Transportation Research Board Annual Meeting
Presentation by Jim Young, Chairman and CEO
January 11, 2010
Thank you for attending and welcome. It’s so important we come together during tough times.
I’m glad to be here because this is where the debates should be taking place. If we want a better, stronger rail transportation system, we need to ensure that long-term policy supports those efforts. We can’t let this get polarized, as many times they do here in Washington. We need reasonable, consistent government policies that will allow the American rail industry to continue to grow, while providing efficient, environmentally friendly transportation to America.
Freight Railroads Are Critical to Our Country
When the world looks at U.S. rails, this is what they see . . . the most-efficient, cost-effective rail industry in the world. We are seven large freight railroads, 33 regional freight railroads and many smaller ones. We are an integrated system hauling 1.5 million freight cars over a network of 180,000 miles. Our common standards like gauge, equipment and operating practices, allow railroads to provide seamless service throughout the continent.
We are for-profit, tax-paying, private-sector companies, and, we are the only transportation mode that is not heavily subsidized by every taxpayer. Even railroads in most other countries, both passenger and freight, are heavily subsidized. In fact, they usually are owned by government or pseudo-government entities.
At the end of the day, our rail network is the envy of the world and gives U.S. businesses a competitive advantage.
Railroads Keep the Economy Moving
U.S. railroads are the vital link to our economic future.
They serve nearly every agricultural, industrial, wholesale, retail and resource-based sector of our economy. Our freight trains touch almost every phase of your lives; we haul enough coal to supply electricity to every home in America, we move the autos you drive and the materials that make-up the roads you drive on. This is 1.2 million carloads of vehicles and 138 million tons of stone, sand and gravel.
We transport enough wheat to make a loaf of bread for every U.S. citizen every day of the year. And perishable products are moved in our high-tech cars, which are monitored in real-time for both atmospheric make-up and temperature from thousands of miles away.
From the fertilizers that increase our farmers’ yields to the pharmaceutical chemicals that save lives every day – trains carry them all. And they do so more safely, than any other form of ground transportation.
Railroads Keep American Businesses Competitive
 Rail rates declined 1981 - 2007 (inflation-adjusted) |
According to the World Bank, U.S. Freight rail rates are the lowest in the world. China, Japan and France had twice the rates of the U.S., while Italy, Spain, Germany and India were even higher.
The affordability of America’s freight railroads means that U.S. consumers and businesses pay billions of dollars less in transportation costs each year than they otherwise would. Recently, railroads had begun to get a better price for our services when transportation demand increased. However, as I just mentioned, you can see that we’ve passed a lot of our savings on to our customers.
Railroads Are the Environmental Solution
In addition to their cost-effectiveness, freight railroads offer huge environmental benefits. Locomotives are three times cleaner than trucks. As a matter of fact, railroads move 43 percent of all freight ton miles, yet they produce only 9 percent of the emissions. In addition, trains are almost four times more fuel-efficient than trucks. And if cars were as fuel efficient as our trains, they could travel about 400 miles on one gallon of gasoline, reducing our nation’s dependence on foreign oil.
If just 10% of the long-haul freight currently moved by highway were diverted to rail, annual fuel savings would exceed 1 billion gallons. That 1 billion gallons saved would mean 12 million fewer tons of greenhouse gas emissions. That’s equivalent to taking 2 million cars off the road or planting 280 million trees.
Studies have shown that congestion costs us 4 billion hours a year caught on crowded roads, which wastes 2.9 billion gallons of gas.
Think about this – a single train can take up to 300 trucks off our highways.
Railroads Help Communities Flourish
Local communities also benefit from freight rail transportation. Freight rail is the safest, and as I just mentioned, the greenest option we have to transport goods. Freight railroads save billions per year in avoided highway costs. A few years ago, ASHTO estimated that if all rail freight were shifted to trucks, it could cost transportation agencies an extra $128 billion for highway improvements.
Railroads spend far more on their infrastructure than the vast majority of state highway agencies. Only three states spend more than Union Pacific [TX, FL, CA]. And, railroads can build five miles of rail for the same amount it costs taxpayers to pay for one urban highway mile.
Railroads also pay billions of dollars per year in taxes and purchase billions of dollars in supplies and materials. And, we offer good jobs that won’t be outsourced overseas. As a matter of fact, we pay $25 billion in annual wages and retiree payments, which helps support local and state economies.
