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February 15, 2022
Driving growth and differential performance among
Class 1 railroads
2
Summary
Building a precision-scheduled railroad generated
substantial benefit for Class I railroads and their
shareholders when compared to their prior performance.
However, with nearly all railroads pursuing the same
strategy, we see performance co-related with industrial
production rather than strategic choices to grow top-line.
Breaking away from the narrow range of industry peer
performance will likely require more deliberate choices
about the scope of operations and services that offer good
prospects for returns on capital. Railroad executives
should shift attention from operations to the configuration
of commercial functions to help realize distinct competitive
advantages and improved shareholder returns.
3
Over the past several decades, nearly every Class I railroad implemented
practices associated with a Precision Scheduled Railroading (PSR)
Nearly all class I railroads implemented PSR between 1998 and 2019
Harrison joins Canadian National and implements PSR – operating
ratio (OR) fell from 89% to 61%
1998
Harrison joins Canadian Pacific. OR falls from
the highest in industry at 83% to 60% by 2015
2012
Harrison appointed CEO of
CSX; achieves 57% OR
2017
E. Hunter Harrison pioneers the
concept of PSR
1993
Union Pacific
achieves 60% OR
through PSR
2018
Norfolk Southern and Kansas City Southern adopt PSR; BNSF the only
Class 1 railroad to not adopt PSR
2019
Train lengths grew; operating routes and schedules became
restrictive; workforce size reduced
2021
Source: Company Annual Reports, Deloitte Analysis
4
Over time operating ratios for all Class I operators migrated to a narrow
57–65% band, improving margins across the sector
71.6% 71.6%
70.8%
69.6%
67.0%
65.0% 64.8%
63.8%
63.2% 63.0%
61.5%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Class I Operating Ratios1
CLASS I AVG
Source: Company Annual Reports
Notes: Grey trend lines indicate operating ratios of Class I operators including BNSF, CN, CP, CSX, KCS, NS and UP
64 – 77%
57 – 65%
Operating ratio narrowed to 8 ppt range,
increasing short term profits for the entire
sector
Operating ratio at 13 ppt range;
only CN had adopted PSR
principles
58 - 73%
5
Despite margin gains, ROC continues to be near-constant, pointing to revenue
growth constraints in the industry
9.4%
10.1%
10.8% 11.0%
11.7%
11.0%
10.1%
10.4% 10.7% 10.6%
5%
10%
15%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
BNSF CN CP CSX KCS NS UP Average
Return on Capital
Source: CapIQ financials (2010-2019) for Return on Capital; The Surface Transport Board reports for Railroad Industry’s Cost of Capital
6
$0
$10
$20
$30
$40
$50
$60
$70
$80
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Thousands
Looking at the five years pre-COVID, rail freight ton-miles declined along with
revenue growth
Railroad Revenue ($B)
Rail share of ton-miles has been declining, confirming cost reductions and
efficiency gains did not lead to substitution among other modes of transportation
In addition, restrictions on pricing further flattened the revenue growth (avg.
rail rates are 44% lower today than in 1981)
Source: Bureau of Transportation Statistics; United States only
% Share of US Ton-Miles of Freight Freight Ton-miles (Millions of tons)
Reduction in coal shipments
1.7
1.6
1.7 1.7
1.6
39%
41%
40% 39%
40%
34%
32%
33% 33%
31%
0%
10%
20%
30%
40%
50%
0
1
2
3
4
2015 2016 2017 2018 2019
Total Rail Ton-miles
Trucking share of Freight Ton-Miles
Rail share of Freight Ton-miles
7
Looking at the past five years, rail revenue growth significantly lagged Trucking
and the overall Transportation sector, driven by sector-wide headwinds
5.2%
6.7%
0.4%
7.5% 7.2%
3.9%
-2.2%
4.5%
1.5%
3.9%
-3%
-1%
1%
3%
5%
7%
9%
Air Water Pipeline Rail Trucking
Revenue CAGR
2010-2014 CAGR 2015-2019 CAGR Transportation CAGR (2014-19): 3.40% Industrial Production CAGR (2014-19): 0.64%
Source: Bureau of Transportation Statistics (BTS)
Notes: 2020 excluded due to covid implications; Air – BTS data includes revenue for both passenger and freight services; Water – only accounts for domestic water transportation; Pipeline – includes both Gas and Oil pipeline
transportation, For projections, gas utilities CAGR was used as it is major component of pipeline industry; Railroad – consists of only Class 1 Railroad revenue
Some of the factors that contributed to
the growth were boom post 2008/09
recession and increased crude oil volumes
Decline primarily driven by changes to
the mix e.g., coal plants shut down,
freight recession 2016/17
8
• What is beyond PSR for railroads?
• What actions would meet investor expectations over the
next five years?
• What are the sources of revenue growth? What is your
strategy?
• How can railroads become more customer-centric?
