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December 2014
When contemplating the year ahead, freight and passenger railroad leaders typically think about the key issues and objectives that likely will impact their business-growth prospects. Progressive Railroading last month polled 12 such leaders about their concerns and goals heading into 2015, and they raised a number of issues.
The responses from seven Class I chief executive officers and five passenger railroad leaders hit on some common themes, such as efforts to advance critical projects, foster more reliable service and pursue positive train control implementation amid an impending federal deadline.
In terms of the issues surrounding Class Is, CEOs mentioned potentially burdensome regulatory developments in the United States and Canada, the need to untangle congestion in Chicago and the necessity to improve crude-by-rail safety.
Union Pacific Railroad considers safe crude oil and flammable liquid movements a No. 1 priority, said Chairman and CEO Jack Koraleski. But some policy changes under consideration by the U.S. Department of Transportation would have far-reaching consequences, he said.
"A uniform national speed limit would degrade America's railroad network fluidity, shift freight traffic and risk to trucks and other transportation modes, and impose excessive implementation costs," said Koraleski.
For passenger-road execs, the top concerns are the need to update equipment and infrastructure with limited capital, and the uncertainty of federal transportation funding amid a newly elected Republican-led Congress. The lack of a new surface transportation bill has placed transit agencies in a holding pattern that can't be sustained, said Metra Executive Director and CEO Don Orseno.
"It's imperative that Congress move forward with a transportation funding plan that helps not just my agency, but all transit properties," he said.
Following are the entire or excerpted responses from the 12 leaders, collected by Managing Editor Jeff Stagl and Associate Editor Julie Sneider. In addition, several complete submittals from among the 12 and two responses from other top execs are available online.
— Jeff Stagl
What's your take on near-term business potential heading into 2015? What's your best-guess business forecast for next year and how can it come to fruition?
We see tremendous opportunity across UP's diverse franchise and remain focused on improving our network velocity and fluidity so that we can leverage these opportunities. Overall, the U.S. economy continues to show signs of strengthening, though we are keeping a close eye on softening economies in various parts of the world.
Going forward, overall production and consumer demand will drive opportunities in finished vehicles and auto parts shipments; America's continuing energy production and oil prices should drive demand for frac sand and drilling materials; grain shipments should be strong reflecting another record domestic corn and soybean harvest; and intermodal highway conversions will be supported by around $1.4 billion in investments in our intermodal terminal network since 2000.
In 2014, UP's capital program was $4 billion. We expect to continue investing 16 to 17 percent of revenue on an annual basis to strengthen our network. Key projects over the next several years include investing in capacity in the Pacific Northwest and across our Sunset Route between Los Angeles and El Paso, and a new classification yard in Hearne, Texas, that will connect some of the largest and fastest-growing markets in North America.
What will be an important issue for your railroad in 2015 and what are the potential obstacles to growth?
Among the most important issues for UP and the entire rail industry is the outcome of several regulatory items. First on the list are two topics that the Surface Transportation Board (STB) is dealing with: open access and revenue adequacy. We have been very clear that providing open access to customers on another railroad would destroy efficiency and create possible unintended consequences. The STB also is looking at a revenue adequacy standard, established more than 30 years ago by the Staggers Act. A cap restricting the ability of U.S. railroads to earn an adequate return will reduce much-needed infrastructure investments to support future freight transportation growth.
Next, it has become clear that despite investing billions of dollars and a herculean effort, railroads are not going to meet the 2015 deadline for positive train control installation. We are committed to the project, but there is a general understanding in Washington that the 2015 deadline won't be met, and we are hopeful it will be extended.
What will be an important issue for your transit agency in 2015 and how do you plan to address it? What's your biggest concern in meeting passengers' expectations in 2015?
The lack of consistent local and federal funding forces us to be creative, think outside the box and look for innovative ways to meet immediate and critical capital needs, maintain our rolling stock, ensure our tracks are in good condition, and on the human capital side, retain and recruit good talent to run the business. This fall, we proposed a $2.4 billion, 10-year modernization plan that will allow us to replace and rehab aging rail cars and locomotives, dating back to the Eisenhower era.
[Also], meeting the federal deadline to install and implement positive train control (PTC) is a major issue for Metra and all commuter railroads. It is an important safety system that will save lives. However, it is complicated and costly to install. In Metra's case, we estimate that we will spend $400 million on the installation of PTC and millions of dollars annually to maintain it. Metra and its Board of Directors are addressing the capital costs of PTC and inadequate funding for the replacement of its aging fleet by issuing bonds or similar financing. While our customers have come to expect us to operate on time 95 percent of the time, that goal will continue to be a major challenge until we are able to update our rolling stock to where it needs to be.
