Oliver Wyman Insights – 2016 Update

OWTL_02-Hit-by-a-Bus_620x298Hit by a Bus: European Passenger Rail

Western Europe is in the midst of a sweeping deregulation of intercity motor coach markets. As a result, long-distance passenger rail services are facing new low-cost bus competitors that are rapidly gaining market share. Passenger rail operators must adapt and evolve to counter not only these new bus services but an increasingly diversified mobility market.

 

2016 OW Publications posted June 2016 Self Driving FreightSelf-Driving Freight in the Fast Lane

Driverless vehicles are about to rewrite the rules for transporting not just passengers, but freight, too.  Driverless cars, which are in development by Google, Tesla, Apple, and a slew of automakers, are expected to revolutionize personal transport in the next decade. Soon, driver-free trucks and locomotives will become a new economic imperative for freight railroads and motor carriers, as well.  The automation of transportation vehicles will have great impact on technology, regulations, and the economy.

 

OWTL_01-Taking-Rail-Virtual-Through-Digital-Industry-Teaser_620x298Taking Rail Virtual Through Digital Industry

For rail and other transportation industries, the fourth industrial revolution (“digital industry”) promises continuing acceleration of innovation on both the supply and demand side. From the manufacture of rolling stock to how rail operators serve their customers, new technologies will lead to entirely new ways of doing business. Disruption of value chains will reach unprecedented levels too, driven not by a few proprietary standard setters, but instead percolating up from the most agile and innovative in an interconnected world of “makers” as well as consumers.

 

OWTL_10-North-American-Freight-Rail-Evolution-Required-Teaser_620x298North American Freight Rail: Evolution Required

North American freight railroads are facing a host of structural industry changes that could dampen their future growth prospects.Coal traffic is declining and crude oil looks unlikely to grow. Driven by e-commerce, supply chains are becoming faster and shorter, impacting intermodal.Technology may lead to a step change in trucking competitiveness. In the face of these changes, can the industry make the breakthrough transformation that’s required?

 

2016-06 Transp & Log Journal CoverOliver Wyman’s Transport & Logistics Journal is one of the firm’s longest-standing publications.  The May 2016 edition includes all of the above articles related to railroading, and more.  Read about what’s new in Travel Cards (Co-branded travel cards are winning the Millennial wallets in time for summer travel), Inline Travel Booking (ancillaries face new challenges), Postal Services (in a whirlwind of change), Trucking (Uber is on its way), and Aviation (growth patterns, innovations, predictive maintenance, and optimization of end-of-life for big assets).

FIRST QUARTER 2016 NORTH AMERICAN RAILROADS PERFORMANCE SUMMARY

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During first quarter 2016, North American railroads continued to struggle with what appears to be a slowing economy, as well as the continuing secular changes affecting the energy market. Total revenue units (carloads and intermodal units) were down for all carriers but KCSM, which saw little change.  General merchandise was up for only KCSM and NS, while intermodal was up slightly for all carriers except CP, KCS, KCSM, and UP.  Coal carloadings, a primary victim of the aforementioned secular changes in the energy market, were down across the board.  Revenue ton-miles were also down for all railroads, except those south of the US border.

2016 Q2 Total Carloads Plus IM

Not surprisingly, lower year-over-year traffic volumes led to lower revenues for almost all carriers. FXE and GWR were the only railroads able to buck the declining revenue trend this quarter.  In addition, FXE and GWR, along with CN, were the only railroads to increase average revenue per car year-over-year.

With declining quarterly revenues comes the usual cost focus, which some carriers did better than others this quarter. In terms of operating ratio, CN, CP, FXE, KCS, KCSM, and NS all lowered theirs year-over-year.  Cost control at CP, KCS, KCSM, and NS had a large influence on operating ratio improvement, while revenue growth had a greater bearing on FXE’s.  For CN, both revenue growth and cost control helped it to improve its operating ratio.

2016 Q1 OR

Improvements in operating ratio were followed by greater operating income year-over-year. While CN, CP, KCS, KCSM, and NS improved their operating income year-over-year, FXE set a new quarterly operating income record for itself.

Operationally, all carriers lowered their average yard dwell and raised train velocity relative to last year. In addition, CN, CP, CSX, FXE, and NS improved their year-over-year employee utilization, as measured by revenue ton-miles per employee.

