July 18, 2012
Jennifer Symoun
Good afternoon or good morning to those of you to the West. Welcome to the Talking Freight Seminar Series. My name is Jennifer Symoun and I will moderate today's seminar. Today's topic is "Siting of Freight Facilities."
Before I go any further, I do want to let those of you who are calling into the teleconference for the audio know that you need to mute your computer speakers or else you will be hearing your audio over the computer as well.
Before we get started on today's seminar, I wanted to announce the availability of a new publication from the FHWA Office of Freight Management and Operations. The FHWA Office of Freight Management and Operations recently released a Freight and Land Use handbook. This handbook provides transportation and land use planners tools and resources to properly assess the impacts of land use decisions on freight movements, as well as the impacts of freight development and growth on land use planning goals. The handbook identifies freight-related land use issues, key considerations, and available resources. Throughout the handbook, examples and case studies from a range of urban and rural areas across the country are used to demonstrate the effectiveness of these techniques. An electronic version of the handbook is available at the web site on the slide on your screen. I've also typed the web address into the chat box.
Turning back to Talking Freight, today we'll have three presenters - John Morris of Cushman and Wakefield Global Consulting, Vann Cunningham of BNSF Railway Company, and Chris Steele of CWS Consulting Group.
John Morris is the Co-Head of Cushman and Wakefield's Global Business Consulting group. He is lead practitioner for C&W's Supply Chain Solutions Consulting practice and is based in Rosemont, IL. He is also on the Executive Committee for C&W's Industrial Services Practice. Mr. Morris is an industry leader in network and location strategy for manufacturing and distribution operations. He has an extensive background in supply chain strategy, network design, supply chain cost reduction, and transportation operations. Sample clients Mr. Morris has completed and led supply chain work with include Thule, Gap, Graphic Packaging, Dale & Thomas, Southern Wine & Spirits, Novartis, Gallo, Home Depot, Circuit City, Starbucks, Unilever, US Foods, Sears, Chrysler, Amway/Alticor, VF, General Motors, Wegman's Stores, Aptar and Constellation Brands.
Vann Cunningham is Assistant Vice President - Economic Development for BNSF Railway Co. He develops and leads programs that encourage rail-oriented industries to locate or expand their facilities on BNSF. He is also responsible for developing rail-served industrial, intermodal and trans-load facilities throughout BNSF's franchise. In this role, he has written and spoken extensively on the impact of transportation, logistics and the evolving global supply chain on corporate site selection, economic development and real estate development. Mr. Cunningham has 40 years of corporate site selection and economic development experience including major domestic and international projects in the public and private sectors.
Chris Steele is president and founder of CWS Consulting Group, an international location strategy company based in Newton, Massachusetts. Chris Steele has over 20 years of business- and urban planning experience in real estate, economic development and location strategy and has worked with clients such as Boeing, Biogen, Lenovo, JP Morgan Chase, and FreightCar America as well as a host of public agencies. Mr. Steele previously served as the Line of Business President for TranSystems Corporation's Real Estate line of business. He also served as the Director for Location Advisory Services at ADP Mintax, and was an integral part of the Ernst & Young Real Estate Advisory Services practice for over 11 years.
Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. If during the presentations you think of a question, you can type it into the chat area. Please make sure you send your question to "Everyone" and indicate which presenter your question is for. Presenters will be unable to answer your questions during their presentations, but I will start off the question and answer session with the questions typed into the chat box. If we run out of time and are unable to address all questions, we will attempt to get written responses from the presenters to the unanswered questions.
The PowerPoint presentations used during the seminar are available for download from the file download box in the lower right corner of your screen. The presentations will also be available online within the next few weeks, along with a recording and a transcript. I will notify all attendees once these materials are posted online.
One final note: Talking Freight seminars are eligible for 1.5 certification maintenance credits for AICP members. In order to obtain credit for today's seminar, you must have logged in with your first and last name or if you are attending with a group of people you must type your first and last name into the chat box. I have included more detailed instructions in the file share box on how to obtain your credits after the seminar. Please also download the evaluation form from the file share box and submit this form to me after you have filled it out. Even if you're not applying for AICP credit, I do encourage everyone in attendance to fill out the evaluation.