How will congressional action/inaction on the funding front impact your agency in 2015?
Our federal funding falls way short of the actual need. Metra needs $9.9 billion over the next decade to achieve and maintain a state of good repair on its system, and it can roughly expect about a fourth of that amount from traditional state and federal sources.
The inability of Congress to move forward with a new transportation authorization bill has put all of us in a holding pattern that can't be sustained. The result is that Metra is increasing fares in 2015, and part of that increase will be to support the first financing program in our agency's history.
However, Metra's borrowing authority can't completely cover our needs to renew our capital assets. It's imperative that Congress moves forward with a transportation funding plan that helps not just my agency but all transit properties moving forward.
Our expectation for growth is similar to the consensus estimate for the U.S. Gross Domestic Product (GDP) for 2015. The growth we are seeing this year has been broad-based and we expect that growth to continue. We expect to grow at a rate that is higher than U.S. GDP and have committed a record amount of capital in order to meet expected customer demand. [Editor's note: BNSF on Nov. 20 announced its capital expenditures for 2015 are budgeted at a record-setting $6 billion.]
Restoring service and continuing to add capacity to meet strong customer demand will continue to be priorities for BNSF in 2015. We have a solid plan for restoring service and adding capacity. While we hope everything goes as we expect, we have contingency plans in place for obstacles that might arise.
Aside from the federal funding question, what will be an important issue for your transit agency in 2015?
This is an exciting time for SEPTA and its customers. In 2015, the authority is embarking on many new initiatives that will impact riders and play a fundamental role in moving the Philadelphia region forward while ensuring that the transit system will be around for future generations. Highlights of the upcoming year will include rebuilding for the future.
Shortly after the November 2013 passage of Act 89, Pennsylvania's comprehensive solution for transportation funding, SEPTA launched a new capital construction program, titled "Rebuilding for the Future," to address a $5 billion backlog of critical capital construction projects such as bridge replacements, power substation overhauls and new vehicle purchases. SEPTA has already begun to perform some of the work associated with the new program. In 2014 alone, the authority awarded contracts for more than $100 million in new capital projects that had been deferred in recent years due to funding constraints. Within five years, SEPTA projects its annual capital budget to exceed $600 million, or more than double the $300 million annual amount SEPTA has had available for improvements in each of the past four years.
The projects SEPTA expects to embark on in 2015 and the coming years include upgrading or replacing viaducts, aging rail vehicles and vital rail bridges; rehabilitating or replacing power substations; renewing track on trolley routes and the Norristown High Speed Line; and strategically expanding parking to address Regional Rail ridership growth.
How will congressional action/inaction on federal funding impact your agency?
SEPTA was very fortunate that the state came through last year with the passage of Act 89. Although the resultant resources will enable SEPTA to address some of the most critical state-of-good repair projects, it was by no means sufficient to address all of the transit needs in southeastern Pennsylvania. It is often said that it's a shared responsibility between the state and federal delegation to provide funding.
A longtime transportation bill that complements what was done in Pennsylvania to preserve and improve our transportation system for the future will be at the forefront of our conversation with federal elected officials.
Before looking ahead, I think it's important to note the remarkable business increase we have seen in 2014. As the winter weather abated, volume increased far beyond forecasts — up to 20 percent in the Chicago region, for example. Some was pent-up demand, but most was associated with steady economic expansion, transition in the energy market characterized by rail movements to support hydraulic fracturing for natural gas and crude oil deliveries to eastern refineries, and continued progress of our Highway-to-Rail intermodal initiative.
As we restore service levels to previous highs, we can unlock additional growth and set the stage for a strong 2015. We see a stable to favorable outlook for most of our markets. Strong oil and gas markets are likely to continue to spur growth in chemicals, including crude oil, frac sand and LPG; metals shipments are growing as steel production has increased; and intermodal will continue to be a major growth driver as we convert more freight to rail, supported by new intermodal terminals, terminal expansions and double-stack line clearances.
To capitalize on these opportunities, we will continue to invest in capacity projects, hire more crews and increase our locomotive and rail car fleets.
Our foremost objective for 2015 will be returning to and moving beyond the record levels of service performance that we achieved in 2013. We have been working closely with customers throughout the year to keep them informed of progress in our network performance and develop solutions.
As we head into 2015, service has stabilized and we are beginning to see areas of progress. The improvement is a direct result of the dedication of our employees and a service recovery plan focused on capacity investments, and the expansion of our workforce and equipment fleets. We placed more than 300 new crew members in service this year and have another 1,300 crew members in training as we head into 2015. We also added 500 refurbished and leased locomotives to our fleet, and ordered 300 new locomotives for delivery in 2015 and 2016.
