With supplies of liquefied natural gas (LNG) expanding due to new extraction technologies, prices continue to remain very low.  Currently, the price differential between a gallon of diesel fuel and an equivalent gallon of LNG is $1.00.  For some drivers, the thousands of miles traveled each year could equal savings of thousands of dollars, if their diesel truck were switched to LNG.  That is becoming more of a possibility with several companies expanding their infrastructures around LNG and committing to hundreds of stations being built within the next few years.  Is LNG the “fuel of the future” in transportation?

In his presentation at the Rail Equipment Finance Conference, which took place on March 5, 2013 in Palm Springs, CA, Jeff Elliott addresses this very question.  In addition to discussing the possibilities this growing fuel source could mean for the trucking industry, he examines whether or not this will pose a future threat to the railroads.  Or, can the railroads also benefit from this new abundant fuel?

Please take a look at LNG as a Tranportation Fuel:  Threat or Opportunity?  And feel free to contact either Jeff Elliott or me with any questions.

We are pleased to announce that William Rennicke, a partner in Oliver Wyman’s Surface Transportation and Corporate Finance Practice, was this year’s recipient of the Norman W. Seip Award For Excellence.

Bill Rennicke Receives The Norman Seip Award
(photo courtesy of Abigail Hart and Railroad Financial Corporation)

The award was presented to Bill at the Rail Equipment Finance Conference, on March 4, 2013, in La Quinta, California, in recognition of Bill’s work in transportation transactions, strategic planning, and transportation asset valuation. In bestowing the honor, the Railroad Financial Corporation noted “Bill’s transportation career spans three decades, including senior management and operating positions at motor carriers and railways. He has been at the forefront of carrier restructuring and financial improvement activities for both private and government transport companies around the world.”

The award is named after Norman W. Seip, who served in the rail equipment industry for over 65 years. Previous winners include Lawrence Beal, who founded the National Railway Equipment Company, Desmond P. Hayes, President of CAI Rail, and Jack Thomas, President of First Union Rail.

I am pleased to present Oliver Wyman’s quarterly report on the class I railroads.  We provide this report quarterly to allow our readers to review the important Class I financial results and operating statistics in an easy-to-read format.

The Q4 2012 report contains one new chart on slide 11 – Gross ton miles per track mile (From 2000 through 2011).  This highlights the fact that traffic volumes and densities are once again reaching their pre-recession levels.  A separate data point (not on this chart) shows that train starts are still down, indicating the general use of longer/heavier trains in North America.

Some of the trends that we noted:

• Continued softness in the coal market is being somewhat offset by increases in crude oil, drilling supplies and chemicals
• BNSF is a big winner in the new oil market, with volumes of 500,000 barrels daily
• Mexican-based revenue and traffic continue their upward movement – with record revenues at Ferromex in Q4
• Most carriers have aggressively increased capital spending going into 2013
• Most class Is are showing improvements in dwell time and average velocity

If you have any questions about this report, or about our Rail Practice at Oliver Wyman, please contact me.

You have probably noticed recent expansive coverage of the new energy boom in North America.  Due to the maturation of new drilling and fracturing technologies, there is a rush to drill and extract now-abundant oil and natural gas from fields such as the Bakken Formation in North Dakota and Eagle Ford in Texas.  There is a reason for so much media exposure – this energy surge will have a dramatic impact on the economy, ranging from lower electricity prices, to a possible manufacturing resurgence, to changes in environmental and transportation policy.

The reverberations of this production spike, along with transportation challenges (due to a lack of pipelines in the right places), have created unusual geographical price differentials in crude oil and natural gas.  Into this mix goes the impact of low natural gas prices on coal, various environmental issues and shifting electricity demand.

What will all of this mean to the railroad business?  In his presentation to the RailTrends Conference in New York City last December, Oliver Wyman Partner Jeff Elliott provided a good primer to the audience on the opportunities and risks that this new business will bring to the rail industry.  The demands for transporting new oil production is fundamentally changing the rail traffic mix, and could soon have a significant impact on  the railroads’ infrastructure investments.  In addition to the effect of expanding crude volumes on rail transportation, Jeff also explains the influence of this new oil, and natural gas production, on other North American energy sources, demand and pricing.

