© Oliver Wyman | NYC-MKT20101-015 SURFACE TRANSPORTATION

Rail Trends Conference 2015 The Service Imperative

Rodney Case Global Rail Practice Head

1 1 © Oliver Wyman

Is an opportunity that is growing

It favors rail

It will not last forever

Is a trend well advanced on other rail networks

The service imperative

Photo source: A. Jennings

2 2 © Oliver Wyman

Railroad Renaissance I Theme: Cost control

– 5-person to 2-person train crews – Back office automation/centralizing – Bigger trains – Fuel efficiency – Shortlining of the branch network

Railroad Renaissance II Theme: Network fluidity and service

– Resource constraints and congestion – Tighter scrutiny by customers and regulators – Targeted growth – Increasing volume and revenue faster than capex

• Paradigm shift: Scheduled

railroading – Scheduled operations, less

expensive than maximizing train size

– Minimizing unit train resource consumption

• Paradigm shift: Service is paramount – OR improvement becomes top-line driven – Tighter control of operations – Better integration of commercial and operating

plans – Targeted allocation of capital – Tighter integration into customer supply chains

Another rail industry transition: Toward service Rail Renaissance II will be just as important as the first one.

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Four defining elements in Rail Renaissance II

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Supply Chain Transparency

Convergence in Planning

Mission Completion

New Social Compact

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Supply chain transparency: A definition

1 Collaboration in information and operations

2 Better matching of service and demand against capacity

3 Drives down safety stocks and excess capacity reserves

4 Daily rail capacity is a perishable commodity that the best supply chains will leverage at the expense of others

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Supply chains are becoming more demanding around consistency and stability

Rail is well positioned in the short term

Infrastructure quality will increasingly differentiate modal choices between road and Intermodal

Infrastructure costs are likely to increase faster in road than rail, providing opportunities for creative new offerings

Photo source: A. Jennings

6 6 © Oliver Wyman

Railroad infrastructure is now the premium condition network The rail network is well positioned for growth after years of focused investment matched to market needs

• The rail network is increasingly dependable

• Expansion and development is privately funded

• Highway service quality is declining

Rail is premium quality

Road is struggling

Source: Norfolk Southern, Montreal Gazette

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Highway investment levels are severely lagging and the capital deficit is increasing, with expected service level impacts Highway and transit spending by government level, 2000-2012, $ billions

0

40

80

120

160

200

2000 2002 2004 2006 2008 2010 2012

Source: US Census Bureau, Annual Survey of State and Local Government Finances; Bureau of Economic Analysis, Price Indexes for Government Consumption Expenditures and Gross Investment (Table 3.9.4, Line 36); RSMeans, www.rsmeansonline.com/references/unit/refpdf/hci.pdf; US Bureau of Labor Statistics and Oliver Wyman analysis. Note: Spending is not cumulative, chart in 2012 dollars

Local

State

• This deficit eventually must be addressed

• The construction cost index is accelerating ahead of the CPI

• Fuel efficiency gains are increasing the funding gap without reducing capital needs

• It is going to get more expensive

Construction Index

Stimulus measures boosted federal investment

Federal

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Highway privatization is growing There is a strong alignment between the infrastructure investor and governments’ need to address the funding deficit Toll road mileage Increases By US Federal Highway Administration report year

1,000

1,500

2,000

2,500

3,000

3,500

2003 2005 2007 2009 2011 2013

Interstate Non-Interstate

Source: Federal Highway Administration, https://www.fhwa.dot.gov/policyinformation/tollpage/miletrends.cfm

• Extra user fees beyond gas taxes are increasingly common

• The funding deficit is starting to be privatized

• Pension funds recently bought: Chicago Skyway ($2.8B); Indiana Tollway ($5.7B)

• Privately owned roads require returns in addition to capital renewal

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The service imperative: The opportunity for rail The contrast in rail and highway network trends should allow railroads to develop higher-quality service offerings

Roads will increasing access costs with flat or declining service levels

Significant growth remains in less than train load flows

Increased service levels may finally have real opportunities for growth

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“Good” rail service is being redefined The recovery of rail service levels from 2014 is widespread but cracks have formed in core rail markets

• Cycle times continue to be slow • Investment in new fleets cannot be

justified by rail or clients • Slow reductions in serviceable fleets

Carload Automotive • Cycle times are an issue • Fleet supply • Inconsistent lane performance during

the year

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Automotive logistics developments Some rail shippers are switching to highway or sea

One manufacturer is trucking production as far as 750 miles and looking at expanding that distance to 1,000 miles

Another manufacturer is looking at “short sea” moves of finished vehicles to East Coast and West Coast markets

Source: Autologistics Conference 2015

Further on the road Longer on the sea

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Supply chain visibility: The customer side Unstable daily shipments contrast with long-term production plans

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5

10

15

20

25

30

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

• Finished vehicles are premium service

• Major portions are restock shipments – no order

• Shipment patterns are inconsistent and ad hoc by day and lane

• Creates unused capacity on trains, which drives aggregation and switching work in yards

Daily shipping patterns show volatility in destinations

Day of the month

Num

ber

of ra

ilcar

s

Source: Oliv er Wyman

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Auto carload rail: Example in action Rail-based auto shipments in Sweden are fully reserved and serve short haul markets with competitive service

Source: Green Cargo

Green Cargo

• $550M annual revenue

• Fully reserved single carload operation

• Competitive service for small volumes and short distances (100 to 500 miles)

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Auto carload rail example: Service and market The rail service offer is port to Stockholm for next morning delivery at 6 am for 15-20 carloads of autos

Destination Stockholm Pittsburgh

Market size 1.5M 2.6M

Distance from port 383 miles 360 miles

Average train speed 45 mph 35-40mph

Time moving in train 8.5 hours 10 hours

A comparison to the US

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Auto carload rail example: The destination ramp Very dependable rail service combined with client reservations requires a very small auto ramp

Source: Google Earth

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Auto carload rail example: The destination ramp

Source: Google Earth

Stockholm ramp

• Over 40,000 units per year

• 3 tracks and approx 2.5 ac

• Spot to pick up – 5 hours

• Located on commuter line with 15 minute headways

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Auto carload rail example: The service plan The auto block moves on regular carload trains with a full cycle every two days

Photo source: D. Lehlbach

Service Plan • Load in block as per reservation

• Local to main yard midday

• 2 carload trains with block swap in hump yard

• Local train set out loads at 6 am

• Local train pick up empties at 11 am

• 2 carload trains back to origin yard evening

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Auto carload rail example: Summary Supply chain transparency facilitates small volumes with high service levels and very lean resources

Summary • <400 mile haul

• 48-hour car cycle

• 40,000 units

• Next morning delivery

• Capacity reserved daily in advance

• Leverages adjacent carload flows

Photo source: D. Lehlbach

19 19 © Oliver Wyman

Supply chain transparency: Summary

1 Shared information can stabilize the plan

2 Consistently fuller trains tend to be more stable and perform better

3 Excess resources can be eliminated creating new profitable untapped markets

4 Service innovation is an imperative for growth areas

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Rail Renaissance II The next natural step in professional railroading

1 2 3 4

Supply Chain Transparency

Convergence in Planning

Mission Completion

New Social Compact

Visit www.railplanning.com