Posts Tagged ‘BNSF’

Moody’s Examines Pros, Cons of PSR

October 22, 2018

The decision of CSX in 2017 and Union Pacific this year to embrace the precision scheduled railroading model means that most of North America’s Class 1 railroads are practicing it.

Only Norfolk Southern, BNSF and Kansas City Southern have eschewed it – at least for the time being.

The concept of precision scheduled railroading is widely believed to have been pioneered by the late E. Hunter Harrison at the Illinois Central Railroad.

Harrison later implemented the concept at Canadian National and Canadian Pacific. He was well on his way to putting it in place on CSX before his death in December 2017.

Wall Street has fallen in love with PSR because a centerpiece of it is reducing costs to drive up profitability and stock prices.

At CSX, management has touted how it is moving the same volume of traffic with fewer employees and fewer locomotives and freight cars.

Railroad executives who favor PSR love to talk up the efficiencies that it brings.

But shippers, those folks who make railroads possible by paying them to haul freight, might be less enamored of PSR.

Moody’s Investors Service is one of North America’s leading debt rating agencies.

The analysts at Moody’s are not opponents of PSR. In fact a recent report by Moody’s about the operating model concluded that service levels have improved at railroads using precision scheduled railroading.

But the report issued a key caveat that Wall Street seems to overlook or downplay.

Shippers may not like how they are being forced to conform to the railroad’s interests rather than the railroad seeking to serve the interests of shippers.

“The model’s train schedule is established with the primary objective to enhance the efficiency of railroad operations,” Moody’s said in a report about PSR. “This narrows the scope to accommodate customer needs and may cause customers having to adapt to the railroad’s train schedule.”

The report quoted an unnamed railroad executive as saying that Harrison’s PSR approach is to set up schedules and tell the customers that they need to work around the trains that are scheduled, not the other way around.

As CSX encountered severe service issues when it implemented PSR too quickly in 2017, Harrison repeatedly relied on the mantra that service would improve and shippers would have better service than they had before.

That may seem true when viewing the service metrics that railroads like to measure themselves against.

One of those is operating ratio, which shows what percentage of operating revenue is used to pay operating expenses.

Lowering operating expenses has become the rage in the railroad industry in recent years, even among carriers that do not practice PSR.

CSX has bragged about how its operating ratio in recent quarterly financial reports has dipped below 60 percent. There was a time when an operating ratio in the 70s was considered in the industry to be a good performance.

Overall, Moody’s spoke favorably about PSR, but acknowledged it “is not a panacea for service problems.”

The report noted that BNSF does not practice PSR but “has maintained good service levels that to date exceed its average 2013 levels.”

Yet, BNSF is a privately-owned company and, Moody’s noted, some metrics that mean a lot to its owner, Warren Buffet, mean far less to Wall Street investors looking for short-term gains.

Buffet is known for his belief in long-term growth, which is often seen as lacking among practitioners of PSR.

“A material reduction in capital expenditures concurrent with the implementation of precision scheduled railroading may affect the railroad’s ability to maintain good service levels over time if sustained too long.” The Moody’s report said.

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CSX Putting New Intermodal Strategy Into Place

October 20, 2018

Earlier this year, CSX CEO James Foote said the railroad’s intermodal network was a mess and needed to be revamped.

Much of that revamping has involved the announcement of plans to end service in smaller intermodal service lanes in favor of higher-volume point-to-point markets.

But management had been vexed as to what to do with the Northwest Ohio Intermodal Terminal outside of North Baltimore, Ohio.

It opened in June 2011 as part of a hub and spoke strategy to build traffic in the lower-volume service lanes CSX is now abandoning.

The idea behind the hub and spoke concept was that volume could be built in low-volume markets by creating a connecting hub much like the passenger hubs that airlines operate in such cities as Atlanta and Chicago.

The concept is also used for air freight service provided by FedEx and UPS. North Baltimore was the connecting hub.

But once the hub and spoke strategy ended what would CSX do with the new North Baltimore terminal? Initially, the carrier talked about using North Baltimore to do block swapping.