While capital expenditures were either flat (CN, CP, and NS) or down (every other carrier, with UP showing the largest absolute decline) compared to last year, it is interesting to note that Q1 2016 tie purchases by railroads were higher than other Q1 purchases over the past two years, indicating the potential for more maintenance and expansion work in the coming quarters.

Altogether, it looks as though CN, FXE, and NS performed quite well this past quarter. CN was able to improve its operating ratio through both top-line growth and cost control, exhibiting not only the continuation of its cost focus, but also highlighting the srailroad’s ability to grow revenue (though not necessarily volumes) in a tough economic environment.  FXE appears to be getting its cost structure in line; lowering its operating ratio by 456 basis points, while also growing revenue year-over-year (and almost setting a new quarterly revenue record).  Finally, NS looks to be getting its cost structure in order once again.  Despite declining revenue, the company was able to lower its operating ratio by 630 basis points year-over-year, a substantial reduction.

Now, for a final note or two. First, a revenue ton-mile slide has been added to the deck.  In coming quarters, it will be split it into a quarterly view and year-to-date view.  Also, on the carload and intermodal unit slides, another group of railroads labeled “Other” has been added.  “Other” represents all North American regional and short line railroads that are not affiliated with GWR.

For the full analysis, please click here.  Please contact me if you have any questions or comments regarding this report.

Securing the future of European Freight Railways

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Over the past decade, European freight rail operators have been growing, but with relatively low profitability.

With traffic becoming increasingly internationalized, one would expect that more long-distance trains would mean better profit margins for European freight rail operators.  However, rail operators struggle to balance the increasingly specialized customer demands with integrated rail freight solutions and value-added services.  Customer demand is volatile, requiring short-term commercial and operational  planning.  Integrated rail freight solutions must be coordinated with increasingly diverse markets claiming a role in rail transport – from corridor specialists and regional feeders to combined logistics operators and service companies.  Stiff intermodal and intramodal competition keeps prices low.  And all of these short-term priorities make long-term asset and resource planning all the more difficult.

Joris D’Inca, a Partner in Oliver Wyman’s Transportation practice in Switzerland, suggests a 5 step plan that can generate positive financial returns in the short term, and substantially improve business designs in the mid- to long term.  The 5 steps include:

  1. Strategic network and commercial planning
  2. Traffic portfolio management
  3. Organization and process redesign
  4. Complementary initiatives that deliver immediate impact
  5. Integrated management of the turnaround program

Joris’s full report, entitled Securing the Future of European Freight Railway Operators, first presents statistics on the current European freight rail market, then describes his 5 step solution in detail, with 3 case studies in which Oliver Wyman designed effective, strategic solutions for freight rail operators in many of these areas.

2015 YEAR END SUMMARY OF NORTH AMERICAN RAILROAD PERFORMANCE

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Fourth quarter 2015, as well as the entire year, proved difficult for North American freight railroads. Traffic volumes were down from 2014 led by a steep structural decline in energy-related traffic (coal, frac sand, and crude oil), which has been a key part of the railroad franchise.  Even intermodal traffic was down a bit in 2015 versus the prior year except at CN and CSX.

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Offsetting the weakness in traffic were continuing pricing gains and cost reductions (led by decreased fuel expenses), resulting in an overall improvement in operating ratios and mixed results in operating income. Both Canadian roads (CN and CP), FXE, and BNSF increased operating income.  The other carriers reported generally modest decreases in operating income except NS, which was down nearly 20 percent, and UP, down about eight percent.

The stand out performer for 2015 was BNSF, which reported a six percent decline in total revenue but a solid 11 percent gain in operating income, due to reduced costs driven by significant improvements in average train speed (up nearly 20 percent) and dwell time (down more than 10 percent). In addition, the company now accounts for over one-third of the industry’s revenue ton-miles, making it North American freight railroading’s 800-pound gorilla.  The Canadian carriers also performed well with modest increases in revenue and declines in operating ratios resulting in higher operating income for 2015 vs. 2014.

