Fred Frailey Column July TRAINS - Ominous

[Gilbert B Norman]

Likely most here are aware that Fred Frailey, who in the interests of full disclosure I should note I have met face to face "along the way', has now become a columnist at TRAINS. His "lead off" in the July issue can only be considered by this observer of railroad industry affairs for something approaching sixty years as "ominous'.

Quite succinctly, Mr. Frailey holds that even when the the economy by any recognized measurement returns to pre-recession 2007 levels, the Ports of Los Angeles/Long Beach will not follow suit. He cites various reasons such as opening of expanded maritime facilities at Prince Rupert, and presumably as well in Mexico, and the expansion of the Panama Canal so that PANAMAX (maximum dimensions of a vessel to transit the Canal) will include any vessel, other than a VLCC - Very Large Crude Carrier, in today's Registry.

If there is any foundation to Mr. Frailey's thoughts, and considering his demonstrated astuteness with regard to industry affairs such could well be the case, this is indeed foreboding to the East-West carriers - and that of course means BNSF and Union Pacific.

The "Land Bridge" concept of handling container traffic never materialized as maritime companies have shown they want to keep their traffic in their hulls to the fullest extent possible. East-West container traffic through LA/LB has represented a Land Bridge of sorts; while the "spin docs" in both Fort Worth and Omaha are putting out "don't worry be happy', who knows what thoughts are held upstairs in the corner offices. Possibly indicative is that the column notes the UP double-tracking of the Sunset Route is presently on-hold; so much for confidence in what the future will bring. All too much of the prosperity both BNSF and UP have enjoyed during the industry's renaissance has come from the distant line hauls of high valued export-import traffic.

If there is to be a realignment in the movement of "ex-im" traffic in which maritime transport will be used to the fullest extent possible, will suddenly highway transport have a rebirth at the expense of rails? Quite unlikely; even if convenience is there, the economics are hardly so. The winner will be NS and CSX as they serve the East Coast ports that expect to "win'. However, one can only hope, especially in the latter case, they will be "up to the job'. If Prince Rupert, which lest we forget is closer to any Asian port than is LA/LB, is to become a major West Coast port, there is only one player in town for that one. The KCS, with their substantial investment in the privatized Mexican rail system, and whoever they end up merged into (I cannot foresee the KCS continuing as an independent; the only question is who) will win "big time' as such could become the most favorable line haul a North American carrier could enjoy from "ex-im" traffic.

This will indeed be interesting; stay tuned.

[NE2]

Not sure how that's a problem, given that the same issue talks about how barges are more efficient.

[QB 52.32]

I have to take credence in what Matt Rose says regarding this situation and consider it not as threatening as Frailey makes out, although it is frightening and does bear watching closely. First, because these threats have not suddenly appeared and have been on the radar screen for close to 20 years, I don't believe that the railroads would have made capacity investments (or received financing or Wall Street approval) if they thought these threats would decrease volume. Rose is also talking with his steamship line customers and listening to the industry, so I have to believe he'd understand how the industry views these shipping alternatives. Secondly, when Rose contends that, by virtue of the huge Southern CA consumer market, and, therefore, large Asian import container volume, LA-area ports will maintain their position in Asian import logistics and see volume recovery for traffic moving inland, I believe there's a good chance that's the case. Steamship lines will be looking at all three pieces of the puzzle to make their logistics decisions: port costs, inland transportation costs, and, probably the biggest, ship utilization economics (both load factor and ship productivity), to determine the logistics of moving the traffic. Prince Rupert targets inland transportation costs and KCS's Mexican port targets port costs, but because they miss that huge CA market, don't help with ship economics unless service (ie., sailing frequency) suffers so I have to believe they will have limited effectiveness. Direct Panama Canal service via east coast ports for midwestern traffic is probably slower than via the west coast ports and, again, might affect ship load factors and productivity, though this seems to be the biggest threat (as has been the Suez Canal for the past 10 years). Lastly, I haven't seen any indication from NS or CSX management that they believe there will be a big shift of midwestern MLB traffic from the west to east coast ports, so presumably they share their western partners' assessment of the situation.