Now, CSX sees the Northwest Ohio terminal as a gateway to Ohio Valley markets.

Rather than pick up containers by rail in such cities as Cleveland, Cincinnati and Columbus, CSX will instead load them aboard trains in North Baltimore after they have been driven there by truck.

CSX and BNSF recently announced a haulage agreement to build dedicated trains that will link North Baltimore and West Coast terminals by running through Chicago.

Also on the docket for North Baltimore is development of a 500-acre logistics park and the launch of service to East Coast ports.

In the recent third quarter earning conference call, CSX executives portrayed their strategy as one of reducing operational complexity while developing a smaller but more profitable intermodal network.

“We still have a long way to go to get that franchise right,” Foote said. “Part of the process is disassembling the old independent structure of the company. Because it’s not an independent company — it’s part and parcel of the railroad.”

By that he meant that previous management sought to provide service to as many terminals as possible and increase the volume of containers handled.

Foote said that resulted in an intermodal network that was inefficient and offered spotty service reliability due to its complex nature.

But perhaps more importantly, it came with high costs and low profit margins.

Overhauling intermodal operations is one of Foote’s areas of expertise, having done it at Canadian National where intermodal went from being CN’s least profitable endeavors to one of average profitability.

He believes the same transformation can be done at CSX, saying that more efficient and reliable service will lead to volume and revenue growth.

Foote said that during the third quarter CSX intermodal traffic was up 3 percent and intermodal revenue rose by 12 percent in comparison with the third quarter of 2017.

The reorganization of CSX’s intermodal strategy that began in fall 2017 has meant that in terms of market coverage, CSX has lost 14 percent of it.

It has dropped or will have dropped by late January 900 intermodal market pairs. It will continue to serve 500 market pairs, meaning it will have given up 44 percent of those pairings.

Most of those discontinued pairings were short-haul traffic and some never generated any traffic volume.

The BNSF haulage agreement is an example of how CSX is using the precision scheduled railroading model to reorganize its intermodal operations.

A key principle of the model is to minimize the number of times that a freight car is handled between origin and destination.

Foote said even after CSX abandoned the hub and spoke concept, it still found itself shuffling containers between trains twice or three times between origin and destination.

CSX officials said the railroad lost 7 percent of its intermodal volume when it ended the hub-and-spoke operation and it expects to lose another 7 percent by ending some of its low-volume markets.

The objective of the new intermodal model is to make up those losses through focus on potentially higher volume markets.

Rail Shippers Expecting Rate Hikes

October 15, 2018

Rail shippers are expecting rate increases of 3.7 percent during the next year, Railway Age has reported.

A survey conducted by Cowen & Company found that shippers now expect the rate hike to be slightly lower than the 4.7 percent that they expected when surveyed in the second quarter of this year.

“Economic confidence and recent business trends remain above the survey’s long-term average. We view these results as neutral to slightly negative for the railroads,” said Cowen Managing Director Jason Seidl.

The survey found that among Class 1 railroads, BNSF had the highest favorable rating in terms of service. Shippers gave BNSF a 70 percent positive rating.

Seidl said the responses received in the survey were diverse but more negative than those given in the last quarter.

“Shippers expect their businesses to expand at an average rate of 2.9 percent in the next 12 months, the second consecutive quarter that shippers’ expectations have declined,” Seidl told Railway Age.

The shippers expressed more confidence in the direction of the economy but that was down sequentially but above the historical average.

Shippers also reported that business levels were less positive than in each of the past two quarters.

CSX-BNSF to Launch Ohio-LA Container Service

October 5, 2018

CSX and BNSF said this week they will begin a container service between Los Angeles and Ohio that will use the Northwest Ohio Intermodal Terminal in North Baltimore.

The service will begin on Oct. 29 and originate trains five days a week in each direction.

On BNSF, the containers will move via the Southern Transcon route west of Chicago.

“Customers who take advantage of this new service can reach key markets within the fast-growing Ohio Valley region,” said BNSF Group Vice President Consumer Products Tom Williams in a statement. “Our new Ohio intermodal service will create an efficient, direct service from the West Coast.”