We're now going to go ahead and get started. Today's topic, for those of you who just joined us, is Siting of Freight Facilities. As a reminder, if you have questions during the presentation please type them into the chat box and they will be answered in the last 30 minutes of the seminar. Our first presenter will be Vann Cunningham of BNSF Railway Company.
Vann Cunningham
Thank you, Jennifer. BNSF Railway is one of the largest Class 1 railroads in the United States. I will approach the issue of freight facilities from the standpoint of the railroad. What I particularly want to talk about today is the concept of inland ports and how that relates to high capacity asset-intensive transportation networks. There are a lot of misconceptions about inland ports and rail facilities. Not all rail sites are created equally. Quite often we're asked: can we just connect up to the rail line. That's a lot like trying to connect up to an interstate highway - it's not quite so easy to do. I thought it would be of most use if I spend the time I have here to help you understand how the railroad functions - particularly how it functions in relationship to major terminals; what the factors are that make that a success; and what has to be considered in terms of siting facilities as you expand or grow in the transportation network.
What are the characteristics of high capacity asset-intensive forms of transportation? We are primarily talking about air, ocean, and rail. Today I'm going to talk about the rail and ocean connection and not so much about airports. All of these major modes of transportation share a common set of needs for large amounts of very capital intensive infrastructure in order to make them work. They have common characteristics. Because of their size, they inherently create economies of scale. They are successful and the demand exists for them in part because that economy of scale allows you to create lower unit operating costs.
A second characteristic of them is that they yield higher levels of reliability and service. As a customer, you are concerned that you have a product available to you when you need it, whether it's an input to your manufacturing process, or consumer goods for a big box retailer. You want your product when you need it. You want to understand when you are going to get it and you want the quality of service and cost that will help you be successful. One of the major times of the year for railroads is the peak season leading up to Christmas. If the product doesn't get to the stores, they have lost an entire year and may have lost the entire product. It's really critical we create those levels of service, and it's one of the key characteristics that have changed in the rail industry over the past 40 years. I saw a note yesterday where someone said they wished more companies would use rail but it is too slow. It's not all about moving slow: it's about reliability.
Another characteristic is that asset intensive networks require passenger or freight density. This makes them attractive for serving large population centers or markets. Finally, they have to be scaleable. Basically, these systems work best if you have a hub and spoke network. One way to think about transportation is like thinking about electrical utility. It has lines and nodes; it's a nodal linear network. Where those nodes are located is critical. If you think about it in electricity terms, you have high voltage transmission lines that go across the country. They go to substations and transformers that bring it down to the level to bring it into your house. You have to be able to scale it. That's a critical characteristic of these transportation networks.
I'm going to focus on intermodal. When I'm talking about a port - whether it's an inland port or an ocean port - I'm talking primarily about the movement of international goods and secondarily about the interface between international goods and the domestic transportation system. For me, an inland port has to have the characteristics of a port. It needs to be a place where you can clear customs, move product in bond so you can maintain its integrity, and it meets the characteristics it would otherwise have if you were talking about an ocean port. In order for these facilities to be successful, they have to have volume, density, and balance. Secondly, you have to consider their proximity to each other. Another way to think about this is, "Do they cannibalize each other or compete with each other?" Finally, it has to cover the market.
First, I'd like to deal with the modes of transportation, how they compare to each other, and what their different requirements are. This is a complicated slide. I want to point out a few things. First is the difference in the units of shipment between the various modes of transportation. In the trucking industry, it's basically one truckload. In the train world, the world of railroads, it's the unit train. A unit train is a number of cars, generally between 90 to 110 cars, capable of carrying anywhere from 90 to 250 units on that train. It's all the same equipment moving as a unit from one origin to one destination, and generally a dedicated service returning from that destination back to that origin, hopefully loaded both ways. In the ocean world, it's the ship. There you are talking about anywhere from 50 to 5,000 truckloads. In the air world, it's either air freight or passengers. With passengers, you can have small planes with only 5 passengers or large planes with up to 300. It is these characteristics of the unit of shipment that affect whether or not you are going to be successful in siting these kinds of facilities.
