According to several published studies, over the next two decades the global economy is expected to double and surface freight volumes will triple.  Most current (and planned) gateway and corridor infrastructure will be insufficient to meet this growth. It is projected that unmet global needs for infrastructure for the next 20 years will be $53 trillion.

The Organization for Economic Co-operation and Development (OECD) has developed a new report, Strategic Transport Infrastructure Needs to 2030, with the sponsorship of Oliver Wyman’s Global Risk Center, which outlines the world’s growing transportation infrastructure needs and the challenges they represent.  Along with the 246-page full report, Oliver Wyman and OECD have also produced a 21-page “Main Findings” summary of the report.   Among other topics, the report looks at whether gateway ports, hubs, and their inland transport connections are up to the demanding tasks ahead.

At a time when infrastructure development, including railroad investment, could play a vital role in global economic recovery, we hope that you will find this report timely and thought provoking.   If you would like more information on Oliver Wyman infrastructure-related reports and events, please visit http://www.oliverwyman.com/transportation-infrastructure-2030.htm

Oliver Wyman sees big opportunities—and possibly requirements—coming down the pipeline that will lead rail companies to focus more attention on sustainability and resource productivity. For starters, the environment in which rail operates is changing rapidly:

•      End customers increasingly value sustainable products; for example, recently more than 50% voted at Coop’s homepage ( a large Switzerland- based food and grocery retailer) that they would be willing to pay more for completely sustainable food – including CO2-neutral supply chains

•      Companies that focus on “local food” have enormous growth rates in the US.  For example, Bright Farms cuts out the need for long-haul transportation by building large-scale greenhouses on top of local malls.

•      NGOs like Carbon War Room have declared war on “dirty” transportation companies and already publish web pages such as http://shippingefficiency.org/, to enable increased transparency into maritime vessel energy efficiency. Global companies can use these pages to ensure their products are shipped sustainably. Land-based transport will be next.

•      Highway and city congestion is increasing, fuel costs are rising, and governments and local cities are imposing increasingly tight regulations on emissions and CO2

Although some railroads already have sustainability and clean energy programs in place, particularly with an emphasis on new locomotive technologies and fuel management, they may be missing out on opportunities to more aggressively market the role they can play in a sustainable future. For example:

•      Rail needs to market its low CO2-footprint per ton-km far more aggressively.

•      Railroads may want to consider developing and branding “green” products or services, as is already common in other transportation sectors (like parcel).

•      Rail companies should think about marketing and building sustainability-focused brands with end consumers, whose opinions can create pull with traditional freight B2B customers

•      Consolidated deliveries into cities and last-mile distribution via rail will experience a renaissance and allow for new revenue opportunities.

To unlock these growth opportunities, railroads will need to:

•      Ensure a “green” energy supply wherever possible

•      Review guidelines for suppliers when purchasing equipment (design and choice of material is one of the key drivers for a closed circle economy)

•      Think about even more sustainable operations (e.g., maintenance, waste disposal)

•      Develop easier and cheaper intermodal transfers options (e.g., roll-on/roll-off)

The potential impacts could be substantial.  For example, parcel companies, by creating “green” products, realized a 20-30% increase in margins. The CO2 footprint of vigilant companies can easily be reduced by 30+ percent. Urban environments can particularly benefit from increased usage of rail and ex-urban traffic consolidation: some cities have seen traffic speeds increase by 30 percent and emissions reduced by 20-35 percent by reducing through truck traffic.

Oliver Wyman has developed a new Sustainability & Resource Productivity Initiative which will support transportation, logistics, energy, manufacturing, and other industrial sectors in developing sustainability solutions worldwide. For more information, please visit www.oliverwyman/sustainability, or contact me at michael.lierow@oliverwyman.com.

UP AC locomotives in DP mode push a manifest train in Oregon

Last week, Canadian National launched a press release containing two announcements that caught my attention, and perhaps signaled some changes to come soon in the North American locomotive market – with ripple effects worldwide.  The press release is summarized “CN will acquire 65 new high-horsepower locomotives as well as 96 second-hand high-horsepower locomotives that will be upgraded.”  The release then details the decision to purchase new AC traction locomotives.  Keith Creel, EVP and COO stated:

“The program includes the acquisition of alternating-current locomotives (AC), which will represent a first for CN.  Our current fleet of approximately 1,900 locomotives employs direct-current (DC) traction technology, which has served us well because of the overall favourable grades of our network. 

We will harness the key advantage of AC traction – much higher adhesion or train-pulling ability at low speeds — in assigning the new AC units to heavy-haul coal service in northern British Columbia and Alberta, where steep grades and sharp rail curvature make heavy demands on our locomotives.”