Please take a look at A New Era for Energy: Opportunity and Risks for the Railroad Industry and feel free to contact Jeff Elliott or me if you have any questions.

Update: On March 4th, Jeff Elliott was interviewed by Marketplace on American Public Radio regarding the Keystone XL pipeline and crude shipments by rail.  See and hear the story on Marketplace’s web site.

The 92^nd annual Transportation Research Board (TRB) meetings were held in Washington, DC last week, where over 10,000 people gathered to discuss anything related to transportation.  Although the program is filled with sessions such as “Asphalt Material Properties and Pavement Performance” and “Tire-Pavement Friction,” TRB has increasingly seen growth in the interest and involvement of freight and passenger rail practitioners, researchers, and policy makers.  It is one of the few forums that promote discussions among these different groups.

TRB is organized around committees, and as interest in rail has grown at TRB over the past several years, so have the number of rail committees.  There is a Rail Group, which is composed of eight rail committees:

• Intercity Passenger Rail
• Passenger Rail Equipment and System Integration
• Railroad Operating Technologies
• Freight Rail Transportation
• Railroad Track Structure System Design
• Rail Transit Infrastructure
• Railway Maintenance
• Railroad Operational Safety

I attended the Railroad Operating Technologies Committee, where one of primary topics, not surprisingly, was positive train control (PTC).  An interesting report prepared for BNSF, CSXT, NS and UP by ARINC Engineering Service was distributed.  This report, entitled “Evaluative Modeling of the Interoperable Positive Train Control System Design,” contained results of computer-based simulations of the various components of the PTC design architecture, including a new 220 MHz radio used for operational communications and interoperability.

When looked at from the reliability of each individual component, the report concluded that PTC falls far short of the “five-nines” (99.999%) reliability goal.  The report predicted that PTC would cause nearly 300 hours of nationwide train delay each day on single track segments, and nearly 400 hours of delay each day on double track segments.  The general consensus in the Committee meeting was that the railroads could not tolerate this amount of delay, and the cost of PTC would increase substantially due to component redundancy that would be required to maintain current service reliability levels.

The Freight Rail Transportation Committee had a standing room only crowd participate in discussions on the latest issues.  One noteworthy topic was “Moving Ahead for Progress in the 21st Century,” known as MAP-21, which is a highway provisions bill for surface transportation funding signed by President Obama last year.  Why was this of interest to the Freight Rail committee?  Because Section 32801 calls for a comprehensive, state level, truck size and weight study.  The issue is whether heavier, longer-combination trucks should be allowed over an interconnected national set of highways.  Stay tuned, because this may likely become the next big threat to the rail industry.

If you haven’t attended TRB, or have missed the event in recent  years, I’d encourage you to go in January 2014.

I had the pleasure of being a member of a panel discussion at RailwayAge’s “Passenger Trains on Freight Railroads” conference in late October in Washington D.C.  I was joined on the panel, “The Choice Between Speed and Frequency – A Global Perspective,” by David Kutrosky, the Managing Director of the Capitol Corridor Joint Powers Authority, and Steve Potter,  AVP Passenger Planning for CSX Transportation.

My presentation, entitled “Frequency and Speed – Global Lessons,” called upon my experience both as a freight rail planner for CPR, and as a consultant to many North America European and Asian railroads.  The reality of the situation globally is that the dominance of mixed networks have limited options for successfully growing both the passenger and freight markets.  A typical railway operation is a network with a broad mix of train services, including intercity passenger, commuter, scheduled freight and unit trains, and true high speed remains rare and tightly targeted.  The majority of the world’s intercity passengers trains travel at speeds below 120 mph and are broadly mixed with 60 mph freight train operations.  The bottom line is that the choice between frequency and speed captivates the planners of the world’s railways.