• What level of margin and growth trade-off are you willing
to make? Can railroads grow their top line while
maintaining a low operating ratio?
What’s next?
9
IndustryAnalogs: Strategies employed by other transportation companies
suggest a range of options as Class I railroads determine their next steps
More Plausible Less Plausible
BUSINESS
STRATEGY
FINANCIAL
STRATEGY
EXPAND INTERMODAL
BUSINESS
RECAPITALIZE WITH
LONG TERM INVESTORS
PURSUE EMPLOYEE
OWNERSHIP
MONETIZE
INFORMATION ASSETS
EXPAND OUTSIDE
NORTH AMERICA
PRIVATIZE RAIL
ASSETS
Public policy, regulatory, and industry structural factors narrow options for Class I railroads
United airlines extended 55%
equity to employees
Jordan industries acquisition of
Echo global logistics; Infrastructure
funds buying into shortlines
JOINT VENTURE
Chicago sold city’s parking meters to
a consortium of companies led by
Morgan Stanley
XPO Logistics acquisition of
Norbert Dentressangle in
Europe
Forward Air acquisition of
BarOle Trucking
Air France, KLM, Delta and
Virgin Atlantic joint venture
FedEx Dataworks using Big
Data to jointly plan
customer demands/returns
Source: Factiva, News Articles, Deloitte Research
10
Investments already being done by railroads, that should continue
1. Continue to apply PSR to enhance asset efficiency on the main line, where opportunity exists
2. Adopt new talent models, that are possible today with available technology (e.g., advanced analytics, automation, manage service for back-office functions)
3. Shape the public policy under Biden administration to support rail growth
1. Improve industrial development, attracting factories/ port facilities/ warehouses to adjacent real estate
2. Improve interface and collaboration with other modes – ports/ocean shipping/ trucking through technology
3. Yield Management – implementing day-of-week pricing and other levers to lower congestion and smooth operations
Existing ideas in
the industry
Source: Biden Infrastructure plan announced on Mar 31, 2021
Table-staked
11
Talk to us
Larry Hitchcock
US National Transportation
Industry Leader
lhitchcock@deloitte.com
James Miller
Canada Railroad Sector
Leader
jamemiller@deloitte.ca
Erich Fischer
Strategy, Automotive & Transportation
industry
efischer@deloitte.com
Yasir Mehboob
Transportation | Restructuring
and Value Creation Services
ymehboob@deloitte.com
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each
of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or
more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to
attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.
Copyright © 2021 Deloitte Development LLC. All rights reserved.
This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional
advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before
making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.
Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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Driving growth and differential performance among Class I railroads

  • 1. February 15, 2022 Driving growth and differential performance among Class 1 railroads
  • 2. 2 Summary Building a precision-scheduled railroad generated substantial benefit for Class I railroads and their shareholders when compared to their prior performance. However, with nearly all railroads pursuing the same strategy, we see performance co-related with industrial production rather than strategic choices to grow top-line. Breaking away from the narrow range of industry peer performance will likely require more deliberate choices about the scope of operations and services that offer good prospects for returns on capital. Railroad executives should shift attention from operations to the configuration of commercial functions to help realize distinct competitive advantages and improved shareholder returns.
  • 3. 3 Over the past several decades, nearly every Class I railroad implemented practices associated with a Precision Scheduled Railroading (PSR) Nearly all class I railroads implemented PSR between 1998 and 2019 Harrison joins Canadian National and implements PSR – operating ratio (OR) fell from 89% to 61% 1998 Harrison joins Canadian Pacific. OR falls from the highest in industry at 83% to 60% by 2015 2012 Harrison appointed CEO of CSX; achieves 57% OR 2017 E. Hunter Harrison pioneers the concept of PSR 1993 Union Pacific achieves 60% OR through PSR 2018 Norfolk Southern and Kansas City Southern adopt PSR; BNSF the only Class 1 railroad to not adopt PSR 2019 Train lengths grew; operating routes and schedules became restrictive; workforce size reduced 2021 Source: Company Annual Reports, Deloitte Analysis
  • 4. 4 Over time operating ratios for all Class I operators migrated to a narrow 57–65% band, improving margins across the sector 71.6% 71.6% 70.8% 69.6% 67.0% 65.0% 64.8% 63.8% 63.2% 63.0% 61.5% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Class I Operating Ratios1 CLASS I AVG Source: Company Annual Reports Notes: Grey trend lines indicate operating ratios of Class I operators including BNSF, CN, CP, CSX, KCS, NS and UP 64 – 77% 57 – 65% Operating ratio narrowed to 8 ppt range, increasing short term profits for the entire sector Operating ratio at 13 ppt range; only CN had adopted PSR principles 58 - 73%
