1

U.S. Railroads and the Future of Intermodal Traffic

Francis P. MulveyVice Chairman

Surface Transportation BoardFootwear Traffic Distribution and

Customs ConferenceLong Beach, CA

September 15, 2008

2

U.S. Railroads and the Future of Intermodal Traffic

• Modern U.S. railroad industry can be divided into pre- & post- Staggers Act

• In the 19th Century railroads expanded rapidly especially after the Civil War

• However, much abuse of monopoly power leading to the Interstate Commerce Act and federal regulations

• Federal regulations ultimately extended to all modes, but proved potentially harmful to railroads

3

Railroad Industry Pre-Staggers• 40 Class I Railroads• 9 Railroads bankrupt • Industry-wide low return-on-investment• Railroads unable to raise capital• Railroads faced steadily declining market share• Regulation prevented RRs from any flexibility

in pricing to compete with other modes• Carriers could not abandon redundant or light

density lines to cut costs• Rates could not cover inflation due to regulatory

lag in rate adjustments

4

Staggers Rail Act of 1980

• Railroads given freedom to set rail rates based on demand

• Streamlined procedures for the abandonment and sale of rail lines

• Encouraged Railroad-Shipper contracts• Expanded ICC power to exempt

categories of traffic • Rates evaluated by ICC under a

reasonableness test

5

Growth & Decline of Class I Railroad Mileage

0

50,000

100,000

150,000

200,000

250,000

300,000

6

Railroad ROI 1970 - 2006

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1970

1980

1990

2000

2002

2004

2006

7

Railroad Industry Cost of Capital and ROI 1996-2006

Cost of Capital BNSF CSXT NS UP KCS SOO GT

1996 11.9% 8.6% 8.9% 13.0% 9.3% 7.2% 23.5% 0.0%1997 11.8% 8.4% 9.8% 13.1% 5.2% 3.6% 12.3% 5.2%1998 10.7% 9.7% 8.1% 10.5% 2.9% 9.1% 4.9% 3.0%1999 10.8% 9.5% 3.8% 5.2% 6.8% 6.4% 2.5% 25.4%2000 11.0% 8.8% 3.6% 5.5% 6.9% 6.3% 5.6% 5.9%2001 10.2% 7.1% 4.6% 8.3% 7.6% 7.0% 5.9% 4.9%2002 9.8% 6.4% 5.2% 9.1% 8.6% 6.5% 5.7% 3.1%2003 9.4% 6.2% 4.0% 9.1% 7.3% 3.7% 0.01% 4.5%2004 10.1% 5.8% 4.4% 11.6% 4.5% 8.3% 3.3% 6.0%2005 12.2% 10.3% 6.2% 13.2% 6.3% 5.9% 8.9% 8.1%2006 9.9% 11.4% 8.2% 14.4% 8.2% 9.3% 11.6% 9.5%

8

Railroad Employment 1939-2006

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

237,000

1,151,000

1,670,000

2006

9

$4.120 $2.145$4.875 $2.320$4.445 $2.183$4.549 $1.507$4.421 $1.012$4.645 $1.021$4.561 $1.299$4.941 $1.301$5.400 $1.000$6.400 $1.500

$0

$2

$4

$6

$8

$10

Class I Capital Expenditures1994 - 2007

Roadway & Structures

Equipment

Total

Billions

2007

10

Since Staggers

• Rail industry freight traffic ton-mile market share has increased from 30.3% in 1980 to 41.2% in 2005

• Rail rates down 55% on average (inflation adjusted)

• Railroads’ ROI increased • Railroads substantially increased

investment in infrastructure• Improvement in safety performance

11

Modal Markets Shares

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1980 1985 1990 1995 2000 2005

U.S. Freight Ton-Miles by Mode: 1980-2005

Railroads

Truck

Data exclude natural gas pipelines. Trucks exclude household, service, retail, and certain other shipments. Source: U.S. Bureau of Transportation Statistics

WaterPipelines

12

The Railroad Industry Today

• 7 Class I Railroads

• 525 Class II and Class III railroads

• Much reduced system through rationalization

• Average length of haul – 900 miles

13

Railroads and Intermodalism• Despite regulatory malaise, railroads did

innovate• Pennsylvania Railroad adopted Piggyback

Service between Chicago and New York in the mid 1950’s

• Containerization began in 1956 by Malcolm McLean

• Containerization and intermodalism resulted in major improvements in transportation productivity

14

Long Island Rail Road carrying farm wagons to market in

January 1885.

15

16

Intermodal Shipments Beginning 1965

275482930445743363244369250243757264443709484113052444015419631570021962882606332021678102273297688065539871360693995229430000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

1965

1975

1985

1991

1993

1995

1997

1999

2001

2003

2005

2007

Total 12,030,000

Containers 9,430,000

Trailers 2,600,00

17

0

1

2

3

4

5

6

7

8

9

Growth of Intermodal Traffic in Port of LA/LB, 1980-2007

18

Container Traffic At The Largest North American Pacific Coast Ports

YTD 2008 (through July) traffic flows in TEU’sImports – loads

Port 2007 2008 Change Pct.

