rail trends conference 2014 - oliver wyman · germany rail freight is a large and growing...

© Oliver Wyman | NYC-MKT20101-015

SURFACE TRANSPORTATION

RAIL TRENDS CONFERENCE 2014

RAIL RENAISSANCE II

Rodney Case

Global Rail Practice Head

1 1 © Oliver Wyman

• Rail is a growth industry globally

• More networks are achieving financial viability

• The business model redesign in the Rail Renaissance saved the train

• In an era of higher market expectations

• New scarcities in key resources

• Need to tweak the Business Model

Rail has earned its place in the future of transportation

2 2 © Oliver Wyman

Revenue ton-kms (billions)

Size of national rail freight networks Revenue ton-kms, 2013

2.9

2.5

2.2

0.6

0.4

0.1

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

China

United States

Russia

India

Canada

Germany

Revenue ton-kms (billions)

Traffic growth in a decade Revenue ton-kms, 2013 versus 2003

77%

12%

32%

77%

23%

32%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

China

United States

Russia

India

Canada

Germany

Rail freight is a large and growing transportation business However, the US growth issues are fairly unique

Sources: AAR Analysis of Class I Railroads, Railway Association of Canada Rail Trends, German Railway Market Analysis, UIC database, and various news items

3 3 © Oliver Wyman

Operating ratio performance Operating ratio is increasingly a top line success story

Total Class I operating ratio 2000 = 1.00

Ind

ex

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Operating revenue

Operating expenses

Operating ratio

Op

era

ting

ratio

Source: Association of American Railroads, Analysis of Class I Railroads, 2000 through 2013, and Oliver Wyman analysis

4 4 © Oliver Wyman

Equipment Personnel Infrastructure

Movement to resource shortages As demand for freight rail service continues to grow, we will need to become more resource efficient

• HR issues with economic

recovery

−Postponed retirements will

start to kick in

−May be better opportunities

for current employees

−Growing traffic demands

means adding more

employees

• Increasing competition for

talent

• Traffic growth in new areas

putting parts of the network

under intense strain

• Even some sections with prior

investment strained, e.g.,

Chicago

• More trouble to come: prior

investment focused on line

capacity, not terminals

• Most new traffic unscheduled

unit trains, take a large share of

capacity

• Locomotives that meet Tier 4

requirements not available until

mid-2015 at the earliest

• Tank cars: Builders can’t

produce fast enough, new

regulations will impact supply

• Record grain harvests, growing

intermodal, etc. will require

more cars

5 5 © Oliver Wyman

20

21

22

23

24

25

26

27

28

29

300

330

360

390

420

450

480

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

• Traffic growth occurring in areas not subject to intensive infrastructure investment

• Sections with significant prior investment are strained

• Prior infrastructure investment largely focused on line capacity, not terminal capacity

• Terminals are proving incapable of handling increased traffic

Quarterly revenue ton-miles (RTMs), average

dwell, and average velocity

Source: Surface Transportation Board, Quarterly Earnings Reports, company quarterly reports, and Oliver Wyman analysis

Billio

ns o

f R

TM

s

Dw

ell (h

ou

rs)/v

elo

city

(mp

h)

Infrastructure capacity Congestion has become a major concern once again

Total RTMs

Average Velocity

Average Dwell

6 6 © Oliver Wyman

Railroad Renaissance I

Theme: Cost control

– 5-person to 2-person train crews

– Automation/centralizing of back office

– Bigger trains

– Fuel efficiency

– Shortlining of the branch network

Railroad Renaissance II

Theme: Network fluidity and service

– Resource constraints and congestion

– Tighter scrutiny by customers and regulators

– Targeted growth

– Increasing volume and revenue faster than capex

Paradigm shift: Scheduled railroading

– Scheduled operations, less expensive

than maximizing train size

– Minimizing unit train resource

consumption

Paradigm shift: Service is paramount

– OR improvement becomes top line driven

– Tighter control of operations

– Better integration of commercial and operating plans

– Targeted allocation of capital

– Tighter integration into customer supply chains

Another rail industry transition Rail Renaissance II will be just as important as the first one.

