Rail Trends Conference 2014 Rail Renaissance II

Transcription

1 Rail Trends Conference 2014 Rail Renaissance II Rodney Case Global Rail Practice Head SURFACE TRANSPORTATION NYC-MKT

2 Rail has earned our place in the future of transportation Rail is a growth industry globally More networks are achieving financial viability The business model redesign in the Rail Renaissance saved the train In an era of higher market expectations New scarcities in key resources Need to tweak the Business Model 1

3 Rail freight is a large and growing transportation business However, the US growth issues are fairly unique Size of national rail freight networks Revenue ton-kms, 2013 Traffic growth in a decade Revenue ton-kms, 2013 versus 2003 China 2.9 China 77% United States 2.5 United States 12% Russia 2.2 Russia 32% India 0.6 India 77% Canada 0.4 Canada 23% Germany 0.1 Germany 32% Revenue ton-kms (billions) 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Revenue ton-kms (billions) Sources: AAR Analysis of Class I Railroads, Railway Association of Canada Rail Trends, German Railway Market Analysis, UIC database, and various news items 2

4 Index Operating ratio performance Operating Ratio is increasingly a top line success story Total Class I operating ratio 2000 = Operating ratio Operating revenue Operating expenses % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Operating ratio Source: Association of American Railroads, Analysis of Class I Railroads, 2000 through 2013, and Oliver Wyman analysis 3

5 Movement to resource shortages As demand for freight rail service continues to grow, we will need to become more resource efficient Equipment Personnel Infrastructure Locomotives that meet Tier 4 requirements not available until mid-2015 at the earliest Tank cars: Builders can t produce fast enough, new regulations will impact supply Record grain harvests, growing intermodal, etc. will require more cars HR issues with economic recovery Postponed retirements will start to kick in May be better opportunities for current employees Growing traffic demands means adding more employees Increasing competition for talent Traffic growth in new areas putting parts of the network under intense strain Even some sections with prior investment strained, e.g., Chicago More trouble to come: prior investment focused on line capacity, not terminals Most new traffic unscheduled unit trains, take a large share of capacity 4

6 Billions of RTMs Infrastructure capacity Congestion has become a major concern once again Quarterly revenue ton-miles (RTMs), average dwell, and average velocity Total RTMs Average Velocity Average Dwell Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Dwell (hours)/velocity (mph) Traffic growth occurring in areas not subject to intensive infrastructure investment Sections with siginificant prior investment are strained Prior infrastructure investment largely focused on line capacity, not terminal capacity Terminals are proving incapable of handling increased traffic Source: Surface Transportation Board, Quarterly Earnings Reports, company quarterly reports, and Oliver Wyman analysis 5

7 Another rail industry transition Rail Renaissance II will be just as important as the first one. Railroad Renaissance I Theme: Cost control 5-person to 2-person train crews Automation/centralizing of back office Bigger trains Fuel efficiency Shortlining of the branch network Railroad Renaissance II Theme: Network fluidity and service Resource constraints and congestion Tighter scrutiny by customers and regulators Targeted growth Increasing volume and revenue faster than capex Paradigm shift: Scheduled railroading Scheduled operations, less expensive than maximizing train size Minimizing unit train resource consumption Paradigm shift: Service is paramount OR improvement becomes top line driven Tighter control of operations Better integration of commercial and operating plans Targeted allocation of capital Tighter integration into customer supply chains 6

8 Four defining elements in Rail Renaissance II Supply Chain Transparency Convergence in Planning Mission Completion New Social Compact 7

9 Convergence in planning Rail network planning remains dominated by expert teams with increasingly sophisticated models and analytics Parallel planning teams create their optimum operating plan with differing definitions of success Reality of daily operations is competition for the same three key resources locomotives, crews and yard infrastructure 8

10 Train-Miles (millions) Average velocity (MPH) The need for a single integrated plan In most global rail networks, irregular unit trains are seen as capacity destroyers Non-coal unit trains traffic Class 1 Railroads % 7.0% 7.2% 7.7% 8.7% Non-coal unit train (NCUT) miles NCUT miles % of total Average velocity Class I railroads System Velocity Unit Train Carloads Carloads (thousands) Sources: FRA Operational Data, AAR Rail Time Indicators, and Oliver Wyman analysis 9

11 Number of tank cars Integration Example : Tank car fleet additions There will soon be 1000 oil train sets on the network and what Class I yard investments are being made to queue them? New tank car supply 70,000 Integration Issues High variation in route structure 60,000 50,000 40,000 30,000 20,000 10, Spot market commodity Volatility in daily volumes Different production rates by loading and unloading sites Significant multiple railroad routings High relative queue factor in transit Sources: Oliver Wyman analysis and AAR Analysis of Class I Railroads 10

12 An Integrated approach - DB Netze DB Netze train path pricing system rewards consistent operations while protecting capacity for unit trains Base Path Price Premium for Speed Cancelation Fee Varies by corridor demand $2.20 to $6.00 per train km X 1.65 for express path X 1.50 for slow path (underpowered) X 0.65 for local path < 24 hours 40% Terminal Track Annual rental -$ $5000 per track Sources: DB Netze Train Path Pricing System 2015 and DB Netze Facility Pricing System