One of the things we have a lot of requests for is to establish a new intermodal facility. A lot of folks have realized intermodal is a key form of transportation for success, particularly in the distribution industry - moving from rail to truck, truck to rail. Being able to deliver that within a region is absolutely key to the economic success of major areas of the country. So a lot of people say they want to have an intermodal facility. What does it take to establish service? Look at the row that says "annual volume required for daily service." If you want to establish daily truck service between Point A and Point B, all you have to do is have one truckload a day, per year. If you want to add a second O-D pair, then all you need to do is double that number and be able to go to the second one. When you start talking about an intermodal train, you need to have 91,250 units of 150 to 400 truckloads; that's 150 to about 280 containers on one train. In order to just have one O-D pair operate in a unit train model with intermodal, you have to have 91,000 units moving between these two points. This is one of the key factors that drive the size and scale of the facilities and one reason why railroads are not particularly interested in going to small places with intermodal facilities. It's very difficult to get this kind of volume. Ocean requires a million units, and air requires anywhere from 2,000 to 100,000 units a year.
With truck and rail, where you have a single driver on trucks and you are dealing with intermodal rail, you are moving about the same distance every day - roughly 500 miles a day. The truck driver is limited to 10 hours a day. The train operates 24 hours a day. The train operates at less than half the average speed of the truck, but because it operates 24 hours a day, it obviously covers a lot more distances and is able to compete with the single driver. In terms of route infrastructure, it's the highway system for trucks, ports for ocean, and airports for air. The rail network is privately owned in the U.S.; it's almost exclusively owned, developed, and paid for by the private sector. Generally, we don't have a lot of flexibility. One issue that concerns a railroad in the area of reliability is that it's not like an electrical system where if a substation gets knocked out, the electron travels at the speed of light. It can come from another location back into that point and it can go thousands of miles in a matter of milliseconds. We're operating at 21 mph. If you disrupt our system, you have 100 trains that can't back up and easily go another direction, so you're very limited. You can reroute a truck, and planes are virtually unlimited in the flexibility of the air corridor. All the other forms of transportation are scalable, but trains really aren't. It costs you $300,000 a year for a crew start, and it costs $300,000 if you are pulling 1 unit or 250 units.
What drives volume and density? Obviously, it's population demand. Back in 2005 and 2006, Virginia Tech did a study for the Census Department Bureau and they identified over the next 50 years major megapolitan demand centers that would be growing in the U.S. Why these areas are important is that 60-70% of the population growth in the U.S. over the next 50 years is going to occur in these regions. We use this as a major organizing principle to understand how our network should be rationalized, expanded, or developed in order to respond to that demand.
If you look at where we're distributed in terms of intermodal facilities, BNSF Railway has 32,000 miles track. We serve the 28 states, 3 provinces in Canada, and we interchange traffic into Mexico. As you can see, we're basically west of the Mississippi River; however, we do get into Atlanta and, through interchanges with the eastern railroads, we get into a number of other locations throughout the eastern U.S. This shows the distribution of where our intermodal facilities are. They are very much related to the red dots, which are the ocean ports that we serve directly in the U.S.
If you look at our core rail routes, you'll see it's relatively complex. The overall core rail network includes all of the carload activity, and it also includes coal and agriculture, which are the other two major components of our core system. However, most of the traffic in intermodal movements is moving from the ports of Seattle, Portland, and Tacoma or in Chicago, or it's moving from LA, Long Beach into Chicago, Alliance, Texas, or Atlanta. It's a four corners kind of thing where we have a corner in the Pacific Northwest, the LA basin, and Chicago, and for us, Texas is a primary location for the major nodes that are connected in our system.
