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By the Progressive Railroading staff
Freight railroads are moving lots of coal and grain, generating more revenue and making the service-metric grade. Passenger railroads are setting ridership records and advancing large-scale projects. Those trends should continue in 2008, helping railroads stay the growth course.
But they’ll also encounter their share of road blocks, making the trip through ’08 a tad more difficult to navigate than this year’s journey. Railroads’ ability to contend with a soft economy, capacity constraints, funding issues and Washington, D.C., developments will be key to arriving at their desired destination.
In the stories that follow, Class Is, short lines and passenger railroads outline the fast lanes and detours they expect to dot their ’08 road maps.
Let the good times roll
’08 figures to follow ’07 in the ‘relatively good year’ column if Class Is
can overcome major economic and legislative obtacles, CEOs say
by Jeff Stagl, managing editor
At a time of year when Charles Dickens’ “A Christmas Carol” garners attention on the stage and TV screens, Class I chief executive officers likely are thinking about another Dickens classic as they reflect on the outgoing year. Or more specifically, its famous opening line: “It was the best of times, it was the worst of times.”
It’s been an up-and-down year for the seven Class Is. CEOs can claim the good times were rolling because:
However, the officers also can provide more than enough evidence to support a bad-times argument:
Despite the highs and lows, 2007 will go down as a good year when all things are considered, according to the seven CEOs, two of whom shared their thoughts during interviews and five of whom provided views in written statements. And 2008 will be another relatively good one, with a similar share of positive and negative developments — likely more of the former than the latter, CEOs believe.
Although they’re monitoring housing starts, automotive production, retail sales, the balance of import/export trade and events on Capitol Hill, the officers used words like “bullish,” “growth potential” and “promising prospects” to describe their projection for next year’s business potential, given what they consider ample traffic opportunities in a soft economy.
The CEOs also have a different view of the year ahead compared with their initial take on ’07. For the most part, they’re confident they know what’s in store: an economy that likely will remain soft through at least first-half 2008, a looming
intermodal traffic rebound, and continuing efforts by shippers and rail labor unions to spur regulatory change.
“There’s not as much uncertainty heading into 2008 as there was going into 2007,” said Norfolk Southern Corp. Chairman, President and CEO Wick Moorman in an interview. “There was a period of transition in the economy into early 2007 that created more uncertainty.”
Convinced they have a good handle on what lies ahead, the CEOs are planning accordingly.
“We expect to introduce new intermodal services next year,” said Moorman. “We’re seeing freight going to East Coast ports instead of the West Coast, and truck carrier price increases are not holding well, which we think will impact our domestic intermodal traffic.”
Railroads will continue to solve “real problems” for their customers and the United States’ transportation system because the rail industry is basing decisions on a secular environment instead of cyclical conditions, CSX Corp. Chairman and CEO Michael Ward believes.
“Our customers see the same dynamics that we see, including increasing and shifting populations, overcrowded highways, and the environmental and cost advantages of rail,” he wrote. “Even though the economic picture remains somewhat unclear, today’s CSX workforce knows how to adjust the sails and respond to changes.”
But that’s not to say the ever-changing economy — and its impact on traffic — isn’t a concern.
The weak housing market’s effect on household spending warrants a “great deal of caution about 2008,” wrote Canadian National Railway Co. President and CEO E. Hunter Harrison. “The industry’s challenge is to stay focused through the ups and downs of the business cycle.”
Three up, three down
Economic swings will affect the fortunes of Union Pacific Railroad’s six business groups. Three (coal, intermodal and agricultural products) will generate more traffic and three (chemicals, automotive and industrial products) will produce fewer carloads, said UP Chairman, President and CEO Jim Young in an interview.
“We don’t see the housing market changing — it’ll be soft all year,” he said. “Chemicals have been stronger than expected this year, but we expect them to be softer in 2008. Finished vehicles are a toss up.”
BNSF Railway Co. Chairman, President and CEO Matt Rose also is keeping an eye on — and anticipating continued weakness in — the housing market. Nonetheless, he’s counting on a good year in two traffic segments.
