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June 2006
by Angela Cotey, Associate Editor
The freight-rail traffic increases we've seen the past three years are a harbinger of things to come. Rail traffic will at least double during the next two decades, transportation trend-trackers say. That's good news for railroads' pocketbooks — presuming roads' already capacity-strained networks can handle the traffic.
It's hardly a given. Although Class Is have set aside more capital dollars to add or upgrade track during the past couple of years, they long ago shed the "Build it, and they will come" mentality. Railroads need to know they'll get a return on their multimillion-dollar investments before committing to any capital project.
But even when they know it, it's been — and likely will continue to be — a challenge to keep up with the traffic demand. At some choke points, there's simply no room to build track.
"When you're up against a wall from a capital standpoint, you look at everything you can do," says Mark Hinsdale, assistant vice president of capacity management and network planning for CSX Transportation. "You don't discount a solution just because you haven't tried it before."
That includes collaborating with competitors. To an extent, Class Is always have, given the interconnectedness of the rail network. But today's premeditated partnerships are a little bit different.
"There's some new thinking that's been developed just in this century — the thinking of, 'Why do I operate over inefficient routes when my competitor has a much more efficient one?'" says independent rail analyst and Progressive Railroading columnist Tony Hatch. "Railroads are thinking about why they're duplicating efforts. They're thinking, 'We do compete, but we also compete with the highways, so we need to work together.'"
Because they've got a shared interest in doing so. Not that that recognition in and of itself makes it easy to identify collaboration opportunities — or hammer out agreement details.
"You're working cooperatively with a competitor, and that is very different from the culture and mind-set that have prevailed for 100 years," says Francois Hebert, VP of network strategies for Canadian National Railway Co.
But the prevailing winds have shifted, and evidence of that mind-set alteration is piling up. From a 1999 Fraser Canyon bi-directional running agreement between CN and Canadian Pacific Railway to last month's closing on a Kansas City Southern/Norfolk Southern Railway Meridian Speedway joint venture that required a hefty capital investment and Surface Transportation Board approval, Class Is are coming up with collaborative (and, arguably, more creative) ways to boost capacity and, in turn, provide better service to ultimately garner more transport market share.
"There's been a paradigm shift on previous views that railroads cannot co-produce to enhance the overall rail transportation network in North America," says Doug McFarlane, CPR's assistant VP of operations-west.
A turning point came in early 1998, when the Union Pacific/Southern Pacific merger meltdown resulted in months of traffic snarl-ups in the Gulf Coast region. As an emergency remedy, UP agreed to set up a co-located regional dispatching center for all Gulf Coast train operations with BNSF Railway Co. The railroads also exchanged half-interests in a former SP Houston-to-New Orleans line.
What began as a band-aid solution became a long-term cooperation agreement. BNSF and UP strategists realized the collaboration helped both railroads expedite traffic flows. The Class Is still share an interest in the line and not only continue to perform co-located dispatching out of a Spring, Texas, facility, but have created two additional co-located dispatching centers — one in San Bernardino, Calif., and another in Kansas City, Kan. The 1998 service issues also spawned bi-directional running agreements between UP and BNSF.
A year later, two other Class Is forged their own directional running agreement. In British Columbia's Fraser Canyon, CN and CPR operate parallel routes — CN, on a flat grade and CPR, on more of a "roller coaster" route, says Hebert. Trains now travel westbound over a 155-mile stretch of track through the canyon on CN tracks and eastbound on CPR tracks.
"Before, we'd meet two, three, four trains that would have to go to sidings and wait," says Hebert. "Now, it's like running on a highway where trains don't stop."
Previously, CPR needed four locomotives to move loaded westbound trains, most of which were headed for the Port of Vancouver. The railroad now only needs two locomotives to carry loaded trains on CN tracks and can use the same two to bring empty trains back east on its own tracks.
"We could run 30 trains a day and, ultimately, we would have had to build sidings and double track," says Hebert. "Now, capacity is at least 100 trains per day."
The agreement took several months to negotiate while strategists worked out dispatching protocols (typically, trains are given priority on a first-come, first-serve basis), and determined how to share the operating-cost savings. For example, since CPR saved fuel and didn't have to operate as many locomotives, CN received about half of those savings because it incurred more wear and tear on its tracks.
Seven years later, the running agreement's still paying dividends. So is another CN/CPR agreement signed in 2004 to operate bi-directionally on parallel tracks in Ontario between Waterfall and Parry Sound.
"We usually approach these by saying, 'If we were one railroad, what would we do?' And that identifies a lot of opportunities," says Hebert.