On the infrastructure side, we will continue our targeted capital investments throughout 2015, particularly across the Northern Tier and in the vital Chicago gateway.
Aside from the federal funding question, what will be an important issue for your transit agency in 2015 and how do you plan to address it? What's your biggest concern in meeting passengers' expectations in 2015?
It is difficult to separate federal funding from any list of priority projects because it can have such an impact on the work done locally. But for us, DART will continue looking for ways to expand our system in response to customer and stakeholder expectations. We will continue pursuing a program of interrelated projects that will expand our light-rail capacity through downtown Dallas, where all four rail lines meet.
We will continue working with our service area cities along the Cotton Belt Railroad corridor (which DART owns) to identify and implement transit options over the next few years. We will also keep working with our service area cities, as well as those adjacent to our service area, to deliver transit to them. Each of these issues is challenging and resolving any one of them would be a significant accomplishment.
DART, and our industry, simply must have a multiyear federal funding solution. We have invested considerable effort in making the case for sustained and substantial investment to our own congressional delegation and that is one of the reasons DART consistently receives delegation support.
At the same time, we have been very actively involved with the American Public Transportation Association in developing a national advocacy campaign to secure a long-term bill. Without it we cannot advance the programs we need to deliver the service our customers have come to expect.
We expect revenue and volume growth in our intermodal and merchandise markets. We anticipate continued opportunities in crude oil and natural gas-related products, as well as drilling materials such as frac sand and pipe. We also anticipate higher steel volumes to support the energy and automotive sectors, while housing expansion will help boost volumes in aggregates, lumber and construction materials. In the automotive sector, volumes are expected to move higher, with increased vehicle production and new models coming online at several NS-served assembly plants. In our agricultural markets, expectations for another record corn and soybean harvest in 2014 will lead to domestic growth and potential export opportunities.
Tightening capacity, highway congestion and rising costs in the trucking industry will drive continued volume growth in our domestic intermodal markets as we take advantage of opportunities for highway conversion and yield improvement. And we expect continued growth in our international intermodal business through organic growth and new services.
Challenging and uncertain conditions are continuing in the coal sector. Utility stockpiles remain below December 2013 levels going into the winter heating season, and demand will depend largely on the severity of the coming winter.
Our biggest immediate challenge is getting our service metrics back where they should be, a result of unexpected levels of volume growth in our heaviest corridors. We remain keenly focused on improving service to meet the expectations of our customers. We are making infrastructure improvements that will expand our capacity in those corridors. The most significant example is the expansion of our Bellevue, Ohio, hump yard, which will double its capacity. The project should be finished by the end of 2014. We are acquiring more locomotives and hiring more train and engine employees to handle the volume growth that we've experienced and that we expect to continue.
Our strategy for growing our business over the long term is great service, the right infrastructure, and a relentless focus on efficiency and productivity. Our strongest resource at NS is a great team of dedicated employees who work every day to raise our performance to new levels.
The safety and security of our employees and customers is our No. 1 priority. We strive to be "Routinely Excellent" in all we do. We want our customers to have an exceptional experience each time they are on our buses or trains. We know that MARTA service must be competitive by offering frequencies that encourage customer usage. We have to retain and attract new riders by employing tools that make using our system very convenient, such as mobile payments and real-time schedule information on your smartphone.
Most exciting, for the first time since our inception 41 years ago, MARTA is expanding. With 74 percent approving, Clayton County residents voted to join MARTA. We are looking forward to providing "Routinely Excellent" service to our newest customers.
An important issue for MARTA is continuing to make sure we have a viable succession plan in place. Studies have shown that the low-50s range is the average age of many transit workers. Before these employees retire, we want to make sure we have prepared the next generation of employees who are ready and experienced to take the transportation industry to the next level.
MARTA, like other transit agencies, receives a portion of its funding from the federal government. The potential loss of federal dollars necessitates more local funding or cuts to the transit program to fill this gap. Inaction by Congress to develop a long-term funding strategy hurts the authority's ability to develop long-range plans for the state of good repair and system expansion.
The problem of funding at the federal level isn't going to solve itself. We're hopeful that Congress understands this reality and will agree on an equitable, long-term funding package for all modes of transportation prior to the current legislation's end date of May 31, 2015.
CN's freight volumes in 2014 have outpaced general economic growth. Our agenda of Operational and Service Excellence is helping to make CN customers more competitive in their own end markets and enabling us to grow faster than the overall economy at low incremental cost.
