U.S. Freight Railroad Infrastructure: Current and Future Issues

Craig F. Rockey

Vice President - Policy and Economics Association of American Railroads

Washington DC

March 17, 2004

The U.S. Rail Network

U.S. Freight Intercity Modal Market Share: 2001

“Other” for ton-miles is less than 0.5%. Source: Eno Transportation Foundation

RRs42%

Trucks28%

Water13%

Pipeline17%

Trucks80%

RRs10%

Ton-Miles Revenue

Water1% Other

7%

Pipeline2%

Freight Rail Provides Major Public Benefits

Fuel efficient

Less pollution

Reduced congestion

Safer0

60

120

180

240

300

360

420

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02

Railroad Fuel Efficiency(Ton-Miles Per Gallon of Fuel

Consumed)

Fuel efficient

Less pollution

Reduced congestion

Safer

The EPA estimates that for every ton-mile, trucks emit roughly

three times more nitrogen oxides and particulates than

locomotives.

Other studies suggest trucks emit 6 to 12 times more.

Freight Rail Provides Major Public Benefits, cont.

Fuel efficient

Less pollution

Reduced congestion

Safer $0

$15

$30

$45

$60

$75

'83 '85 '87 '89 '91 '93 '95 '97 '99 '01

Costs of U.S. Highway Congestion(Billions of Constant 2001 Dollars)

Source: Texas Transportation Institute

Freight Rail Provides Major Public Benefits, cont.

Fuel efficient

Less pollution

Reduced congestion

Safer

Freight Rail Provides Major Public Benefits, cont.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

'88 '90 '92 '94 '96 '98 '00 '02

Truck

Railroad

Truck vs. Railroad Hazmat Incidents

Source: AAR analysis of data from FHWA, FRA, RSPA, and STB.

Today’s Freight Rail Environment

Vast majority privately-owned.

Essentially no government funding.

Separate freight & passenger operations.

Access privately negotiated, voluntary.

Generally owner and operator.

Economic Fundamentals of Freight Railroading

Railroads are networks with virtually unlimited origin-destination pairs — what happens in one place affects many others.

High fixed and sunk costs — infrastructure can’t easily be picked up and moved.

Substantial economies of scale and scope.

Huge differences in customer demands and options.

0

2

4

6

8

10

12

14

16

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02

Freight Rail Traffic Density(Millions of Class I Ton-Miles

Per Mile of Road Owned)

Source: AAR

RRs Have Far Higher Capital Expenditures Than Other Industries

Cap. Expend. as a % of Revenuefor Various U.S. Industries:

Avg. 1997-2001

All manufacturing 3.8%

Petroleum & coal products 2.9%Transportation equipment 3.0%Food 2.7%Machinery 3.3%Wood products 3.2%Primary metal products 3.8%Chemicals 4.9%Paper 4.9%Nonmet. mineral products 5.8%

Class I Railroads 18.8%

Source: U.S. Census Bureau, AAR

Source: AAR

$0$1$2$3$4$5$6$7$8$9

$10

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Expenses Capital Expend. Total Less Depreciation

Class I RR Spending on Roadway and Structures

($ Billions)

Transport Demand: U.S. DOT says freight traffic will increase nearly 70% by 2020; international higher.

Service Quality: Reliability, speed, frequency

Price

Highway Congestion: Pressure to reduce congestion, emissions, fuel use, and enhance safety.

Passenger: Demands for freight-owned track.

Drivers of Railroad Demand

But Because Railroads Do Not Earn Their Cost of Capital…

0%2%4%6%8%

10%12%14%16%18%20%

1981 1984 1987 1990 1993 1996 1999 2002

Source: Surface Transportation Board

Cost of Capital

Return on Investment

Class I Cost of Capital vs. Return on Investment

…They Cannot Make All Desired Investments

Best used for projects whose main purpose is to meet public needs.

RRs pay for their benefits and public pays for public benefits.

Not “subsidy” to RRs

Public-Private Partnerships Can Help

“Relatively small public investments in the nation’s freight railroads can be leveraged into relatively large benefits for the nation’s highway infrastructure, highway users, and freight shippers.” --AASHTO

Railroads Providing Better Service

Alliances with other RRs, other modes, customers, suppliers, others

Technological applications

Innovations in locomotive operations, staffing, asset utilization, scheduling

Better equipment and infrastructure

New offerings

Other Challenges Facing RRs

Reregulation

Environmental

Truck Size and Weights

Economic Growth

Fuel Tax

Safety

Passenger Rail

P

SecurityStaffing

TEA-21New Technology

3

Daunting growth forecast.

Infrastructure is preeminent issue.

Don’t restrict rail earnings through reregulation

Tap public/private partnerships.

Continued focus on meeting customer needs

Summary