Transport and Logistics
The Complex Future of the North American Rail Network:
It can be difficult to remember, in the midst of todayâ€™s tough economic news that we are in the second â€œgolden ageâ€ of North American railroading. In the past several years, all of the Class Iâ€™s have seen increased profitability and service levels, even in the face of some traffic reductions. It can be argued that renewal has been driven by stronger railroad business designs and enhanced by the increasing attractiveness of rail transportation. The future of the railroadsâ€”and the role they can play environmentally and economically continues to be of intense interest not only to shippers but to government, private equity investors, and the public at large.
Class I Operating Income and Carloads Originated,1998-2015
While railroad performance to date has been strong, structural changes now arising out of both the market and political worlds will likely test railroadsâ€™ capacity to evolve their business models while retaining or enhancing the value of their franchises. Two key structural changes discussed herein the evolution of intermodal and the uses of network capacity are being driven by fundamentally different concerns, but both offer the possibility of profound shifts in terms of how railroads will operate, maintain, and expand their networks:
Â„The intermodal business, the engine of growth for railroads over the past few years, is poised to evolve into a market of smaller lanes with shorter hauls demanding higher service levels. There will be opportunities to generate new revenues, but these revenues will be far more challenging to capture and retain.
Â„Public debate over network capacity and who defines, controls, and funds it continues to grow and this is rapidly becoming a complex strategic issue for the railroads. All levels of government appear to be placing billion-dollar bets on the return of passenger trains to many now freight-only corridors, while local communities are demonstrating increased capacity to influence the extent of individual mainline capacities.
These two issues are both likely to lead to the development of more complex networks targeting the transportation needs of shorter haul markets once thought to have been lost permanently to the roads. The return of short haul services promises increased rail activity but will require a revamping of business models for both freight and passenger franchises.
The Evolution of Intermodal: Smaller Lanes, Shorter Distances:
In the 1990â€™s, the rail industry maintained an open debate about the future of intermodal and its ability to pay for the extra network capacity it required. A decade later, expanding traffic volumes, coupled with strong pricing, led the Class Iâ€™s to make significant investments in their networks. In particular, the Class Iâ€™s capitalized on the rapid growth of the import container business to develop and reinforce their intermodal networks to the benefit of domestic business.
But the rapid drop in import container volumes over the past year has once more raised strategic questions about the future of this business. The market is entering a period of lower long-term growth and supply chains are being reconstructed based on a new reality of increasingly expensive and scarce longer-term transportation capacity.
Further, intermodal growth will no longer be based largely on West Coast port throughput. While the future expansion of the Panama Canal is one risk to the continued growth of West Coast ports, recent volume developments at Gulf and East Coast ports suggest a shift is already occurring. This will shorten length of haul to key markets; more importantly, unlike West Coast ports, smaller East Coast ports cannot generate sufficient volume to build daily â€œsolid trains. CSX and NS, which serve primarily the East Coast, will likely have to evolve their service designs to accommodate these smaller volume and shorter haul markets, resulting in a more complex operation based on â€œblocksâ€ of traffic, rather than on trains. The typical daily volumes from a one million TEU port generate many small blocks that will need to be combined into a network of trains to remain commercially viable.
Typical Daily Volumes for a One Million TEU East Coast Port
Domestic intermodal traffic is actually holding its position in a falling transportation market a clear signal that such service is now structurally integrated in the transportation marketplace. Domestic intermodal business however is likely to evolve in a fashion very similar to container imports: comprising blocks of traffic (not full trains) moving over short distances, increasing operational complexity. The upside however is the opportunity for railroads to generate revenue from
what is still a fairly new and growing market segment.
The future North American intermodal market may look much more like existing European intermodal markets. (Exhibit 1-3 shows the current US versus European market.) While European railroads support significantly shorter distances, they manage to create large revenue bases through high volumes and higher rates per container. While it is true that European trucking costs are also higher, many operators have capitalized on the congestion of European highways to entice volumes
from road at attractive rates even for short distances.
Changing intermodal markets could lead to significant network restructuring in North America to capture new shorthaul revenue sources. It is important to highlight that this is not completely new territory, and that mature markets like Europe have developed large revenue bases in these highly competitive markets.
US versus European Rail Market: Revenue, Volume, and Average Distance