CSX said it will work with NorthPoint Development to construct a 500-acre logistics park adjacent to North Baltimore facility and is expanding eastern access to the facility through new service to and from the Port of New York and New Jersey.

This will involve international traffic that will be trucked from North Baltimore to destinations in southern Michigan, western Ohio, and Indiana.

The logistics park will include traditional warehousing and distribution capabilities, as well as services such as a container yard and equipment storage, export container stuffing, and transload and break-bulk resources, all within a heavy-haul local corridor.

The North Baltimore facility was opened in June 2011. At the time, CSX operated it on a hub and spoke model in which containers from various locations throughout the CSX network were routed there to be interchanged.

The hub and spoke approach was intended to help build traffic density in low-density intermodal markets.

That model was dropped last year when CSX ended the hub and spoke intermodal operating model. At the time, CSX officials said sorting containers in North Baltimore added transit time to traffic that is price- and service-sensitive.

Instead, CSX said it would focus on point-to-point intermodal service in high-volume markets.

The BNSF-CSX agreement means that containers will no longer be trucked across Chicago but instead will move through the city by rail.

Intermodal analyst Larry Gross told Trains magazine that BNSF is trading the cost of trucking containers in Chicago for extended drayage from North Baltimore to destinations that include Detroit, Cleveland, Columbus, Cincinnati and Louisville.

Gross said there is not much drayage capacity at present in North Baltimore, which means the new service is likely initially to appeal to national trucking companies such as J.B. Hunt and Schneider National, which have their own drivers.

“It’s not like drayage capacity will magically appear,” Gross said, but added that he expects local drayage capacity to develop as intermodal volume increases in North Baltimore.

The logistics park CSX plans to develop in North Baltimore will offer opportunities for backhaul moves of agricultural products to Asia.

The park will be similar to logistics parks that BNSF has near its intermodal facilities in Joliet, Illinois; Oklahoma City; Kansas City; and Alliance, Texas.

In the short term, CSX said the number of trains serving the North Baltimore facility won’t change, but is expected to grow over time.

The service that starts on Oct. 29 will use existing intermodal trains that BNSF and CSX interchange in Chicago.

CSX Revamping Intermodal Service

August 16, 2018

The plans of CSX to revamp its intermodal business will focus on more profitable longer-haul service linking major markets.

Trains magazine reported on Wednesday that CSX has notified its customers that numerous changes are being made to traffic that is interchanged with BNSF as well as the pending end of 75 low-volume service lanes.

A similar change in interline service with Union Pacific had been announced about a week ago.

CSX said that the changes are designed to reduce transit time through Chicago.

The new operating plan will funnel interchange traffic coming through Chicago to five eastern destinations including Chambersburg, Pennsylvania; North Kearny, New Jersey; the Northwest Ohio Intermodal Terminal in North Baltimore, Ohio; Springfield, Massachusetts; and Syracuse, New York.

Intermodal traffic will be sent to those terminals by truck from markets now served by rail. For example, traffic going to and from Cincinnati, Cleveland, Columbus and Detroit will travel by highway to and from North Baltimore.

Baltimore will be served via Chambersburg; Philadelphia via North Kearny; Worcester, Massachusetts, via Springfield; and Buffalo, New York via Syracuse.
CSX said the changes will cut travel time, including by as much as a day between West Coast terminals and New England.

The changes will occur in mid-September with UP interchange and in mid to late September for BNSF interchange.

BNSF and CSX also will shift interchange traffic bound for the Southeast from Chicago to Memphis. This includes traffic headed for Atlanta, Florida, and Charlotte, North Carolina.

“We have been working closely with our interline partners, Union Pacific and BNSF, to streamline interchanges, especially for traffic routed through Chicago and the Southeast,” CSX Chief Marketing Officer Mark Wallace wrote in a letter to intermodal customers. “These changes, to take effect prior to peak season, will enable us to execute our service plan with greater reliability and speed during this important shipping period.”

Union Pacific had told its shippers in early August of the plans of CSX to end steel-wheel Chicago interchange between a number of UP origins and CSX destinations as well as to shift interchange away from Chicago and New Orleans in favor of Memphis.

