Study Reveals Shippers' Ongoing Concerns about North American Freight Railroad Capacity

Respondents to a Booz Allen/Traffic World survey suggest increasing annual spend by up to $4 billion.

Not only are most rail freight shippers concerned about capacity issues in North America’s railroad system, but 92% of respondents to a recent survey think they will get worse.

This is according to results of the Rail Capacity Survey published in the July 30, 2007 edition of Traffic World—part of a joint project by the magazine and Booz Allen Hamilton.

The first-of-its-kind, Web-based survey collected data from rail and intermodal shippers and potential rail freight users about the capacity of the rail freight network and its impact on customers.

Research conducted by Booz Allen cited 2006 as the ninth consecutive year that rail demand increased while the rail network infrastructure shrank in size. At this rate, the network will experience 500 billion ton-miles of new traffic—and over 20% growth in rail freight demand—in the next 10 years.

The Association of American Railroads (AAR) estimates that about $148 billion must be invested to expand the nation's freight rail infrastructure over the next three decades to make sure that adequate rail capacity exists to meet future demand. More than half of the survey respondents believe railroad capital spend on infrastructure should be increased by at least 20% to 40% over today’s levels.

The survey underscores the infrastructure crisis in the transportation industry, says Booz Allen associate Rune Haug. “The trucking industry has problems with driver shortages and highway congestion. But railroads have substantial capacity issues, mostly with specific bottlenecks in the system.”

Haug cites other key points from the Booz Allen/Traffic World study as follows:

• Almost 66% of shippers responding to the survey agree that there is a shortage of rail freight capacity in North America
• Areas of greatest capacity shortage are network bottlenecks and terminals
• 92% say that the problem will get worse if no new actions are taken in addition to current actions already under way
• Shippers believe railroads must invest more of their own money in the system beyond the $8 to $10 billion per year railroads invest now
• 80% say an additional $2 to $4 billion is needed annually to boost capacity; 35% say at least $4 billion more is needed
• Capacity issues are discouraging shippers from diverting cargo from trucks to rail

Generally, shippers prefer using rail for its efficiency, and 42% of respondents said they would increase their rail shipments up to 40% if there were no rail capacity issues. One respondent said it would make more sense to move some of its business by rail rather than truckload, but “the chief constraint is availability of private equipment and cost.”

Should Railroads Fund More Capex from Their Own Cash Flow?

The Booz Allen/Traffic World survey results are timely for the freight transportation industry, which is studying the relationship between heightened demand and available capacity.

Freight carriage by the seven major railroads in the North American system is comprised largely of coal; traditional carload contents such as lumber, chemicals, and agricultural- and automotive-related products; and intermodal containers carrying a vast array of industrial and consumer goods.

Inadequate returns over many years discouraged railroads from investing in their infrastructures. But survey respondents say underinvestment by the railroads is one of the primary reasons for current capacity shortages. To improve rail capacity, the Traffic World article accompanying the survey indicates overall support by shippers for government assistance in the form of tax incentives. But shippers also believe railroads should spend more of their own money.

Booz Allen research shows that railroads are one of the most capital-intensive industries in the U.S., but railroad capital returns are less than other capital-intensive industries. Railroads have not been able to fund all capital expenditures from cash flow, and rely increasingly on third-party investments, especially for equipment.

Senior associate Tim Murphy says that railroads essentially have four alternatives to secure the additional investments they need:

• Internally generated cash flow,
• Reallocation of capital spend,
• Public-private partnerships, or
• Third-party investors, such as private equity.

“Private equity investments are flowing into transport infrastructure, as shown by the RailAmerica and Florida East Coast Railway deals,” Murphy adds, citing two regional railroads that drew substantial investments from private equity firms in 2006 and 2007. “We expect this trend will continue with renewed overall interest to invest in railroads.”

The survey was structured with questions about root causes for the rail capacity crunch; freight traffic diversion from highways to rail; how the capacity crunch affects shippers’ businesses; and shippers’ proposed or ongoing solutions. Shippers also ranked potential actions by railroads or government that could boost capacity, and sections were provided for additional comments.

The survey was sent to six thousand current and former Traffic World subscribers who ship a range of goods. Two-thirds of the respondents spend at least $10 million each year on freight transportation. Fifteen percent spend less than $1 million to ship goods, but another 15% spend at least $500 million.

Booz Allen is recognized for its extensive expertise in the global transportation arena, and especially its focus on the rail industry, transport companies, and investors. Traffic World has been the weekly source of transportation industry news since 1907.

story posted October 5, 2007