Rail Industry Overview and Trends Condensed 10-17-2006

SK Snavely King Majoros OConnor & Lee
Economic and Management Consultants
Rail Industry Overview and Trends

A Report to CSCMP 2006
Tom OConnor
Snavely King Majoros OConnor & Lee
1111 14th St. NW Suite 300 Washington, DC 20005
Phone 202 371-9149 email skmoltom1@aol.com October 17, 2006
CSCMP 2006 San Antonio Snavely King Majoros OConnor & Lee, Inc. 1988-2006 www.snavely-king.com

Four Key Rail Trends

I Intermodal: Dramatic increases Surging growth in Asian economies leads to higher US rail volume with lower rail profits per unit - Capacity is a key issue II Rail Economics: Costs And Rates - Their use in negotiations and regulatory settings III Rail Regulation and Competition
Fuel Surcharges Legislative and Regulatory Initiatives
IV. Mergers And Strategic Alliances mergers may be coming and strategic alliances have already arrived

I. Macro Rail Industry Overview

Increasing importance of Intermodal Relatively weaker profit position of Intermodal rail industry wide; BNSF appears to be an exception Strategic Alliances of Rail and Truck
Schneider allies with BNSF and with CSX in Intermodal JB Hunt first quarter revenue was 41 % Intermodal
Intermodal now 23% of Rail Revenue, more than Coal Relative cost advantage of rail over truck increases as fuel cost rises

Recent Trend: Increasing importance of Intermodal

Jan 06 to Aug 06: Intermodal up 6.4% and Carloads up 1.5%
Railroads Pursued Intermodal Cost Subsidy by Federal Government - A response to Revenue Constraints on Intermodal.

Long Term Trend: Increasing importance of Intermodal
Source: AAR, Traffic World
Intermodal growth can absorb railroad capacity and cut into carload service

The Highway Network: Approaching and Exceeding Capacity.

1998 2020
Chart Source: Batelle
Highways over-capacity are shown in red for 1998 and forecast 2020 Highways approaching capacity shown in blue for 1998 and forecast 2020

Factors Affecting Railroad Capacity In The Future: Import/Export And Intermodal
Increasing use of back haul to reduce cost and increase capacity

Tropicana back hauling other products to FL
Projected growth in Intermodal is both welcome and a concern to Railroads

Volume levels up and profit levels down

Long Term Shifts In Production Have A Major Impact On Domestic Transportation

Chemical Business: persistent shifts of
Mexico is the second largest US trade partner and has growing importance in trade with Asia Continued Impact On Freight Flows Of Long Term Shifts In Domestic Industrial Production US Trade Deficit with China was $202 Billion in 2005 US Trade Balance Was Running At Annual Deficit Of $763 Billion As Of April 2006
6.4% Higher Than The Record $717 Billion US Trade Deficit In 2005
domestic production overseas

$100 $80 $60 $40 $20 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 Trade Balance (right axis) Imports (left axis)
Source: US Department of Commerce
$25 $20 $15 $10 $5 $0 ($5) ($10) Exports (left axis) Trade Balance Trend Line

Long Term Shifts In Production Have A Major Impact On Intermodal Volumes and Port Congestion
Continued Impact On Freight Flows Of Long Term Shifts In Domestic Industrial Production
US trade showed a deficit with China of $19.6 billion in July 2006; 12 months at this level would yield a US deficit of $240 billion; 20% above the US deficit in 2005
Monthly US deficit worldwide was $68.0 billion in July 2006
US Deficit

II. Rail Economics: Costs And Rates

Commodity Comparison
Compare rail rates to other rail shipments of the same commodity
Year over Year comparison

Compare year over year change in rail rate
Rail Profitability; Revenue Cost Ratios (RCR)

RCR is Revenue divided by variable cost RCR estimates the profit the railroad realizes from each rate. RCR is used for regulatory purposes at the Surface Transportation Board (STB)

The Profitability of US Rail Shipments Varies Widely as measured by Rail Revenue divided by Rail Cost (RCR)
Revenue Cost Ratios: Commodities with $2 Billion or More in Revenue
Source: STB; 2004 Waybill Sample
Total Rail Freight
135%
Misc. mixed shipments ex. forward Transportation equipment Chemicals Food and kindred products Coal Farm products 0% 20% 40% 60% 80% 100% 120%
127%
118%
164%
119%
145%
150%
140%
160%
180%
Revenue Cost Ratio: Rail Revenue Divided by Rail Variable Cost

