The U.S. Freight Railroad Industry: Where We Are in Dan Keen Wichita Ad Valorem Conference July 31, 2018

Transcription

1 The U.S. Freight Railroad Industry: Where We Are in 2018 Dan Keen Wichita Ad Valorem Conference July 31, 2018

2 Topics For Today Background Current issues The future? Other \\aarfs2\communications\content INVENTORY\Photos & B- roll\intermodal\bnsf-intermodal-yard- Aerial SLIDE 2

3 U.S. Freight Railroad Fast Facts 7 Class I, ~593 non- Class I railroads ~138,000 miles ~30,000 locomotives ~1.6 million railcars ~4 billion gallons fuel consumed annually ~170,000 employees \\aarfs2\communications\content INVENTORY\Photos & B-roll\Rail Employees & Operations\Rail-Workers-Track \\aarfs2\communications\content INVENTORY\Photos & B-roll\Locomotives\Red-Train SLIDE 3

4 North American Freight Railroads SLIDE 4 BNSF CN CP CSX KCS NS UP Non Class Short Line/Regio I Multiple Owners

5 Class I Railroads Account for Most U.S. Rail Traffic BNSF UP CSX NS KCS CNGT SOO Revenue ($ bil) $21.1 $21.2 $11.1 $10.6 $1.3 $3.2 $1.4 Miles operated 32,401 32,122 20,813 19,467 3,393 5,873 4,836 Carloads (mil) States Employees 41,493 44,146 22,814 26,717 2,958 6,641 2,768 Avg. haul (miles) 1, Locomotives 8,326 8,530 3,958 3, Data are Figures are for U.S. operations only. Source: R-1 reports to the STB SLIDE 5

6 Railroads Help Keep Coal- Based Electricity But Non-Class I RRs Are Crucial Too SLIDE 6

7 General Characteristics of U.S. Freight Railroads Privately-owned, common carriers Same company usually owns the track and operates trains over it; no automatic access to another s tracks Little government funding Regulation less than once was, but still substantial What happens in one place affects others Host, but generally don t operate, passenger trains SLIDE 7

8 Why Freight Rail? Cost effective Safety Environmentally friendly Huge volumes SLIDE 8

9 Size Matters Railroads Scale Enables Efficiency Elsewhere One railcar coal = electricity for 21 households for a year. One railcar wheat = 258,000 loaves of bread. One railcar corn = 37,000 chickens or 480,000 bags of Fritos. One railcar ammonia fertilizer = 770 acres of corn. toaster-food-white-bread / om/snacks/productpage/fritos/fritosoriginal-corn-chips SLIDE 9

10 Railroads Help Keep Coal- Based Electricity How much did Class I railroads pay in property taxes in 2017? A. $450 million B. $665 million D, $1.31 billion C. $910 million D. $1.31 billion SLIDE 10

11 $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $ % Railroad Property Taxes Exceed $1.3 Billion ($ billions) '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Figures are for Class I railroads only and only include taxes based on value of real estate and personal property used in rail operations. Excludes taxes on gross receipts, franchise fees, excise taxes, and similar items. Source: Railroad R-1 reports to the STB SLIDE 11

12 Class I Railroad Operating Revenue ($ billions) $61.2 $47.8 $58.2 $67.2 $69.9 $72.9 $77.7 $71.7 $65.8 $70.0 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Note: net income for 2017 has been adjusted to account for tax effects from the Tax Cuts and Jobs Act of Source: AAR SLIDE 12

13 Railroads Help Keep Coal- Based Electricity For the average U.S. manufacturer, capital spending is about 3% of revenue. What is it for freight RRs? A. 6% B. 9% D, 19% C. 14% \\aarfs2\communications\content INVENTORY\Photos & B-roll\Rail Employees & Operations\IMG_840 D. 19% SLIDE 13

14 RRs Are Far More Capital Intensive Than Other Industries 21% 18% 15% 12% 9% 6% 3% 0% RRs Capital Expenditures as a % of Revenue Class I RRs Computers Paper Chemicals Nonmet. Plastics & Min. Prod. Rubber Motor Vehicles Wood Prod. Avg. All Mfrg. Petr. & Coal Prod. Sources: Census Bureau, AAR SLIDE 14