In 2015, CN expects to be well positioned to accommodate growth in a number of economic sectors, again at an overall pace greater than the economy. However, we see certain headwinds, such as the slowing of China's economy and the stalling of Europe. At the same time, the strength of the U.S. economy is a bright spot, so we expect good growth in several North American markets, and in the U.S. in particular. This will include container imports into North America fueled by higher consumption, and merchandise traffic such as finished vehicles and lumber and panels for housing activity. The energy sector should remain a growth driver for CN in 2015 despite lower oil prices than in 2014.
Obviously, the global economy faces a number of risks, from an even greater slowdown in China to more turmoil in Europe, and the disturbing situation in the Middle East. Whatever happens to economic conditions, CN will remain focused on growing faster than the economy because of our continued pursuit of quality service, solid first mile/last mile initiatives and an innovative supply chain mindset.
CN is also keeping an eye on the regulatory environment in Canada and the U.S. It's been clear over the past 25 to 30 years that reliance on normal commercial forces in a market-based framework is required for the success of North American railroads. A reversal of this market-based mindset would undoubtedly be harmful to the industry's success and economic contribution.
Over the past two-plus years since my team started work at CP, much of our focus has been on cost control. That will continue to be a focus for us. But now people have begun asking: How do you keep this thing going? My answer is that we grow our business. I expect 2015 will be a great year for growth at CP, as will 2016, 2017 and 2018.Last year, we generated $6.13 billion in revenue. By 2018, we expect to grow revenue to $10 billion annually. How do we achieve that? We continue to keep costs tightly under rein and deliver excellent service in the meantime. It’s a model that doesn’t depend on outside factors to drive growth.We see our crude-by-rail business as a key driver of growth in coming years, with growth shifting from the Bakken region to western Canada. We also believe domestic intermodal is an area where we can bring a lot to the table. We’ve already seen growth in domestic container business simply by taking a close look at the schedules and eliminating time-wasting inefficiencies.
The North American rail industry is exceptionally well positioned to move the goods that support the economy for reasons such as fuel efficiency and ever-crowded highways. But there are industry players that continue to squabble over who gets the biggest piece of the pie, forcing interline business to be interchanged in all the wrong places. At CP, we’ve begun to look at ways to chart the best origin-to-destination routing, even in a few cases voluntarily giving other railroads a bigger piece of the haul.One solution to all this must be considered: pro-competitive mergers. If this were to happen, I think we’d see a great shift of traffic away from Chicago toward outlying points. I hear people saying the timing isn’t right for mergers. But it’s time we stopped leaning on all the old reasons why we can’t, and instead start exploring the reasons and ways it can be done.
Aside from the federal funding question, what will be an important issue for your transit agency in 2015 and how do you plan to address it?
UTA recently completed an ambitious program to build 70 miles of new commuter- and light-rail lines two years ahead of schedule and $300 million under budget. We are now focused on improving our customer experience. We plan to achieve this by increasing the frequency and quality of our service and embracing technological advances that include implementing a distance-based fare.
What's your biggest concern in meeting passengers' expectations in 2015?
Our passengers have expressed a desire for more service, particularly through more frequent bus and rail trips. Our challenge is finding funding to meet the growing demand for our services. We have addressed these needs in part by becoming a leaner and more efficient agency while continuing to pursue and explore sustainable options to help us provide the service levels our customers want.
Providing for transportation infrastructure is a fundamental role of government. Being able to move people and goods freely and efficiently is a central component of economic growth and development. Failure to act to invest in our transportation system would be catastrophic — not just for our agency, but for the nation as a whole.
KCS is expecting continued growth in the U.S. from most of the industries we serve, and a slightly higher growth rate in Mexico. We expect strong growth in the crude oil business as well as continued strength in Mexico's automotive "ecosystem."
In order to capitalize on the growth opportunities we see in front of us, we need to maintain strong operational metrics and strategically invest in our franchise.
There are few key areas that will drive revenue and traffic growth on our network in 2015:
Much like last year, our task will be to capitalize on the growth opportunities we are projecting, while maintaining strong operational metrics and continued margin improvement. We continue to address this challenge by scaling costs well below volume and revenue growth projections, and using network capacity to absorb new growth. We will also continue to expand our network capacity in the U.S. and Mexico to efficiently handle the expansive business growth we project during the rest of this decade.
To that end, we will continue to make strategic investments in our cross-border network system capacity, locomotive fleet and rolling stock. In 2015, KCS looks to stay a step ahead of our growth by investing in the business through yard expansions, mainline sidings, locomotives and rolling stock. We will continue to drive operating ratio improvements through revenue growth, system efficiency and cost controls.
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