CN alone has inked more than a dozen partnership pacts with several Class Is during the past seven years. In the meantime, other railroads have been inking them, too. And railroads aren't just sharing track, but trains and sometimes crews, as well.
To take advantage of competitors' more efficient routes or eliminate redundant operations, railroads are forging "co-production" agreements. Case in point: a CPR/NS/CN agreement to move traffic through the U.S. Northeast.
For years, CPR struggled to make Northeast U.S. subsidiary the Delaware and Hudson Railway (D&H) profitable and efficient. So, about four years ago, CPR officials concluded the D&H would be better off moving traffic for or in conjunction with other railroads.
In 2004, CPR and NS teamed up to move each other's traffic through the Northeast. Both had large yard operations in Buffalo, N.Y., so CPR closed its yard and all traffic is now handled through NS. The two roads jointly share train operations on a corridor between Buffalo and Binghamton, N.Y., and Philadelphia and New Jersey.
"It enables us to run full and efficient trains where in some cases we were running more often than we needed to or with less trains," says CPR's McFarlane.
Also on the D&H, CPR since November 2004 has moved both NS and CN traffic about 300 miles from Montreal to Saratoga, N.Y., to Binghamton, where NS takes trains to points south. Before, trains coming from eastern Canada would take a circuitous route using CN tracks to Buffalo and interchange with NS, which would bring the trains back to Philadelphia.
The arrangement has enabled CPR to increase revenue and traffic on the D&H. And CN and NS gained a seamless, direct north-south route out of Montreal, cutting 330 miles off the previous route and up to three days off transit times. The agreement also helped the railroads garner more business in the area, where trucks historically carried much of the region's lumber and forest product shipments.
"With our route, we couldn't compete before," says Hebert. "Now, we can offer a better price and better service."
Each day, a team comprising operations officials from each railroad communicates through emails, conference calls and reports to review day-to-day operations. The group meets monthly to review service metrics and operating issues.
Meanwhile, CN is working with another Class I in the U.S. Northeast to move traffic more efficiently. In January, CN and CSXT signed a long-term haulage agreement under which CSXT transfers traffic from its Sarnia, Ontario, chemical customers to CN, which places cars on through trains headed for Toledo or Buffalo, where they reconnect with CSXT's network.
CSXT's Sarnia operation doesn't connect with its network, so CSXT previously had been using CPR's tracks to travel out of Sarnia.
"It was a very circuitous route that added a lot of miles and a lot of cost," says CSXT's Hinsdale, adding that the new route has cut several days off trains' travel time.
CN also reached another co-production agreement with CPR in January. The railroads are operating each other's trains into and out of the Port of Vancouver, where container volumes are expected to grow significantly during the next decade.
CN and CPR each have tracks that lead to the port — CN's on the North Shore and CPR's, on the South Shore (CN has access rights to operate on the South Shore, as well). Historically, CN has handled switching operations on the North Shore and CPR, on the South Shore, but it took time to get trains to their final port destination.
"Cars would literally sit around for days and eat up track space and create congestion," says Hebert.
With British Columbia port traffic expected to increase an additional 3 million to 5 million 20-foot equivalent units annually by 2020, letting cars take up space soon won't be an option. So, CN and CPR developed a routing and switching agreement under which all trains headed for the port will stop in Boston Bar, about 75 miles outside of Vancouver. There, CN crews will board CPR trains and take them to the North Shore, and CPR crews will board CN trains headed for the South Shore, eliminating handoffs and knocking days off trains' arrival time to the port.
The railroads began handling each other's trains in early March after spending six months refining details.
"The concept itself is quite simplistic," says CPR's McFarlane. "What makes it complicated is how you mesh your computer systems, information systems and day-to-day operations into an agreement that allows us to get the benefits we need but minimize our interference with each other."
To oversee operations, the railroads appointed a governance team that includes senior and operations managers from both Class Is stationed in the Vancouver area, as well as members of each railroad's transportation or operations center.
The group will meet face-to-face monthly to review tracking documents and "scorecards," which tally transit and car-dwell times, and note customer feedback. Members also communicate several times daily to exchange train arrival information and port docking times.
But not all of today's collaboration pacts are production oriented. To streamline traffic exchanges at major gateways, some roads are forging routing protocols, which are "basically a road map to build volume density, and improve transit times and consistency over a particular gateway," says Pete Rickershauser, BNSF's VP of network development.
In January 2005, BNSF unveiled its most recent routing agreement, a pact with CN to direct traffic more efficiently through interchanges in Vancouver; Noyes, Minn.; Superior, Wis.; Chicago; Memphis; and New Orleans.