15 Record Recent Spending on Infrastructure & Equipment $32 $28 $24 $20 $16 $12 $8 $4 $0 ($ billions) '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Capital spending Maintenance expenses Total Data are for Class I railroads. Source: AAR SLIDE 15

16 Today s Profits Pay For Tomorrow s Railroads As demand increases, the railroads ability to generate profits from which to finance new investments will be critical. Profits are key to increasing capacity because they provide both the incentives and the means to make new investments. Congressional Budget Office (Jan. 2006) SLIDE 16

17 Class I Railroad Net Income $8.1 $6.4 $9.1 ($ billions) $10.9 $11.9 $13.4 $14.4 $14.5 $13.2 $14.5 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Note: net income for 2017 has been adjusted to account for tax effects from the Tax Cuts and Jobs Act of Source: AAR SLIDE 17

18 Class I Railroad Operating Ratio* 80% 78% 76% 74% 72% 70% 68% 66% 64% 62% '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 *Operating expenses divided by operating revenue. Source: AAR SLIDE 18

19 Railroads Have Only in Recent Years Earned Their Cost of Capital Class I RR Cost of Capital vs. Return on Investment 18% 15% 12% 9% 6% 3% 0% RR Cost of Capital RR Return on Investment '81 '84'86 '88 '90'92 '94 '96'98 '00'02 '04 '06'08 '10'12 '14 '16 Note: In 2006, the Surface Transportation Board significantly changed the method by which it calculates the rail industry cost of capital. Source: STB SLIDE 19

20 Higher Rail Profitability Has Led to Higher Rail Spending $32 $28 $24 $20 $16 $12 $8 $4 $0 ($ billions) RR spending* RR net income** '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 *Capital spending + maintenance expenses. **Net income for 2017 has been adjusted to account for tax effects from the Tax Cuts and Jobs Act of Data are current dollars and are for Class I railroads. Source: AAR SLIDE 20

21 Return on Equity: Freight RRs vs. Fortune % 14% 12% 10% 8% 6% 4% 2% 0% Class I RRs Fortune 500 median '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Return on equity = net profit / shareholders' equity. Source: AAR, Fortune magazine SLIDE 21

22 Total U.S. Rail Carloads (millions) '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Data do not include the U.S. operations of CN and CP. Source: AAR Rail Time Indicators SLIDE 22

23 Total U.S. Rail Carloads 320,000 (average weekly originations) 300, , , , , , Data are average weekly originations for each month, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR Rail Time Indicators SLIDE 23

24 U.S. Rail Intermodal Traffic (millions of containers and trailers) '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Data do not include the U.S. operations of CN and CP. Source: AAR Rail Time Indicators SLIDE 24

25 U.S. Rail Intermodal Traffic 300,000 (average weekly originations) 280, , , , , , Data are average weekly originations for each month, are not seasonally adjusted, and do not include the U.S. operations of CN and CP. Source: AAR Rail Time Indicators SLIDE 25

26 U.S. Rail Carloads + Intermodal Traffic SLIDE 26 (millions) '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Data are originations and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic

27 Total U.S. Rail Carloads + Intermodal Units 580,000 (average weekly originations) 560, , , , , , , Data are average weekly originations for each month, are not seasonally adjusted, do not include intermodal, and do not include the U.S. operations of CN and CP. Source: AAR Rail Time Indicators SLIDE 27

28 Some of the Things That Keep Railroads Busy Continually changing markets that are difficult to foresee and plan for Positive train control Reregulation Truck size and weight Customer service The economy SLIDE 28

29 Constantly Changing Markets Part grain Annual Rail Carloads by Commodity: (index 2005 = 100) coal sand, cr. stone chemicals steel, other metal prod. motor veh.* metallic ores* pulp & paper* food & grain mill prod. lumber & wood* intermodal *Combined U.S. + Canadian carloads Source: AAR Weekly Railroad Traffic SLIDE 29

30 Constantly Changing Markets Part grain Annual Rail Carloads by Commodity: (millions) coal chemicals sand, cr. stone steel, other metal prod. motor veh. & parts* metallic ores* pulp & paper* food & grain mill prod. lumber & wood* *Combined U.S. + Canadian carloads Source: AAR Weekly Railroad Traffic SLIDE 30