[David Benton]

Heck , the railroads may have to court domestic traffic and passenger trains .

[2nd trick op]

The nature of the rail enterprise mandates continuous foresight, so I agree with Mr. Norman's assesment that the possiblity of re-developed maritime competition has to be taken seriously. But on a more positive note, the very long lead times will give rail carriers much more time to adjust, and to develop alternative strategies.

And the first thing that should be recognized is that this is not 1973, when work-rules were taken as written in stone, and cheap, abundant fuel pretty much guaranteed that anything other than the basest bulk commodities didn't move by rail unless they went at least a thousand miles or so. If the possibility arises that there's an alternative for the long-distance intermodal traffic that financed the industry's renaissance, the reduction in that traffic can free up a rebuilt physical plant which can handle shorter hauls previously turned away.

Let's recall, just for example, that railroads began making a pitch for very (by comparison) short hauls for materials as common as aggregate over twenty years ago, that Conrail tried a New York-Buffalo RoadRailer service during the late 1970's, and that like the aforementioned Empire State Express, Reading's stillborn Bee Line serice was conceived in the days before crew districts became a negotiable item.

Market forces are a double-edged sword, but that fact wasn't fully acknowledged pre-Staggers. The basic efficiencies of flanged-steel-on-steel are so universal that open capacity isn't likely to go unrecognized for very long, if those who control that technology are given the freedom to respond.

What does disturb this writer is that the public simply can't recognise that the rail system, while very adaptable, can't be retooled as quickly or inexpensively as portrayed in the media. And that should send an ominous signal when it is becoming increasingly apparent that our new Administration would like to extend more public-sector interference into just about every facet of economic life.

There are still a lot of people out there who are ready to buy the message that a handful of men in three-piece suits are directly accountable for the demise of their dreams, and there are plenty of politicians willing to pander to a misguded faith in the public sector. In that atmosphere, the rail industry, with its huge investment in immovable physical plant, is a sitting duck, and could face the same destruction-by-misregulation that gutted our automobile industry.

I'm sure that there are also any number of managers in Fort Worth, Omaha, Jacksonville and Norfolk who recognize this, but the issue is so volatile that it can't begin to be addressed in the mainstream media until a better understanding of the underlying facts is more widely disseminated.

[David Benton]

I have now recieved my Trains and read the actual article .
It seems both Ceo's( Matt Rose in particular ) , are aware on both the problems and the opportunities the current recession presents .
Opportunity ???
Domestic intermodal . At the moment they have the capacity to provide decent transit times . they have breathing space to iron out problems and improve service . And they must continue to improve service . Taking a breather on infrastructure improvements is a mistake imho . They must show their new and potential customers that good service is not just a product of the current lower traffic levels . They must show that they can provide that service into the future .
i would question the actual profitability of international intermodal ( suggestions that $ 50 a box are enough to sway a shipper ), and i would suggest that domestic is far more lucrative . Far more demanding i would think , but potenially more profitable .
Having more than one string to your bow never hurts , and a recession certainly shows how valuable this is .
The new ports have their advantages , and should be expanded . but i don't see the Califionia ports suffering as much as Mr Frailey thinks .

[Vincent]

I rode the Catalina ferry through the Long Beach Harbor last September and noted that things seemed pretty quiet on the waterfront. I agree with Mr. Frailey--it will be a long time before the freight railroads see 2007 traffic levels again. Do you remember that 2007 AAR study on freight capacity and investment that was full of maps covered with red lines and dire predictions of gridlock in 2035? I think some of those conclusions will need to be re-thought. The coming decades are going to re-define the place of railroads in the American economy, but that's been the history of railroading.

Frailey writes that:

The ports of Los Angeles and Long Beach are expensive, inefficient and politically unfriendly.