Converting Chemical Shipments From Domestic Rail Carload to Converting Chemical Shipments From Domestic Rail Carload to Intermodal Import Can Lead to Dramatic Changes in Rail Rates Intermodal Import Can Lead to Dramatic Changes in Rail Rates
To This From This
Revenue Cost Ratio is railroad revenue as aa percentage of railroad cost. Revenue Cost Ratio is railroad revenue as percentage of railroad cost. Misc. Mixed is Primarily Intermodal Misc. Mixed is Primarily Intermodal CSCMP 2006 San Antonio Snavely King Majoros OConnor & Lee, Inc. 1988-2006 www.snavely-king.com

III. Rail Regulation and Competition

Initiatives At Surface Transportation Board (STB)
Two major STB initiatives will impact Shippers Fuel Surcharge Railroads Reporting Fuel Revenue and Cost to STB Fuel Surcharge linked to Fuel Cost Small Shipment Rate Case A Rulemaking to redefine procedures Reflects a more proactive approach

14%
2005 Average Fuel Surcharge Compared to 2005 Change in Fuel Cost

13% 13% 13% 12%
12%
11% 11%
10%
8%
6% 5% 4% 4% 3% 5% 4%
2% 2%
0% BNSF CSXT KCS NS UP Total

Source: Railroad SEC filings and Company websites
2005 Average Fuel Surcharge
Change in Fuel Cost as % of Total Cost

Fuel surcharges claimed by the BNSF and the UP are virtually identical. Fuel surcharges claimed by KCS, NS and CSXT are also virtually identical. In contrast with this uniformity, fuel cost as a percent of operating cost differs widely
20.0% 18.0% 16.0% 14.0%
US Class I Railroad Fuel Surcharge: BN and UP

20.0% 18.0% 16.0% 14.0%
US Class I Railroad Fuel Surcharge: CSXT NS and KCS
F u e l S u rc h a rg e
10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
F u e l S u rc h a rg e
Month
12.0%
12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
Ja n F e -0 4 b M a -0 4 r A p -0 4 r M a -0 4 y J u -0 4 nJu 04 l A u -0 4 g S e -0 4 p O c -0 4 t N o -0 4 v D e -0 4 c J a -0 4 n F e -0 5 b -0 Ma 5 r A p -0 5 r M a -0 5 y -0 Ju 5 nJu 05 l A u -0 5 g -0 Se 5 p O c -0 5 t N o -0 5 v D e -0 5 c J a -0 5 n F e -0 6 b M a -0 6 r A p -0 6 r M a -0 6 y -0 6
Source: Class I Railroad Websites
Source: Class I Railroad Websites
BNSF
UP
Source: Railroad SEC filings and Company websites
Ja n F e -0 4 bM a 04 rAp 04 r M a -0 4 y -0 Ju 4 nJu 04 l A u -0 4 g S e -0 4 pOc 04 t N o -04 v -0 De 4 cJa 04 nFe 05 b M a -0 5 rAp 05 r M a -0 5 y -0 Ju 5 nJu 05 l A u -0 5 g S e -0 5 pOc 05 t N o -05 v -0 De 5 cJa 05 nFe 06 b M a -0 6 rAp 06 r M a -0 6 y -0 6
Month
CSXT
NS
KCS

Rail Costs as measured by RCAF are very similar with and without fuel RCAF-A is Rail Cost Adjusted for Productivity Costs and Productivity and Fuel all as Measured by Rail Industry
1.200
RCAF U (Unadjusted) RCAF-U Less Fuel Un Adjusted For Productivity
RCAF A (Adjusted) RCAF-A less fuel Adjusted For Productivity
0.800
Adjusted or Unadjusted, There is Little Difference Between RCAF With Fuel and RCAF without Fuel
RCAF-U 2002 Q4 =100
0.400
19 94 19 94 19 95 19 95 19 96 19 96 19 97 19 97 19 98 19 98 19 99 19 99 20 00 20 00 20 01 20 01 20 02 20 02 20 03 20 03 20 04 20 04 20 05
RCAF-U is Rail Cost Adjustment Factor Without Reflecting Productivity Gains

Railroad Financial Performance

Union Pacific, the largest US railroad
70 percent growth in 2005 net income to $1.03 billion, Revenue jumped 11 percent to $13.6 billion.
Burlington Northern Santa Fe, second-largest US railroad,

93 percent growth in 2005 net income to $1.5 billion, Revenue of $13 billion, up 19 percent, for 2005.
CSX, the third largest US railroad