31 As Markets Change, Very Hard to Plan and Manage Rail Networks Different train types Resource limitations Different service requirements Need for long lead times Different locations Need for ongoing maintenance Regulatory requirements Railroads are networks SLIDE 31

32 Railroads Help Keep Coal- ($ billions) Based Electricity U.S. Class I RR Gross Revenue by Commodity in 2017 Total = $69.5 billion Waste & scrap $1.2 2% Petr. & coal prod. $2.9 4% Crude oil $0.7 1% Other $5.1 8% *Some intermodal is interspersed in other commodities. In total, intermodal is ~24% of revenue. Source: AAR (FCS) Food $5.8 8% Intermodal* $ % Coal $ % Grain $5.5 8% Motor veh. $5.5 8% Chemicals $ % Lumber & wood $2.0 3% Pulp & paper $2.2 3% Primary metal products Cr. stone, $2.3 sand, gravel 3% $3.7 5% SLIDE 32

33 U.S. Coal Production vs. Consumption Consumption Production Figures are Source: EIA SLIDE 33

34 Total U.S. Electricity Generation Has Stopped Growing 4,200 (million megawatthours) 4,100 4,000 3,900 3,800 3,700 3,600 SLIDE 34 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: Energy Information Administration

35 U.S. Electricity Generation by Type of Fuel 2,250 2,000 1,750 1,500 1,250 1, Coal (million megawatthours, ) Natural Gas Coal 52% 45% 30% Natural gas 16% 24% 32% Nuclear 20% 20% 20% Renewables 2% 4% 10% Hydro 7% 6% 7% Nuclear Hydro Renewables Source: Energy Information Administration SLIDE 35

36 U.S. Natural Gas Production (trillion cubic feet) '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Energy Information Administration SLIDE 36

37 Average Price of Natural Gas to Utilities $10 (dollars per million BTU) $8 $6 $4 $2 $0 SLIDE 37 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Energy Information Administration

38 U.S. Coal Consumption and Production Down in Recent Years 1,200 1,150 1,100 1,050 1, SLIDE 38 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: EIA Consumption (millions of tons) Production 2017 production = 34% from 2008 peak 2017 consumption = 36% from 2007 peak

39 U.S. Rail Carloads of Coal vs. Electricity From Coal Rail coal carloads** (right scale) 140, , , Electricity generation from coal* (left scale) ,000 60,000 40,000 *3-month moving average, million megawatthours. **3-month moving average based on weekly originations. Source: EIA, AAR SLIDE 39

40 U.S. Coal Volumes Are Down Sharply (millions of tons) U.S. coal tonnage in 2017 was 41% lower than in the peak year of Carloads were down 3.24 million over the same period, the equivalent of 27, car coal trains '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Data are originated tons for Class I railroads. Source: AAR (Freight Commodity Statistics) SLIDE 40

41 Rapid Intermodal Growth (millions) Containers Trailers '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: AAR Weekly Railroad Traffic SLIDE 41

42 U.S. Rail Intermodal Traffic 290, ,000 (6-week moving average originations) , , , , (peak year) 230, , Week # Data do not include the U.S. operations of CN and CP. Source: AAR Rail Time Indicators SLIDE 42

43 Coal vs. Intermodal as % of U.S. Rail Revenue 28% 26% 24% Intermodal 22% 20% 18% Coal 16% 14% '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Data are for BNSF, CSX, KCS, NS, and UP combined. Source: company reports SLIDE 43

44 Why Has Intermodal Grown? Better service Huge RR investments Truck problems fuel, driver shortages, congestion Switch from other freight cars Growing economy and trade \\aarfs2\communications\content INVENTORY\Photos & B-roll\Intermodal\BNSF- Intermodal SLIDE 44

45 What is Positive Train Control (PTC)? Designed to stop or slow a train before certain accidents caused by human error occur: Collisions Derailments caused by excessive speed Unauthorized incursions onto track where maintenance is taking place Movement of train through a track switch left in the wrong position. SLIDE 45

46 Features of the PTC Mandate Mandated by 2008 rail safety bill Required for: All main lines on which regularly scheduled passenger trains travel All Class I main lines > 5 million annual GTM handling TIH materials. Installation by Dec. 31, 2018, testing until Dec. 31, 2020 SLIDE 46

