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Rail News Home Rail Industry

January 2012

Rail News: Rail Industry

BNSF expects shales, domestic intermodal and other promising sectors to propel 2012 traffic beyond GDP-growth levels


by Jeff Stagl, managing editor

John Lanigan sums up his No. 1 goal for BNSF Railway Co. this year in three words: "grow, grow, grow." His No. 2 goal? "More growth," said BNSF's executive vice president and chief marketing officer on Dec. 5 in his Fort Worth, Texas, office.

More-than-minimal growth is attainable in 2012, Lanigan believes. And more business means BNSF would be running on all cylinders.

"We work in a production environment and we do best when we're busy," he says.

Workers likely will be a tad busier than they were in 2011 because Lanigan and other BNSF senior executives hope to exploit promising business-growth opportunities derived from shale drilling activities, export coal and grain movements, the domestic intermodal market and automobile production.

The execs believe that if demand trends hold, those sectors can help continue to drive up revenue, which in third-quarter 2011 rose 13 percent year over year to $4.9 billion, according to a U.S. Securities and Exchange Commission filing. Traffic would get a boost, too, perhaps to a level exceeding U.S. economists' projection of 3 percent gross domestic product growth in 2012, says Chairman and Chief Executive Officer Matt Rose.

Based on last year's performance, volume could stand more of a sustained lift. Despite gradual strengthening in the second half (third-quarter volume rose 3 percent to 2.4 million units), BNSF's carloads through 2011's first 48 weeks dipped 0.8 percent to 4.06 million units, according to Association of American Railroads data.

However, the intangibles that could cause 2012 growth projections to come up short are the same ones encountered the past few years: economies in the United States and many other nations that continue to recover, an unemployment rate that remains high, consumer confidence that's still shaky at best, and housing and commercial construction markets that are continually soft.

Nonetheless, senior execs are fairly confident those factors won't impede growth. Some U.S. economists say there's a 40 percent chance of a double-dip recession, but "we don't see it," says Rose.

"Consumer confidence will continue to heal, " he says.

In the energy sector, which includes shale-related and export coal traffic, "we're thinking 6, 7 or 8 percent growth," says Rose.

Volume and revenue growth is plausible in both emerging and established markets, meaning more new business as well as more carloads from existing accounts are on tap, says Lanigan.

"We work with customers to look for growth opportunities," he says. "But as we explore other markets, we don't want to forget about the mature markets."

Overall, U.S rail traffic gradually is maturing again, heading toward the all-time-high, pre-recession mark reached in 2006. That level could be re-attained in late 2012 or early 2013, says Rose.

"The system is loading itself back up, but with a different mix than in past recessions," he says, citing shale-related traffic as an example. "But a significant step-up in volumes would be challenging, [as] we would need more terminals. At the end of the day, if a plant is at capacity, you need to build more concrete."

To ensure BNSF has the necessary capacity to take on more traffic in the near term, the 2012 capital spending budget will be very similar to 2011's $3.8 billion, even after subtracting a "big casualty loss" from the devastating floods that caused massive infrastructure damage last spring, he says. Flood-related repairs cost BNSF about $375 million last year.

The Traffic Tales In Shales

So far, capacity isn't hindering senior execs' efforts to generate and accommodate more traffic in several key sectors. It isn't much of a factor in developing business from shales, such as the Bakken Formation in North Dakota, Niobara Formation in parts of Colorado and Wyoming, Eagle Ford Shale in south Texas and Barnett Shale in north Texas. Over the past two years, traffic derived from shales "is like going from zero to 100 mph," says Lanigan.

However, tight rail-car availability and a limited number of crude-oil terminals are slight business-growth hindrances, says Denis Smith, BNSF's vice president of industrial products marketing.

"We also need more final destinations that have the capability to handle unit trains," he says.

Horizontal drilling and hydraulic fracturing techniques help producers extract crude oil and natural gas from shales. Although the U.S. Environmental Protection Agency is studying whether hydraulic fracturing operations are inadvertently polluting groundwater sources in some areas, production at many shales is stepping up.

In the Bakken Formation, a hotbed of horizontal drilling more commonly called the Bakken Shale, BNSF currently serves six crude-oil terminals. But within two years, that figure will rise to 13 terminals, says Smith.

The railroad delivers inbound drilling materials, such as frac sand and pipe, to numerous oil wells, and predominantly moves outbound crude oil to St. James, La., Stroud, Okla., and points in Texas.