237 percent growth in 2005 net income to $1.2 billion Revenue increased 7 percent to $8.6 billion.
Norfolk Southern, the fourth largest US railroad

39 percent growth in 2005 net income to $1.3 billion Revenue rose 17 percent to $8.5 billion

IV. Mergers and Strategic Alliances Major US Ports And Metropolitan Areas With Populations Greater Than 1 Million People

Rail service via Mexican Ports is a Response to US West Coast port congestion The Mexican ports and the Meridian Speedway Joint Line links to NS and targets service to East Coast population centers and rapidly growing Intermodal freight This could foreshadow major shifts in rail flows
IV. Mergers And Strategic Alliances

Ports of Los Angeles and Long Beach handle: 70% of cargo moving between Asia and the US 40% of total ocean cargo shipped to US every year from the world.

KCS Estimates

Most Observers See Virtually no Network Redundancy left in the Rail System
Segments of many mainlines at capacity Operating issues in some terminals Recurring shortage of crews due to retention and training challenges Need to acquire and refit locomotives The Railroad Metrics tell the Story

Rail Mergers: Lessons for the future

Continued high demand Traffic is up Freight volumes expected to double in 20 years Increasingly, new highways are a non-starter Railways will have a bigger role If they can do the job
Source: Jim McClellan NS Sr. VP Strategic Planning June 2004
Strategic Alliances Are an Alternative to Mergers

Source: Tom OConnor VP SK October 2006

Major Independent Railroads

CP UP CSX
KCS
CN
BNSF
TFM FXE
NS

Major Independent Railroads Showing Some of the Rail Strategic Alliances CP UP CSX
KCS
CN
G
NS
BNSF
TFM FXE
Alliance

Four Key Rail Trends

I Intermodal: Dramatic increases Surging growth in Asian economies leads to higher US rail volume with lower rail profits per unit - Capacity is a key issue II Rail Economics: Costs And Rates - Their use in negotiations and regulatory settings III Rail Regulation and Competition
Fuel Surcharges Legislative and Regulatory Initiatives
IV. Mergers And Strategic Alliances mergers may be coming and strategic alliances have already arrived

Background on Snavely King

Snavely King Majoros OConnor & Lee has provided consulting services to the Rail Industry, rail shippers and hundreds of other clients in transportation, telecommunications and utilities in the US, Canada and Overseas. For more than three decades SK has built its success on developing and applying practical market and economic solutions for its clients. The firm's financial and strategic advice is backed by the professional staff's wide experience in designing and applying business solutions, evaluating corporate transactions, analyzing start-up companies, and in providing strategic planning services to commercial, institutional and government clients. In more than 2,000 projects, the analyses and expert advice provided by SK have significantly assisted both private and public sector clients.

Tom OConnor
Tom OConnor is Vice President of Snavely King Majoros OConnor & Lee, an economic and management consulting company. He has been engaged in the business of economic analysis for more than thirty years, beginning as an economist with the Interstate Commerce Commission (now the Surface Transportation Board) and subsequently in economic consulting and management positions of increasing responsibility with:
The United States Railway Association as Manager of Local Rail Services Planning Conrail as Assistant Director of Costs and Economics Association of American Railroads as Assistant Vice President of Economics DNS Associates as Vice President, and since 1988 with Snavely King Majoros OConnor & Lee as Vice President
Tom OConnors practice centers on transportation with specific focus on negotiations and infrastructure issues including rationalization and redesign of the railroad infrastructure in the US as well as rebuilding of the railway infrastructure in Eastern Europe. Mr. OConnors work in the Balkans in Eastern Europe focused on both transportation and telecommunications. Tom OConnor has provided testimony on a wide range of issues in proceedings before courts and regulatory commissions in the United States and Canada including:
Interstate Commerce Commission; Surface Transportation Board; United States Railway Association; Regulatory Commissions in New York, Indiana and Pennsylvania; State Courts in Indiana, Montana and Virginia; Arbitration Panel in New York; Mediation Panels in Massachusetts and Washington DC; Canadian Crown Commission; US District Court for Eastern District of Virginia, and US District Court for Arizona
Military- US Army - Combat Engineers
o Education- Economics BA and Graduate - Phi Beta Kappa

Rail Industry Overview and Trends Condensed 10-17-2006

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Rail Industry Overview and Trends Condensed 10-17-2006

Uploaded by

Copyright:

Available Formats

SK Snavely King Majoros OConnor & Lee

Economic and Management Consultants