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Rail News Home Rail Industry Trends

June 2011

Rail News: Rail Industry Trends

Auto traffic helps keep Class Is on the road to revenue growth


By Julie Sneider, Assistant Editor

Class I executives have been using words and phrases ranging from “cautiously optimistic” to “bullish” to describe their outlook on North American freight railroads’ automotive business for 2011.

They have reason to be enthusiastic. Automobile manufacturers have been posting significant sales increases in recent months, a trend reflected in carload traffic. As of April 30, auto traffic was up 9.6 percent to 364,296 carloads year to date, compared with the carloads hauled during the same period a year ago. In all of 2010, North American freight railroads carried 1,023,882 carloads of motor vehicles and equipment, a 22.7 percent increase compared with 2009’s total, according to Association of American Railroads (AAR) data.

The Class I executives’ attitudes toward 2011 automotive business is in stark contrast to what they were thinking in late 2008, when U.S. automakers were careening toward a financial meltdown that drove the leaders of Ford Motor Co., General Motors Co. and Chrysler Group L.L.C. to Washington, D.C., to ask Congress for billions in bailout money. Ford ultimately determined it wouldn’t need federal loans (nor would it file for Chapter 11) to survive, but GM and Chrysler accepted billions in federal loans. Even after receiving government bailouts, Chrysler filed for bankruptcy on April 30, 2009; GM did the same a month later.

At the same time, European and Asian automakers were struggling, too. In early 2009, Toyota Motor Co., the world’s largest automaker, forecast its first group operating loss in 70 years. By late April, Volkswagen Group, the world’s No. 2 automaker, posted a 76 percent drop in first-quarter operating profit. Meanwhile, governments in Germany, France, Italy and Spain were drawing up various loan and incentive packages to revitalize European auto companies, while Canada’s government was arranging billions in bridge loans to the Canadian branches of GM and Chrysler.

Feeling the pain

As the auto industry’s turmoil reverberated through the economy, freight railroads felt the pain through diminished auto traffic. By the end of 2009, total motor vehicle and equipment traffic (Class I and non-Class I) had plummeted 31 percent to 834,476 units compared with 1,211,095 units in 2008, and 39 percent when compared with 1,375,424 units in 2007, according to AAR data.

Freight railroad executives, legal staff and marketing teams found themselves in daily conversations — sometimes several times a day — with Chrysler and GM as the two automakers worked their way through bankruptcy and organizational restructuring.

“Anytime you have customers the size of GM or Chrysler — and we do a lot of business with those companies — [and] their business is threatened, you are very concerned,” says Richard Kiley, group vice president-automotive at Norfolk Southern Railway. “We stayed in very close contact with those companies to understand what their planning was like as they went through their reorganization, and we worked closely with them throughout the bankruptcy process.”

NS held “day-to-day tactical discussions” with Chrysler and GM officials to determine which contracts the automakers would be able to fulfill and the business relationships they would retain after the companies completed bankruptcy proceedings.

“We were hopeful that they would come through the way they ultimately did — and in fine fashion,” Kiley says. “But, we also knew that going forward we would be in reasonable shape.”

Other Class I executives have similar tales to tell.

“The Detroit Three are 70 percent of our auto business, and obviously very important to us. Our main focus was to be as supportive as we could, recognizing that they also were going through very difficult times and not knowing what their situation would be,” says Julie Krehbiel, Union Pacific Railroad’s former vice president and general manager-automotive. (Editor’s note: After she was interviewed for this article, Krehbiel resigned from her position at UP in April.)

Turnaround time

Fast forward to 2011, and what a difference two years have made. During 2010, GM and Chrysler restructured and emerged from bankruptcy in five weeks, and have since continued to repay their government loans, in some cases ahead of schedule. Along with Ford, they pared down and retooled product lines to be more competitive with international competitors like Toyota and Honda by designing and selling smaller, fuel-efficient cars.

Falling unemployment rates, pent-up demand for new cars and federal stimulus initiatives like “Cash for Clunkers” helped drive consumers back to dealership showrooms. As auto sales increased, so did railroads’ traffic.

“Consumer confidence is a lot better than it was in 2009 and 2010,” says Patrick Lewis, director of automotive accounts at Canadian Pacific, where automotive revenue grew 3 percent in the first quarter. “People who put off buying vehicles over the past couple of years are coming back into the market.”