Most of the 197 UMAX service lanes being discontinued are low volume, including 67 that have not had any container movements in the past 12 months. Other lanes being dropped averaged just one container per week.

“Maintaining these status-quo service offerings would be detrimental to the majority of our customers and the East-West transcontinental network, particularly during fall peak,” Wallace said in his letter tocustomers.

CSX contends that most of the UMAX volume in cancelled steel-wheel interchange lanes can continue via crosstown trucks linking UP and CSX terminals.

However, Trains quoted an intermodal analyst as saying that might not happen because drayage capacity is tight in Chicago and it will increase the cost of the move. The analyst said drayage by highway will increase the travel time.

Movements from the West Coast to the Ohio Valley are likely to stay on the road once they are unloaded in Chicago.

In some instances, the traffic might be diverted to Norfolk Southern in Chicago. Of the UMAX lanes being dropped, 49 could potentially shift to NS.

CSX CEO James Foote had indicated during an earnings call conversation last month that the carrier was studying revamping its intermodal network. He said at the time that during his days at Canadian National that that carrier had undertaken a similar intermodal restructuring.

During his comments last month Foote said CSX would seek to become more efficient.

In his letter to shippers, Wallace said CSX will not be making any other changes to its intermodal network until the peak season is over.

The intermodal restructuring will not result in any closing of terminals.

BNSF Seeks PTC Deadline Extension

June 15, 2018

Over the past year there has been a cascade of reports about the progress that U.S. railroads are making toward installing positive train control systems on tracks that carry passengers or hazardous cargo.

The federal law that mandates PTC be installed by the end of this year also allows for an extension of the deadline if certain conditions are met.

The bid for an extension must be made to the Federal Railroad Administration.

Although the PTC deadline is still several months away, the first request for a two-year extension has been made and it has come from an unlikely source.

BNSF said last December that it had installed and was operating PTC on all subdivisions required to have it, making the western railroad a leader in PTC installation.

But BNSF is seeking the extension because of what it terms how the FRA is interpreting federal law as to the interoperability of PTC, which means that locomotives from one railroad can operate under the PTC systems of another carrier.

In a news release, BNSF said the FRA has interpreted federal law to mean that all other railroads operating across any of BNSF’s PTC-equipped lines must be capable of operating with BNSF’s PTC system, but not all railroads that use BNSF track will have completed their PTC installation by the end of this year.

BNSF also said that interoperability of PTC systems between Class I, commuter and short-line rail carriers “remains a challenge.”

The Fort Worth-based carrier said it has PTC in place on 88 required subdivisions covering more than 11,500 route miles.

Recently Amtrak and BNSF announced that two long-distance passenger trains using BNSF track, the Southwest Chief and California Zephyr, will begin using PTC this summer.

In a series of progress reports, the FRA has indicated that some railroads, particularly commuter carriers, are in jeopardy of not only missing the PTC installation deadline but also failing to make sufficient progress to qualify for an extension of the PTC deadline.

Class 1 Capital Budgets Are Mixed Bag

February 15, 2018

North America’s Class 1 Railroads have varying plans for capital spending in 2018.

At one extreme, Canadian National plans spend a record $C3.2 billion for capital spending, which includes laying new track and buying new locomotives.

That is an increase of C$500 million over what CN spent last year.

On the other extreme are CSX and Kansas City Southern, both of which have cut their capital spending budget.

Compared with its peers, CSX is taking a meat axe to its capital budget, slashing it by $400 million to $1.6 billion for the year.

KCS is reducing its capital budget by $30 million and will spend between $530 million and $550 million.

Union Pacific and Norfolk Southern are planning to increase their capital spending while BNSF and Canadian Pacific have announced flat capital budget.

NS will spend an additional $100 million on a $1.8 billion capital budget while UP is increasing capital spending by $200 million to $3.3 billion.

The BNSF 2018 capital budget is $3.3 billion while CP will spend between C$1.45 billion and C$1.5 billion.

CN plans to spend C$1.6 billion on track and other infrastructure, including replacing 2.1 million ties and more than 600 miles of rail.

