Global Economic

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Full text and graphics version

• Global Economic
• Railroad Trends
• Efficiencies

Jim Blaze, Zeta-Tech Associates 900 Kings Highway
N. in Cherry Hill, New Jersey, USA,
08034 blaze_at_zetatech.com
You become a trend maker
March 22, 2007
2
Please allow me to introduce background data
about which my fellow speakers will address in
turn with more details

• Here are my themes
• Finding the Critical Trends in the data noise
• Efficiency metrics that matter
• Global Benchmarking to become the best
• Becoming a Trend Maker
• Your Challenge after this conference

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I am a railway man and this was my company
CONRAIL
Seattle
CONRAIL
Montreal
Chicago
San Francisco
New York
St. Louis
Los Angeles
Graphic tricks make It look bigger than it it
Major Joint Service Routes
Blaze_at_zetatech.com 2004
4
What technical innovations were implemented in
the past two to three decades?

• Containerization
• Giant TEU ocean ships
• High efficiency diesel-electric locomotives
• Doublestack rail wagons
• Heavy rail car axle load limits
• Very long heavy train sets

We will cover some of these briefly in the coming
slides
5
Hard to see the long supply chain pattern in the
fog without evidence
We will use facts. patterns and numbers from
data to illuminate the track ahead
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Did you ever have to make up your mind
to choose one path and leave the
other behind?
You will have to make choices as to how to
serve the supply chains
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Let us focus first on Strategic Examples of Rail
Freight Supply Chain Measurements

• Implementation pace of technical improvements
• Changes to meet market competition
• Changes in market elasticity of demand

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• Implementation pace of technical improvements

More than 50 of breakthrough improvements come
from adoption of technology
Each generation of managers gets one such
opportunity
2 chances if you are really lucky
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• Implementation pace of technical improvements

Winners often take advantage of someone elses
idea
and implement it faster and better
Can you and will you do this
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Just as in boxing or soccer the railway market
share prize will go to the best competitor

• The railway freight prize will be
• Market Share
• Profitability
• Recovery of asset costs

Indian team members celebrate 1983 Prudential
World Cup
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2) Market Competition along Global Supply Chains
Identify thy enemy Learn his weakness Use
your strengths
Density and Fuel Efficiency are your rail
advantages

• Improve your economies of scale and
• Beat the truck with lower costs per unit

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2) Market Competition along Global Supply Chains

• You need to react swiftly to market actions by
  competitors
• Take only 6-hours for publishing a new rail
  price quote
• You cannot wait around for 13 months and
  convinced customers that you are their preferred
  global freight leader

You snooze -- you lose
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3) Elasticity of demand in key marrkets
What is your elasticity in key corridors?
East China to Rotterdam example
This is the competitor
11,000 TEUs
What happens to rail demand when the rail price
is raised in the face of such vessels? Will you
retain or lose market share?
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STRATEGIC QUESTIONCan overland rail compete with
an 11,000 TEU Ocean Service?

• 13/02/2007NEW PROPOSAL for container train
  running
• CHINA - Kazakhstan Russia
  Ukraine to Western Europe
• Russia and Ukraine approved the tariff agreement
  for the transportation by container train using
  40 foot containers
• The rates are as follows
• Kazakhstan 847
• Russia 1,104
• Ukraine 274
• TOTAL 2,225
• PLUS added costs to reach German markets

HOW MUCH RAIL SHARE AT THESE PRICES?
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3) Elasticity of Demand

• You may be faster then the Suez route
• But the few days saved is worth maybe 200 per
  box in on-time inventory
• But if you take prices up and demand drops, your
  demand influence on the market is inelastic

You take price up and you will lose market share
and traffic
Because ships like this
are the market price leaders
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History shows us how Eurasian railways can beat
the Ships and the Suez Corridor
Both time and price charged per box will matter
How close to 1,200 plus can you get
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1983 Here is what the train had to beat
Launched for APL in 1973 One of four
all-container ship design 17 Years after the
first Sealand Container ship
The 3rd President Jefferson APL ship Competing
with the first double stack train
1,508 TEUs
90 ft beam
Competition Corridor was The Panama Canal route
to US East Coast
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My friend Ted Krohn will demonstrate what single
action allowed US rails to take a 70 plus market
share away from the ships and the trucks
TECHNOLOGY WAS THE KEY TO THIS SUPPLY CHAIN CHANGE