It you look at our intermodal system, you will see it is much simpler. It connects with 10 out of the 14 megapolitans that are shown on this map. It's clearly not everywhere. It is focused primarily on major megapolitan areas and growth centers that we'll see over the next 30 years.
This shows market coverage. We talked about proximity to each other. Basically, we look at a 200- to 250-mile radius. When traffic comes into an intermodal facility, it's lifted off of the rail car. It goes onto a chassis. It it's a trailer, it goes on the ground, and there' about a 15-20 hour period during which the dray company needs to come in to pick it up and deliver it. They're able to deliver very effectively within a 200-mile radius. They get one or two turns a day on most of the equipment, which is highly efficient. You can see that there's relatively little overlap here. We've designed this system so that we can cover the maximum amount of markets in the country with the minimum amount of facilities.
BNSF Railway is a combined company that was previously the Burlington Northern and Santa Fe. They merged about 15 years ago. At the time of the merger, the two combined railroads had about 149 intermodal facilities between them. Today, we have a little over 30. We've rationalized this system. These are major ones that we've closed over the past decade and a half. We've rationalized this system significantly to improve the efficiency of the network.
This is a map showing the requests that we have on a fairly regular basis for new facilities to be opened. If we backed up to the earlier slide, you would see that many of the ones requested to be opened are very close to or within the radius that we already serve, or they're in locations where we previously closed a facility.
I'd like to draw your attention to one particular case that gives you an example of what's involved when trying to cycle in facilities. We had facilities at Saint Paul, Dilworth, and Billings. Dilworth, MN is right across the line from Fargo. Dilworth was a facility that primarily served UPS package business. It was a domestic facility. Saint Paul is a larger international and domestic facility. Billings really functions as a location where we combine some intermodal flats and equipment with a regular carload and then move it to a point where it can join with the rest of the traffic. In Bismarck and Minot, we didn't have anything. We had a requests from Bismarck to open a facility, Minot, and in Fargo. We came in, looked at the market, talked with the State, and asked the State to do a freight mobility study, which they undertook, and to decide where they wanted to concentrate their efforts. We knew we could not support this many facilities in that particular location. In fact, Dilworth was less than 5000 and was in some consideration of being closed at that time anyway, because of the number of units that we were handling there. As you can see, Bismarck is 437 miles from Saint Paul, Dilworth is only 240 miles from Saint Paul, Minot is only 273 miles from Dilworth, and Billings is relatively close to Bismarck. Of all the ones requested, the only two in the U.S. we have opened in the past five years that are smaller facilities are Minot and Lubbock, Texas. Lubbock could support it because it had as specialized product: large amounts of cotton that needed to move in containers to the West Coast.
After we did this study, we determined we would close Dilworth as an intermodal facility and open Minot. We moved some of the activity from Billings to Bismarck and permitted some intermodal traffic to move in the manifest system from Bismarck. We rationalized the system down to these two locations. The justification for Minot was threefold. Firstly, they have specialty grain products that do not yield themselves to large shipments; they lend themselves best to being put into super sacks and going into containers. Secondly, they were willing to sign a guarantee; in other words a take-or-pay contract. If we run trains in there, they pay whether it's full or not full. It offset some of the risk that was associated with running dedicated trains into Minot. Thirdly, they were able to get a contract with steamship companies. The steamship companies control international containers. They were able to get a contract with one of the steamship companies that guaranteed them the availability of international boxes so they would be able to have the containers there when they needed them and to fulfill their requirements. This was a unique situation. Lubbock and Minot are generating a significant amount of traffic for export that justifies the development of intermodal operation in a small location.
This is the western network for the Union Pacific Railroad, our principal competitor. Their network is a little denser than ours. They have a little more overlap, but it's very similar. Their lines run parallel to ours, but not in exactly the same areas. They have an effective and efficient system. We compete in every arena. They have standards, as we do, that you need to have about 200,000 lifts. A lift is a movement on to or off of a rail car. You have to have about 200,000 in order to open a facility and be assured it's going to be successful.
