U.S. Railroads and the Future of Intermodal Traffic

1. U.S. Railroads and the Future of Intermodal Traffic Francis P. Mulvey Vice Chairman Surface Transportation Board Footwear Traffic Distribution and Customs Conference Long Beach, CA September 15, 2008

2. U.S. Railroads and the Future of Intermodal Traffic • Modern U.S. railroad industry can be divided into pre- & post- Staggers Act • In the 19th Century railroads expanded rapidly especially after the Civil War • However, much abuse of monopoly power leading to the Interstate Commerce Act and federal regulations • Federal regulations ultimately extended to all modes, but proved potentially harmful to railroads

3. Railroad Industry Pre-Staggers • 40 Class I Railroads • 9 Railroads bankrupt • Industry-wide low return-on-investment • Railroads unable to raise capital • Railroads faced steadily declining market share • Regulation prevented RRs from any flexibility in pricing to compete with other modes • Carriers could not abandon redundant or light density lines to cut costs • Rates could not cover inflation due to regulatory lag in rate adjustments

4. Staggers Rail Act of 1980 • Railroads given freedom to set rail rates based on demand • Streamlined procedures for the abandonment and sale of rail lines • Encouraged Railroad-Shipper contracts • Expanded ICC power to exempt categories of traffic • Rates evaluated by ICC under a reasonableness test

5. Growth & Decline of Class I Railroad Mileage

6. Railroad ROI 1970 - 2006

7. Railroad Industry Cost of Capital and ROI 1996-2006

8. Railroad Employment 1939-2006 1,670,000 1,151,000 237,000 2006

9. Class I Capital Expenditures1994 - 2007 Billions Total Roadway & Structures Equipment 2007

10. Since Staggers • Rail industry freight traffic ton-mile market share has increased from 30.3% in 1980 to 41.2% in 2005 • Rail rates down 55% on average (inflation adjusted) • Railroads’ ROI increased • Railroads substantially increased investment in infrastructure • Improvement in safety performance

11. Modal Markets Shares

12. The Railroad Industry Today • 7 Class I Railroads • 525 Class II and Class III railroads • Much reduced system through rationalization • Average length of haul – 900 miles

13. Railroads and Intermodalism • Despite regulatory malaise, railroads did innovate • Pennsylvania Railroad adopted Piggyback Service between Chicago and New York in the mid 1950’s • Containerization began in 1956 by Malcolm McLean • Containerization and intermodalism resulted in major improvements in transportation productivity

14. Long Island Rail Road carrying farm wagons to market in January 1885.

16. Intermodal Shipments Beginning 1965 Total 12,030,000 Containers 9,430,000 Trailers 2,600,00

17. Growth of Intermodal Traffic in Port of LA/LB, 1980-2007

18. Container Traffic At The Largest North American Pacific Coast PortsYTD 2008 (through July) traffic flows in TEU’sImports – loads

19. Container Traffic At The Largest North American Pacific Coast PortsYTD 2008 (through July) traffic flows in TEU’sExports – loads

20. Container Traffic At The Largest North American Pacific Coast PortsYTD 2008 (through July) traffic flows in TEU’sPct. Imports

21. Future of Intermodalism SPURS • Rising Fuel Prices • Continued Truck Driver Shortages • Growing Highway Congestion • New Ports and Port Modernization

22. Future of Intermodalism THREATS • Lack of Rail Capacity • Lack of Domestic Port Capacity • Rising Manufacturing Costs Abroad Relative to U.S. • More All-Water Routes • Panama Canal to Eastern U.S. • Lack of Investment due to Re-Regulation

23. Growing Capacity/Congestion Problem • Problem not limited to highways • Ports dealing with larger vessels and rapidly expanding international trade • Rail capacity problem is of more recent vintage • Economic regulation fostered excess capacity, especially for railroads

24. The Developing Rail Capacity Crisis Shrinking workforce and infrastructure partially offset by productivity improvement but… continuous increase in traffic begins to absorb “excess capacity” • Network becomes more vulnerable to stochastic events • A “perfect storm” or the rail version of global warming

25. The Genesis of theRailroad Capacity Problem • Improved earnings yet all Class I’s are not revenue adequate • Historically RR’s ‘punished’ by Wall Street for making capital investments • RR’s often found that infrastructure investments failed to generate sufficient income • L/T strategy to reduce size of workforce • Added rail infrastructure is long-lived while demand increases can be short-lived

26. Carrier Responses to Recent Capacity Problem • More railcars and locomotives purchased and leased • Accelerated hiring and training of crews • Some infrastructure expansion efforts • Price rationing of available capacity • RR’s choosing who they will serve and the common carrier obligation

27. Long-Term Rail Capacity Constraint Factors • Demand for freight rail projected to grow by 60-70% over next two decades • RR’s inability to earn cost of capital • Pressure from Wall Street to reduce capital costs and improve ROI • Long-term contracts limit RR pricing flexibility • RR’s tend to bid L/T contract rates down to L/R marginal costs

28. Approaches to the Transportation Congestion Problem • Build more physical infrastructure • Adopt technological innovations • Can RR’s do this and maintain profitability? • Better utilize existing facilities • Promote shipper/traveler behavioral changes • Public/Private Partnerships All have potential but all have limits

29. Infrastructure Capacity • SAFETEA-LU – 2 years late, $90 Billion short • $286.5 Billion over 6 years • 38% more than TEA-21 in 1998 • Far short of $375 Billion estimated need • Contained rail title but far from intermodal legislation • Expanded the RIFF program to $35 Billion, makes shippers eligible

30. Rail Capacity Investment • RR’s support limited public sector role • Public/Private partnerships • Alameda Corridor • CREATE • RR Trust Fund concept • Investment Tax Credits • Short Lines 286K car issue • Class I access and limited fiscal capacity • Renew interest in infrastructure investment and GREEN-TEA

31. Obstacles • Dollar resources • Resistance to change • Labor contracts • Ineffective lobbying efforts to address freight transportation needs

32. Need to Focus on Freight Issues & Intermodal Solutions • Reauthorization of highway program is only 4 years away • Increase visibility of freight issues • Install a comprehensive evaluation process (i.e. c/b analysis) within in the planning process • Address limitations on federal funding that dedicates $ to a single mode or non-freight purposes

33. Thank you. Questions?