Doing business in LA/LB is expensive with high labor costs and TEU taxes. There also are heavy restrictions on water and air pollutants that might not be imposed in Mexico or remote parts of Canada, but the Ports of LA/LB serve a population base that includes Los Angeles, San Diego, Las Vegas, Phoenix, Tucson and all the smaller cities in the southwest portion of the USA. It's a huge and still growing population that will depend on efficient and competitive rail service. Also, the Ports of LA/LB are the leader on the west coast at quickly getting containers off the ship and onto the flatcars. From a shipper's perspective, LA/LB is an expensive port-of-call but it's a very efficient place for the loading/unloading of ships and getting the containers on the road.


Ominous? How about these topics...

China is investing heavily in their internal infrastructure (they are expecting to have the world's largest HSR network in 20 years). So, how will the collapse of the US (and world) economy affect the Chinese economy and the Chinese citizens? Can Beijing continue to produce economic miracles for its citizens if there's a steep and sustained drop-off in exports to the USA and the rest of the world? How will the internal politics of China develop if the global recession eats into the Chinese economy? Continuing this paragraph will inevitably drift way off-topic, but it's an interesting subject to contemplate.

The move away from coal is also going to test the business plans of the big railroads. I'm sure that the Powder River will still be busy in 10 years, but conservation, renewables and nuclear are going to take a larger and larger slice on future energy-use pie charts. The Sun Belt states are facing a need to build infrastructure for transportation mobility as well as energy and water supplies. Years and years of attracting people and businesses by offering sunshine and low taxes will have its cost in the future. There isn't any low cost means of producing energy for the future. Coal will have its costs in terms of environmental consequences, conservation requires an end to low-cost building practices, renewables are still technologically far from ready for mass implementation and nuclear is proving to be very costly to build and operate. Railroad managers are going to have to think carefully about the future.

[QB 52.32]

Frailey didn't write about it but the UP is probably more vulnerable than BNSF who does have a more-diversified intermodal business as Rose points out--- probably 1/3 international, 1/3 domestic via truckload carrier and 3rd party channels, and, 1/3 premium comprised of USPS, UPS and LTL motor carrier traffic. UP's heavier orientation towards international traffic is probably the reason why they've suspended their capital program for capacity expansion.

[BR&P]

They don't sound TOO vulnerable - from the June 3 JOURNAL OF COMMERCE:

Intermodal shipper Hub Group will start shifting 8,400 domestic containers next week away from BNSF Railway and into the hands of rival Union Pacific Railroad, partly drawn by UP’s service of providing dedicated equipment.

I don't have a link to the entire story but it goes on for several paragraphs.

[QB 52.32]

They don't sound TOO vulnerable - from the June 3 JOURNAL OF COMMERCE:

Intermodal shipper Hub Group will start shifting 8,400 domestic containers next week away from BNSF Railway and into the hands of rival Union Pacific Railroad, partly drawn by UP’s service of providing dedicated equipment.

I don't have a link to the entire story but it goes on for several paragraphs.

Actually, in the scheme of things it's small potatos worth 14,400 revenue moves for $110 million annually and does point to UP's strategic intermodal vulnerabilities and vulnerability in supporting or maintaining intermodal-based capacity-expansion capital improvements in the face of MLB threats and traffic downturn. By way of background, for the first 5 months of 2009, BNSF handled 1.48 million intermodal units, down 15.6% against 2008, vs. UP's .97 million units, down 21.5% against 2008. While it is a big chunk of business and an important (and probably necessary) win for UP, it comes from a higher-cost, intermodal equipment-oriented UP operation vs. an assets-lean BNSF operaton, and, while it probably wouldn't be reported, no doubt "aggressive" UP pricing. UP, competing against BNSF's higher service intermodal franchise, having suffered greater relative losses because of their greater dependance upon MLB intermodal traffic, is having to (prudently) win a lower-rated segment of domestic traffic based upon price and with a more-expensive product....leading to lower profitability to service the debt of past capacity expansion or justify additional capacity-expansion capital expenditures.