“Demand for Powder River Basin coal and American agricultural products is expected to remain strong, subject, of course, to fluctuations in global markets,” Rose wrote.
CN anticipates traffic-growth opportunities in bulk and industrial products.
“The continuing boom in western Canada is generating new traffic flows, from inbound pipe and diluents, to outbound coke and sulphur, and the expansion of alternative fuels is driving new business in ethanol and biodiesel,” wrote Harrison.
CN also is projecting intermodal traffic growth.
The Port of Prince Rupert terminal, which opened in October, is well positioned for growth throughout 2008 by bringing in containers from Asia for distribution to U.S. and Canadian markets, and moving loads back to help maintain a better traffic balance on the Pacific, Harrison wrote.
In ’08 and beyond
Kansas City Southern, too, expects significant intermodal traffic growth for subsidiaries The Kansas City Southern Railway Co. (KCSR) and Kansas City Southern de México S.A. de C.V. (KCSM) — both in 2008 and 2009. The development of an intermodal hub at the Port of Lazaro Cardenas, Mexico, and creation of a U.S./Mexico intermodal corridor will be the drivers, wrote KCS Chairman and CEO Mike Haverty.
“We anticipate seeing traffic growth first in intra-Mexico in 2008 and then expanding into the U.S. in 2009,” he wrote.
KCS expects chemical, coal and grain traffic to remain strong, as well. In addition, KCSM will get a carload boost from a new automotive plant set to open next year in San Luis Potosi, Mexico, and KCSR will continue to move metals from a new SeverCorr L.L.C. steel plant that opened in October in Lowndes County, Miss.
NS’ intermodal traffic will get a shot in the arm after the Rickenbacker terminal opens in Columbus, Ohio, in January. The Class I also plans to introduce intermodal services along the 1,400-mile New Jersey-to-Louisiana Crescent Corridor NS is developing, Moorman said.
Canadian Pacific Railway is projecting additional intermodal traffic, too.
“Global GDP appears solid with China at 10 percent and India at 7 percent,” wrote CPR President and CEO Fred Green. “Growing global economies means continued strong primary resource demand and import/export container trade.”
With a 44 percent bulk/29 percent intermodal/27 percent merchandise split, CPR’s traffic mix provides a balance between resource commodities, and semi-manufactured and consumer goods, Green wrote.
The Class I is targeting revenue growth between 4 percent and 6 percent next year.
An “Alberta Industrial Heartland” strategy will help propel CPR toward that goal. The railroad plans to construct lines to serve planned and existing bitumen upgraders northeast of Edmonton in Alberta’s developing industrial and oilsands region.
“We are immediately investing $15 million in capital for new infrastructure to increase distribution and logistics capacity and offer expanded transload capabilities for inbound construction materials, including dimensional shipments required by the upgraders,” wrote Green. “Our vision is to create a rail network focused on the movement of byproducts created from upgraders in the industrial heartland, which include sulphur, petroleum coke, asphaltene, and various liquids and gases.”
CPR also envisions a redrawn network that includes the Dakota, Minnesota & Eastern Railroad Corp. (DM&E), which the Class I acquired in October. The 2,500-mile regional presents traffic growth opportunities in ethanol and coal — specifically, the Powder River Basin (PRB) project.
CPR is seeking STB approval to integrate the DM&E into its system. The board recently ruled the transaction is a major one, meaning the STB won’t complete its review and issue a final decision until September 2008.
“A trustee has been appointed in the meantime and the DM&E management will continue with day-to-day operations until the STB’s review is completed,” wrote Green.
Eye on the ‘E’
CN is awaiting an STB decision on its own regional acquisition. In October, the Class I submitted an application to the board seeking approval to acquire a major portion of the Elgin, Joliet & Eastern Railway Co.’s (EJ&E) 198-mile mainline that encircles Chicago.
CN plans to invest $100 million in the EJ&E line to build connections, improve infrastructure and expand capacity. The Class I hopes to close the transaction in mid-2008, Harrison wrote, but the STB late last month said its review process — which will include an environmental impact study — could take longer.