The situation with the eastern roads is a little bit different. This is the CSX intermodal system, a fairly rational system. In the lower right hand corner, it says about 100 miles, so if you had a 200 mile radius around their system, it would look like they were all on top of each other. In the east, you can get away with a shorter length of haul and a denser system because of the population density in the area. You are able to support the systems because you can get the volume at the local level and the density that makes it work. The other factor that affects it, especially in the northeastern corridor, is that it's extremely dense in this area. One thing to realize for those of you in the northeast is not only do you have a high population, but you have an extremely congested highway situation. To the extent that the highway system is congested, you need to have more locations, because on the trucking end of it, the more turns a day - the more times they can use the truck - the more cost effective it is. If it costs you $700 a day to pull out of the lot, it's a lot better if you can deliver five loads a day than one every two or three days. Clearly, congestion works to make the rail more competitive in shorter distances and allows you to locate intermodal facilities much closer together than you would in the western U.S. Our average length of haul on intermodal is over 2000 miles. In the eastern U.S., the average length of haul on intermodal is around 700 miles. It's a much shorter length of haul because of the population density. A few years ago I visited Philadelphia on 4th of July weekend. I was interested in seeing Gettysburg and I thought I would drive over there and come back in one day. At the end of the day I had about a half an hour at Gettysburg because no one told me that there are 50 mph interstates. With trucks moving at that kind of speed with that kind of density, it's very advantageous and cost effective for them to be able to locate them more densely.
To wrap this up, what are the consequences of locating a facility improperly? It complicates the train make-up and the dismantling process. To the extent possible, a Class 1 railroad is a long distance hauler. We want to be able to move a train intact as far as we can from its origin to destination with the minimum number of intermediate stops necessary to fuel and do crew changes. If you have an intermodal train that has freight on it and has to go to multiple locations, then you have to stop and swap blocks of cars that are going to go to these locations and be able to make a train up that will meet those requirements. It's what makes it work for UPS, FedEx, and all the trucking companies that ship on us. It simplifies the train operations and reduces the number of set-outs. A set-out is when you stop, take a portion of the train, set that out, and somebody comes and does something with it locally. It reduces the number of pick-ups. Clearly, the more complexity you have adds time to the overall transit. The reason intermodal is so successful today and has grown as a major part of the business over the last 20-25 years is because freight can compete with truck and with long haul freight. One thing a lot of people don't realize is that the vast majority of UPS ground freight that moves more than 500 miles moves on the railroad. You can go from Chicago to LA in easily under 4 days with these expedited trains. Complexity increases the variability of service. More complexity is less reliable. One of the biggest complaints about rail historically has been "I can't depend on them. I can't get it when I need it." If the facility is located improperly, facility and train operating costs go up. It makes it much more difficult to make effective investments in infrastructure. An intermodal facility such as we're building in Kansas City today is a $250-$300 million investment; the cranes alone are over $50 million. These are major facilities. Building a minor facility, unless you have the economies scaled to support it, is a real issue.
If you look at the major intermodal corridors in the U.S. today, in the east you have greater density, and you see the NS and CSX corridors. A major part of the corridor efforts that the NS and CSX are doing - the Crescent and the Heartland - are designed to increase the track infrastructure to remove obstacles to being able to double stack containers and move them as fast as they can, as far as they can, similar to the way the western railroads operate. The largest two corridors in the U.S. are the Sunset corridor and Southern TransCon corridor, followed by the Central corridor and the Northern TransCon corridor. These are the really large routes that carry about 70% of all intermodal traffic in the U.S. that's moving more than 1,000 miles.
What are the characteristics of intermodal routes? They connect to major markets and major ports. They are high capacity. They have the signaling, sidings, and grade separations - primarily double and triple main track that allow them to pass each other. We have about 100 trains a day going back and forth between LA/Long Beach and Chicago every day. We originate about 50-60 coal trains a day on the coal route. These are similar to the numbers Union Pacific would have. It's extremely important that we have the right kind of infrastructure to be able to pass properly. You want to minimize the route options. With more density and less complexity, you get the benefits I talked about. Lastly, intermodal facilities minimize gateways. What is a gateway? The ports are gateways, as are the interchanges between the Class 1 railroads. Minimizing the number of gateways you're utilizing gives you the density volume that make it work efficiently and allow you to assure your customers that they are going to have their products when they need them.