The traffic-generation opportunity in the Bakken is vast given oil producers' accelerated efforts to establish more wells and extract more crude, and the Class I's extensive network and market reach in the region, says Smith. But it will take time for production to catch up with BNSF's hauling potential, he says. Currently, the railroad moves less than 100,000 barrels of crude daily from the shale.

"We have the capability to haul 750,000 barrels per day if all of the stars were aligned and it all went clickety-click," says Smith.

The stars are aligning for rail transportation in the Bakken and other shales because it takes longer to acquire the necessary permitting and is costlier to build a new pipeline than to set up a rail move.

"And a pipeline can only flow one way," says Smith.

In the Niobara Formation or Niobara Shale, BNSF isn't generating much traffic yet. The soil is harder compared with the Bakken Shale and it's more difficult to horizontally drill for crude oil, says Smith. But within a year, oil producers will sort out the drilling challenges and BNSF will obtain more traffic, he believes.

The Class I currently is handling some traffic from the Eagle Ford Shale, where wells produce oil and gas, and the Barnett Shale, a natural gas play like the Marcellus Shale in Pennsylvania and New York, says Smith. Although the Marcellus Shale is located hundreds of miles from BNSF's network, it's a traffic-generator, too.

"[Frac] sand from some of the origins we serve heads east to the shale," says Smith.

Taking The 'Next' Step

BNSF is mining a host of business-growth opportunities in the domestic intermodal sector, too. The key driver: a next-generation intermodal service launched two years ago that gained business-development traction and a new identity last year.

BNSF Next Generation Intermodal (NGI) offers different transit speeds and multi-modal rail options in the same shipping lane for seasonal or promotional freight, or goods needed to replenish inventories or cover store deliveries. For example, the Class I can offer five-, seven- or nine-day delivery from Los Angeles to Chicago to Detroit — in conjunction with CSX Transportation and/or a trucking company — with the faster transit time covered by expedited trains that can travel up to 800 miles per day.

The service can be tailored to a shipper's needs, such as by ensuring inbound freight is delivered to distribution centers or certain retail stores on a tight schedule. BNSF collaborates with other asset-based carriers — including 16 ocean carriers and 50 domestic trucking firms — to guarantee equipment availability or provide drayage or other services.

NGI is all about supply-chain optimization, says Richard Miller, general director of intermodal solutions.

"Shippers are under the spotlight more than ever to reduce inventory and lower costs," he says. "[NGI] is an answer to those goals."

The service's main characteristics are flexibility, reliability and visibility, says Miller.

The flexibility stems from BNSF's ability to offer multiple rail locations, transit times and rates. For example, freight moving from southern California to Charlotte, N.C., via Atlanta can reach the destination in four days on an expedited BNSF train from California to Atlanta and truck from Atlanta to Charlotte; five days on a regular BNSF train from California to Atlanta and truck from Atlanta to Charlotte; or seven days on a BNSF train to Memphis, Tenn., and CSXT train from Memphis to Charlotte.

In terms of reliability, NGI averages 95 percent on-time performance for door-to-door deliveries. Meanwhile, visibility refers to real-time tracking reports and access to customized data, such as service recovery plans, shipment notifications, and exception and mobile alerts. Customers also can manage their shipments from a smartphone using BNSF's mobile applications designed to pinpoint the location of a container or trailer, offer billing information and provide estimated times of arrival.

Conversions And Aversions

NGI is helping BNSF increase highway conversions, says Miller. Overall, intermodal traffic through 2011's first 48 weeks climbed 7.9 percent year over year to 3.9 million units, with much of the gain attributable to higher domestic volume.

"While there is still uncertainty about the economy with regards to consumer spending/demand, there are still tremendous opportunities for conversion," said BNSF Group Vice President-Consumer Products Steve Branscum in an email. "The main driver ... will be over-the-road conversion with existing as well as new users of intermodal."

Existing customers are increasing their intermodal usage for distribution center-store and promotional freight, while new users are entering the intermodal realm given the coverage and confidence that NGI can provide for their different transportation needs, said Branscum.

However, long-standing misperceptions about intermodal persist, he said. Among them: inflexible transit times and poor on-time performance.

"Our challenge will be to continue to educate shippers and carriers on the flexible and reliable intermodal options available to meet their unique and specific requirements," said Branscum.

Michaels Stores' transportation officials used to believe that rail could not perform as well as trucks in terms of on-time delivery, according to a NGI case study provided by Miller. After five years of testing intermodal services provided by Swift Intermodal and BNSF, intermodal now is the retailer's preferred freight transportation mode.