47 What PTC Systems Must Be Able to Do Determine precise location and speed of trains. Warn train operators of potential problems (e.g., stop signal ahead). Take action if the train operator does not respond to a warning. Everything must be interoperable SLIDE 47

48 Largest Combined Effort in U.S. Transportation History Geo-mapping 54,000 route-miles Install technology on 17,200 locomotives Install ~28,600 wayside interface units Install technology on ~2,100 switches in nonsignaled territory ~14,500 signal replacement projects New radio system Back office systems and dispatching software Cost? $10+ billion

49 Significant Progress CLASS I FREIGHT RAILROAD PTC IN OPERATION AS OF DEC. 31, 2017 In PTC Operation Miles Required for PTC Operation % Complete 30,223 54,028 56% Source: AAR compilation of figures provided by individual Class I railroads

50 Basic Principle Behind RR Regulation Today If the U.S. is to have a viable, privately-owned freight rail system: Someone has to pay for it. The market is far superior to the government in determining who should pay. SLIDE 50

51 Some Rail Customers Want to Shift Course Basic complaint: railroads charge too much and railroads use of differential pricing is unfair. Proposed solution: government price controls on what railroads can charge. SLIDE 51

52 The Risk: A Downward Spiral Price controls / restrictions on differential pricing Revenue falls Funds available for reinvestment fall Rail network shrinks Loss of scale economies Further shrinkage & traffic diversion SLIDE 52

53 Truck Size and Weight Limits Today 1982: Congress decrees that trucks on Interstate Highway System can weigh no more than 80,000 pounds. 1991: Congress limits routes on which trucks with two or more trailers (longer combination vehicles, or LCVs) can travel. Limits imposed largely due to concerns about safety and the uncompensated highway damage trucks cause. \\aarfs2\communications\content INVENTORY\Photos & B-roll\Highways & Trucks\Multiple-Trucks-Highway SLIDE 53

54 Why Say No to Longer and Heavier Trucks? Available data don t support heavier trucks (June 2015 DOT study). Huge existing truck underpayments would increase. Would divert freight to trucks that don t pay their own way from railroads that do. More bridge damage and need for design upgrades. Sixth axle not a cure-all. 8/truck _1280.jpg SLIDE 54

55 Railroad Customer Service Everyone agrees it has to improve Bar is continuously being raised Service improvements are expensive Railroads face conflicting pressures SLIDE 55

56 Even In Best of Times, Planning & Managing Rail Network is Difficult Railroads are networks what happens in one area can impact operations hundreds of miles away Different train types have different characteristics and service needs (e.g., coal vs. UPS packages; freight vs. passenger, etc.) Traffic volumes not always foreseen; traffic mix changes Long lead times (2 years for a locomotive, 6-12 months for a trained engineer, up to several years for a new siding, etc.) Ongoing maintenance takes away track time Regulatory requirements SLIDE 56

57 30 Average Train Speed: Aug July 2018 (miles per hour, 3-week moving average) Source: Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul SLIDE 57

58 What Have Railroads Been Doing To Improve Service? Process changes Improved information technology People Locomotives and freight cars Physical plant SLIDE 58

59 Class I Railroad Employment 175, , , , , , , ,000 Total (left scale) Train & engine (right scale) Source: STB 76,000 72,000 68,000 64,000 60,000 56,000 52,000 48,000 SLIDE 59

60 Recent GDP Growth 6% 5% 4% 3% 2% 1% 0% -1% -2% (% change over previous period) Source: BEA trend line SLIDE 60

61 Consumer Confidence Has Surged SLIDE 61 (1985 = 100) Source: Conference Board

62 Total Industrial and Manufacturing Output (2012 = 100) Total industries* 104 Manufacturing *Includes utilities and resource extraction in addition to manufacturing. Source: Federal Reserve SLIDE 62

63 Very Low Official Unemployment Rate 9% 8% 7% 6% 5% 4% 3% 2% Source: Bureau of Labor Statistics SLIDE 63

64 Index of Leading Economic Indicators SLIDE 64 (2016 = 100) Source: Conference Board

65 Weak Correlation: Services-Related GDP* vs. Total Rail Traffic** 12% 8% 4% 0% -4% -8% -12% -16% (% change over previous year) Services-related GDP* correlation = 32% Total rail traffic** '01 '03 '05 '07 '09 '11 '13 '15 '17 *Imports, exports, and personal consumption of services; intellectual property; and government consumption expenditures. **Total originated U.S. carloads and intermodal units. Rail traffic excludes the U.S. operations of Canadian railroads. Source: BEA, AAR SLIDE 65