“The acquisition will save the company at least a day of transit time through the Chicago gateway ... and give CN an opportunity to expand its service to the American steel industry,” Harrison wrote.
But CN likely won’t invest the $100 million if the Railroad Competition and Service Improvement Act of 2007 (H.R. 2125/S. 953) and Railroad Antitrust Enforcement Act of 2007 (H.R. 1650/S. 772) wade their way through Congress and land a presidential signature. The bills propose to cap freight rates, amend federal antitrust laws to repeal railroads’ exemptions and significantly reduce the STB’s rate case filing fees.
All the CEOs expressed strong opposition to the legislation, which they believe will limit their respective railroad’s ability to reinvest capital in infrastructure improvements and capacity expansion.
“The rail industry is investing large sums of money to increase infrastructure capacity to handle growing volumes moving over long distances,” wrote Harrison. “We firmly believe a market-driven environment is the best way to assure that our highly capital-intensive industry continues to improve service and asset productivity.”
BNSF’s Rose believes there’s a “much higher chance” a bill could come out of committee or one of Congress’ two houses.
“The question that must be asked is whether these actions would result in more rail capacity. History has told us that they would not,” he wrote.
An AAR-commissioned National Rail Freight Infrastructure Capacity and Investment Study released in September showed rail tonnage would increase 88 percent by 2035 and the Class Is would need to spend $135 billion to provide enough capacity to handle it.
“Whatever regulatory policy is adopted is going to have to be a policy that incents investment,” Rose wrote. “I am convinced now more than ever that our country needs a national transportation policy if we want to ensure the right amount of capacity is available when it is needed.”
Getting the word out
CSX is trying to provide policymakers the necessary facts to help ensure “they make the right decisions,” wrote Ward.
“Many lawmakers see the benefits of allowing and encouraging railroads to continue on the path of making significant investments in the rail system while earning a reasonable return on invested capital,” he wrote.
NS’ Moorman, who lately has been traveling to Washington “more than I thought I would and more than I want to,” believes Class Is and the entire rail industry needs to be as aggressive as possible to “make sure our voice is heard and sensibility prevails,” he said.
“It boils down to allowing railroads to play a bigger role in moving goods in this country or the days of limited profitability and contraction will return,” Moorman said.
KCSR also is trying to help educate lawmakers and other constituents about the need for capital investment, wrote KCS’ Haverty.
“KCSR doesn’t believe it is likely that re-regulation bills will become law in 2008,” he wrote. “We believe there are sufficient votes in the Senate to stop bad legislation if such legislation came from the House.”
UP’s Young, too, believes the rail industry has just enough congressional support to defeat the bills if they came to a vote.
While Young’s monitoring the bills’ progress, he plans to keep an eye on the shakeout from the STB’s September decision to simplify procedures governing rate challenges.
Shippers now can file a case for $150 instead of thousands of dollars, choose a resolution process and obtain an award up to $1 million with eight months of filing a complaint.
Although Young is concerned more shippers will seek regulatory relief, he recognizes they sought an easier way to challenge rates.
“I don’t necessarily agree with the changes, but I understand they will be a benefit to my customers,” said Young.
Taking all the credit
Meanwhile, Rose expects to keep close tabs on tax credit legislation, which could help Class Is expand capacity.
“Assuming rail revenues grow apace with tonnage and railroads maintain their current expansion investment levels, and if the Class Is can continue to achieve productivity gains of up to 0.5 percent per year, Class Is still would face a gap of $39 billion in capacity investment required by 2035 to meet projected growth,” he wrote. “Passage of the investment tax credit could not only close that gap, but allow for additional rail capacity that would let our economy further leverage the environmental benefits of railroads and provide an alternative to our already-stressed highway infrastructure.”
“Capacity,” “investment” and “economy” will continue to be buzz words all year long.
No matter how things shape up, the CEOs are fairly optimistic they’ll be referring to ’08 as a good year when all is said and done. If not, they expect a quick turnaround in ’09.
“Even if the economy is weaker than expected, we are confident that economic adjustments in 2008 will set the stage for what should be a solid rebound in 2009,” wrote Harrison. Email comments or questions to
Like their Class I brethren, short-line executives are concerned about the economic and legislative climates, yet encouraged by traffic growth opportunities — especially in the ethanol market — heading into 2008.