Michaels Stores' annual intermodal moves grew from less than 250,000 miles in 2005 to more than 7 million miles in 2010. In addition, the retailer is exploring more direct-to-store moves and evaluating intermodal on routes less than 1,000 miles, says Miller.

Although some shippers "used to be afraid of using intermodal," now they're thinking long term and incorporating intermodal into multi-year transportation agreements, he says.

"They're gravitating toward asset-based carriers to get more [cost] security in the long term," says Miller.

There are a few other traffic segments senior execs expect to gravitate toward healthier gains in 2012, namely automotive, and export coal and grain.

Eye On Automotive

Automotive volume should get a boost from recovering Japanese automakers and a new vehicle plant, says EVP and CMO Lanigan. Through 2011's first 49 weeks, BNSF moved 116,374 loads of motor vehicles, up 3.8 percent year over year.

Last year's well-documented tsunami impacted production in Japan, but a strong typhoon in Thailand that wasn't talked about as much in rail circles had a large impact on manufacturing, as well, says Lanigan. Many electronic components for vehicles produced in Japan are manufactured in Thailand.

Although Japanese automakers' lower production last year will make 2012 volume "look stronger," increased U.S. production also will help boost this year's auto traffic, says Lanigan.

For example, Toyota in November opened a $1.3 billion, BNSF-served auto production plant in Blue Springs, Miss., near Tupelo. The facility now employs about 1,200 workers to produce Corollas, but will boost employment to 2,000 later this year as production ramps up.

Likewise, export coal volume should continue to tick up as demand remains robust in China and other overseas markets where domestic supplies are tight. Although total coal volume through 49 weeks dipped 5 percent to 2.17 million loads, domestic traffic served as a drag because of last year's mainline-clogging floods and relatively flat utility demand.

"Export coal is doing better than what we have seen in the past three or four years," says Lanigan.

Export volume growth likely will be somewhat modest because there's only one West Coast coal loading center, which is located in Vancouver, British Columbia, he says. Two other proposed loading centers in Washington state are in the permitting stage, says Lanigan.

In the export grain sector, developments overseas also are affecting volume. Major droughts in Russia and other nations are limiting their domestic crops.

"Droughts could create more competition for U.S. crops," says Lanigan.

Total grain volume through 49 weeks inched down 0.1 percent to 528,781 carloads, but export grain demand likely will help tick up total volume in early 2012.

Overall, it won't take long for Lanigan and other senior execs to determine if their 2012 volume projections in a number of sectors are on target, especially consumer products.

"It will be critical what happens in January and February to tell us if the strong retail sales from Black Friday and Cyber Monday were only a one-time shot," says Lanigan.

What will be critical to BNSF's business fortunes well beyond 2012 are the evolution of U.S. transportation policies and regulatory reforms, says Chairman and CEO Rose. For example, the next long-term surface transportation bill probably won't appropriate huge tax dollars for highways, perhaps a similar $80 billion, but it won't place more of a use tax on truckers, either, he says.

"The government says it doesn't fund trucking, but it does appropriate dollars for highways," says Rose.

Under Heavy Analysis

In addition, proposals to increase truck size and weight on interstates might interest legislators as a way to address transportation capacity, but the cost to upgrade or rebuild highway bridges for heavier trucks hasn't been fully analyzed, he says. The rail industry experienced the same analysis shortfall when it transitioned from 263,000- to 286,000-pound rail cars several years ago, says Rose.

"It was a big mistake that the effect on rail bridges wasn't fully analyzed — bridge studies were done, but they weren't done right," he says. "We say do a study on the stress state of highway bridges."

Legislators also need to draft national transportation policy that improves the entire U.S. supply chain and bolsters transportation infrastructure, Rose believes. BNSF is trying to play a larger role as a supply chain partner and enabler, and the nation's infrastructure investment is not keeping pace with increasing demand, he says.

Although political posturing clearly was evident in 2011, lawmakers should maintain their focus on the economy and jobs because "the economy can't seem to get a direction," says Rose.

That rudderless ship sentiment aside, Rose feels more bullish about BNSF's revenue and traffic growth potential than he did in late 2010. But he knows it's vital to be ready for any economic or political surprises that might crop up and impact business — or another unexpected bout with Mother Nature, for that matter.

"We are seeing a structural recovery," says Rose. "I feel pretty good about things, but I keep a mirror up to see what's behind me."

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