The Future of Passenger Mobility

mobility-2040To understand how people will move around in the future, Oliver Wyman surveyed several hundred transportation executives and experts globally and identified a number of trends that are likely to shape passenger transport over the next 25 years. These include the mainstreaming and increased efficiency of shared mobility, the rise of integrated mobility providers, the decline of private cars, the development of smart cities, and increased innovation and competition in passenger transport.

Joris D’Incà, OW’s Express & Logistics Sector Leader, discussed OW’s findings in a panel discussion at the InnoTrans trade show for traffic engineering held in Berlin, Germany on September 22.

Read the summary

View the report

Rail Colleagues Ride Historic Everett Train

imag1049_burst002bw11.20.2016.  Andrew Jennings, a contractor with Oliver Wyman’s rail practice for over 20 years, took approximately 60 friends, family and colleagues on a train trip on the Everett Railroad.  In addition to OW colleagues, heads of several shortline railroads as well as one VP from Norfolk Southern helped Andrew celebrate his birthday while enjoying the scenic trip through Blair County, PA, riding behind the historic, restored 1920 Alco-Cooke 2-6-0 Number 11 .

In the picture from left to right are Megan Brisch (OW Knowledge Services), Dave Hunt (OW Rail Practice), Andrew Jennings, Jason Kuehn, (OW Rail Practice), and Carl Van Dyke (Contractor to OW Rail Practice).

Second Quarter 2016 North American Railroads Performance Summary

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During second quarter 2016, North American railroads continued their struggles with declining traffic volumes. Total revenue units (carloads and intermodal units) were down for all carriers but those involved with Mexico (FXE, KCS, and KCSM).  While KCS traffic volumes remained flat, FXE and KCSM saw some growth, indicating greater acceptance of Mexican railway transportation among shippers, a still growing national economy, or some combination thereof.  General merchandise was up for only BNSF, KCS, and KCSM (accounting for all of KCS’s growth), while intermodal was down for all carriers except FXE and KCSM.  Coal carloadings were down across the board, continuing the decline in that once highly important commodity.  Revenue ton-miles were also down for all railroads, except for FXE, KCS, and KCSM.

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

In terms of operating ratio, BNSF, CN, FXE, GWR, KCS, KCSM, and NS all lowered theirs year-over-year.

2016-q2-or

Cost control at KCS, KCSM, and NS had a large influence on operating ratio improvement, while revenue growth per RTM had a greater bearing on those at BNSF and FXE.  For CN, both revenue growth and cost control helped it to improve its operating ratio year-over-year.

This quarter, improvements in operating ratio were not necessarily followed by greater operating income year-over-year. While FXE set a new quarterly operating income record for itself, only KCS and KCSM improved their operating income year-over-year.

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

Finally, capital expenditures were generally 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 Q2 2016 tie purchases by railroads were substantially higher than any other quarterly purchases over the past two years, indicating more roadway maintenance work in the coming quarters.

Altogether, it looks as though Q2 2016 was the quarter of the Mexican railroads. FXE and KCSM were able to not only counteract the declining volume trend affecting the greater North American railroad industry, but they were also able to either grow their revenue (FXE), or at least arrest the decline (KCSM) affecting the other North American carriers.  Further, both FXE and KCSM were able to lower their operating ratios to keep more of that revenue flowing to their bottom lines.

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One last note: on September 8, the Surface Transportation Board released its industry cost of capital number and the rate of return on net investment for all Class Is under its purview for 2015. The cost of capital fell once again to 9.61%.  However, rather than seeing more railroads become revenue adequate, the number remained at four, as in 2014.  For 2015, CN and CP’s US operations were deemed revenue adequate, while BNSF and UP were also.  Interestingly, 2015 is the first year that NS was not deemed revenue adequate since 2010.

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

Oliver Wyman Insights – June 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

2016-04-20_Securing Future of European Freight

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

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 […]

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THIRD QUARTER 2015 NORTH AMERICAN RAILROADS PERFORMANCE SUMMARY

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 […]

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Rod Case presents at RailTrends Conference

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 […]

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Capacity at the Interface: 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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