NEW COMPETITIVE REALITIES: GROWTH AT A LOWER COST

Transcription

1 NEW COMPETITIVE REALITIES: GROWTH AT A LOWER COST NOVEMBER 29, 2018 Rodney Case Partner

2 Competitive Context

3 Technology transformations will start where leverage is high rail is a niche market for tech Freight rail, a small piece of the surface transport economy 2015 surface transport vehiclemiles: 3.14T Passenger (Cars & Pickups) 2.8T 90% Freight rail 36B 1% Truck 280B 9% Generates slightly fewer ton-miles than trucks 2015 freight ton-miles: 3.79T Truck 2.05T 54% Rail 1.75T 46% And a tenth of trucking revenue 2015 freight revenue: $791B Truck $719B 91% Rail $71.7B 9% TECH FIRM VIEW RAILROAD VIEW SUPPLIER VIEW Source: US DOT BTS, National Transportation Statistics, tables 1-35 and 1-50; AAR, Analysis of Class I Railroads 2015; Oliver Wyman analysis

4 Tech focus is shifting to areas adjacent to core transport Inventory carrying cost reduction is a consumer imperative US business logistics costs, 2016 $ billions/% of total $596 /43% LTL Full Truckload Private/Dedicated Trucking $299/21.5% Rail $72 Parcel Air Water Pipeline Other Modes Source: US Logistics Council, 2017 State of Logistics Report, Oliver Wyman analysis $410/29% Storage Financial Other Inventory Carrying Costs $88/6% Carrier Support Shipper Admin Other Logistics Costs Reducing the level of stock buffers is increasingly a shipper priority Smaller and more frequent shipment orders Large investments by tech firms and start-ups are focused on developing tools and techniques Costs due to poor or inconsistent service are areas of current thirdparty innovations and profit

5 More than three-quarters of investment in surface transport will NOT be spent on the vehicle but on information Autonomous technologies 2030 global market forecast Sea 740 Air Train 370 Onboard systems 1170 Training Signaling Asset management Traffic management Roads & corridors Connectivity services Professional services Total = $3,430B 1,150 City services Cybersecurity Data management Defense services Energy distribution Communication Ground MRO Operations Mobility services Autonomous Vehicles VEHICLES 22% MRO & Aftermarket services & onboard systems Fleet, Traffic & Infrastructure management OPERATIONS & SERVICES 78% Services, systems & data

6 Technological transformation has already begun and is accelerating Levels and benefits of autonomous vehicles OPERATOR PARTIAL ASSISTED AUTONOMY Operator Authority System autonomy Full, requesting advice if necessary L1 Advise only if requested Acceptance of advice L2 Provision of advice Advanced driver assistance systems Increased safety & fuel efficiency (including platooning) OCCURRING NOW CONDITIONAL AUTONOMY Authorize action Advise, action if authorized Human driver + autopilot Better driver supply/retention NEXT FEW YEARS HIGHLY AUTONOMOUS Revoking action Advised action, unless revoked FULLY AUTONOMOUS Interrupt Autonomous No driver needed/conditional Parallel evolution to diagnostics/ remote sensing Radical change for trucking REGULATORY BARRIERS Platoons will soon move beyond testing, and vehicle autonomy will continue to grow L3 L4 L5

7 Autonomous vehicles: Projected timelines The pace will be set by regulatory barriers not technology Year Passenger vehicles Commercial trucks 2018 L4/L5 testing L2/L4 testing 2019 L4 pilots 2021 L4 limited urban operations L4 platoon testing (3 drivers) 2023 L4/L5 regulatory reform 2025 Regular L4 platoons (3 drivers) 2028 L4/L5 ridesharing widespread 2030 L4 platoons (1 driver)

8 Urban road network congestion will increase through 2045 ATLANTA Highway level-ofservice (LOS) ABC D E F 2016 CONGESTION 2045 CONGESTION Source: US DOT 2016 Highway Performance Monitoring System, Oliver Wyman analysis. Roadways selected in HPMS where NHS > 0 and Facility Type = 1 or 2. Values are for the peak hour.

9 Rapid adoption of shared vehicles/micro-transit could counterbalance congestion projections Estimated percentage of congested miles, LOS D-F, five state-sample, National Highway System roadways INTER-URBAN URBAN 50% 50% 40% 30% 20% 10% Optimistic Most Likely Pessimistic 40% 30% 20% 10% 0% % Note: Sample states are California, Georgia, New Jersey, Ohio, and Texas. Values are for the peak hour. Source: US DOT 2016 Highway Performance Monitoring System, Oliver Wyman analysis. Roadways selected in HPMS where NHS > 0 and Facility Type = 1 or 2.

