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January 2013

Rail News: Rail Industry Trends

RailTrends 2012 represented a full deconstruction of the North American rail industry — by Tony Hatch


— by Tony Hatch

The rescheduled RailTrends® 2012 (RT) conference, held Dec. 10-11 at the W New York Hotel in New York City, offered a rather full deconstruction of the North American rail industry and its prospects. I use the term "deconstruction" because not only did RT examine the industry from the widest variety of viewpoints (including, for the first time, a significant passenger perspective), but Superstorm Sandy caused the coherent agenda order we strive for to be beholden to a wide variety of speaker re-booking needs — and thanks to all for that. Needless to say, in our little corner of the world, the score was RailTrends 2012 1, Sandy 0.

Essentially, the news over the intensive day-and-a-half proceedings was mixed — caution over the near term (the i.e., the fiscal cliff) and continued optimism for the longer term. RE: optimism — enough, certainly, to fire up unprecedented spending and a few new or updated projects we heard about, including All Aboard Florida, the National Gateway and various hub creations.

Of course, we also heard a lot about energy, specifically crude by rail, the excitable and lasting topic of three specific presentations — from Kansas City Southern (KCS) EVP of Sales and Marketing Pat Ottensmeyer, Dakota Plains Holdings Inc. VP of Operations Robert Henry and Oliver Wyman Partner Jeffery Elliott — but at least mentioned in just about every freight-related presentation. The consensus that emerged from RT: We're still in the very early innings of a very long game.

On the government relations front, we heard from an array of trade associations: Association of American Railroads (AAR), American Short Line and Regional Railroad Association (ASLRRA), Railway Supply Institute, National Industrial Transportation League, National Railroad Construction and Maintenance Association, and Railway Association of Canada (RAC).

AAR President and CEO Ed Hamberger ("for the defense") was outstanding in talking about bringing product and geographic competition into the equation. ASLRRA President Richard Timmons rightly noted: "It's a transformational period. The challenge is to see clearly enough to make reasonable decisions." RAC President and CEO Michael Bourque was particularly relevant and timely: While the United States ponders slowly developing regulatory changes through the Surface Transportation Board's (STB) ex parte 711, the Fair Rail Freight Service Act entered the Canadian legislature while we were at RT. By U.S. standards, this would be an invasive stretch, but Canadian carriers and RAC appear to believe that while the precedent is troubling (to say the least), given the devil's details, it wouldn't be too onerous for the railways up north.

The 'Energy Renaissance' Rules

U.S. regulators, too, were ably represented at RT. STB Chairman Daniel Elliott, National Transportation Safety Board Chair Deborah Hersman and Federal Railroad Administration Associate Administrator for Railroad Policy and Development Paul Nissenbaum offered updates on and insights into their respective agencies' current rail takes.

Meanwhile, noted political speaker Jamal Simmons didn't promise a diversion from cliff diving, but said that the Obama administration would place trade at the upper end of its priorities.

Other speaker highlights, and there were many, included:

• The rail-car market remains relatively solid: Rail Theory Forecasts L.L.C. President Toby Kolstad suggested it's a healthy, if tanker-biased, environment, with a big one-year drop (from 57,000 deliveries in 2012 to 47,000 in 2013) reflecting the cyclical decline in sand-car orders due in part to the wave of velocity that is hitting the rail fleets.

• KCS' Ottensmeyer focused on energy, perhaps its forgotten growth market after autos and white goods in Mexico, chemicals, grain and intermodal. But a look at an aerial map clearly shows what should be a great opportunity in Mexico for frac drilling. Combine that with KCS' sand originations and Port Arthur control in Texas, and it gives the Class I a rather balanced exposure to the developing energy supply chain.