7 7 © Oliver Wyman

Four defining elements in Rail Renaissance II

1

2

3

4

Supply chain transparency

Convergence in planning

Mission completion

New social compact

8 8 © Oliver Wyman


• Rail network planning remains dominated by expert teams with increasingly sophisticated models and analytics

• Parallel planning teams create their optimum operating plan with differing definitions of success

• Reality of daily operations is competition for the same three key resources locomotives, crews, and yard infrastructure

9 9 © Oliver Wyman

7.0% 7.0% 7.2% 7.7%

8.7%

0

10

20

30

40

50

60

2009 2010 2011 2012 2013Non-coal unit train (NCUT) miles

NCUT miles % of total

The need for a single integrated plan In most global rail networks, irregular unit trains are seen as capacity destroyers

Tra

in-M

ile

s (

milli

on

s)

Non-coal unit trains traffic

Class I Railroads Average velocity

Class I railroads

Sources: FRA Operational Data, AAR Rail Time Indicators, and Oliver Wyman analysis

600

650

700

750

800

850

900

950

21.0

22.0

23.0

24.0

25.0

26.0

2009 2010 2011 2012 2013

System Velocity Unit Train Carloads

Carlo

ad

s (th

ou

sa

nd

s) A

ve

rag

e v

elo

cit

y (

MP

H)

10 10 © Oliver Wyman

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2010 2011 2012 2013 2014

Integration example: Tank car fleet additions There will soon be 1,000 oil train sets on the network, and what Class I yard investments are being made to queue them?

New tank car supply

Sources: Oliver Wyman analysis and AAR Analysis of Class I Railroads

Nu

mb

er

of

tan

k c

ars

Integration issues

• High variation in route structure

• Spot market commodity

• Volatility in daily volumes

• Different production rates by loading

and unloading sites

• Significant multiple railroad routings

• High relative queue factor in transit


An integrated approach - DB Netze DB Netze’s train path pricing system rewards consistent operations while protecting capacity for unit trains

Sources: DB Netze Train Path Pricing System 2015 and DB Netze Facility Pricing System 2015

Base path price

Premium for speed

Cancelation fee

Terminal trackage

• Varies by corridor demand

• $2.20 to $6.00 per train-kilometer

• Less than 24 hours – 40% of price

• X 1.65 for express path

• X 1.50 for slow path (underpowered)

• X 0.65 for local path

• Annual rental – $3,000 to $5,000 per track


Network performance with growth Germany’s network performance has been consistent

80

85

90

95

100

105

110

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

Germany US

Overall train traffic growth DB, US Class Is and Amtrak, 2004 to 2013

Tra

in-m

ile

s in

de

x

(20

04

= 1

00

)

Sources: DB Annual Reports; DB Facts and Figures; U.S. Department of Transportation, FRA, Operational Data Tables

1. Definition of on-trip performance: DB – all trips < 6 mins than the scheduled arrival; Amtrak – trips within 250 miles < 10 mins, 251–350 miles < 15 mins, 351–450 miles < 20 mins, 451–550 miles < 25 mins,

and greater than 550 miles < 30 min. Long-distance Amtrak trips are those >= 400 miles

85%

74% 77%

41%

70%

47%

0%

20%

40%

60%

80%

100%

2004 2013 2014

DB long-distance Amtrak long-distance

On

-tim

e p

erf

orm

an

ce

Percent on-time performance1

DB, US Class Is and Amtrak, 2004, 2013, and 2014


Convergence in planning - Summary

• Build a single operating and network plan with clear definition of

network and resource reserves

• Reward stable operations

• Reconstruct cost allocations to track against actual operation needs

and related reserves held in the system


Four defining elements in Rail Renaissance II

1

2

3

4



Mission completion

New social compact


Mission completion - A potential definition

• Primary mission successful

• Key operation parameters met

• Subsystem performance meets specifications

• External impacts within mission design


Class Is have a generous definition of mission success While catastrophic failures have been massively reduced, progress eliminating other unplanned events has lagged

