© Oliver Wyman | NYC-MXD15901-001
DIGITAL TRANSFORMATION IN SURFACE TRANSPORTATION
Rodney Case Global Rail Practice Head
NOVEMBER 17, 2016
1 1 © Oliver Wyman
Defining elements of Rail Renaissance II A rapidly changing competitive marketplace & transformational technology will require freight rail adaptation in four key areas
1 Supply Chain Transparency Growth-driven model • Beyond the train • Smaller lots, less distance
2 Convergence in Planning Leverage customer demand • Parallel flows of different LOBs, clients • Broader capacity management
3 Mission Completion Develop credible reliability • Not necessarily faster • Robustness will be key
4 New Social Compact Engage multifaceted public • All politics are local • Rail is great in abstract, but…
2 2 © Oliver Wyman
My great grandfather said that had he asked his customers what they really needed, they would have said a faster horse.
– William Ford Jr, Executive Chairman Ford Motor Company
3 3 © Oliver Wyman
Customer demand is driving supply chain transformation, but the supply side has significant & growing issues
Supply chain orientation • Transportation portion more subordinated • More differentiation than simply distance
Photos top to bottom: Wikimedia Commons, Getty Images, Amazon.com media photo
Level of service • Maintenance deficits • Urban congestion in key markets
Labor market dynamics • Increasing regulations • Continued retention & attraction issues
The Evolution of Trucking & Logistics
5 5 © Oliver Wyman
Online platforms Telematics &
fleet management Robotics &
self-driving trucks Transportation
software solutions • On-demand delivery
platforms – Local/peer-to-peer – Food/beverage
• Freight transportation marketplaces connecting shippers & carriers
• GPS tracking & fleet management integrated solutions
• Mobile-based solutions for truck drivers
• Shipment tracking & support solutions
• Automated/robotics logistics solutions
• Self-driving solutions for multiple truck types
• Self-driving enabling technology/sensors
• Autonomous last-mile delivery: Drones, ground robots
• Trucking management software
• Supply chain management software & integrated logistics software solutions
• Analytics/specialized software solutions
Non-traditional players in the trucking & logistics space are increasing
Source: CrunchBase, Capital IQ, Quid, Oliver Wyman analysis
6 6 © Oliver Wyman
Investments in startups have grown significantly in the past three years Investments received by trucking & logistics startups per group & per year US$M, US & Canada
Source: CrunchBase, Capital IQ, Quid, Oliver Wyman analysis
$3.6 BN
Total Investment Received
Online Platforms
Robotics & Self-driving Trucks
Telematics & Fleet Management
Transportation Mgmt. Software
46
2009
124
CAGR: 29%
141
2008
106
2007
81
2005
37
< 2000 2016 2012
271
2015
637
251
2014 2013
179
820 860
2011 2010 End of
September
7 7 © Oliver Wyman
Autonomous trucking: Safety alone can make it happen Labor savings Safety • Could reduce need for OTR drivers • Driver wage/benefit savings will likely
accrue to trucking companies & their customers
• Little to no effect on consumer pocketbook • Likelihood of more congestion, more road
damage, so not persuasive for politicians & their constituencies
• Estimated savings: up to $92 billion per year in driver wages & benefits
• Safety is the strongest selling point for regulatory authorities, politicians & drivers
• 2014 large truck crashes: – 3,903 deaths (11.9% of total) – 111,000 injuries (4.7% of total) – 438,000 large truck accidents
• Estimated savings: almost $180 billion a year in economic & societal costs
Source: Oliver Wyman analysis
More than lower operating expenses will be needed to get autonomous trucks past government regulation & on the road
Substantial safety improvements for the general public will propel the implementation of autonomous trucks
8 8 © Oliver Wyman
Initial savings from reduced risk & fuel efficiency will fund further investment in disruptive trucking technology
Issue priority
Up to 10% Cost Advantage Disruptive Impact
