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Rail News Home Union Pacific Railroad

June 2014



Rail News: Union Pacific Railroad

Union Pacific Railroad banks on a new terminal near the Mexico border to drive up intermodal business



— by Jeff Stagl, Managing Editor

Diverting freight from trucks is a big part of Union Pacific Railroad’s intermodal strategy. If a $400 million investment in a southern New Mexico facility pays off in the near term, the Class I might add a million or so truck conversions to its “win” column.

On May 28, UP opened an intermodal facility in Santa Teresa, which was completed a year earlier than projected and became semi-operational in April. Built on a 2,200-acre site that’s 11.5 miles long and one mile wide, the facility features an intermodal ramp with an annual lift capacity of 225,000 units, a locomotive fueling facility, 1,266 container and trailer parking stalls, and eight automated gates.

The terminal is about eight miles from a Santa Teresa-San Jerónimo, Mexico, border crossing and replaces a much smaller intermodal ramp about 15 miles away in El Paso, Texas. UP execs envision the facility as a large siphon that could help the Class I capture trucks moving hundreds or thousands of miles from northern Mexico to the Midwest, East and beyond.

A potentially big draw: Trucks could use either the less-congested Santa Teresa-San Jerónimo crossing or a more heavily traversed El Paso-Ciudad Juárez, Mexico, crossing to reach the terminal. Each year, more than 800,000 trucks move through the two crossings and more than 1 million trucks travel through the region — targets UP hopes to hit with regularity to build volume in Santa Teresa.

“We want to get them all,” jokes UP Chairman and Chief Executive Officer Jack Koraleski. “But realistically, we think we can get a substantial portion of them over time.”

Efforts to generate more intermodal business are evident in UP’s traffic ledger. The Class I has achieved record volume growth each year since 2009 and traffic grew 8 percent year over year in the first quarter, when intermodal accounted for one-third of total volume and one-fifth of total revenue. Currently, domestic intermodal business totals about 1.6 million units annually.

One way to generate more units is to add intermodal capacity where there’s an apparent need. Enter Santa Teresa.

But before UP can start generating a return on its large investment, it will need to convince shippers that rail is the optimal mode to move their freight from Santa Teresa to such far-flung destinations as Atlanta, Chicago or New Orleans, and even points in the U.S. Northeast or Canada. Where the terminal is situated — in relation to various favorable factors — will help the Class I make a strong truck-to-rail case, senior executives believe.

It’s strategically located along the railroad’s 760-mile Los Angeles-to-El Paso Sunset Route and will serve as a major NAFTA gateway near the El Paso-Juárez borderplex, they say. The facility also is in close proximity to maquiladoras, or clusters of factories in Mexico that manufacture products in duty- and tariff-free zones.

Moreover, it’s adjacent to a logistics park featuring commercial property available for development that could help cement the area around the intermodal facility as an inland port, senior execs say.

There already are hundreds of warehouses and distribution centers dotting both sides of the border — and more are on the way.

“Distribution centers are a natural for intermodal-truck operations,” says UP President and Chief Operating Officer Lance Fritz. “Our Rochelle and Joliet [Illinois] facilities have seen economic development that occurred in a year or a year and a half on a large scale. Santa Teresa could see economic development happen very quickly.”

Birth and rebirth

Although the potential appears great to stop a lot of trucks in Santa Teresa and move countless containers and trailers on trains, tapping it will require intermodal services tailored to borderplex shippers’ needs. Some current services and a few soon-to-be-introduced ones — such as a Santa Teresa-New Orleans-Atlanta-Charlotte, N.C., routing to come later this year — are designed to serve what continues to be an evolving region.

“The area wants to grow and is growing rapidly, [but] it’s hemmed in by the population in El Paso,” says Koraleski. “The market is changing and there’s a rebirth of maquiladoras in northern Mexico. There’s an opportunity for economic expansion and a real opportunity for growth in New Mexico itself.”

While production inputs for existing maquiladoras continue to be strong, most major manufacturing plants are being built away from the border, said UP Vice President and General Manager of Intermodal John Kaiser in an email.

“The border will continue to enjoy the presence of numerous manufacturing facilities that will fuel consumption in the region overall, but the true growth is now spread more broadly instead of just at the border,” he said.

UP Vice President of Mexico Markets Bernardo Ayala acknowledges that the additional intermodal capacity put in place in Santa Teresa is a reflection of the significant manufacturing growth registered in Juárez and Mexico’s state of Chihuahua. Some manufacturing performed in China is coming back to Mexico, he says.

An array of commodities that move in containers are being shipped from maquiladoras and exported to the United States, such as home appliances, says Ayala. In addition, numerous products — such as computer components — are being produced at New Mexico or Texas plants near the intermodal terminal.

“The facility is designed for over-the-road traffic coming from 40 to 50 miles of Santa Teresa, and perhaps a bit more or less than that,” says Ayala.

UP currently generates about 10 percent of its annual revenue from traffic moving into and out of Mexico. To ratchet up that percentage, the railroad will need to show it can offer a competitive advantage to trucks via the Santa Teresa facility.

Major selling points

For one, UP can offer can offer a closer and more fluid border crossing.

“We’re talking a couple of hours” in the time difference for a truck to make it through the Santa Teresa-San Jerónimo crossing versus the El Paso-Juárez crossing, says Ayala.

Over time, the Santa Teresa-San Jerónimo crossing could become congested, especially if UP’s diversion plans are realized. If that occurs, UP plans to work with the U.S. and Mexican governments to eventually expand the crossing, says Ayala.

