(The Kansas City Star posted the following article by Randolph Heaster on its website on August 22.)
KANSAS CITY — Two years ago, U.S. railroads were caught off guard by the increase in the amount of imports arriving into the country from Asia.
The glut of goods intended to stock shelves for the Christmas holidays got backed up in West Coast ports and at choke points through the domestic rail system.
The result was slow deliveries, lost orders and angry customers. Another result was a contrite rail industry that determined it must make investments in its network. And invest it did.
The industry has hired thousands of new employees and continues to look for more. It has spent billions of dollars for new tracks, new locomotives and rail cars, bridges and technology.
As the second largest rail hub in the country behind Chicago, much of that investment has occurred in Kansas City. This decade alone, railroads have invested more than $600 million in infrastructure improvements and have added hundreds of workers in the area. And that is just the beginning.
BNSF Railway, the country’s second largest railroad by revenue, plans to build a $1 billion intermodal facility near Gardner that would surround its rail-truck hub with distribution and warehousing facilities. The mammoth project could eventually employ thousands in the area.
And so this fall — considered the “peak season” as consumer goods arrive in time for the holidays — the rail carriers think they are prepared to distribute the ever-growing inflow of stuff.
Mike Haverty, chairman and chief executive of Kansas City Southern, said business for the railroads in 2004 jumped because of a number of factors. A rise of manufacturing in China, a shortage of truck drivers in the U.S. and rising fuel costs that made moving goods by rail more attractive all helped tie the rail system into knots.
“The industry as a whole had been decreasing capacity for a number of years,” he said. “So we just got caught. Virtually every railroad was in the same category, no doubt about that.”
Since then, Haverty said the rail industry in general and Kansas City Southern in particular have been able to make investments to increase capacity by adding track, acquiring more locomotives and rail cars, and also hiring more people.
“I don’t see the bottlenecks on the West Coast happening that we had two years ago, if for no other reason than that it’s been two years,” said Michael Lerner, president of Rail Logistics, an Overland Park-based rail logistics provider. “They’re learning to adjust. The railroads are in the driver’s seat right now because of the demand. They are in a position to take the most profitable freight, and they’re putting some of the money back into the infrastructure.”
That is what Hal Owens, president of Precision Components Inc., wants to hear. Two years ago, the Phoenix company went through periods where Union Pacific Railroad did not make shipments for two weeks. That is costly for a business that is a warehouse and distributor of construction materials and commodities for customers without rail access.
“Generally, it’s much better now,” said Owens, although he added that the housing market in the West has slowed somewhat. “The railroads have been doing a good job for the last eight months or so.”
Holiday cheer
The Intermodal Transportation Institute of the University of Denver held a conference in early July where transportation executives from railroads, trucking companies, logistics firms, and container companies expressed optimism about the peak season.
“There may be some regional issues, like weather conditions, that create problems,” said Patrick Sherry, director of the National Center for Intermodal Transportation at the University of Denver. “But nobody is sensing that there’s going to be car shortages and backlogs.”
All the major railroads sent letters to the Department of Transportation ’s Surface Transportation Board last month in response to the agency’s request for how they will handle the demands of the peak season. The department started the practice after the 2004 delivery debacles. The American Association of Railroads and the board next month will hold a forum in St. Louis to hear customer concerns.
October is normally the busiest month of the peak season. However, freight volumes for the railroads have been setting records nearly on a monthly basis since last year. A recent survey released by the National Retail Federation tracking U.S. port activity expects August to be as busy as October. Having been burned before, many customers are ordering goods earlier, spreading out deliveries to try to avoid delays.
“The increase in volumes is going to challenge everyone’s ability to perform, but the ports themselves and the truck and rail systems are all operating OK so far,” said Paul Bingham, economist for Global Insight, a consulting firm that conducts the retail group’s survey.
Union Pacific and BNSF, the nation’s two biggest railroads, transport most of the goods arriving in the busy Los Angeles and Long Beach ports.
BNSF, the country’s biggest intermodal carrier, told the transportation board it is not anticipating congestion problems through the rest of the year, including during peak season. That is because the railroad has bulked up considerably. Matt Rose, BNSF chairman and chief executive, said the railroad has increased its capital spending every year since 2002.
“Between 2002 and 2006, BNSF will have invested almost $10 billion to maintain the quality of our infrastructure and to provide additional capacity, not including freight car acquisitions,” Rose said in the letter.
BNSF has had a net increase of 5,000 employees since 2002 companywide. Locally, BNSF has about 2,500 employees, about 200 more than this time last year, said Pat Hiatte, a BNSF spokesman at its Fort Worth, Texas, headquarters.