How We Got Here
 Pre-Staggers: Bankrupt railroads. Post-Staggers: Investing in safety, service and growth. |
It took immense effort to get to where we are today. If we look back at where we came from, you see that it’s a true underdog success story. By the 1970s, decades of increasingly archaic and burdensome regulations nearly killed the railroads. More than 20% of mileage was operated by railroads in bankruptcy. Track and equipment falling apart. 50,000 miles under slow orders, or speed restrictions, because of dangerous conditions. Two percent return on investment -- below what a child could earn on a passbook savings account. Declining service and market share. (By 1978, the rail share of inter-city freight had fallen to 35%, down from 75% in the 1920s.)
Even Union Pacific, one of the nation's strongest railroads, was preparing for nationalization. Congress had two choices: nationalization, at a continuing cost of untold billions of dollars; or partial deregulation and more reliance on the free market.
Congress wisely chose deregulation and passed the Staggers Rail Act of 1980.
Class 1 Railroad Results
 1964 – 2008 (Index 1981 = 100) |
Washington got out of the business of running railroads. They kept regulatory safeguards that protect shippers against unreasonable rates, and they recognized that if America is to have viable freight railroads, someone has to pay for them -- the market is far superior to the government in determining who should pay.
Three decades later, our country is still reaping the benefits. This chart clearly shows the results of balanced regulation. Since 1981:
- Productivity is up 144% -- among the highest of all U.S. industries.
- Volume up 95%
- Revenue (inflation-adjusted operating revenue) is down 4%.
- Rail prices or rates (inflation-adjusted revenue per ton-mile) are down 49%, even after an increase in average rates since 2005.
Focused on Productivity to Create Value
We achieved this through productivity and investments.
Staggers encouraged the railroads to streamline their operations and work with customers to help them find the most cost-effective and, incidentally, the most environmentally friendly way to get their goods to market. It gave us the opportunity to drive productivity with innovation and technology.
We’re using lasers, ultrasounds and acoustic vibrations for safety and reliability. Our hi-tech, efficient locomotives have allowed UP to move twice the amount of freight on the same amount of fuel. Our R&D has led to longer rail life and reduced operating costs. Our gamma-ray inspection devices that continue to learn through algorithms have increased border security.
There are hundreds more examples that are allowing us to move more freight with fewer resources, ultimately sharing that value with our customers.
Higher Earnings = Higher Capital Spending
 $ in billions – Class I Railroads |
Along with productivity, we’ve improved service through strategic and constant investments. As you can see on the chart, there is a direct correlation – the more we earned, the more we invested. In 2008, Class I railroads earned $6.99 billion more than they did in 1980. And we increased our investment by the same amount – $6.97 billion to be exact.
Faster, Reliable Service Driving Satisfaction
All of this has led to faster, safer and more reliable service. Using Union Pacific as an example, I can tell you that we are running at record levels. Our Service Delivery Index is proof of that. It is an index of measurements that are critical to our customers. It includes train-cycle time, car-cycle time, trip-plan compliance and intermodal box availability. We’ve improved almost thirty points in just five years, to a record 92. More importantly, customers are seeing the value.
We’ve had a robust 35-question survey in place for more than 20 years. Through the good times and the challenging times, we have surveyed a representative sample of our customers each month. And let me tell you, they are not shy. As an example, during some of our most challenging times, we were seeing CSI scores in the low 30s, while today - when we are providing the best service in our history - we are receiving CSI scores in the upper 80s.
As the middle chart shows, 2008’s best-ever results were broken again in 2009. Additionally, the survey is action-oriented, so that lower ratings received on any question will trigger follow-up by a member of our sales team, who works with the customer and cross-functionally at UP to resolve specific problems.
We also identify the six key drivers of satisfaction – those questions with the highest statistical correlation to overall satisfaction. Five of the questions are all tied to service performance, how we resolve service problems (up 4 points from last year), and the accuracy of the shipment information we provide (up 3 points from last year). The sixth one focuses on price, and customers are still voting positively (up 4 points from last year), because of the additional value we are bringing to the table.
Safer Than Other Industries and Getting Safer
 (Index 1980=100) |
These efforts also created one of our nation’s safest industries. According to FRA data, from 1980 to 2008, train accident rates went down 72 percent. Rail cargo is safer – loss and damage as a percent of revenue is down more than 70 percent. Rail employee injury rate fell 82 percent. And, according to U.S. Bureau of Labor Statistics data, railroads have lower employee injury rates than other modes of transportation like trucks, barges and airlines.
Actually, we are safer than most other major industry groups – even grocery and retail stores have higher accident rates than railroads. In addition, U.S. railroads have employee injury rates well below those of most major European railroads. 2008 was rail’s safest year yet, and preliminary data for the first eight months of 2009 show continued safety gains. While we’re pleased with the improvements, our goal is ZERO.