• By decreasing the rail costs incurred per
  container by up to 45
• Allowing rail PRICE charged per container to drop
  by about one half to two-thirds third from this
  single railway action

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This was the technology that did it
23 years ago in 1984
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Because the 1984 Stack Train proved
Successfulgiant ships became economical
C-10
C-6
APL built ships not capable of the Panama Canal
passage The C-10 Class Truman was delivered in
April 1988
4,300 TEUs
129 ft and 3-inch beam
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Who organizes these Supply Chain today?

• Besides APL who are among the best logistics
  providers?

Among the best is UPS
This analysis is called benchmarking
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UPS even manages which railway company will
distribute many of the finished automobiles by
rail wagons
UPS decides who is most efficient railway vendor
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Here is a check list of Supply Chain Services
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No longer a trend --- Now the skill to beat
Can you do all this with Quality assurance?
IF NOT, YOU WILL PROBABLY TAKE ORDERS FROM THOSE
THAT CAN
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Who has these supply chain skills?
Here are a few of the emerging quality
organizers
ProLogis
Bilex
PACER
Looks like a trucker, acts like a forwarder
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Most leading supply chain organizers are so
strong they do not need regulatory protection
from railways
TOP SIX in 2006

• ORGANIZER Net Income
  Profit Growth
• UPS 6.0 Billion
  20
• Federal Express 2.5 Billion
  22
• TNT 1.3 Billion
  -11
• PACER 99 Million
  29
• UTI Worldwide 127 Million
  33
• C H Robinson WW 332 Million 47

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Let us look closely at just a few North American
railway freight trend numbers and see what they
broadly tell us
Railway trends in the face of supply chain
management
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A few North America trends

• Why begin here?
• Because of their pace of change
• Because of their wealth of data (metrics)
• Because they offer a best of breed freight
  benchmark in a global logistics service market

Fast Processes
Are data rich
Strong RESULTS
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USA Ton-Mile All Rail Freight
15 Year Business Increase
Up up and up
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rail Ton-Miles in past 7-Years
Trend tremendous growth pattern
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USA Intermodal Rail
15 Year Business Increase to 12.3 Millions
Trailers and Containers in 2006
Two Years with negative growth shown in red
columns
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10 Year Pattern In Millions of Trailers and
Containers per Year
Total of 12.3 Mil Units
9.4 mil Containers
Cross-over year in 1992
2.9 mil Trailers
Trailers versus Containers
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These previous unit numbers are not TEU
unitsMany of these are the actual number of
unitsup to the large 53 foot long units
Equivalent to more than 21 Million TEUs in 2006
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Made possible by doublestacking technology
A trucking company is now a leading US rail
intermodal player one of several truckers
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The King At 53-feet
48-foot USA Domestic Box
45-foot Pacific Box
FEU
40-foot Basic Box
TEU
20-foot Basic Box
BIG -- BIGGER -- BIGGEST TREND
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Cubic feet
3,787 feet
3,427 feet
3,014 feet
FEU
2,372 feet
TEU
SEARCH FOR CUBIC CAPACITY
1,149 feet
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FEU
Because this TEU box often pays a US rail rate
almost equivalent to the 40 or 45 foot rail rate
TEU
the TEU is slowing disappearing in the USA
market
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25 or more of all ocean containers are
trans-loaded to larger US boxes on the Pacific
Ocean to East Coast Global Corridors
NEW SUPPLY CHAIN TREND
TRANSLOADING
Why?
The answer is Economies of Scale from cubic
capacity of big box doublestacks
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Not a decision of regulators or policy planners
Since 1999, more than 90 of US double-stack rail
cars have been designed with a 53-foot well
The well is the lower container position in a
double-stack rail car
The market has voted for the 53-footer
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This means that for you to become an intermodal
player like PACER requires a lots of capital
equipment investment