After reviewing some of the case studies that I have personally been involved with, I came to these conclusions:

• The mix of freight and passenger trains is difficult, but possible, when the two are designed in an integrated fashion – both parties must improve coordination
• Strategic targeting of infrastructure capacity for freight and passenger near stations, terminals and choke points can open significant capacity within double track corridors
• Ad hoc unit trains are more commonly seen as capacity destroyers by network planners than scheduled train operations with speed differentials
• Passenger operation’s unit costs remain manageable at mid-range speeds and allow for attractive market pricing while retaining train profit margins
• Low cost growth has been attained through methods other than large speed increases on a number of mixed corridor operations world wide

If you would like to discuss mixed operation corridors and the challenges related to the choice of “frequency versus speed” please contact me at Rod.Case@oliverwyman.com

Attached is our 3rd quarter summary for the Class I railroads.  We provide this report quarterly to allow our readers to review the important Class I financial results and operating statistics in an easy-to-consume format.  This deck contains 2 slides that were not included in the past few reports: 1) the ROI and revenue adequacy for the Class Is in 2011 (slide 9); and 2) a comparison of the Class I stock prices against the S&P 500 since April 2009 (slide 12).

Overall carloadings have been fairly flat since the start of the year, with coal being the largest negative factor for most of the railroads.  The bright spot in the quarter (and in 2012) has been intermodal and the quickly growing shale energy (Bakken and other regions) business, producing crude oil traffic as well as supplies such as frac sand and oil-well equipment.

Please let me know if you have any questions about this report.

Classification yards in general, and hump yards in particular, are costly components of a railroad’s freight operations.  Over the last several decades, as rail carriers sought to reduce their operating costs wherever possible, classification yards were often targeted for elimination.  However, as traffic has returned to the rails in ever-increasing volumes (the recent recession notwithstanding), rail companies have found a renewed need for classification yards, both flat and hump.  Witness, for example, Norfolk Southern’s reopening of Enola and its expansion of Bellevue, as well as Union Pacific’s expansion of Livonia and West Colton and proposed construction of facilities in Texas (Mumford), New Mexico (Strauss), and Arizona (Red Rock/Picacho).

Even though classification yards have seen something of a renaissance in recent years, the need to keep operating costs at a minimum still remains.  For yard facilities, particularly hump yards, this means that their capacity utilization and productivity must be high in order to offset their high fixed costs.  Thus, as a railroad’s service design planners are responsible for routing traffic across the company’s system, it is incumbent upon them to ensure that classification yards have all the traffic they can reasonably handle.  Read more…

Photo by David Lester

I am happy to report that we wrapped up a very successful Freight Rail Planning Conference in Atlanta last week.  The event, co-hosted by Oliver Wyman and Norfolk Southern, attracted over 70 attendees from 15 different organizations.  We had representatives from most of the Class Is railroads as well as from European, Asian and Mexican railroads.  The final agenda is available here.

Special thanks to Deborah Butler and Fred Ehlers, of Norfolk Southern, our keynote speakers.  I also want to again thank NS for sponsoring a tour of the nearby Inman Yard and Locomotive Shop, as well as for all of their organizational assistance in making this event such a success.  The conference agenda included 12 sessions with over 24 speakers.  We’d like to take this opportunity to, once again, thank all of our speakers for their participation.

Oliver Wyman’s Bill Rennicke

The theme of the conference was “New Developments and Ideas” for freight carload services, and we had informative presentations on NS’s Unified Train Control System, traffic forecasting, the impact of “new oil” on carload services, empty wagon management systems, intermodal service design, optimizing local services, and on the state of the rail industry in North America.  Oliver Wyman’s Development team also gave us a view to new systems being developed in optimization & analysis tools, user interfaces, web-based architecture and dynamic network data visualization.

All conference attendees have received, or will soon receive, a password for access to the 2012 presentations on this site.  If you have any questions about the conference material, please contact Bonnie Painter via e-mail or at 609-520-2190.

Photos by David Lester

I am pleased to provide you with the Fall 2012 issue of the Oliver Wyman Transport & Logistics Journal, a publication of Oliver Wyman that discusses issues facing the global transportation and logistics industries. This issue focuses on strategies and ideas that may prove to be fertile ground for competitive growth, in the context of a global economy that is still struggling to regain momentum.

The eight articles in this issue encompass four key topics:

• Improving cost and service levels in the rail industry by optimizing fleet costs and ratcheting up maintenance-of-way performance
• Finding new sources of growth in logistics, through an understanding of important trends by sector (e.g., technology, retail) and greater emphasis on network efficiency
• Understanding and mitigating risk: externally for large infrastructure projects and internally for portfolios of initiatives
• Developing sustainability solutions for cities and more specifically at transport & logistics customers

I hope you find that this issue provides a wealth of timely and thought-provoking information. I look forward to hearing your comments