Inherent Challenges of Railroading
While we’ve made great improvements over the last few years, we still have some major challenges – some are just inherent to railroading.
For example, railroads are at the top among all industries in terms of capital intensity. In the 10 years from 1997-2006, Class I railroads spent each year, on average. 16.9% of their revenue on capital expenditures. The comparable figure for the average U.S. manufacturer was 3.3%.
We have huge fixed investments, especially for infrastructure like tracks and bridges, that we have to maintain every year whether we get hit by a recession or not. Up to a point, we can reduce costs by running more traffic over a rail line. When traffic is below that point, we still have to maintain the infrastructure. Unfortunately, railroads do not generate adequate revenue to earn their cost of capital. In recent years until the recession, price increases driven by market demand and our productivity gains have helped narrow the gap. However, with high capital hurdles and a global recession, we are not yet there. In addition, our “factory” doesn’t have roof. This creates great challenges for us each and every year.
To help you understand what we’re up against, I've included a couple of UP examples. On the top is a mudslide in the Oregon mountains that wiped out 3,000 feet of track. For 105 days, our engineering team worked through nights and snowstorms until all service was restored. It took 700,000 tons of earth to stabilize that mountain. And it was done without a single injury.
Iowa flooding, where our east/west main line crosses the Cedar River, is another a great example. The water exceeded the previous peak recorded more than a century ago in 1851. Through proactive efforts, operations were back to pre-flood levels in about a week. And, with record temperatures this winter, we’re battling Mother Nature on a daily basis.
Rails Can Be Part of Solution with Policy Support
We also have other challenges.
Railroads pay billions of dollars of taxes that our competition doesn't pay. Trucks are subsidized, have a shorter tax recovery period, don’t pay property tax on their “right of way,” and have much lower payroll taxes. Government mandates that were put in place over the last five years will cost the rail industry $13 billion dollars. Items like:
- Emission control: Effective 2015, after-treatment devices will need to be applied to current locomotives. These Tier 4 locomotives will be more expensive, with higher operating and maintenance costs. Tier 4s will likely use more diesel fuel. It is ironic that an EPA very concerned about greenhouse-gas emissions is imposing new emissions standards on railroads that are likely to increase fuel consumption and CO2 emissions.
- PTC: This is a $10+ mandate with “cost to benefits” at about 15 to 1. Ongoing operating expense will reduce net operating income equal to 40% of growth capital. This is a real threat to capacity.
- Passenger Rail: While many good things can come from more passenger rail, like reductions in GHG, fuel & congestion, we must not superimpose it on existing freight networks. It will consume freight capacity, limiting ability to handle customer growth and bring in the goods that communities need. In the end, it would transfer freight back onto the highways, and not truly address the problem of capacity.
There are things we can do to support growth in the rail industry, like:
- A 25% tax credit for projects that expand rail capacity. Studies show that $1 in investment yields $3 in economic benefits.
- Public-private partnerships have proven successful. Here, railroads pay for railroad benefits and the public pays for public benefits, creating cooperation in solving transportation problems.
- Balanced regulation: A proper balance between regulation and market forces is essential for the privately-funded railroad industry to attract investment and survive. We have seen how excessive regulation can ruin this industry. We have seen how reduced regulation can produce a dramatic recovery. With recent changes made by the STB, there is no need for additional regulation now. Nevertheless, we are working with Congress to try to craft a new balance that will address political concerns while still allowing the railroad industry to prosper and meet the nation's transportation needs. We aren't there yet, but we will remain engaged in the process as long as there is a hope of reaching an acceptable balance.
Capital Investment Relies on Returns
Earlier, you saw a chart illustrating how increased rail investment was in lock-step with increased income over three decades. I cannot emphasize enough the impact that lowering rail revenue will have on investment. The ramifications are not just academic theory, nor are they threats. It is a reality. Wall Street and capital providers have been very clear on this. Shareholders will not allow us to invest if the returns are not there. Less investment will mean:
- Deteriorating tracks and equipment.
- Declining Rail service.
- More highway gridlock as freight shifts to trucks.
- Ultimately, higher costs for American consumers.
Rail’s Bright Future – Public Benefits of Rail
Railroads have served this country for more than a century. And we’ve been critical to the nation’s growth and development. We have the opportunity to play an even greater role by providing solutions to many of the transportation concerns America faces. That is why it is so important that when we put policies in place, we don’t get it wrong. These decisions will severely effect the outcome if rails grow or deteriorate. It will impact the economy, American businesses, consumers and the communities in which we live. While there is much at stake, I have great confidence we will find the right answers.