The Economics and Regulation of the Freight Rail Industry Third Annual Colloquium June 16, 2017
Stage-Setting The Rail Industry and the Economy The Level of Rail Output Mix of Traffic Rail Employment Rail Investment 2
Rail Traffic and Goods-Related GDP 24% 18% 12% 6% 0% -6% -12% -18% -24% -30% (% change over previous year) Goods-related GDP* Rail traffic** GDP sectors that generate freight were essentially in recession in 2016 correlation = 97% 2008 2009 2010 2011 2012 2013 2014 2015 2016 *Imports, exports, and personal consumption of goods; fixed residential investment; business investment in equipment & structures; government gross investment; and change in inventories. **U.S. carloads excluding coal and grain, plus intermodal units. Rail traffic is originations and does not include the U.S. operations of Canadian railroads. Source: BEA, AAR ASS
Macroeconomic Advisers & the Blue Chip Consensus Q4 to Q4 % change or average at Q4 2017.1 2017.2 2017.3 2017.4 2018.1 2018.2 2016 2017 2018 GDP Growth Macroeconomic Advisers (6/3) 1.2 2.9 2.9 2.0 2.0 2.2 2.0 2.2 2.1 Blue Chip (6/10) 1.2 3.0 2.4 2.3 2.3 2.5 2.0 2.2 2.4 PCE Growth Macroeconomic Advisers 0.6 3.3 3.3 2.3 2.2 2.0 3.1 2.4 2.0 Blue Chip 0.6 2.9 2.5 2.4 2.4 2.6 3.1 2.1 2.5 Unemployment Rate* Macroeconomic Advisers 4.7 4.3 4.2 4.2 4.2 4.1 4.7 4.2 4.0 Blue Chip 4.7 4.4 4.3 4.3 4.3 4.2 4.7 4.3 4.2 GDP Price Inflation Macroeconomic Advisers 2.2 0.8 1.4 1.7 2.1 2.1 1.6 1.5 2.2 Blue Chip 2.2 1.4 2.0 2.0 2.2 2.1 1.6 1.9 2.0 3-month T-bill Yield* Macroeconomic Advisers 0.6 0.9 1.2 1.4 1.4 1.6 0.4 1.4 2.0 Blue Chip 0.6 0.9 1.1 1.3 1.4 1.6 0.4 1.3 2.0 10-year Treasury Note Yield* Macroeconomic Advisers 2.4 2.3 2.4 2.6 2.8 2.9 2.1 2.6 3.2 Blue Chip 2.4 2.4 2.6 2.7 2.8 3.0 2.1 2.7 3.2 * Percent; annual values are for fourth quarter www.macroadvisers.com June 2017
Class I RR Freight Revenue $52.9 $59.4 $56.1 ($ billions) $64.8 $67.6 $70.5 $75.1 $69.0-16% $63.2 $46.1 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Data are for Class I railroads and are not adjusted for inflation. Source: AAR ASS
Originated Tonnage in 2016 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 (billions of tons originated) '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16-16% Data are for Class I railroads. Source: AAR Freight Commodity Statistics ASS
Total U.S. Rail Carloads: 2007-2016 18 17 16 15 14 13 12 11 10 9 (millions) '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Data are originations and do not include the U.S. operations of CN and CP. Source: AAR Weekly Railroad Traffic -2.1 ASS
Continued Declines in Rail Coal Carloads 7.48 7.71 6.84 7.07 7.06 (millions) 6.20 5.95 6.11-1.9 5.31 4.19 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ASS Data are originated carloads for Class I railroads. Source: AAR (Freight Commodity Statistics)
Coal as Percentage of U.S. Railroad Revenue 21% 23% 25% 24% 25% 22% 20% 19% 17% 14% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Data are based on originated tons for Class I railroads. Source: AAR (Freight Commodity Statistics) ASS
U.S. Electricity Generation by Type of Fuel Fuel 2000 2005 2010 2016 Coal 52% 50% 45% 30% Natural Gas 16% 19% 24% 34% Nuclear 20% 19% 20% 20% Renewables 2% 2% 4% 8% Hydro 7% 7% 6% 6% Other 3% 4% 1% 1% Source: Energy Information Administration ASS
Rapid Intermodal Growth* 14 12 10 8 6 4 2 0 (millions) Containers Trailers '80 '84 '88 '92 '96 '00 '04 '08 '12 '16 * Source: AAR Weekly Railroad Traffic ASS
Why Did Intermodal Traffic Decline in 2016? P = $4.00 P=$2.00 12
14 A Look at the Most Recent Data
Total U.S. Rail Carloads: Jan 2011 May 2017 320,000 (average weekly originations) 300,000 280,000 260,000 240,000 220,000 200,000 2011 2012 2013 2014 2015 2016 2017 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 ASSOCIATION OF AMERICAN RAILROADS
U.S. Rail Carloads Excluding Coal: Jan 2011 May 2017 200,000 (average weekly originations) 190,000 180,000 170,000 160,000 150,000 140,000 130,000 2011 2012 2013 2014 2015 2016 2017 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 ASSOCIATION OF AMERICAN RAILROADS
U.S. Rail Intermodal Traffic: Jan 2011 May 2017 300,000 (average weekly originations) 280,000 260,000 240,000 220,000 200,000 180,000 160,000 2011 2012 2013 2014 2015 2016 2017 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 Weekly Railroad Traffic ASSOCIATION OF AMERICAN RAILROADS
U.S. Rail Carloads of Coal 140,000 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 (average weekly originations) 2011 2012 2013 2014 2015 2016 2017 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 Weekly Railroad Traffic ASSOCIATION OF AMERICAN RAILROADS
Total Class I RR Employment 176,000 172,000 168,000 164,000 160,000 156,000 152,000 148,000 144,000 140,000 2010 2011 2012 2013 2014 2015 2016 2017 Source: STB D E 19 DE 19 ASSOCIATION OF AMERICAN RAILROADS
Spending on Infrastructure and Equipment* $20.2 $21.5 $20.2 $20.7 $23.3 ($ billions) $25.5 $25.1 $28.0 $30.3 $25.9 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 *Capital spending + mainten. expenses. 2016 is preliminary. Data are for Class I RRs. Source: AAR ASSOCIATION OF AMERICAN RAILROADS
Summary A thumbnail sketch an industry in flux The complete picture? No! Need a richer discussion of the fundamental economic forces driving the freight rail industry To be smart businessperson, regulator, consumer or legislator need to better understand fundamentals. The Georgetown Colloquium! 21