10 Implications for Rail

11 Risk: Innovations drive trucking costs down by nearly 40 percent, partially offset by increased use taxes Potential reduction in intercity trucking costs 2015 vs. future ton-mile cost, assumes fully implemented tech innovations, in US cents 28.4% truck cost reduction Change of 2.92 cents per ton-mile Current truck cost Super Truck I 0.44 Super Truck II ADAS 3-trailer platoons (3 drivers) trailer platoons (1 driver) trailer platoons Driverless trucks Added road use tolls/ taxes Would raise ~$22.5B per year L0 L1 L2 L4 L4 L5 Future truck cost Does not include truck dray costs, or the impact of any rail responses. Five-axle 53 dry van used as a reference point. Source: National Transportation Statistics, Table 1-50, OW analysis

12 Risk: Truck demand grows faster than rail. Technology adoption rates define the scale of market loss Rail and truck net ton-mile growth (trillions) Trucking will double in size in the next 25 years 2017 to 2045 CAGR Truck +2.84% Forecasted rail ton-mile market share 47% 42% 37% 2017 rail market share: 45.3% Status quo Most likely with rail initiatives Most likely Rail carload +0.16% Truck IM +3.21% Rail IM +2.21% 32% 27% 22% Difference: 193B ton-miles Difference: 212B ton-miles to 2045 share loss 15.8% 18.8% 22.1% Note: Truck and rail IM estimated. Source: US DOT FAF 4.4, Oliver Wyman analysis

13 Risk: Rail loses share in all mileage segments, with the >1,000- mile segment losing the most share All commodities (billions of ton-miles) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % % General merchandise (billions of ton-miles) 5,000 Rail Share % Rail Truck Series 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % 32% % Total rail volumes will grow but share will drop in each core segment

14 Opportunity: Peak-hour daily congestion grows steadily to impact >40 million loads/year by 2045, creating a major diversion opportunity Rail intermodal unit forecast and diversion potential Millions of intermodal units Source: AAR Weekly Traffic annual reports, FAF, Oliver Wyman analysis 40M 8M 25M Potential diversion traffic With 20% diversion Intermodal unit forecast

15 Rail Response

16 Moving forward: Rail must build from the advantage of vertical integration while massively leveraging technology adoption Improve resilience Leverage network Increase productivity Encourage innovation

17 Improve resilience: Daily network operation is inconsistent Resilience in operations is necessary for consistent service and future profitable growth GENERIC CORRIDOR: TRAIN VOLUME VS. AVERAGE DELAY Volume: trains per day 2014 Average delay per train

18 Increase productivity: Railroads must adopt more technologies than just driverless trains Trucking marginal operations costs Tolls Class I rail marginal operations costs Equipment lease or purchase Fuel Equipment lease or purchase Fuel Repair & maintenance Driver wages & benefits Repair & maintenance Tires Insurance & permits Salaries, wages & benefits Other Train crews 7 % Materials, tools, supplies, purchased services, & other Casualties & insurance Railroads have the strategic advantage of vertical integration to optimize the use of assets and labor in one system Source: ATRI 2015 Report, STB 2015 R-1s, Oliver Wyman analysis

19 Leverage the integrated network: Rail can reduce its costs by half for long-term viability, but only 25% of that will likely come from T&E costs Potential reduction in rail freight costs 2015 vs. future ton-mile cost, assumes fully implemented initiatives & technology, in US cents 2.73 Current rail cost Tighter integration fail to Maint: 1- preventive 51.6% rail cost reduction 1.41 cents reduction person crews 0.33 Driverless trains Line-ofroad fueling Electric propulsion Automated auto- Simplify dispatch mated -ing processes 1.32 Future rail cost Note: Does not include rail dray costs, STB open access, or the impact of any truck responses. Average Class I railroad costs / ton-mile used as a reference point. Certain initiatives not impacting costs were omitted (e.g., extended reach, increased penetration) Source: Oliver Wyman analysis

20 Innovation: European express rail freight pilot Punctual: On-time performance is at passenger train levels Consistent: Train path integrated into the network design Congestion: City core terminals to leverage urban congestion Shared capacity: Open to all shippers using standard rolling carts Retailed: Priced by rolling cart not by carload or trainload Photo source: Mercitalia

21 The example of passenger train evolution: From locomotivehauled coaches to integrated modular train designs Bidirectional Auto coupling Modular design Smart systems Integrated data Auto fueling Terminal Terminal Mechanical Mechanical Capacity Terminal A single locomotive driver has been the constant. The technology opportunities for rail are abundant outside of the cab Photo source: Bombardier.com

22 Is operations resilience the new OR goal for rail

23 #RailTrends18

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