North American railroads

have invested heavily in

early detection, …

… which has reduced the

number and severity of

derailments, …

… but not the frequency of

other unplanned events like

locomotive failures and hot

boxes

LAST AEI SITE 0534 LS372 ENGLEWOOD TRACK #1 CONSIST NOT VALIDATED BY AEI TP860: CR 2’11” – NO CREW AVAILABLE TP812: TM 32” – MET ZMFLAF 18 TP666: SH 1’12” – HBD DETECTOR TP666: CT 57” – RECREWED TRAIN

LAST AEI SITE 1101 CO003 ST. LOUIS TRACK #3 CONSIST NOT VALIDATED BY AEI CO486: TM 45” – HELD FOR TWO EASTBOUNDS CO112: TM 32” – MET MWSCH 12 CO043: LF 3’42” – LOCOMOTIVE FAILURE CO007: CT 57” – RECREWED TRAIN

0.0

2.0

4.0

6.0

8.0

10.0

12.0

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

20

13

US Class I incident rate

Incidents per million train miles

Sources: US Federal Railroad Administration and Oliver Wyman analysis


Larger trains require new mission standards Our relentless drive for operations efficiencies are creating more complex rolling stock performance needs

5,500

5,750

6,000

6,250

6,500

6,750

7,000

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Average gross tons per train Average gross tons per car

Gro

ss

to

ns

80

82

84

86

88

90

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Gro

ss

to

ns

Sources: Association of American Railroads and Oliver Wyman analysis

Gross tons per train grew by 12.2 percent

between 2000 and 2013

Gross tons per railcar grew by 10.2 percent

between 2000 and 2013


Unexpected events compromise mission completion Over 500,000 unexpected delays impact over 1 in 4 trains

Total

estimated

incidents

Detector activations 12,000

Detector failures 1,000

UDEs 27,000

Train separations 2,000

Crossing protection failures 110,000

Unscheduled work 125,000

Locomotive failures 44,000

Recrews 210,000

Total 531,000

Sources: Various US Class I railroads and Oliver Wyman analysis

Estimated frequency of unexpected events

US Class I railroads in 2013


Mission completion failure eats sustainable capacity Due to a higher mission failure rate, Class Is operate at a capacity discount relative to foreign networks

Sources: Association of American Railroads; International Union of Railways; Potter, et al, Transnet Ore Line Project; and Oliver Wyman analysis

0%

10%

20%

30%

40%

50%

60%

0 20 40 60 80 100

Four largest

US Class Is

Train intensity and multiple-track route miles

Pe

rce

nt

of

rou

te m

ile

s w

ith

mu

ltip

le m

ain

s

Average trains per day

Russia

Germany

Kazakhstan

C

China

France

D

Ukraine

Poland

B

Italy

A

North American impediments

• Higher en route equipment

failure rates

• Larger train sizes

• Low integration of unscheduled

trains

• Poor terminal and corridor

integration


0%

10%

20%

30%

40%

50%

60%

0 20 40

Four largest

US Class Is

The opportunity cost of North American rail operations Inconsistent network performance day after day reduces the potential earning capacity of the network

Sources: Association of American Railroads and Oliver Wyman analysis

+1 train $5B in additional revenue

daily across the entire

railroad network

Increase train density

Train intensity and multiple-track route miles

Pe

rce

nt

of

rou

te m

ile

s w

ith

mu

ltip

le m

ain

s

Average trains per day

C

D

B

A


Mission completion - Summary

• Consistent performance on the network starts with better mission

completion

• All industry participants are part of the solution – Fleet owners,

maintenance contractors, origin customers, and railroad operators

• Economic model must move from cost avoidance to opportunity cost

• Mission completion failure points must bear the associated costs of the

delay including forfeit revenues

• This will NOT be a one solution works for all corridors and terminal areas


Rail Renaissance II The next natural step in professional railroading

1

2

3

4



Mission completion

New social compact

Visit www.railplanning.com

rail trends conference 2014 - oliver wyman · germany rail freight is a large and growing...

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