CN is also on record with a locomotive type and financing summary for the second-hand locomotive acquisitions: “CN will purchase… 42 second-hand GE Dash 8-40C locomotives, 11 leased GE Dash 8-40C locomotives, and 43 second-hand EMD SD60 locomotives.”  Read full article here…

Oliver Wyman was once again a sponsor of the annual Rail Equipment Finance Conference, held in La Quinta, CA on March 4th through March 7th.  This is the 25th year of the Rail Equipment Finance Conference, which brings together the top rail North American finance and rail equipment professionals

Manny Hontoria, a Partner in Oliver Wyman’s Surface Transportation Practice, gave a keynote address on “The Impact of Growth on the Freight Rail Network – What this Means to the Equipment Community.”  Manny’s topical presentation covered the impact of capacity, congestion and network velocity on demand for locomotives and cars through 2035.   Jeffery Elliott, also with the Surface Transportation Practice, presented “The Changing Locomotive Marketplace – Implications for future demand.”  As the rail industry emerges form the long economic downturn, Jeff reviewed the factors that will drive new locomotive demand in the next decade.

Oliver Wyman, together with other Marsh & McLennan Companies of Marsh, Mercer and NERA Economic Consulting, are sponsoring the 2012 North American Infrastructure Risk conference on April 24, 2012, in New York City.  This invitation-only conference focuses on key infrastructure risk topics related to the public interest and private investment.  For more information, please contact Ken Cudlipp at ken.cudlipp@oliverwyman.com or 214-721-1508.

In the 4th quarter of this year, Oliver Wyman’s will host a North American Rail Planning Conference.  The date and location of the event are not yet set, but based on the interest and participation by the rail planning community in the 2010 Princeton, New Jersey, and 2011 Hamburg, Germany events, we will be hosting a US-based conference in late 2012.  As plans for the conference are developed, we will be contacting previous participants via e-mail and I will post the details in this blog.

Attached is the Class I Rail Summary and Analysis for the 4^th quarter of 2011.  Some of the Class I trends that were noted by the Oliver Wyman Rail Team:

1)      Revenue and operating income are finally reaching the peak levels last seen at the start of the recession

2)      Domestic coal is weakening and projections do not indicate a comeback soon.  However, export coal remains strong

3)      Domestic intermodal is providing much of the intermodal growth in the East

4)      Operating indicators such as dwell and average velocity had been heading in the wrong direction in early 2011, but now appear to be flattening or improving

5)      The Bakken Shale oil and gas is providing a traffic boost for several railroads due to demand for oil and gas drilling equipment and materials

Please contact me if you have any questions about this report.

I had the pleasure of traveling across Canada from Vancouver to Toronto on the VIA Rail’s flagship train, the Canadian.  If you have never done this, do it soon.  The trip in the winter time is relaxed, the train is not crowded and the fares are cheaper.  The train is frozen in time; not much changed from its debut in the 1950’s.  There are many types of accommodations including the last open section sleepers in North America (as far as I know), which surprisingly were occupied by several people including a Japanese and an Australian student.  The trip is 4 nights and 3 days long and the student fare in an open section upper berth is about $600 which for travel across Canada, four nights lodging, and 3 meals a day is not a bad deal!

The trip was outstanding. The weather was beautiful.  The trip was timed for a week when the moon was full, so sightseeing continued at night if desired.  We had an informal group of 20 railroad industry people and we constituted about half of the sleeping car passengers.

The entire train left Vancouver with 73 people.  There were three types of travelers on board, tourists like our group, locals that really used the train to get around (the train made a couple of flag stops especially across the great shield where road access is limited), and pass holders who could travel for free.  The onboard service was generally great – friendly and attentive

Read the full article…

There was an excellent story by Steve Lohr in last Sunday’s New York Times on “The Age of Big Data.”  Many of you have probably heard about the term “big data,” which the article describes as ”…a shorthand for advancing trends in technology that open the door to a new approach to understanding the world and making decisions.”  According to Lohr, data is growing at 50% per year, more than doubling every 2 years.

The article goes on to describe how the nexus of new technology (e.g. artificial intelligence, data collection/storage and processing speed) and the exploding amount of data available from all imaginable sources, have created an environment whereby business, government, the arts and science can distill new insights from this tsunami of information.

One of the examples offered in the article is the now-familiar story of “Moneyball.”  In the book by Michael Lewis, and the recent film starring Brad Pitt, the story described how a professional baseball team general manager used new data sources and statistical analysis to identify undervalued players and built a winning team at a relatively low cost.

This reminded me of the story written last year by Oliver Wyman’s David Hunt, and published in the Fall Newsletter of INFORMS Railway Applications Section, entitled “Big Data and Railroad Analytics.”  In his article, David also used Moneyball as an example of the use of big data to analyze new metrics to dramatically improve the performance of an organization.  He went on to to describe how the North American Rail industry is just starting to use the treasure trove of data that they dynamically collect, to improve the analysis of their business, lower operating costs and produce greater profitability.  David also described the use of the new Traffic Flow Analyzer (TFA), that has been developed to manage the analysis of massive railroad databases.  If you missed the article, you can find a copy of it on this blog site.

It looks like big data is here to stay.

Oliver Wyman recently conducted an extensive survey of the Service Design groups at the Class I railroads.  Some of the results on similarities and differences between the groups will, I believe, be of interest to our blog readers.