Although the railroads’ auto traffic may not yet be back to pre-recession levels, it is moving along steadily. In first-quarter earnings calls, some Class I executives credited automotive volume growth as a reason for increasing revenue and earnings. At Kansas City Southern, for example, the automotive segment led first-quarter revenue gains, ballooning 43 percent year over year to $31.1 million as volume rose 13 percent to 20,100 units. Volume was strong in Mexico, especially in Lázaro Cárdenas, KCS Executive Vice President of Sales and Marketing Patrick Ottensmeyer said during the company’s April 21 earnings conference.

NS’ Kiley describes his company’s auto outlook this way: “We are very bullish on automotive. … We think domestic production is here to stay — it’s obviously supported by the United States, whether that’s the federal government or the states.”

One negative factor that could influence the Class Is’ 2011 automotive performance is the impact Japan’s March earthquake and nuclear crisis has had on the Japanese auto sector’s production and supply chain. When interviewed in mid- to late April, Class I executives said Japan’s crisis would affect their auto volumes in the second and possibly third quarters, but executives remained upbeat about total auto carload growth for the year. In mid-May, the consulting firm A.T. Kearney Inc. issued a caution in its 15th annual automotive study that “the unfolding events in Japan will impact vehicle sales” in both the new and used vehicle market this year.

Still, the Kearney report forecasts 13.2 million new autos will be sold in the United States in 2011, with sales reaching pre-recession levels of about 16 million units by 2013. That’s good news to the Class Is, which have been adapting their operations to accommodate major shifts in the auto industry long before the onset of the Great Recession. The railroads’ auto segments have diversified to serve a mix of domestic and import auto producers, as U.S. automakers (and some of their suppliers) downsized operations, closed plants and shifted some production from the United States to Mexico.

Today, the vast majority of Class I auto business involves the transport of finished vehicles. Auto-parts traffic has diminished over time as older assembly plants were downsized and redesigned, with parts suppliers now located much closer to auto assembly centers.

“The movement of parts by rail doesn’t exist in the new auto plants,” says Andy Strok, assistant vice president of the automotive group at CSX Transportation, where full-vehicle transport represents 95 percent of auto traffic.

At the same time, global contenders Honda, Toyota, Hyundai, KIA and, most recently, Volkswagen have built plants in North America, opening the doors to even greater business opportunities for freight railroads.

Moreover, Class Is have been introducing new services and using improved technology to help auto manufacturers transport newly built cars from the assembly line to the dealership much faster and without damage.

Diversifying customers

Ford, GM and Chrysler “are still very important customers” to CSXT, where the automotive business represents about 8 percent of annual revenue, Strok says. But the railroad today has a much more diverse customer base, and handles nearly one out of every three motor vehicles produced in the United States. In addition, CSXT developed a variety of automotive transportation and handling services, including its Total Distribution Services Inc. (TDSI) subsidiary that provides vehicle-handling services through a network of auto distribution and storage facilities to eastern, southeastern and Gulf ports.

As the economy began to soften in 2008, CSXT “significantly” adjusted its auto-operating network, including temporarily suspending dedicated auto trains and putting rail cars in storage, Strok says. By early April, the vast majority of CSXT trains that support automotive were back in operation.

“We are back in a growth mode, as production volume in North America has gone up,” and could reach 13 million to 13.8 million this year, he says. In the first quarter, CSXT’s automotive volume increased 20 percent and revenue, 29 percent compared with first-quarter 2010. Factor in the calamities in Japan, and Strok maintains a “cautious optimism” about auto traffic for the year.

Also remaining optimistic for growth is NS, which retains a “large amount” of business with Ford, GM and Chrysler, and serves all other major automakers as well, Kiley says. That includes the newer “transplanted domestics” — those non-U.S.-based automakers that opened U.S. production facilities during the past two decades, including Volkswagen’s $1 billion auto production complex in Chattanooga, Tenn., where the first car rolled off the assembly line in April.

VW a win for CSXT, NS

The complex, which marks VW’s return to making cars in North America for the first time in 22 years, features an assembly plant, a training center, a business park for VW parts suppliers, and a rail link to both CSXT and NS.

Auto currently represents about 7 percent of NS’ total revenue, a substantial change from the past four years as a result of the auto industry’s downsizing, Kiley says. The Class I’s network spans 24 auto assembly plants, 31 auto distribution terminals, three just-in-time rail centers and four vehicle mixing centers.

NS merged its auto and intermodal business into one unit six years ago to offer a range of modal and supply-chain management solutions to auto manufacturers, he says.

One solution — developed with UP during the past year — is an automotive interline co-loading service that allows multiple automakers’ vehicles to be loaded onto a single rail car. The process allows UP and NS to serve lower volume destinations, as well as to support auto companies’ desire to deliver vehicles to dealerships as quickly as possible.