Most indicators suggest the economy will remain sluggish through the first half or three quarters, according to four regional and short-line holding company execs.
“But there are opportunities even in a weak economy,” says John Fenton, chief operating officer for short-line holding company OmniTRAX Inc. “There can be more exports and less loss of jobs.”
Fenton anticipates more export traffic at the Port of Churchill, Manitoba, which is managed by OmniTRAX and served by the company’s Hudson Bay Railway Co. The port will handle more fertilizer and wood pellets, which are growing Finnish markets, and more export grain — even after setting a Canadian Wheat Board record this year of 621,000 tons, says Fenton.
“We think we can build on that,” he says. “We have a ‘1-million-ton team,’ which includes operations and marketing people, that will work toward that mark.”
To accommodate increased port traffic, OmniTRAX will spend $68 million to modify a grain elevator, construct sidings and upgrade a Hudson Bay line between western Canada and the port. The Canadian and provincial governments each will provide $20 million for the projects.
OmniTRAX also expects to gain traffic from a wind-turbine blade plant set to open in January on the Great Western Railway of Colorado L.L.C. and an ethanol plant scheduled to open in June in Camilla, Ga., on the Georgia & Florida Railway Inc.
Ethanol to fuel traffic
Next year, Genesee & Wyoming Inc.’s (GWI) Portland & Western Railroad also will be serving a new ethanol plant — in Port Westward, Ore.
“That plant’s a bit unusual because it’s not in the central part of the country,” says GWI President and CEO Jack Hellmann. “They’ll move corn in by rail and ship out ethanol by rail or barge.”
In addition, GWI’s Bay Line Railroad will begin serving a wood pellet plant near the Port of Panama City, Fla., and Commonwealth Railway will begin serving a new container terminal in Portsmouth, Va.
“We have opportunities to increase traffic independent of the economy,” says Hellmann.
The Indiana Rail Road Co. mostly is insulated from the economy because the regional doesn’t mov
e much automotive- or housing-related traffic, and no intermodal loads, says President and CEO Tom Hoback.
“We’re strong in energy, such as coal, petroleum products and chemicals, and alternative energy, like ethanol,” he says.
Currently, the 500-mile regional is talking to two ethanol producers about locating plants in southwestern Indiana and awaiting a biodiesel producer to work through financing difficulties for a Newton, Ill., plant, says Hoback.
Overall, carloads will increase from about 170,000 this year to more than 180,000 in 2008. In addition, revenue will rise more than 10 percent year over year primarily because of carloads generated by a 92-mile Fayette-to-Bedford, Ind., line that Indiana Rail Road acquired from Canadian Pacific Railway in 2006, says Hoback.
Ethanol will be the primary traffic driver for Iowa Interstate Railroad Ltd., which expects carloads to increase about 5 percent in 2008 after rising 6 percent to 77,000 units in 2007. Three 100-million-gallon-capacity plants will open next year, generating an additional 15,000 carloads for the 552-mile regional.
“As long as oil prices keep going up, ethanol prices will remain up,” says Iowa Interstate President and CEO Dennis Miller. “However, there will need to be more blending facilities to keep ethanol cycling.”
Capitol Hill concerns
There’s another thing on Miller’s mind apart from the ethanol supply chain — “re-regulation” legislation, which he believes will reduce Class Is’ capital investments and affect rates.
“If they tell us to charge X amount to move freight from A to B, it might not be enough to cover it,” he says.
If any form of the legislation passes, there’ll be a winnowing of Class I traffic, which will trickle down to short lines, GWI’s Hellmann believes.
Also on the legislative front, the United States needs a balanced national energy policy, instead of a “patchwork” of federal and state policies, to spur coal growth, says Hoback. And the short-line industry likely will obtain a one- instead of three-year extension for the tax credit law (U.S. Code Section 45G), he says.
“It looks like we’ll have to go back to Congress next year to get a longer extension or make it permanent,” says Hoback. “The credits to us mean $1 million in capital means.”