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The two Eastern carriers (NS and CSX) face the greatest headwinds for the future, as their coal volumes are most impacted by the recent structural changes in energy markets, and their relatively short-haul networks make cost reductions more difficult and competition from trucking more intense. Both Eastern railroads have the highest operating ratios of the Class I carriers, even though relative to several decades ago when railroads were struggling to get margins of 20 to 25 percent, their current 30 percent operating margins look good.

Return on invested capital (ROIC) has declined considerably and is now in the single digits for all carriers except UP and the two Canadian roads. Capital spending, which increased dramatically in the last two years as most railroads tried to recover from the fluidity crisis of 2014, has dragged the ROIC down significantly.

One item to note: KCS elected to terminate its financial reporting for KCSM at the beginning of 2016. In the search for alternative data sources, I was able to find enough financial information to continue the production of KCSM figures for most, but not all, exhibits.  Those exhibits that will no longer include KCSM are Return on Invested Capital, Year-to-date Free Cash Flow, and Year-to-date Capital Expenditures.

For the full analysis, please click here.  Please contact me if you have any questions or comments regarding this report.

THIRD QUARTER 2015 NORTH AMERICAN RAILROADS PERFORMANCE SUMMARY

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CN, CP, and FXE were the winners in third quarter 2015.  While almost all carriers saw year-over-year improvements in operating ratio (OR), CN, CP, and FXE were able to improve their ORs, at least partly, through top line revenue growth (when appraised through a revenue ton-mile perspective).  Not surprisingly, CN and FXE posted record quarterly revenue, while CP missed its previous record by less than three percent.  Average revenue per unit was also up for all three carriers.  Finally, all three carriers posted record quarterly operating income, despite increased costs for CN and FXE.

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As for the other railroads, almost everyone saw improving ORs year-over-year (with BNSF showing the greatest improvement through lower expenses), although revenue and operating income were generally down compared to the prior year’s third quarter.

As for the overall industry, just about every carrier posted improved operating metrics with average yard dwell down and average velocity up. Total freight volumes were generally down, with BNSF the lone exception thanks to growth in intermodal and coal.

All in all, North American railroads saw lower year-over-year traffic volumes and revenues overall. Better ORs and network performance, though, speak to the industry’s readiness to efficiently handle traffic when the freight returns.

For the full analysis, please click here.  Please contact me if you have any questions or comments regarding this report.

Rod Case presents at RailTrends Conference

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Rodney Case, Managing Partner for Oliver Wyman’s Global Transportation Practice, presented the “Service Imperative” at the RailTrends Conference in New York City on November 19. North American railroads have made significant investments in capacity, while highway infrastructure spending has lagged, which could mean new opportunities for railroads to grow – provided they can deliver the service levels that shippers now expect.  View the slides of his presentation on Oliver Wyman Insights.

 

Capacity at the Interface: Fixing Chicago

Fixing Chicago

David Lehlbach of Oliver Wyman Global Transportation Practice discusses Chicago rail congestion at Railway Age Passenger Trains on Freight Railroads conference in Washington, D.C., Oct. 28-29. “Player with railroads and the nation’s freight handler,” as Sandburg said of it in 1914, Chicago today sits at the nexus of transcontinental freight rail traffic moving both east-west […]

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Happy But Leaving: Can a New Value Proposition Manage the Risk of Talent Drain?

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Excerpted from BRINK To face down the risk of losing top talent, organizations must do more than rely on the traditional belief that today’s happy employees will be tomorrow’s stalwarts. With millennials and Gen Xers (the latter group ranging in age from 34 to 50) now representing the dominant share of the workforce, their preferences […]

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New Book Offers a Comprehensive View of Rail Operations Problem Solving

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The just-published Handbook of Operations Research Applications at Railroads is the first book ever to provide a comprehensive look at operations research and the role it can play on the modern freight railroad. The handbook’s 11 chapters consider operational problem-solving in the areas of train and locomotive scheduling, line of road operations, car scheduling/trip planning, […]

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Rail Crossings on Google Maps – the Start of Something New?

2015 09 Rail Crossings on Google Maps

Recently it was announced that the Federal Railroad Administration and Google are teaming up to add the locations of all US grade crossings to Google Maps. When drivers use the maps for turn-by-turn navigation, they’ll get audio and visual alerts of crossings as well. There’s a good reason for this partnership: An alarming increase in […]

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