• 1,850 intermodal rail wagons
• 28,700 chassis
• used to transport containers over the highways
• 28,200 containers

1,000 customers 100 agents 17 offices
700 contract truckers 1 Million loads a year
Company is worth about 1Billion on the market.
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Supply chain is focused on what they can get into
their box and not what they can get onto your
limited wagon
High value cargo needs cubic space
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Efficiencies from modern container trains is not
possible on most of the worlds railways because
of overhead clearance restrictions
20.5 feet in North America on strategic routes


Doublestack performance REQUIRES clearance
investment on key routes
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We need to electrify in order to save fuel
costs say many railroadersWRONG suggests Jim
Blaze and ZETA-TECH Associates Inc.
Electric wires big challenge to achieving
efficient doublestack corridors for customers
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Marketing tools like ZETA-TECH Intermodal Model
and TrackShare help you identify your costs and
then help you set competitive prices

• Here are examples of different cost levels and
  different prices on a Chicago-New York intermodal
  corridor per train

Out of pocket variable cost
30,000 Long run variable costs
40,000 Marginal costs on congested routes
49,000 Full Costs
60,000 Full Costs plus profit
margin 80,000
((Rounded numbers as examples)
Do you measure your costs to help set prices in
this way?
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Let us examine Europe and other Trend Data
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• THE UK Beats the Continental trends

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British Isles Rail Freight Change Metrics
19.4 Billion ton-km in 2002 to 22.1 Billion in
2006
7.5
-4.5
Yes increasing rail ton-m
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UK Regulator reduces freight charges by 50 to
win freight to rail

• The Rail Regulator announced a significant
  contribution to the Government's objective of
  achieving an 80 growth in rail freight traffic
  by 2010
• He ruled in favor of halving the access
  charges freight operators pay to Railtrack for
  use of its network
• DID IT WORK?

April 2001
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UK SUCCESS

• So far has in fact delivered growth
• Better volume results than in most of Europe
• Far better than Africa and South America
• But at a continuing subsidy cost

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UK PRODUCTIVITY ISSUES REMAIN

• Freights less than 800 meters in length
• At best a 25.5 ton axle load versus 30 in
  Norway
• No double stack economies of scale

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In Germany
a six year decline in rail freight tons

• DB Rail Freight Change
• 6 Years
• IRJ Reported intelligence from Germany

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25-metric tons per axle is finally appearing in
EuropeThree decades after start of N. Am HAL
trend began
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Sweden leads the way on Continental Europe

• Adopting ZETA-TECH recommended HAL
• Our ambition is to reduce operating costs
• Objective achieved with 30-tonne axle loads
• Each 68 wagon train set replaces 52 wagon sets
• 7,000 trains a year drops to just to 4,000 per
  year adding PATHS
• Cost reduction by nearly one half per tonne
  kilometer

Mine-to-harbor freight capacity of more than 23
million tonnes per year LKAB uses its own
locomotives and cars
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European Rail Freight Change Pattern so far

• After a decade and a half
• EU-15 rail freight share is 14 of k-tm measure
• Ten Billion Euro share versus 200 Billion truck
• 800 million Euro in annual losses (EU-15)
• Major strengths are in
• Heavy industry like coal (70) and steel (35)
• Port container short shuttle trains (40 some
  ports)
• High utilization selected Europe corridors like
  Swiss Apls

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35-year view of EU Community Rail Freight
Market share loss and real volume drop to Truck
and Sea modes
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15 year view of EU Community Rail Freight
At closer scale
NOT A DATA RICH ENVIROMENT
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22 November 2005EU Rail Freight Reportby
Railway Transport and Interoperability Unit

• The turnaround in rail freight performance in
  the EU has not yet been achieved
• Hopes now placed on the new European Regulatory
  Agency
• not upon market forces and commercial actions
• So far, insufficient entrepreneurail efforts

Note the 2-year data intel lag Note the fact that
this was the latest report
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While the European rail freight market is
technically open the results are less than
expected

• On-time within 30 minutes equals just 64
• About the standard rate for all USA carload in
  the 1970s
• Quality improves but remains insufficient
• Cost per unit down only 2 annual in last 3
  years
• Need to achieve at least another 20 cost
  reduction
• Best practices adoption
• Has improved productivity by 30 in 5-years when
  implemented
• Market entry by new rail operators has been
  modest
• Focused on full train operations - excluding
  mixed freight

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For a review of other global data I suggest a
review of World Bank Tables

• Why not on my slides today?
• Most of the data fields are empty
• The data is often very old
• Trend analysis capability is therefore limited

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What is Your Strategic Rail Freight Plan?