13 Train-miles index (2004 = 100) On-time performance Network performance with growth Germany s network performance has been consistent Overall train traffic growth DB, US Class Is and Amtrak, 2004 to 2013 Percent on-time performance 1 DB, US Class Is and Amtrak, 2004, 2013, and % 41% 74% 70% 77% % Germany US DB long-distance Amtrak long-distance Sources: DB Annual Reports; DB Facts and Figures; U.S. Department of Transportation, FRA, Operational Data Tables 1. Definition of on-trip performance: DB all trips < 6 mins than the scheduled arrival; Amtrak trips within 250 miles < 10 mins, miles < 15 mins, miles < 20 mins, miles < 25 mins, and greater than 550 miles < 30 min. Long-distance Amtrak trips are those >= 400 miles 12

14 Convergence in planning - Summary Build a single operating and network plan with clear definition of network and resource reserves Reward stable operations Reconstruct cost allocations to track against actual operation needs and related reserves held in the system 13

15 Four defining elements in Rail Renaissance II Supply Chain Transparency Convergence in Planning Mission Completion New Social Compact 14

16 Mission Completion - A potential definition Primary mission successful Key operation parameters met Subsystem performance meets specifications External impacts within mission design 15

17 Class Is have a generous definition of mission success While catastrophic failures have been massively reduced, progress eliminating other unplanned events has lagged LAST AEI SITE 0534 LS372 ENGLEWOOD TRACK #1 CONSIST NOT VALIDATED BY AEI TP860: CR 2 11 NO CREW AVAILABLE TP812: TM 32 MET ZMFLAF 18 TP666: SH 1 12 HBD DETECTOR TP666: CT 57 RECREWED TRAIN LAST AEI SITE 1101 CO003 ST. LOUIS TRACK #3 CONSIST NOT VALIDATED BY AEI CO486: TM 45 HELD FOR TWO EASTBOUNDS CO112: TM 32 MET MWSCH 12 CO043: LF 3 42 LOCOMOTIVE FAILURE CO007: CT 57 RECREWED TRAIN North American railroads have invested heavily in early detection, which has reduced the number and severity of derailments, but not the frequency of other unplanned events like locomotive failures and hot boxes US Class I incident rate Incidents per million train miles Sources: US Federal Railroad Administration and Oliver Wyman analysis 16

18 Gross tons Gross tons Larger trains require new mission standards Our relentless drive for operations efficiencies are creating more complex rolling stock performance needs Average gross tons per train 7,000 6,750 6,500 6,250 6,000 5,750 5,500 Average gross tons per car Gross tons per train grew by 12.2 percent between 2000 and 2013 Gross tons per railcar grew by 10.2 percent between 2000 and 2013 Sources: Association of American Railroads and Oliver Wyman analysis 17

19 Unexpected events compromise mission completion Over 500,000 unexpected delays impact over 1 in 4 trains Estimated frequency of unexpected events US Class I railroads in 2013 Total estimated incidents Detector activations 12,000 Detector failures 1,000 UDEs 27,000 Train separations 2,000 Crossing protection failures 110,000 Unscheduled work 125,000 Locomotive failures 44,000 Recrews 210,000 Total 531,000 Sources: Various US Class I railroads and Oliver Wyman analysis 18

20 Percent of route miles with multiple mains Mission completion failure eats sustainable capacity Due to a higher mission failure rate, Class Is operate at a capacity discount relative to foreign networks Train intensity and multiple-track route miles North American impediments 60% 50% 40% 30% 20% 10% 0% A Poland B C Four largest US Class Is D France Italy Ukraine Kazakhstan Russia Germany China Average trains per day Higher en route equipment failure rates Larger train sizes Low integration of unscheduled trains Poor terminal and corridor integration Sources: Association of American Railroads; International Union of Railways; Potter, et al, Transnet Ore Line Project; and Oliver Wyman analysis 19

21 Percent of route miles with multiple mains The opportunity cost of North American rail operations Inconsistent network performance day over day reduces the potential earning capacity of the network Train intensity and multiple-track route miles 60% 50% 40% 30% 20% 10% A B C Four largest US Class Is D $5B Increase train density +1 train daily across the entire railroad network in additional revenue 0% Average trains per day ($15,000 per train hour) Sources: Association of American Railroads and Oliver Wyman analysis 20

22 Mission Completion - Summary Consistent performance on the network starts with better Mission Completion All industry participants are part of the solution Fleet owners, maintenance contractors, origin customers and railroad operators Economic model must move from cost avoidance to opportunity cost Mission Completion failure points must bear the associated costs of the delay including forfeit revenues This will NOT be a one solution works for all corridors and terminal areas 21

23 Rail Renaissance II - The next natural step in professional railroading Supply Chain Transparency Convergence in Planning Mission Completion New Social Compact 22

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