— Jeff Stagl
Despite ridership growth and capital project progress, big-picture uncertainties dampen transit execs’ mood on the year ahead
By Angela Cotey, Associate editor
In 2007, demand for public transportation was higher than ever. As of mid-November, many transit agencies were on pace to blow their all-time-high 2006 ridership stats out of the water. And industry-wide, about 30 percent of all public-transit riders are new users, according to the American Public Transportation Association (APTA).
That should leave transit execs feeling pretty good about the year ahead, right? Wrong.
The cost to operate a transit system is increasing far faster than the rate of inflation, and local, state and federal funding hasn’t kept up. It’s putting several agencies in the awkward position of having to cut service and/or raise fares at a time when more people than ever are depending on them. And with the Highway Trust Fund dwindling, SAFETEA-LU’s 2009 reauthorization looming and a new administration entering the White House, there are a lot of big-picture uncertainties that have some execs feeling a little anxious about the year (or years) ahead — not only for their agency, but for the transportation industry as a whole.
“We’re looking at what should be a tremendous success story, but the issue for us instead is, ‘Where can we make cuts?’” says Joe Giulietti, executive director for the South Florida Regional Transportation Authority (SFRTA), which in 2006 led the nation for commuter-rail ridership growth. “And everyone I’ve talked to is going through the same thing.”
That’s in part because state and local funding shortfalls continue to trickle down to transit agencies, causing budget crunches despite higher farebox revenue.
Not keeping pace
At the Greater Cleveland Regional Transit Authority (GCRTA), expenses have increased about 3.5 percent during the past several years, largely because of escalating fuel prices, while the local sales tax revenue has risen just 1 percent. In addition, the state of Ohio slashed transit funding by 63 percent between 2001 and 2007, says General Manager Joe Calabrese. So, GCRTA will cut service about 4 percent next year. On the rail side, the agency plans to reduce some service frequency after 8 p.m. GCRTA also will implement the second half of a two-phase fare increase next month.
The Chicago Transit Authority (CTA) is feeling the effects of reduced funding levels, too. CTA funding agency the Regional Transportation Authority reduced CTA’s appropriation by $14 million for 2008 compared with 2007’s total. In addition, CTA’s public funding levels have increased only 4 percent during the past five years while inflation has grown 11.3 percent during the same time period. As a result, the authority’s 2008 budget calls for significant service reductions, layoffs and fare increases.
The Washington Metropolitan Area Transit Authority (WMATA) also plans to implement a fare increase in January to help offset increased operating costs. But the bigger issue is finding capital funds to rebuild infrastructure.
“We don’t have a dedicated funding source — we just get what the jurisdictions agree to pay,” says WMATA General Manager John Catoe Jr. “We have to secure capital funding to rebuild what we have before we can expand. The reliability of our system will be the real issue for us in the upcoming year.”
At the Regional Transportation District of Denver (RTD), the main issue is the rising cost of materials — a huge concern for General Manager Cal Marsella since the agency’s in construction mode right now.
“Prices for steel, copper and concrete have accelerated way beyond any trend we’ve seen in the past,” he says. “It seems like global demand is way up and somehow we have to figure out a way to deal with that and not let costs continue to skyrocket.”
Operating costs continue to rise as well, so the agency will implement a 25-cent base fare increase Jan. 1.
At SFRTA, expansion plans are being threatened by state and local funding shortfalls. The state of Florida is facing a shortfall totaling up to $1 billion during the next five years, and the three counties SFRTA depends on to provide local funds are planning massive budget cuts.
The authority someday hopes to expand service to the north, as well as south to Miami International Airport, but without additional state and local funding, SFRTA won’t even have enough dollars to match any federal grant it could receive, says Giulietti.
Not that the funding situation’s much better at the federal level. The Highway Trust Fund, which includes an account that serves as a revenue source for mass transportation projects, is rapidly drying up and facing a shortfall by 2009. Since the federal motor fuel tax rates that are used to fund the account are based on a fixed cents-per-gallon fee instead of a percentage of gasoline purchased, trust fund revenues have decreased as automobiles have become more fuel efficient.