Los Angeles 2,531,107 2,263,959 (267,148) -10.55%Long Beach 2,132,560 1,861,725 (270,835) -12.70%Vancouver 593,246 608,021 14,775 2.49%Oakland 496,568 470,250 (26,318) -5.30%Seattle 465,193 404,911 (60,282) -12.96%Tacoma 402,120 376,117 (26,003) -6.47%Portland 63,489 63,045 (444) -0.70%

Total 6,684,284 6,048,028 (636,256) -9.52%

19

Container Traffic At The Largest North American Pacific Coast Ports

YTD 2008 (through July) traffic flows in TEU’sExports – loads

Port 2007 2008 Change Pct.

Los Angeles 894,283 1,092,678 198,395 22.18%Long Beach 866,537 1,067,574 201,037 23.20%Vancouver 445,282 493,483 48,201 10.82%Oakland 514,482 559,756 45,274 8.80%Seattle 274,198 278,652 4,454 1.62%Tacoma 249,172 304,319 55,147 22.13%Portland 86,952 76,779 (10,173) -11.70%

Total 3,330,906 3,873,241 542,335 16.28%

20

Container Traffic At The Largest North American Pacific Coast Ports

YTD 2008 (through July) traffic flows in TEU’sPct. Imports

Port 2007 2008

Los Angeles 74% 67%Long Beach 71% 64%Vancouver 57% 55%Oakland 49% 46%Seattle 63% 59%Tacoma 62% 55%Portland 42% 45%

Total 67% 61%

21

Future of Intermodalism

SPURS• Rising Fuel Prices• Continued Truck Driver Shortages• Growing Highway Congestion• New Ports and Port Modernization

22

Future of Intermodalism

THREATS• Lack of Rail Capacity• Lack of Domestic Port Capacity• Rising Manufacturing Costs Abroad Relative

to U.S.• More All-Water Routes

– Panama Canal to Eastern U.S.

• Lack of Investment due to Re-Regulation

23

Growing Capacity/Congestion Problem

• Problem not limited to highways

• Ports dealing with larger vessels and rapidly expanding international trade

• Rail capacity problem is of more recent vintage

• Economic regulation fostered excess capacity, especially for railroads

24

The Developing Rail Capacity Crisis

Shrinking workforce and infrastructure partially offset by productivity improvement but… continuous increase in traffic begins to absorb “excess capacity”

Network becomes more vulnerable to stochastic events

A “perfect storm” or the rail version of global warming

25

The Genesis of theRailroad Capacity Problem

• Improved earnings yet all Class I’s are not revenue adequate

• Historically RR’s ‘punished’ by Wall Street for making capital investments

• RR’s often found that infrastructure investments failed to generate sufficient income

• L/T strategy to reduce size of workforce• Added rail infrastructure is long-lived while

demand increases can be short-lived

26

Carrier Responses to Recent Capacity Problem

• More railcars and locomotives purchased and leased

• Accelerated hiring and training of crews

• Some infrastructure expansion efforts

• Price rationing of available capacity

• RR’s choosing who they will serve and the common carrier obligation

27

Long-Term Rail Capacity Constraint Factors

• Demand for freight rail projected to grow by 60-70% over next two decades

• RR’s inability to earn cost of capital• Pressure from Wall Street to reduce capital

costs and improve ROI• Long-term contracts limit RR pricing

flexibility• RR’s tend to bid L/T contract rates down

to L/R marginal costs

28

Approaches to the Transportation Congestion Problem

• Build more physical infrastructure

• Adopt technological innovations– Can RR’s do this and maintain profitability?

• Better utilize existing facilities

• Promote shipper/traveler behavioral changes

• Public/Private Partnerships

All have potential but all have limits

29

Infrastructure Capacity• SAFETEA-LU – 2 years late, $90

Billion short• $286.5 Billion over 6 years

– 38% more than TEA-21 in 1998

– Far short of $375 Billion estimated need

• Contained rail title but far from intermodal legislation

• Expanded the RIFF program to $35 Billion, makes shippers eligible

30

Rail Capacity Investment

• RR’s support limited public sector role• Public/Private partnerships

– Alameda Corridor– CREATE

• RR Trust Fund concept• Investment Tax Credits

– Short Lines 286K car issue– Class I access and limited fiscal capacity

• Renew interest in infrastructure investment and GREEN-TEA

31

Obstacles

• Dollar resources

• Resistance to change

• Labor contracts

• Ineffective lobbying efforts to address freight transportation needs

32

Need to Focus on Freight Issues & Intermodal Solutions

• Reauthorization of highway program is only 4 years away

• Increase visibility of freight issues• Install a comprehensive evaluation

process (i.e. c/b analysis) within in the planning process

• Address limitations on federal funding that dedicates $ to a single mode or non-freight purposes

33

Thank you. Questions?