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October 1997
Something old,
something new
Coal and intermodal important
to rail industry
Some of the increased business and optimism in the rail industry
has to do with a booming U.S. economy and potential traffic due
to the passage of the North American Free Trade Agreement, but the
railroads are also making inroads into something that's relatively
new while relying on an old standby.
What's new is the increasing emphasis on intermodal transportation
(moving trailers and other containers by rail and at least one other
mode of transportation), and what's old is the continuing importance
of the coal industry for the Ninth District's rail lines.
Intermodal: cooperative competition
Railroads have been investing millions of dollars in the volatile
intermodal market, the fastest growing segment of the railroad industry.
In 1995, the railroads' share of the total intercity revenue freight
ton-miles rose to 40.6 percent from 39.1 percent the previous year.
Growth in the Ninth District has been, if anything, even more dramatic.
The amount of freight being transported from Portal, N.D.—where
the Canadian Pacific (CP) crosses into the United States—to
the Twin Cities has increased 75 percent since 1990, according to
John Bergene of the Soo Line Bergene of the Soo Line, a wholly owned
subsidiary of CP.
This growth has, at times, fueled disputes among various portions
of the transportation industry. Railroad employees are quick to
point out their industry is somewhat disadvantaged because trucking
firms, barge operators and the airlines are subsidized by local,
state and federal agencies in the form of roads, locks and dams
and airports. Representatives of the latter groups counter that
railroads received land grants to extend lines. Although land-grant
railroads did exist, only about 10 percent of the real estate railroads
presently own came in the form of land grants, according to Association
of American Railroads' spokesman Tom White, and there was a quid
pro quo. All railroads had to move government freight at 50
percent and personnel at 80 percent of going rates. The practice
ended in 1947 when laws were changed.
If conversations with a dozen railroad spokespersons from short
lines to Class 1 giants can be said to represent the industry, it
is clear the railroads see the trucking industry—and not their
fellow railroads—as their competition.
Despite occasional acrimony, though, railroads and the trucking
industry are busy forging alliances to combine the door-to-door
convenience of trucks with the long-haul economy of rail service.
Innovations such as trailers equipped with both rubber tires and
detachable steel wheels and drive on/drive off unit trains will
make the process even more streamlined.
The railroads are pleased with this intermodal arrangement because
it generates more business; trucking firms benefit because they
can utilize their trucks more efficiently. For shippers, partnerships
between the maritime industry, railroads and trucking firms mean
that containers can be packed with merchandise, placed aboard special
ships, offloaded onto freight cars and then dropped onto trucks
for local delivery. Ultimately, consumers make the greatest gains
in the form of lower prices. Trains can move a ton of freight 802
miles on a gallon of gas; a car would have to get 500 mpg to be
as efficient. Intermodal cooperation, thus, produces less pollution
and reduces highway traffic congestion.
The emphasis on intermodal has paid some dividends. Business has
expanded from 3 million trailers and containers in 1980 to 8.1 million
in 1996. Canadian Pacific is banking on the continued growth of
intermodal in a big way, recently completing a large container port
in Vancouver, British Columbia. In addition, the railroad enlarged
tunnels and snow sheds in order to accommodate double-stacked container
cars, recessed flat cars with two containers stacked one on top
of the other. CP hopes to offer Asian steamship lines an alternative
to ports in Seattle, Wash., and Long Beach, Calif. Bergene contends
that CP's Vancouver-Chicago line can have containers into Chicago
a day earlier than other routes.
Competition between segments of the transportation industry or
between rail lines is not the only thing pushing continued investment
in intermodal. Much of the growth is spurred by demands by business
and industry. More and more emphasis is being placed on just-in-time
deliveries. In other words, what shippers desire is the ability
to rid themselves of costly warehousing and inventory controls.
They want the product when they need it, not sooner or later. For
example, the Soo Line runs a daily 3 a.m. train from Chicago to
the Twin Cities filled with enough parts for a day's production
run at the St. Paul Ford plant.
