Something old, something new

Coal and intermodal important to rail industry

David Page | Intern

Published October 1, 1997  | October 1997 issue

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.