"There was a time not too long ago on all railroads where what gateway was given the revenue or carloads was essentially left to the market manager for each commodity," says Rickershauser.
As with all routing protocol agreements, the Class Is' operating and service design teams met to determine the best service route for interchanged traffic. Using a computer model, service design managers viewed both railroads' networks simultaneously, with one overlaid onto the other. Managers input traffic information, such as the number of miles a particular train would travel, hours in transit and yards it would go through, and the model determines the most efficient route.
BNSF and CN marketing managers split revenue this way: If one railroad's trains traveled less miles than the other, the one that traveled more miles would be compensated based on a per-mile formula.
Since mid-2005, CN has provided BNSF's industrial products division with a weekly report that outlines how many trains are complying with the routing protocol. As of mid-April, reports showed gateway compliance was in the mid-90 percent range, says Rickershauser. The percentage is impressive considering railroads had very different routing priorities in the not-so-distant past, when "marketing people decided where you would interchange with another railroad," says CN's Hebert.
"Every railroad wants to go the longest possible route on its own network to earn maximum revenue," he says. "Here, the thinking was, 'Let's not go the longest route, but let's take the shortest, most efficient route. We'll get less revenue, but there will be less cost, too.'"
CN also entered into routing protocol pacts with other roads, including a November 2004 agreement with UP to consolidate and interchange traffic moving between western Canada and Texas in Superior; between Texas and Arkansas, through Salem, Ill.; and between eastern Canada and the south-central United States, through Memphis to avoid Chicago.
In March 2005, CN paired up with NS to interchange traffic moving between the Gulf Coast and U.S. northeast in New Orleans or Memphis.
A couple of railroads recently took their collaborations a step further when, instead of co-producing, they began co-investing.
When KCS and NS officials sat down last year to renegotiate a haulage agreement for NS to operate intermodal trains on the KCS-owned Meridian Speedway, KCS was seeking ways to address capacity constraints along the 320-mile Meridian, Miss.-to-Shreveport, La., corridor. NS wanted a more permanent arrangement that wouldn't have to be revisited every few years.
So, the Class Is agreed to form a joint venture, Meridian Speedway L.L.C., to control the corridor. Under terms of the agreement, which received Surface Transportation Board approval in April, KCS contributed the line to the joint venture but retained a 70 percent interest. NS will invest $300 million, including a $100 million initial cash contribution, during the next two years to help KCS complete capacity improvements over the next four years in return for a 30 percent ownership stake.
KCS will continue to operate trains on the speedway; NS will be the sole operator of domestic intermodal services to and from points west of Fort Worth, Texas, and points east of Meridian. KCS will use NS dollars to add capacity by upgrading signals, extending and adding sidings, and adding double track. KCS also will improve the overall maintenance of the line.
"As you add more traffic, you have to raise the standard in order to be more reliable," says David Brown, NS' former vice president of strategic planning, who last month joined CSXT as VP and chief transportation officer.
Beyond NS' $300 million contribution, additional capital investments will be made as needed and funded by each railroad according to their ownership share, says Larry Lawrence, KCS' senior VP of strategy and assistant to the chairman.
To determine how capital dollars will be spent, and to oversee joint-venture operations, the Class Is appointed a management committee comprising NS Chairman, President and Chief Executive Officer Wick Moorman and Executive VP of Planning and Chief Information Officer Kathryn McQuade; and KCS Chairman, President and CEO Mike Haverty, Executive VP and Chief Operating Officer Art Shoener, Senior VP and General Counsel Robert Terry, and Lawrence.
The capital investment will help NS handle additional intermodal traffic, which has increased 45 percent along the speedway since NS was originally granted haulage rights from KCS in 2000.
"KCS is building a superhighway for intermodal traffic from Mexico into the southeast and to do that, we need to dramatically increase capacity on the Meridian Speedway," says Lawrence. "NS wants a higher market share of the intermodal traffic between the southeast and southwest U.S., and this allowed them to connect with Union Pacific in Shreveport and lock in current their current haulage agreement to connect with BNSF. It was a big strategic victory for both companies."
And maybe the first of additional joint ventures in the future, says independent analyst Hatch, adding that railroads now realize they don't necessarily have to buy each other to obtain the same kind of benefits.
"These agreements have become a true alternative to mergers," says Hatch. "You can accomplish a huge percentage of the synergies that you would achieve through mergers, but do it without the enormous financial, operational and political risk."
Count on Class I capacity planners to continue to explore the collaboration alternative.
"Even if there's a downturn, we've learned a new way to do things," says Brown. "Once you accept the fact that you can make this work and not be hurt by it — and in fact, be helped by it — you can think about how you can take it further."
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