Intermodal—by providing the most efficient way to transfer
bulk product from one part of the country to another-fits nicely
into a business climate which increasingly insists upon timely service.
Although the Soo Line is presently reporting relatively flat revenues
from intermodal, Gus Melonas, regional spokesperson for Burlington
Northern Sante Fe (BNSF), offers this one-word appraisal of his
railroad's intermodal business: "Great."
Coal: unit profitability
At 16 percent of total rail revenues, intermodal is still second
to coal, which accounts for over a fifth of the industry's revenues
and over 40 percent of total tonnage. The importance of coal transportation
to the industry as a whole is nowhere more evident than at Wyoming's
Powder River Basin, from which vast amounts of low-sulfur content
coal are shipped around the country.
The Dakota Minnesota & Eastern Railroad (DM&E), created
from spare parts of the old Chicago Northwestern (CNW), is making
plans to spend $1.2 billion over the next five years to bring coal
through South Dakota and Minnesota to the Mississippi River. The
company hopes to build 250 miles of new track and upgrade 650 miles
of existing track in order to compete with two Class 1 railroads
that currently serve the coal fields.
If the deal is approved, it would be the first major new construction
on a rail line since the 1970s, when Burlington Northern built 100
miles of new track to get into the Powder River, and CNW laid 60
miles of new track and upgraded another 50 or 60 miles in order
to serve the basin. The latter's lines were eventually acquired
by the Union Pacific.
Although recent news reports suggest that some industry analysts
think BNSF and Union Pacific (UP) might fight the proposed expansion
with the Federal Surface Transportation Board, White predicts that
once DM&E allays any environmental fears, the expansion will
be approved. After all, new emission regulations will put greater
pressure on energy-producing firms to purchase low-sulfur coal.
Further-more, the DM&E is promising economic benefits all up
and down the line. Over 1,200 ongoing new jobs in South Dakota and
450 ongoing new jobs in Minnesota will be added to the thousands
of construction jobs needed for the five-year project.
With this type of potential job creation, politicians from the
affected states are likely to work diligently to make sure the railroad's
proposal is approved. Still, no one predicts the big lines will
roll over and play dead. James Valentine, an analyst with Salomon
Brothers, expects the BNSF and UP to keep the upstart from winning
any cargo commitments by cutting coal-freight rates. DM&E officials
think the major carriers are at or near capacity and cannot use
that strategy, either.
The reason coal is so profitable for the railroads is that it
requires single-commodity trains, called unit trains, which are
relatively easy to load and shoot across the country to wherever
coal is needed. DM&E's expansion into this lucrative market
will depend less on a struggle with its competitors and more on
its ability to raise the necessary financing since even a small
inroad into the Powder River market will more than offset costs.
Despite occasional rivalry, relations between railroads are usually
marked by cooperation rather than competition. Since there are no
coast-to-coast railroads in the United States, the national and
international nature of trade requires the various players within
the transportation industry to work together to get products from
one spot to another. For that reason, according to BNSF representative
Pat Hiatte, the various players must have "solid working relationships."
While coal and intermodal traffic will probably continue to drive
the industry, particularly the Class 1 railroads, there is no magic
commodity bullet, according to Jerry Fruin, a University of Minnesota
applied economist. Certain items will always need to be transported,
including grains, fertilizer and chlorine. In fact, the hauling
of grain produced 28 percent of Soo Line's revenues in 1995, the
largest single source of income. Fertilizers, primarily potash,
and other chemicals coming from Saskatchewan were second and coal
followed behind.
In order to provide better service to the highly volatile grain
market, Soo Line has begun a PERX program (Protected Equipment Rate
eXchange) designed to allow shippers to lock in car supply and rates
up to four months in advance. The certificates are fully transferable
instruments. BNSF and UP have similar programs.
—Dave Page
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