Transport and Logistics Part 02

Transport and Logistics
Network Capacity: Improving Usage, Increased Demands:

Over the past three decades, Class I railroads worked diligently to reduce their overall network, primarily by spinning off lower-density lines to shorthaul partners. The rally in freight traffic over the past decade however has exposed bottlenecks in the system and created a need for capacity expansion. Such expansion is now being complicated by emerging public needs. While the freight railroads possess a similar mindset for negotiations around shared networks, the public has a very different set of objectives, and that gap has grown into a core strategic question that many railroad executive teams are still
defining.
The recent experience of the CN acquisition of the EJ&E (in which CN was required to fund noise mitigation, safety fencing, and emergency response for two towns in Illinois), and the coming tsunami of passenger rail investment clearly demonstrate that network capacity is becoming an increasingly local issue. These very public interventions on the use of network capacity require sophisticated solutions that exceed the flexibility of most existing network sharing models. In
response, the Class Is will need to ask themselves three key questions:
• „Is owning all of the network still relevant to the business model?
• „What further joint access capacity arrangements can be achieved between railroads on commercial terms?
• „How much more capacity can be generated from the existing network; in particular, to support expanded passenger rail services?
Determining Network Ownership and Control Requirements:
There was a time when railroads thought that they had to own or control all of the network over which they operated. But mergers and the proliferation of short lines have dramatically grown the level of joint access, and network sharing is now geographically widespread, involving most North American railroads. Many key mainlines are shared and even some of the most competitive corridors have more than one railroad on the track. These arrangements have been arrived at through commercial negotiations and terms, which have been used to expand the shared network well beyond any “forced access” required by the STB due to mergers.
The success of joint access raises the question of whether it is necessary for a railroad to retain exclusive control of the network on which it operates. While many rail executives insist that such control is still necessary, the general trend illustrates that is no longer an absolute. Longer-term, railroads are likely to see even more sophisticated network sharing models capable of ensuring efficient operations.

Increasing Joint Access on Commercial Terms
Although the expansion of joint operations was, for a time, driven by network reductions, recent developments of joint operations are being driven more by efficiency gains or overall growth opportunities. The rapid expansion of agreements in both scale and number suggests that openness to joint access is increasing significantly.
Norfolk Southern (NS) for example has recently sponsored two innovative, commercially-based joint operations models that will squeeze more capacity out of existing networks:
• „Cooperative agreements that include investments in main line networks not owned by NS, including with CN MidAmerica Corridor Initiative), Pan Am Railroads (Patriot Corridor), and Kansas City Southern (Meridian Speedway)
• „In an attempt to foster the growth of short haul traffic, NS has provided access for its short line partners in upstate New York to interchange traffic directly with one another over NS’s lines.
These examples indicate that commercial terms can be successfully broadened to improve the use of existing regional networks. Further, the MidAmerica Corridor Initiative (in which CN and NS will share track between Chicago, St. Louis, Kentucky, and Mississippi to establish shorter and faster routes for traffic moving between the Midwest and Southeast) is providing the industry with a model for using regional networks creatively to unclog urban areas. This model may become increasingly important as expanding local train operations further congest large urban areas. It will be critical for Class I’s to integrate commercially driven, regional-network based solutions into any future negotiations about capacity expansion.

Expanding Capacity on the Existing Network:

It should not be surprising that US railroads have some of the lowest rail rates in the world and accordingly operate some of the largest freight trains to compensate. What may not be as well known is that the North American network carries far fewer trains overall compared to countries with similar network structures.
The difference in train volumes per year is dramatic, reflecting the varying roles of these networks: whereas the
North American network runs primarily freight trains with limited passenger/commuter rail services, countries such as Germany and Japan run extensive, high-frequency passenger services in addition to freight traffic. What the exhibit does not show of course is that many of these other networks are highly subsidized and their freight operations are largely uneconomic.
transport and logistics
This is an important point to keep in mind, as a new focus of public scrutiny in the US and Canada is determining what capacity is available from a given network or corridor to support both freight and passenger train service. Certain North American corridors do run high- intensity mixed passenger and freight services (more than 10,000 trains per year), such as Toronto-Montreal (CN and VIA) and the California Capital Corridor between Oakland and Sacramento (Amtrak
and UP). But these operations are only successful if the freight owner is sufficiently compensated for physical improvements and maintenance, and a high level of service for freight customers is maintained. As governments and communities seek to expand passenger rail service, it will be important for Class I’s to develop an objective process
to explain the tradeoffs between increased train counts caused by new passenger operations and the resulting impacts on network and assets that will not show up in a simple train count/capacity analysis. If the Class I’s hesitate too long, the weight of global case studies, together with recent pro-passenger rail regulatory changes, may create irreversible impacts on their financial and operational performance.
Steaming Ahead of the Curve
The changing marketplace for intermodal and the profound changes coming in terms of rail network capacity demands require that railroads evolve their business models in preparation for a world of more complex train operations with more partners. In the short term, the recession is making it more challenging for the industry to maintain profitability, but it does offer a “silver lining” in the form of a brief respite for railroads to work through needed strategic decisions and set their long-term business objectives before they find these objectives being set for them by others.

Transport and Logistics

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