CALGARY, Alta.–Canadian Pacific released a white paper today stating that a change in the railroad industry status quo is necessary to support continued growth in the North American economy.
The full text of the white paper, A 21st Century Railroad for a 21st Century Economy, is below. A PDF version can be downloaded here.
Continued growth in the U.S. economy is dependent on North American rail service meeting current and future demand. In order to meet that demand, the railroads must add capacity. The question of how to create additional capacity to accommodate growth is a critical one. Adding infrastructure and building more track has become increasingly difficult, if not impossible.
Additionally, the demands of the common carrier obligation must be taken into consideration. Specifically, all Class 1 carriers must transport goods tendered to the railroad, no matter how dangerous. This comes into direct conflict with staunch resistance from communities of all sizes to add infrastructure in the form of new tracks and terminals. The prospect of increased traffic is also unpalatable in many instances, even if it improves the overall efficiency of the broader transportation network.
The solution lies in adding capacity without adding infrastructure, increasing the efficiency of the overall network and addressing critical issues, such as congestion in Chicago.
Canadian Pacific (CP) said it believes that industry consolidation offers the best opportunity to improve efficiency of the existing network and creates much needed incremental capacity without adding infrastructure, all while improving service for shippers.
CP is pursuing a combination with Norfolk Southern Corp. (NS) that it believes will:
Enable far better utilization of existing infrastructure.
Introduce alternative options for re-routing traffic around areas of congestion.
Create new opportunities to generate the most efficient route for rail shipments.
Allow CP-NS to provide end-to-end service to customers, without hand-offs and interchanges, which improves safety.
Improve overall service for shippers of all sizes across the network.
The status quo is not an option for North American rail. Change is necessary to support continued economic growth, and that change needs to happen now.
Traditionally, railroads have primarily relied on adding new infrastructure to increase capacity. Building new track or sidings for passing, expanding rail yards to accommodate more cars or longer trains, and adding new connections to facilitate more efficient routings have all been important tools for expanding rail capacity. While railroads continue to reinvest record amounts of capital to add capacity, it is becoming increasingly more difficult to add physical infrastructure. Local and state opposition to building new infrastructure is more prevalent and vocal than ever before. This is especially true in urban areas where many rail customers are located and where many railroads interchange traffic.
Nowhere is the need for additional infrastructure more critical and the ability to add it more difficult than in Chicago, CP said. With six major Class 1 railways and a significant Amtrak and commuter train presence, Chicago is the most critical hub within North America’s rail system. In 2014, roughly 25 percent of all rail traffic traveled through Chicago. In short, what happens in Chicago affects the entire network, the country said.
Although substantial effort has been made to improve infrastructure in Chicago, those efforts have fallen short. The CREATE project, for example, which was designed to invest billions of dollars into critically needed infrastructure to improve Chicago’s congested transportation system, including freight rail infrastructure, has been largely unsuccessful. A multitude of stakeholders with various competing interests make it difficult, if not near impossible, to achieve consensus and identify a path forward. As a result, very little has been accomplished to improve the freight and passenger rail congestion issues in Chicago in a meaningful way.
Today, the rail supply chain and Chicago are fluid and the system is performing well. This is largely a function of a weakened economy, lower shipments and favorable operating conditions.
“But we are living on borrowed time. The time to act is now. The rail industry cannot wait until factors converge again and gridlock resumes. It is imperative for the economy and the public interest that we take steps now to unlock additional capacity,” said the paper.
Unfortunately, recent government regulations have reduced capacity. For example, regulations have been imposed that restrict train speeds for certain commodities in certain areas. While these regulations are intended to increase safety, reducing train speeds reduce system capacity.
Some have suggested that the capacity problem can be addressed by adding more trains. When the physical operating footprint of a railroad line or yard is constrained and near its sustainable capacity, introducing additional locomotives and rail cars into the system is the wrong answer. It is like adding more cars to a highway blocked with rush hour traffic.
“CP has improved asset utilization significantly by cycling railcars faster and decreasing dwell time for locomotives and railcars at terminals. Between 2011 and 2014, CP’s network speed increased 19% and terminal dwell time dropped by 20% (excluding winter of 2013/14). While we continually strive to be more efficient, the law of diminishing returns applies and we need to find other ways to address capacity issues,” the company said.
CP said it believes that industry consolidation offers the best opportunity to increase capacity without adding infrastructure.
Consolidation enables far better utilization of existing infrastructure. For example, trains interchanged in Chicago today must be broken apart and rebuilt in yards within the city and then delivered to receiving carriers. The process involves multiple interchanges between multiple carriers in multiple yards. A merger would allow these activities to be performed elsewhere so that trains moving through Chicago can move smoothly through the city without exiting the mainline, the railway said.
An expanded network also introduces alternative options for re-routing traffic around areas of congestion and creates new opportunities to generate the most efficient route for rail shipments. For example, a large amount of agricultural shipments from the Upper Plains states move through classification yards, over connecting carriers to milling markets east of the Mississippi. This traffic could move in a more expedited manner over alternate gateways in seamless, single-line movement. Likewise automotive traffic currently moving over Chicago could be expedited through other gateways, significantly reducing automobile companies’ inventory costs.
A merger would allow CP-NS to provide end-to-end service to customers, without hand-offs and interchanges. Reducing these disruptive activities can significantly improve velocity, lower costs, and enable the combined company to move more goods more quickly without increasing rates. Faster single line movements, which remove inefficient handlings, would improve the bottom line for all customers, especially those that own their own railcars.
Additionally, if Chicago becomes gridlocked as it did in the winter of 2013 – 2014, a combined CP-NS would have greater expanded routing optionality that would allow our customers’ products to get from origin to destination without having to suffer through extended delays in a gridlocked Chicago.
Tangible Benefits to Shippers from a CP-NS Combination
CP also proposes adopting competitive enhancements that shippers have been demanding.
For example, the new company would give shippers the choice of where they can connect with another railroad along its network, bringing an end to the practice of “bottleneck pricing” in the U.S., further enhancing competition. Currently, railroads are not required to quote separate portions of haul when there is only one single carrier operating on a particular segment. We also see significant opportunities to improve operating efficiencies on NS’ system, unlocking additional capacity while providing faster and more reliable service to NS served customers.
Second, in terminal areas, the combined CP-NS would allow another carrier access to its railway to serve CP-NS customers if the new company is not providing adequate service or competitive rates in those areas, the railway said.