Federal motor-fuel tax rates have lost one-third of their purchasing power since the last time they were adjusted in 1993, and of the 60 cents per mile that automobile drivers now pay to operate their car, only 1 cent is paid in federal fuel taxes to the Highway Trust Fund, according to APTA.
“The pool of available money has gone down for both the highway side and the transit side, so looking forward to next year, we’ve got a major issue,” says SFRTA’s Giulietti. “Congress is going to have to come up with a way to deal with the shortfall in federal revenues.”
And with the presidential election looming, transit execs know they’ll have to do some quick work to get the new administration up to speed on transportation issues before SAFETEA-LU’s 2009 reauthorization.
“The 800-pound gorilla in the room is the presidential election and that will bring a realignment of priorities, and we’re hopeful it will bring funding for transit,” says Denver RTD’s Marsella.
For their part, transit execs say they’ll step up efforts next year to educate all elected officials on the importance of mass transportation.
“We as a country have to look at transportation opportunities and we’ve got to be planning now,” says Dallas Area Rapid Transit President and Executive Director Gary Thomas. “The federal government has got to be very aggressive in identifying alternative sources of transportation because we can’t build enough highways, nor do I think we want to.”
Caltrain Executive Director Mike Scanlon, for one, hopes the increasing awareness of environmental issues will help convince Congress to provide more funding for public transit programs.
“There are great opportunities that will come to railroading because of the increased awareness of the reality of global warming — the way we are living and the very real threats to the well-being of the planet,” he says. “We have an opportunity and a responsibility to start addressing this stuff.”
Transit agencies are doing their part to address such issues — at least, as best they can with available funds. Whether it’s a large-scale expansion plan or small service adjustment, most transit agencies have efforts under way in the coming year to address ridership increases and continue to provide worthy motor vehicle transportation alternatives.
For its part, Caltrain is in the midst of electrifying its commuter-rail corridor so it can (hopefully) one day operate electric multiple unit vehicles rather than diesel locomotives as part of its 2025 plan.
“Really, ‘2025’ is a misnomer — the thing about most railroads is you can make incremental improvements and start reaping benefits much sooner,” says Scanlon.
WMATA’s taking the incremental approach by increasing train lengths to accommodate ever-increasing ridership. In October, the authority officially eliminated four-car train operations during the peak period; now, trains are at least six cars long.
The next step: operating eight-car trains, an effort that began as a pilot in early 2006. By 2008’s end, WMATA expects to use eight-car trains for 50 percent of peak period service.
At GCRTA, officials plan to continue promoting the agency’s rail lines next year by adjusting service so bus routes feed the rail stations. Currently, only 15 percent of the agency’s passengers use its trains; bus riders account for the majority of the GCRTA’s ridership.
“Rail is expensive to maintain and operate … so if we’re going to have rail in Cleveland, we should use it,” says
Fast Track to Expansion
Meanwhile, Denver RTD will advance its $4.7 billion FasTracks program, which calls for building 119 miles of light- and commuter-rail lines, and 57 stations by 2017. Marsella expects to complete negotiations for a Denver Union Station remodeling project so construction can begin next year. He also hopes to conclude negotiations with Union Pacific Railroad and BNSF Railway Co. to operate passenger trains on four of the FasTracks lines. In addition, RTD will continue construction on the first of the FasTracks corridors and conduct environmental work for the remaining lines.
DART will move ahead with expansion plans, as well. The agency is in the midst of a project that will more than double its 45-mile light-rail system by 2013. Twenty-seven miles are under construction, and final design for another 17 miles is expected to be complete by 2008’s end, says Thomas.
No matter how big or small, all agencies’ service and expansion efforts will go a long way toward improving transportation options for their specific region, as well as chipping away at environmental and congestion issues nationwide — not only for 2008, but for years to come.
“We’ll never get rid of the car, but as part of the solution, we have to look at all different modes of transportation and it’s an expensive proposition — we’re not talking about solving problems in 2008, but for [future generations],” says DART’s Thomas. “We have to start laying the groundwork today or we’ll never catch up, and the only way to do that is to push for federal funding for transit projects.”