The survey focused on five primary areas:  (1) Service Design responsibilities and composition; (2) the planning process; (3) central execution/control systems; (4) planning tools (developed in-house and acquired externally); and, (5) demand management planning.

There are generally 80 to 100 people employed at each of the Class I railroads for planning how the railroad operates.  Some of these staff are part of the Service Design group, while others are scattered throughout the company in a specific line of business (intermodal, coal, grain, etc.), in the dispatch center (locomotive planning), in Engineering (maintenance planning), or in operations research/information technology (tool building).

As might be expected, there were several similarities among the Service Design groups.  All of the Service Design groups plan road trains, blocking, hazardous material shipments, interline movements, and local service (usually jointly with the field).  All of the Service Design groups also develop trip plans for general merchandise and automotive traffic, and they generally measure trip plan compliance as the initial ETA plus 24 hours.  An interesting result of the survey was that all of the Service Design groups have a very limited number of staff (typically around 5) with the authority to directly make changes to the production version of the operating plan.  This tightly controlled access is necessary due to the complexities of the plan and to the mission critical nature of the information.

There were also several key differences identified between the railroads.  Some of the railroads make continual changes to the operating plan, while other railroads make changes on a fixed (typically weekly) schedule.  Short-term forecasts are used to develop the plans at some railroads, but the others prefer to use history due to concerns over forecasts accuracy.  There were also several differences between the groups in the planning of intermodal and bulk services.  While most of the railroads produce trip plans for intermodal flat cars, not all of the railroads produce trip plans for intermodal boxes.  Also varying from railroad to railroad was the planning of which bulk traffic moves in unit versus merchandise service, and whether or not bulk traffic moves in blocks.  Finally, all of the Service Design groups provide some planning for local service, but the level of detail and the accuracy of these local service plans varied greatly.

Follow this blog in the coming months as we release more detailed information on specific topics from the results of the Oliver Wyman survey of the Class I railroad’s Service Design groups.  If you have any questions about service design and our survey, please contact me at david.hunt@oliverwyman.com.

As we wind down to the end of 2011, I thought that it would be a good time to take a look at some of the recent Oliver Wyman Publications that might be of some interest to our readers.  While this blog tends to focus on issues that surround rail planning, many of the materials produced by our colleagues in adjacent Practices could also applicable to the rail industry.

A great example of this is a recent piece from our Aviation, Aerospace and Defense (AAD) group on ”Crews Control.”  In a story, published in Airline Business, Oliver Wyman Partners argue that while C-Suite management would like to ignore the complexities of crew supply chain issues, at 10-20% of an airline’s cost structure, management would be well served to focus on this issue. The authors outline a plan for senior managers to aggressively focus on all facets of their crew management function, which can reduce crew costs by more than 20%.

Another publication, recently produced and distributed by our Corporate Finance and Restructuring Practice, suggests that the rules of the private equity game have changed and that investing decisions are increasingly dependent on operating performance gains rather than financial leverage.  In “Value Due Diligence,” the authors outline their thinking that the  “extension of scope, the combination of industry and functional expertise, and the focus on the key levers for post-acquisition value creation and risk management, pave the way for better decision making, immediate action and faster results.”

Our Energy Practice produces many fine publications each quarter, but I thought that their recent piece, provocatively entitled “Are You Ready For the Wrath of the Customer?” would be very appropriate as it deals with pricing and customer expectations in a capital intensive industry.  The piece states that as customers become more agitated by the constant upward creep of rates, “utilities will need to work closely with regulators and policy makers to achieve constructive regulatory outcomes while building and leveraging their capabilities, offerings, tools, and resources to create new value for their customers.”

Lastly, I would like to once again highlight the Oliver Wyman Transportation and Logistics Journal, which was posted in November of this year.  The Fall 2011 edition of our journal was very well received and I mention it here, just in case you missed it…

Have a great Holiday Season!

Once again, we are pleased to make available the Oliver Wyman quarterly Class I Freight Rail Analysis and Summary.  Please note that a few upgrades have been prepared for the Q3 report.  Slides 12 and 13 show the nine-quarter plot for dwell and velocity, which are critical measurements on the trends for customer service among the railroads.  In slides 14 and 15, we have added Mexican carloading data for Ferromex (FXE) for the first time.  In a future report, we hope to be able to break out the Kansas City Southern (KCSM) Mexican loadings as a comparison to Ferromex.

As with previous versions of this report, we have included all important financial data such as operating ratio (OR), revenue, operating income, ROIC and capex, showing a year-on-year comparison with the third quarter of 2010.  Other information included in the report are carloadings and revenue ton-miles (RTM) per employee.

Oliver Wyman only uses publicly-available data as the basis of our graphs and analysis and no proprietary railroad data is used in any way.  We would like to expand and improve upon the scope, analysis and presentation of this type of freight rail information.  If you have found it useful, or have suggestions for improvements, please contact me at kevin.foy@oliverwyman.com