• to earn Market Share

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Most of your growth and profits will likely come
from heavy haul commodities
This is how you can compete and be valuable to
these global bulk shippers
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Example using shorter length, shorter height,
with HEAVIER AXLE LOADING
4.8 Net to Tare
Light weight -----------------------------------
49,100 Lbs. Load limit-----------------------
----------------- 236,900 Lbs.Gross rail
load----------------------------------- 286,000
Lbs.
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Proposed Equipment specs in Net to Tare
Ratio as Axle Loads Increase
Net to Tare Ratio
Tonnes Per Axle
These economics and the engineering principles
are the same the world over
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• Acknowledging that the North American business
  model produces these results
• Growing volume,
• Better asset use rates
• Lower your prices and hiher profit margins
• Able to compete on price with the other modes

I predict some of you will finally shift to this
business model

• Some of you will finally shift to this business
  model

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Ladies and gentleman, together we have reviewed
trends

• There are few surprises
• Most patterns are duplicated in every part of the
  globe
• Most trends look negative
• At best somewhat stable
• But there are examples of success

like this NS Doublestack
Trainmaster Rob
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Some of these factors of change
Railroads do not control
No Monopoly Power

• Yet even with a loss of volume, freight railways
  can in fact become more self sustaining by
  using management tools
• Look at CONRAIL and CN history for the economic
  proof

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CONRAIL WAS SOLD IN 1997 AT A HUGE PROFIT TO
SHAREHOLDERSTHIS IS HOW OUR OWNERS MEASURED
BUSINESS SUCCESS
The business value of the railway increased from
3 Billion to more than 10 Billion How will
you measure your railways success?
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CONRAIL SERVED ONLY PARTS OF THE GLOBAL SUPPLY
CHAIN
Big player small pond
Smaller player in bigger pond
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Very small supply chain agent in the big global
pond
But very profitable and one of UPSs very best
railway vendors
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I predict that if your Eurasia corridor
performance does not improve soon, that CN might
try and compete with the China/Europe Rail
Corridor via this routing
Pacific Ocean to CN-Prince Rupert and Atlantic
ocean partners might compete on price
How? By using their technology cost advantages
Blaze_at_zetatech.com
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Success is possible amidst these global supply
chains for you the UIC railways man or woman
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When you leave this Conference you exit as
railway trend makers

• I and the other speakers challenge you with 3
  simple
• questions
• What action will you take to make your own trend?
• What will be your metrics?
• How fast will you act?

What will be your to-do list
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My farewell challenge to you

• From the speakers that follow me
• Find 3 things that matter to your railway
• Identify a plan to execute your improved role
• Beat the clock on execution of your plan
• Seek to become the best -- not just average
• Set measured goals
• Call me in 6-months so I can celebrate you
  improvement

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Remember that mistakes will occur as your execute
your plan
FACT Most plans fail during the execution phase
286,000 pounds in a 263,000 pound design can
break the wagons back
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The clock is ticking
The swift, efficient, and accurate will gain
market share even in the face of new supply
chain competition
This is Jim Blaze blaze_at_zetatech.com
jim-blaze_at_comcast.net
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Source Credits

• Some pictures from www.RailPictures.net
• Some pictures from www.parovoz.com/newgallery.net
  
• ZETA-TECH studies for NS, BNSF, Banverket, US
  Government FRA and FHWA
• EU Technical Reports
• International Railway Journal, Railway Gazette,
  Trains, and Railway Age
• HAUER Associates Inc
• UIC Data Trends
• AAR Data Trends
• Ted Krohn of KrohnConsult
• Mongolia Railway Authority
• Dr Alan Zarembski of ZETA-TECH Associates Inc and
  our technical staff