66 12% 8% 4% 0% -4% -8% -12% -16% Better Correlation: Goods-Related GDP* vs. Total Rail Traffic** (% change over previous year) Goods-related GDP* Total rail traffic** correlation = 90% '01 '03 '05 '07 '09 '11 '13 '15 '17 * Imports, exports, and personal consumption of goods; fixed residential investment; business investment in equipment & structures; government gross investment; and change in inventories. **Total originated U.S. carloads and intermodal units. Rail traffic excludes the U.S. operations of Canadian railroads. Source: BEA, AAR SLIDE 66

67 Railroads Help Keep Coal- Based (years) Electricity Length of U.S. Economic Expansions Since As of July 2018, the As of July 2018, the current current recovery rececovery is more is more than than 9 years nine years old. old. Y-axis is year recovery began. Source: National Bureau of Economic Research SLIDE 67

68 Railroads Help Keep Coal- Average Based Annual Electricity Growth U.S. Economic Expansions Since 1949: Q4 '49 - Q2 '53 Q2 '54 - Q3 '57 Q2 '58 - Q2 '60 Q1 '61 - Q4 '69 Q4 '70 - Q4 '73 Q1 '75 - Q1 '80 Q3 '80 - Q3 '81 Q4 '82 - Q3 '90 Q1 '91 - Q1 '01 Q4 '01 - Q4 '07 Q3 '09 - Q2'18 2.3% 2.8% 4.0% 4.0% 4.4% 4.1% 3.8% 5.4% 5.1% 5.3% 7.6% Source: National Bureau of Economic Research SLIDE 68

69 Railroads Help Keep Coal- What s Economists. going on? Based Electricity One said 3.2% and the other said 3.6% and wouldn t back down. SLIDE 69

70 People Drive the Economy / / SLIDE 70

71 The Economy s People Problem: Part 1 21% 18% 15% 12% 9% 6% 3% 0% '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 '25 ' , 2025, and 2030 are projections. Source: Census Bureau SLIDE 71

72 The Economy s People Problem: Part 2 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% % Change in Size of the Labor Force trend line Source: Bureau of Labor Statistics SLIDE 72

73 The Economy s People Problem: Part 3 64% 63% 62% 61% 60% 59% 58% 57% 56% % of Working Age Population With a Job Source: Bureau of Labor Statistics SLIDE 73

74 The Economy s People Problem: Part 4 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% SLIDE 74 (5-year rolling average of annual productivity growth*) '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 *output per year. Source: Bureau of Labor Statistics

75 Railroads Help Keep Coal- Based Electricity Economists are often asked to predict what the economy is going to do. But economic predictions require predicting what politicians are going to do and nothing is more unpredictable. -Thomas Sowell Photo courtesy of the Hoover Institution SLIDE 75

76 RRs and Foreign Trade: Summary Statistics International Trade as a Share of Rail Traffic in 2014 Rail Trade Trade % Total Share of Total Revenue ($ bil) $75.1 $ % Tons (millions) 1, % Units (millions)* % *carloads and intermodal containers and trailers Source: AAR analysis of government and other data ~50,000 rail jobs worth over $5.5 billion in annual wages and benefits depend directly on international trade SLIDE 76

77 Railroads Help Keep Coal- U.S. Grain Exports Based (million tons) Electricity Corn Wheat China Total % China Total % % % % % % % % % % % Soybeans Sorghum China Total % China Total % % % % % % % % % % % % = China's share of total Source: USDA SLIDE 77

78 Long-Term Demand for Freight Transportation Will Grow Billions of Tons of Freight Transported in the U.S. 2015e 2020p 2030p 2040p The U.S. DOT forecasts total U.S. freight movements to rise from around 18.1 billion tons in 2015 to 25.5 billion tons in 2040 a 41% increase. e estimated p projected Source: FHWA - Freight Analysis Framework, version 4.4 SLIDE 78

79 Assn. of American Railroads SLIDE 79