Another Santa Teresa advantage: The old El Paso intermodal ramp was small and congested, and didn’t provide the services that customers want, he says. Now, UP can offer can new destinations and routes, says Ayala.

“We’re looking at different lanes now, with some points going farther east,” he says.

UP sales teams currently are working with intermodal marketing companies and the Class I’s Streamline subsidiary to promote the new facility’s advantages and services.

“Not everyone is comfortable with the new facility yet. We’re trying to get them used to it,” says Ayala.

Through the Streamline Passport program, a door-to-door intermodal service tailored for customers in Mexico, shipments can clear customs at the border and be serviced to and from UP’s border terminals in Santa Teresa; Laredo, Texas; and Nogales, Ariz.

If marketing efforts are successful, the Santa Teresa facility can be expanded in the coming years. The terminal’s design would enable annual lift capacity to be increased from 225,000 to 700,000 lifts; track for the ramp and fueling station to be extended from 74,000 to 145,000 feet; container and trailer parking to be widened from 1,266 to 4,380 stalls; and the automated gate system to be enlarged from eight to 12 lanes.

“We believe we could double the intermodal facility if business develops and grows [as anticipated],” says Koraleski.

The railroad already is anticipating operational benefits from the terminal’s fueling station. Trains previously needed to be fueled at the old downtown El Paso ramp and then again at some outlying points, says Fritz.

“Now trains can be taken to New Mexico for fueling, and then head to El Paso,” he says, adding that the new station helps increase operational efficiency and fluidity.

The Santa Teresa facility also can be a boon to operations because it’s located along the Sunset Route. Intermodal cargo could be taken off ships at Southern California ports and transported directly to Santa Teresa instead of being sorted at the ports, says Koraleski.

A long-running state of affairs

New Mexico has been a key cog in UP’s operations for more than a century. The Class I’s involvement in the state dates back to 1881, when the nation’s second transcontinental rail link was formed.

Predecessor Southern Pacific Railroad expanded its line east from Los Angeles to Lordsburg, N.M., in 1880, and eventually to Deming, N.M., in 1881.

The second leg of UP’s network through New Mexico began as the El Paso & Southwestern Railroad (EP&SW), which in 1905 acquired a route from El Paso north through New Mexico to connect with the Chicago, Rock Island & Pacific Railroad at Tucumcari and complete what became known as the Golden State Route. SP eventually absorbed the EP&SW and UP acquired SP in 1996.

Now, UP operates 618 miles of track in New Mexico.

With the intermodal facility in place, the railroad expects to create 600 permanent jobs in Santa Teresa over time. In addition, the state of New Mexico eventually will gain public benefits valued at more than $500 million, UP estimates.

The Class I has constructed crew change buildings at the facility that will serve as a home base for employees who operate long-haul trains in and out of the area.

Last year, UP originated 15,391 cars and terminated 9,135 cars in New Mexico compared with 8,358 and 10,368 cars, respectively, in 2012.

Those figures likely will rise in the coming years as traffic ramps up in Santa Teresa.

Road work ahead

The terminal has the capacity to support strong domestic intermodal growth for UP, becoming a critical link in the continued development of cross-border trade between Mexico and the United States, said Robert W. Baird & Co. Inc. analyst Benjamin Hartford in an email.

But a limiting traffic-building factor, at least in the near term, is the somewhat constrained road infrastructure leading into and out of the facility, he said.

“The number of trucks crossing at the Santa Teresa border has increased by over 50 percent over the past five years,” said Hartford. “The infrastructure, particularly on the Mexican side of the border, needs investment to expand its capacity to handle both the continued expected growth in truck traffic leading into and out of the Santa Teresa facility from Mexico as well as the supporting freight services, including warehouses and industrial spaces.”

Whatever senior execs might learn as they confront challenges to developing business in Santa Teresa will help drive future intermodal investments.

The Class I might replicate the terminal in other areas, says Koraleski.

“We’re looking at a lot of different locations where we could grow and expand all over the network,” he says.

UP looked at Santa Teresa for a long time before moving ahead with the facility. Planning dates back to 1999, when UP executives held discussions with primary intermodal customers.

“We talked about what to do about capacity in El Paso,” says Koraleski.

'Land of Enchantment'

It took a while to ensure the timing was right to make the investment. Now that the long-planned facility has come to fruition, senior execs will monitor its success in diverting trucked cargo.

If the terminal becomes a major draw, then the railroad will consider developing a classification yard or facilities for other traffic segments in Santa Teresa, says Koraleski.

The facility already has enticed several potential customers to build nearby facilities.

Last year, shipping container-storage firm Twin Cities Services and industrial recycling company W. Silver Recycling announced plans to construct facilities at the adjacent logistics park.

UP’s facility was a big reason the companies decided to locate facilities in Santa Teresa, the firms’ owners said in a press release issued in July 2013.

“We are now becoming competitive [and] being viewed as a place to come to instead of skipping right over New Mexico and going right into Texas,” said New Mexico Gov. Susanna Martinez in the release.

If several intermodal market-influencing factors remain favorable, more customers figure to come Santa Teresa’s way.

“As long as economy hangs in there and consumer spending is strong, we’re in really good shape,” says Koraleski.

The shapes senior executives are most interested in seeing soon are stacks of containers and lines of trailers in Santa Teresa.

It won’t be long before they begin to compile there, and then — hopefully — they keep piling up, Koraleski says. It’s the right facility in the right place at the right time, he believes.

“The property is quite unique,” says Koraleski.

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