Union Pacific Railroad sent us VP of Engineering Joe Santamaria. He reassured me that despite the publicly announced reduction in capex as a percentage of revenue (no longer the perfect measurement, anyhow) from 17 percent to 18 percent down to 16 percent to 17 percent, UP nonetheless would spend as it saw fit to maintain the railway — a strategic look as opposed to the tactical viewpoint at the end of the "bad old days."  And with revenue growth forecast to be strong thanks to pricing, economic recovery, and crude and chemicals, the net dollar number likely will continue to grow.

CN EVP and Chief Marketing Officer Jean-Jacques Ruest, in a presentation titled "Growth and New Traffic Opportunities at CN," noted that "one of the benefits of the energy renaissance is it's teaching railroads to move fast." As for growth and new traffic opportunities, Ruest said: "Probably the biggest story for CN revenue is energy, and energy is crude. Alberta heavy crude."

• Represented by President and CEO Jim Hertwig, Florida East Coast Railway (FECR) is a "phenom" as we say, running 75 percent intermodal on a 351-mile Florida racetrack — proving that with density and a product, even very short-haul intermodal can get a great ROI. The FECR "story" gets refined every year as it adds blue-chip customers (Wal-Mart, USG) and extends its market reach (Charlotte, Memphis, Atlanta) — and all of this before the wider Panama Canal promises to be at least a partial solution to the 4:1 balance issue the railway and the state "enjoy."

Genesee & Wyoming Inc. (GWI) President and CEO Jack Hellmann looked positively giddy, given the sure-thing status of the RailAmerica Inc. (RA) merger approval from the STB (note: it came on Dec. 20). Contrary to my earlier expectations, I got the strong impression from Hellmann that all of the RA properties fit within the traditional GWI "cluster" system, with only one new region; even RA's rail construction company Atlas may be a keeper, after all. GWI has an amazing safety record — half the accident rate of the Class Is (with short lines, it usually is the other way around, or more).

• Newly energized OmniTRAX Inc. has been growing and emphasizing development. For example: "We're looking to handle crude from the Bakken at the Port of Churchill; it's the only arctic deepwater port," said President and CEO Gary Long. Another OmniTRAX focus: "We'll be increasing the marketing of our transload business — it's the fastest way to grow," he said.

Florida East Coast Industries EVP of Corporate Development Husein Cumber provided an overview/update on All Aboard Florida, a privately owned, operated and maintained higher-speed passenger-rail service that would run 240 miles between Miami, Cocoa and Orlando. It's expected to stand alone on an EBITDA and ROI basis without government funding or real estate assistance. Can it be done?

• Also joining us was Amtrak President and CEO Joe Boardman, who offered a spirited talk on his vision of the future for the national passenger railroad. "Amtrak is not dwelling on the negative," Boardman said. "We're dwelling on growth."

• Domestic intermodal still will be the top-billed star. CSX Corp. VP of Intermodal Bill Clement demonstrated why the coming promise of domestic conversion shouldn't be overlooked in an oil boom, with 9 million loads achievable on the CSX system and the development of a new hub to complement the successful northwest Ohio venture.

Alaska Railroad Corp. President and CEO Chris Aadnesen talked about his unique freight-passenger property, citing opportunities for growth, current expansion projects and challenges — chiefly, the severe cold and abundant snow.

• Consultants Oliver Wyman, well known for their work with Canadian Pacific and CSX, among others, confirmed our belief in the aforementioned crude-by-rail story while still proposing that coal will be back (or at least up year over year) in 2013. As Oliver Wyman's Elliott put it, only half of the radical drop is systemic.

• Larry Shughart of WorleyParsons — our last speaker — might have been our most shocking: By benchmarking best practices on both the revenue (prices) and cost (operating practices) sides, railroads could achieve improvements that range from 32 percent upside (Norfolk Southern Corp.) to fully 60 percent (Canadian Pacific), he said. And that is without marketshare gains in intermodal, grain's comeback, shale plays, etc.!

Tony Hatch is an independent transportation analyst and consultant, and a program consultant for Progressive Railroading's RailTrends® conference. Email him at


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