UP and NS are co-loading from the Detroit automakers to various destinations throughout the United States, but the process also supports international automakers by consolidating imports at ports of entry and co-loading to common destinations, UP and NS officials say.

“The year 2009 was a difficult year for auto — in general, we had over a 50 percent decrease in volume — so we had to look at how to do things differently,” says UP’s Krehbiel. “You can’t run the same network with half your volume. So we worked hard on co-loading.”

UP also combined its automotive and intermodal networks, “which allowed us to be agile as volumes moved around so dramatically,” she says. Also in 2009, UP unveiled its prototype AutoFlex™ rail car, a convertible multi-level car for transporting motor vehicles of various sizes. The 90-foot-long car can be adjusted to accommodate bi-level or tri-level motor vehicles using the same rack structure, an advantage to shippers as consumer automobile buying preferences shift from large SUVs to smaller, fuel-efficient cars. UP is marketing the AutoFlex to other railroads, Krehbiel says.

Those efforts and other tweaks to its automotive business helped boost UP’s auto traffic 37 percent to 396,975 carloads in 2010 compared with 2009, according to AAR figures. Meanwhile, auto represented about 8 percent of UP’s total revenue in 2010, up from 6 percent in 2009, according to UP.

Another Class I putting considerable energy into co-loading is CN, which registered a 30 percent increase in 2010 auto carloads compared with 2009, according to Kevin Doucet, assistant vice president of automotive. And despite the impact of severe winter weather, CN’s automotive revenue inched up 1 percent in the first quarter.

CN has access to all auto assembly plants in Canada, several in Michigan and one in Mississippi, and provides rail transport from auto parts facilities in Michigan and Ontario. The railroad serves shippers of import vehicles through ports in Halifax, Nova Scotia, and Vancouver, B.C., as well as through interchanges with other railroads.

Following the supply chain

Co-loading automobiles and other efforts to move customers’ products through the supply chain more efficiently is part of a corporate-wide philosophy that calls for constantly viewing business from the customer’s perspective, says Doucet.

Another example: CN’s Autoport vehicle processing and transshipment facilities, which were designed to reduce port dwell times and move imported vehicles from the ships at ports to the dealerships much more quickly than in the past. Not only will CN unload the vehicles from the ships and load them onto trains for delivery to truck carriers or dealerships, CN also will do all the processing, such as adding accessories that manufacturers want installed on motor vehicles prior to delivery to dealerships.

In late 2010, CN reported supply-chain efficiencies reduced dwell times for European import vehicles handled by the Halifax Autoport facility by 25 percent.

“Viewing the automotive business from a supply-chain perspective will be important as we go forward,” says Doucet. “I think 2011 will be a strong year.”

Hector Cuevas, commercial director of automotive for Ferrocarril Mexicano S.A. de C.V. (Ferromex), predicts a strong year, too. Automotive business has grown exponentially for Ferromex over the past five years; behind grain, it’s the railroad’s second-largest commodity group.

Ferromex moved 101,858 carloads of motor vehicles and related equipment in 2010, a 29 percent leap over 2009’s total, according to AAR data. The growth is even more striking when compared with 2005, when the railroad hauled 38,000 automotive carloads, Cuevas says.

“For Ferromex, automotive has a very successful history over the last six years,” he says. “Six years ago, the commodity represented only 6 percent of our volume.”

Even during the global recession, Ferromex’s auto-related revenue remained steady — $88.2 million in 2009 vs. $88.4 million in 2008 — due in part to an increase in business from Chrysler, Cuevas says.

Ferromex is taking advantage of opportunities stemming from the auto industry’s growing presence in Mexico, he says. Although it doesn’t directly serve all the auto plants in Mexico, it does business with all the automakers represented in the country, including Chrysler, GM, Ford, all Japanese automakers that have facilities in Mexico, and Volkswagen.

“Our very good results in the last year were the result of a complete commitment by the company to improve our service,” says Cuevas. “We work very hard to stay close to our customers and to anticipate the needs of our customers.”

Customer service is key

Customer service is vital to continued growth in automotive for all Class Is. One service challenge railroads faced at press time: getting enough idled rail cars out of storage to meet automakers’ demands.

Part of the problem was that the Detroit Three returned to healthier production levels faster than many people predicted. But Class Is have taken significant steps to ramp up capacity as quickly as possible, rail execs say. Has the ramp-up been a challenge? Yes, but considering how the world looked in October 2008, that’s a challenge they’re only too happy to accept.

E-mail comments to Julie Sneider, Assistant Editor

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