Intermodal traffic, the movement of containers or trailers using railroads, trucks and ships, is up for BNSF in Kansas City. Last year, it logged 320,000 loadings and dropoffs at its Kansas City intermodal hub, said Steve Forsberg, a railroad spokesman in Overland Park.
“Through July, we’re up 12 percent from the same time last year,” he said.
That was second only to Chicago, which has one of the intermodal complexes that BNSF envisions for Gardner. BNSF has proposed investing $1 billion in a logistics park and intermodal hub that would connect the railroad’s operations with distribution centers and warehouses. The freight complex would employ thousands of people and be the third of its kind in BNSF’s system.
Union Pacific also has made investments that allowed it to handle greater volumes.
Jim Young, the railroad’s president and chief executive officer, said its train work force will grow by 600 this year. Since 2003, Union Pacific has had a net increase of 3,700 engineers and conductors.
Union Pacific will also have added 200 locomotives to its fleet by the start of peak season, Young said, as well as acquiring 2,100 rail cars in 2006.
Union Pacific recently said it was hiring nearly 1,800 train service workers this year, many of whom are expected to replace retiring workers. The railroad has openings for nearly 75 jobs in the Kansas City area, where Union Pacific employs about 2,000 people, said Mark Davis, a railroad spokesman at its Omaha headquarters.
For rail unions, the demand for more workers has been a mixed blessing.
“The staffing levels are certainly better than earlier this decade,” said Frank Wilner, a spokesman for the United Transportation Union. “But the pressure on crews to work longer hours as fatigue becomes a factor continues to be a concern.”
The union, which has about 60,000 active railroad members, also said an earlier push to create management-union programs to train new hires has dissipated.
“We’re seeing railroads abandon those projects out of cost concerns and a desire to move trainees into actual operating positions at an accelerated pace,” Wilner said.
Among several infrastructure improvements, Union Pacific said it has added run-though tracks at its Armourdale yard in Kansas City, Kan.
“Adding one additional track allows more trains to go through the yard without slowing down,” Davis said. “Increasing train speed not only helps in customer satisfaction but allows a railroad to operate more efficiently. If you’re fluid and on time, that frees up resources to move other trains.”
Other improvement to the overall rail system in the area in recent years include building so-called flyover bridges in the Blue Valley industrial district and another near Kemper Arena, at a total cost of more than $135 million. The bridges allow trains to pass through intersections without waiting for another to pass.
“Over the last two or three years, the railroads have identified where the choke points are that have created the bottlenecks,” said Chris Gutierrez, president of Kansas City SmartPort. “There will be issues for shippers as there always is during peak time, but nothing like a couple of years ago.”
Looking south
Kansas City Southern operates mostly a north-south route system geared toward the NAFTA corridor and so its efficiencies are generally unaffected by buildups in the California ports.
But like the other railroads it has been making significant investments, increasing its train operations staff this year by 150 employees. Its future looks bright in terms of the role it might play down the line in the growing deliveries of retail and manufactured goods from Asia.
Kansas City Southern and its Mexican subsidiary, Kansas City Southern de Mexico, operate a route that links Mexico’s West Coast port of Lazaro Cardenas to the southeastern U.S. as well as Kansas City.
It launched daily intermodal service from Lazaro Cardenas in June and has a partnership agreement with Schneider National, the biggest private U.S. trucker. That service currently runs through Jackson, Miss., and on to Atlanta via the Norfolk Southern.
Hutchinson Whampoa Ltd., which operates the world’s biggest container port in Hong Kong, has begun a $200 million expansion of Lazaro Cardenas.
Kansas City Southern’s Haverty said the current annual capacity at Lazaro Cardenas is 100,000 containers known as TEUs, or 20-foot equivalent units. By the end of 2007, it could be 700,000 units.
Eventual capacity at Lazaro Cardenas is expected to be 2 million units, which still would pale in comparison with the current combined container traffic in Los Angeles and Long Beach of 14 million containers annually. That figure could reach 35 million by the year 2020.
Nevertheless, Haverty thinks Lazaro Cardenas can be a key port to relieve pressure at Long Beach and Los Angeles, where delays are more likely and labor costs are higher.
But that is in the future. For this year, the key ports are those in southern California and the Pacific Northwest.
While the rail industry projects optimism, one prominent shippers group remains cautious. Peter Gatti, executive vice president of the National Industrial Transportation League, said no labor problems are expected in the West Coast ports, but other factors such as grain shipments can affect the flow of goods from Asia.
“The shippers are going to be watching the situation extremely closely,” he said. “It’s a positive that the railroads are optimistic that they have the capacity to move the product. But there are still a number of factors that could emerge as we enter the peak season.”