  • 5. 5 Despite margin gains, ROC continues to be near-constant, pointing to revenue growth constraints in the industry 9.4% 10.1% 10.8% 11.0% 11.7% 11.0% 10.1% 10.4% 10.7% 10.6% 5% 10% 15% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 BNSF CN CP CSX KCS NS UP Average Return on Capital Source: CapIQ financials (2010-2019) for Return on Capital; The Surface Transport Board reports for Railroad Industry’s Cost of Capital
  • 6. 6 $0 $10 $20 $30 $40 $50 $60 $70 $80 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Thousands Looking at the five years pre-COVID, rail freight ton-miles declined along with revenue growth Railroad Revenue ($B) Rail share of ton-miles has been declining, confirming cost reductions and efficiency gains did not lead to substitution among other modes of transportation In addition, restrictions on pricing further flattened the revenue growth (avg. rail rates are 44% lower today than in 1981) Source: Bureau of Transportation Statistics; United States only % Share of US Ton-Miles of Freight Freight Ton-miles (Millions of tons) Reduction in coal shipments 1.7 1.6 1.7 1.7 1.6 39% 41% 40% 39% 40% 34% 32% 33% 33% 31% 0% 10% 20% 30% 40% 50% 0 1 2 3 4 2015 2016 2017 2018 2019 Total Rail Ton-miles Trucking share of Freight Ton-Miles Rail share of Freight Ton-miles
  • 7. 7 Looking at the past five years, rail revenue growth significantly lagged Trucking and the overall Transportation sector, driven by sector-wide headwinds 5.2% 6.7% 0.4% 7.5% 7.2% 3.9% -2.2% 4.5% 1.5% 3.9% -3% -1% 1% 3% 5% 7% 9% Air Water Pipeline Rail Trucking Revenue CAGR 2010-2014 CAGR 2015-2019 CAGR Transportation CAGR (2014-19): 3.40% Industrial Production CAGR (2014-19): 0.64% Source: Bureau of Transportation Statistics (BTS) Notes: 2020 excluded due to covid implications; Air – BTS data includes revenue for both passenger and freight services; Water – only accounts for domestic water transportation; Pipeline – includes both Gas and Oil pipeline transportation, For projections, gas utilities CAGR was used as it is major component of pipeline industry; Railroad – consists of only Class 1 Railroad revenue Some of the factors that contributed to the growth were boom post 2008/09 recession and increased crude oil volumes Decline primarily driven by changes to the mix e.g., coal plants shut down, freight recession 2016/17
  • 8. 8 • What is beyond PSR for railroads? • What actions would meet investor expectations over the next five years? • What are the sources of revenue growth? What is your strategy? • How can railroads become more customer-centric? • What level of margin and growth trade-off are you willing to make? Can railroads grow their top line while maintaining a low operating ratio? What’s next?
  • 9. 9 IndustryAnalogs: Strategies employed by other transportation companies suggest a range of options as Class I railroads determine their next steps More Plausible Less Plausible BUSINESS STRATEGY FINANCIAL STRATEGY EXPAND INTERMODAL BUSINESS RECAPITALIZE WITH LONG TERM INVESTORS PURSUE EMPLOYEE OWNERSHIP MONETIZE INFORMATION ASSETS EXPAND OUTSIDE NORTH AMERICA PRIVATIZE RAIL ASSETS Public policy, regulatory, and industry structural factors narrow options for Class I railroads United airlines extended 55% equity to employees Jordan industries acquisition of Echo global logistics; Infrastructure funds buying into shortlines JOINT VENTURE Chicago sold city’s parking meters to a consortium of companies led by Morgan Stanley XPO Logistics acquisition of Norbert Dentressangle in Europe Forward Air acquisition of BarOle Trucking Air France, KLM, Delta and Virgin Atlantic joint venture FedEx Dataworks using Big Data to jointly plan customer demands/returns Source: Factiva, News Articles, Deloitte Research
  • 10. 10 Investments already being done by railroads, that should continue 1. Continue to apply PSR to enhance asset efficiency on the main line, where opportunity exists 2. Adopt new talent models, that are possible today with available technology (e.g., advanced analytics, automation, manage service for back-office functions) 3. Shape the public policy under Biden administration to support rail growth 1. Improve industrial development, attracting factories/ port facilities/ warehouses to adjacent real estate 2. Improve interface and collaboration with other modes – ports/ocean shipping/ trucking through technology 3. Yield Management – implementing day-of-week pricing and other levers to lower congestion and smooth operations Existing ideas in the industry Source: Biden Infrastructure plan announced on Mar 31, 2021 Table-staked
  • 11. 11 Talk to us Larry Hitchcock US National Transportation Industry Leader lhitchcock@deloitte.com James Miller Canada Railroad Sector Leader jamemiller@deloitte.ca Erich Fischer Strategy, Automotive & Transportation industry efischer@deloitte.com Yasir Mehboob Transportation | Restructuring and Value Creation Services ymehboob@deloitte.com
  • 12. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms. Copyright © 2021 Deloitte Development LLC. All rights reserved. This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.