questions/Comments BryanJG@pbworld.com

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