Fuel cost Risk/insurance Driver shortage Highway congestion #2 #3 #1 #4
• Truck fuel efficiency improving faster than for locomotives
• Platooning will likely improve more
• Fuel prices will rise again
• Automation increases safety
• Risk reduction financing first wave of automation
• Humans cause most accidents
• Drives up insurance costs
• Automation reduces driver fatigue, need for OTR drivers
• Reduction in drivers due to ELD’s, drug testing
• Automation = more vehicles per lane
• Fewer accidents = better highway fluidity
• Aging infrastructure • Underfunded financing
environment
9 9 © Oliver Wyman
With asset turnover every three years, large trucking companies can adopt new technology quickly, without retrofitting existing fleets
• Average fleet age: ~18.4 years • Long-lived assets
– Cannot size fleet to business levels easily – Lower utilization – Minimal secondary market
Class I rail industry technology cycles
• Average fleet age (some larger companies): 1.5-1.7 years
• Operate tractors half their warranty life – High resale value – Low maintenance cost
Trucking industry technology cycles
Fast technology adoption • Better asset utilization & capital turnover • Quick fleet size adjustment for business cycles • Less risk averse
Slow technology cycle • More market reactive • Cycle economics driven by unit reduction
– Larger & larger locomotives – Larger train sizes
Year 0 Year 30
1
1
2
3
4
5
6
7
8
9
10
Year 0 Year 30
10 10 © Oliver Wyman
Federal agencies & states are actively focusing on the study, testing & regulation of autonomous vehicles
Source: National Council of State Legislatures, DOT/NHTSA Policy Statement Concerning Automated Vehicles, 2016 Update
State level AV legislation
WA
OR ID
CA NV UT
AZ NM
CO
TX
OK
KS
MT
WY
ND
SD
NE IA
MN WI
IL MO
AR
MI
IN
KY TN
MS AL
NC SC
GA
FL
OH PA
VA WV
DC MD DE NJ
NY
CT RI MA
NH VT ME
AK
HI
LA
Executive order Enacted
Under consideration AV regulation suggested
No action
• AV is not currently prohibited if a driver is in the vehicle
• 34 states plus DC have considered legislation or executive action in the past 5 years
• Commercialized testing is happening: – Uber testing in Pittsburgh, PA – AV distribution of beer in Colorado
Regulatory activity (as of May 2016)
State DOTs likely will lead adoption & establish regulatory frameworks, as was the case for truck length & weight limits
11 11 © Oliver Wyman
With highway maintenance funding declining, conversion to toll roads may facilitate autonomous trucking Toll road mileage growth, 2003-2013 • Tolling is an attractive way to fund
infrastructure deficits – Chicago Skyway – $2.8 billion – Indiana Toll Road – $5.7 billion
• Private toll roads need to maximize revenues • Density increase from AV could eliminate the
need to add additional lane miles • Unrestricted AV access on the existing
road network, however, would eliminate incentives for private funding
Source: Federal Highway Administration, https://www.fhwa.dot.gov/policyinformation/tollpage/miletrends.cfm
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2003 2005 2007 2009 2011 2013
Interstate Non-interstate
Dedicated autonomous vehicle lanes could support >40,000 tractor-trailers/day, which equals more than 100 double stack trains
12 12 © Oliver Wyman
Commercial on-road AV implementation is likely to be gradual
NOW NEAR TERM STRATEGIC HORIZON FULL DEPLOYMENT
Auto Route Following • Reduced fatigue • Increased safety • Fuel economy
Manned Platoons • Coordinated braking • Automated “tailgating”
Photo source: Getty Images
Driver assist • Lane departure alert • Collision prevention • Driver awareness alert
Highway AV Platoons • Multiple units led by
one driver • Automatic cruising if
platoon separated
Driverless Linehaul • Drop-off/pickup by
driver at highway staging areas
• Highway dedicated lanes or navigation infrastructure
Fully Driverless • Remote control
if necessary • “Rescue” crews in
case of malfunctions or accidents
13 13 © Oliver Wyman
We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.