It also plans to plunk down C$400 million on equipment acquisitions, including 60 high-horsepower locomotives as part of a three-year, 200-unit order from GE.

At NS, track maintenance projects are budgeted at $930 million this year while it will spend $345 million for locomotives and $50 million for cars.

“Locomotive capital will be focused on the rebuild and conversion of locomotives from DC to AC power,” said NS Executive Vice President and Chief Operating Officer Cynthia Earhart.

With CSX mothballing numerous locomotives and freight cars, it sees no need to acquire new equipment.

KCS said its capital budget is down largely because it won’t be buying any locomotives.

STB Finds 4 Class 1 RRs Revenue Adequate

September 7, 2017

Four Class I railroads were revenue adequate last year, the U.S. Surface Transportation Board has determined.

That means that Norfolk Southern, BNSF, Union Pacific and the Soo Line (the U.S. subsidiary of Canadian Pacific achieved a rate of return on investment equal to or greater than the Board’s calculation of the average cost of capital to the freight rail industry.

The STB determined that the 2016 railroad industry cost of capital was 8.88 percent. The revenue adequacy figure was calculated for each of the Class I freight railroads in operation as of Dec. 31, 2016, by comparing this figure to 2016 ROI data obtained from the carriers’ Annual Report R-1 Schedule 250 filings.

The Class I ROI figures were: BNSF, 10.11 percent; CSX, 8.62 percent;  Grand Trunk (including U.S. affiliates of Canadian National Railway), 8.60 percent;  Kansas City Southern, 6.23 percent; Norfolk Southern, 9.20 percent; Soo Line, 9.58 percent and Union Pacific, 13.39 percent.

CSX to Begin Shipping Iron Ore to Lorain Steel Mill

August 3, 2017

CSX plans to begin shipping iron ore to a plant in Lorain, Ohio, that will turn it into pig iron.

Republic Steel and ERP Iron Ore LLC said they have reached a memorandum of understanding by which the iron ore will move by rail to Lorain from a pellet plant in Reynolds, Indiana.

Republic owns the steel mill in Lorain and ERP owns the Indiana facility.

Once the Lorain operation is fully operational, Republic expects to produce up to one million net tons of pig iron per annum that will be used to produce steel for electric arc furnaces.

American pig iron production has fallen in recent years due to competition from imports from Brazil, Russia and the Ukraine.

ERP noted that electric arc furnaces are displacing traditional blast furnaces.

Last January, ERP acquired the Indiana plant by buying the the assets of Magnetation LLC. Founded in 2006 in Grand Rapids, Minnesota, Magnetation used technology it developed to extract iron ore concentrate from old mine waste-sites on Minnesota’s Mesabi Range.

It opened the $400 million Indiana plant in 2014 to supply AK Steel.

The iron ore travels to Reynolds via a 120-car train of concentrate from Minnesota to Chicago on BNSF. CSX then transports the ore to Reynolds.

CSX also moves trains of finished pellets to AK Steel facilities in Ohio and Kentucky.

After the open market iron ore business collapsed in 2014, Magnetation filed for bankruptcy protection and closed its Minnesota and Indiana facilities in late 2016.

ERP was founded by Tom Clarke of Roanoke, Virginia, who as an entrepreneur made his first millions in the health care industry.

He later became an environmental activist and founded ERP and Chippewa Capital Partners.

Clarke has also acquired financially distressed or bankrupt coal mines, which he said he will make environmentally responsible despite the vast amounts of carbon dioxide released when coal is burned.

Heritage Covered Hoppers?

July 17, 2017

We’ve all heard about heritage locomotives, particularly those that Norfolk Southern created to celebrate its 30th anniversary back in 2012.

If you pay attention as a train passes you at trackside, you might spot some freight cars in some semblance of their original livery.

It might be an outline of a former herald, e.g., Penn Central or Conrail, or it might be the faded markings of a one-time owner.

And then there is this covered hopper that can be described as heritage, BNSF style. One of its grain cars is shown in Cleveland with an added “Burlington Route” emblem on it.

Photograph by Roger Durfee