– Bill Gates, Founder Microsoft
Railroad Evolution Requirements
15 15 © Oliver Wyman
Railroads must adopt more technologies than just driverless trains
Class I rail marginal operations costs Trucking marginal operations costs
Enroute work events, especially for local trains, mean that train crew costs cannot go to zero. Railroads will have to look at fuel cost, asset utilization & labor productivity in mechanical & engineering functions for additional cost reductions.
Source: ATRI 2015 Report, STB 2015 R-1s, Oliver Wyman analysis
7%
Equipment lease or purchase
Repair & maintenance Tires
Tolls
Insurance & permits
Driver salaries, wages & benefits
Fuel Fuel
Salaries, wages & benefits Casualties &
insurance
Materials, tools, supplies, purchased services, & other
Repair & maintenance
Equipment lease or purchase
Other
Train Crews
16 16 © Oliver Wyman
74
Example: AV technology benefits will gradually increase trucking’s competitive pressure on rail – particularly intermodal Truck vs. rail intermodal cost & break-even distance progression with AV implementation Indexed relative cost per unit-mile, 2,000-mile sample
Note: Includes drayage cost. Capital costs account for extra cost of truck Source: ATRI 2015 Report, Oliver Wyman analysis
150
100
50
0 Full AV (with
$0.10/mile toll)
83
Linehaul AV
79
3 Unit Platoon (driver in lead
cab)
96
3 Unit Platoon (driver in all cabs)
122
Current Truck
131
Rail IM
100
Disruptive Driver
Savings Equipment
Savings
Up to 10% cost advantage Fuel
Savings Risk Exposure
Savings
17 17 © Oliver Wyman
Rail’s current business context – reduced traffic volumes & complicated regulatory hurdles for AV – presents opportunities to test reengineered business models & technologies
1 2 3 New operating
models Reengineered target
markets Technology
competitiveness • Prepare for future state where
labor costs no longer drive aggregation/queuing models
• Consolidate and/or contract “over the road” & terminal support roles
• Prepare for smaller lot sizes, shorter distances
• Orient to supply chain total costs to compete on more than transit price
• Launch of new “LOB”
• Regain competitive position with trucks on technology development & testing
• Actively initiate pilots & collaboration with rail suppliers
Photos L/R: Oliver Wyman, Getty Images
18 18 © Oliver Wyman
New operating models: Based on service reliability & resilience Over 500,000 unexpected train-based delays impacted 1 in 4 Class I road trains in 2013
Source: CSX & Oliver Wyman analysis
Failures consume capacity & constrain revenue growth potential
Estimated frequency of unexpected train-level events: Class Is in 2013
• Mechanical resilience is important but not the biggest delay source
• Recrews are the largest issue & driverless will mitigate it
• Unscheduled work is a network planning issue
• The majority of failures are outputs of network management decisions
Total est. incidents Recrews 210,000 Unscheduled work 125,000 Crossing protection failures 110,000 Locomotive failures 44,000 UDEs 27,000 Detector activations 12,000 Train separations 2,000 Detector failures 1,000 Total 531,000
19 19 © Oliver Wyman
Reengineered target markets: Germany Germany’s railways are growing due to strong market innovation
• Germany is a large mature market where rail freight is rapidly evolving: 230 competing freight railways
• Growth is driven by new market offers & operational models that are service intensive & asset efficient
• Growth has occurred within the same network footprint with existing technologies
-2%
7%
-5% 0% 5% 10%
USA .
Germany .
Sources: AAR Analysis of Class I Railroads, Railway Association of Canada Rail Trends, German Railway Market Analysis, UIC database, Oliver Wyman analysis
Traffic growth in a decade Change in revenue ton-km, 2015 versus 2006
20 20 © Oliver Wyman
Driverless, high tech
Single person, high tech
Single person, low tech 1 2 3
Tech
nolo
gies
2016 Near term Long term
Advanced predictive failure systems
RCLS on mainline fleet
Line of road support systems
Loco-based technologies
Advanced train dispatch
Right-of-way security
End of paper-based communications
Advanced remote train management & control
Technology competitiveness: A roadmap & piloting can help railroads stay in lockstep with trucking technology maturity
Supply chain view Automatic product loading/
unloading
#RailTrends16