Moving to ocean container shipping routes, these are the major routes in the U.S. Clearly, the 600 pound gorilla is China. It's the inter-connection between the west coast ports. You can see the lines that take us across the country. Product comes into the West Coast. It's moved across the country. A certain amount of trans-shipment work goes on in the LA/Long Beach area. Probably a third of what comes into the LA/Long Beach area goes into the Inland Empire area and is then trans-loaded into domestic containers and moves out across the U.S. Another third of it stays in the region, and another third bypasses that area and goes directly on rail right out of LA/Long Beach across the country. A lot of people have questions about the impact of the Panama Canal. We'll just have to wait and see. I don't know what the affect will be. As you add 6-10 days, that's going to increase the amount of freight that will be in-transit, and that's going to affect the inventory capabilities of companies. They will have to do different kinds of planning. There's no question in my mind that it's going to be a boon to some extent, particularly to Savannah and Charleston, and to a lesser extent to Norfolk and New York. There's been a lot of discussion about Houston as a source of intermodal freight. Houston is as far away from the Panama Canal as Savannah and Charleston. From an intermodal standpoint, if you come to Houston, you still have to put product on road or rail to get it back to the eastern market. Houston's real benefit is going to be in bulk commodity, which it already dominates in the U.S., not in the containerized freight area.
Looking at port capacity and gateway capability, the big boys are already on the east coast today, in New York and Norfolk of course. These large ships were 8,000 TEUS and now 14,000-15,000 TEUs. TEU is a 20-foot container equivalent; 20-foot and 40-foot containers are the international units, and 53-foot containers are the domestic units. LA/Long Beach matches the freight of all the rest of them combined, excluding New York. They have the depth of the channel for very large ships. There's a lot of work going on in the east and a lot discussions going on about that. One of the issues you have to consider is that I've seen numbers that range from a $2 billion to $6 billion investment that would be required to be able to dredge channels and accommodate larger ships. It will be interesting to see what happens with that. It's definitely going to be a benefit; whether or not it's going to be a sea change is a matter of debate. One thing you have to consider is at the end of the day, it's all about time and dollars. If you put a pin in Detroit and New Orleans and draw a line, 250 miles on each side of that is the demarcation line for freight coming into the western or eastern ports. That line moves according to the cost of transit and freight. Railroads have a certain amount of control and influence over which way that freight will go.
These are the local port markets. A large amount of product comes into these and stays in the immediate area. There's not a lot of movement with this; it moves within 150 miles, and clearly that's a large part of the port business throughout the U.S. today.
If we look at inland port markets, we see, again, bringing international freight into or out of these markets is very much centered on the megapolitan areas we discussed earlier. These are the areas we serve today, and you can see some merging.
Important characteristics of container port facilities include freight density; the local market; proximity and market coverage; connectivity to core rail routes or inland ports; common use facilities; and the depth of channels and infrastructure restrictions. These are all factors that affect the ability of an ocean port to be successful.
In conclusion, for air travel, ocean travel, rail travel, freight density is absolutely the key factor: how much freight you have, what the volume is, whether or not it's balanced. Are you loaded both directions or empty in one direction? Intermodal facilities, both inland and port facilities, are key to driving freight density, so where we locate those is critical to the success of them. Routes should be high capacity and simple; try to keep this thing down to something that will move large amounts of traffic longer distances and will be reliable for the customer and profitable for the railroad and transportation companies.
For those of you that are transportation professionals, I think we need to do a much better job of educating the public and politicians on how transportation networks work. I think we need a national freight mobility policy to understand how these networks work and how communities fit into it. We need to better define the future transportation network as we look for it. A lot of planning needs to be done. On Federal and State highway transportation money, we need recognition that highways and rail and airports and ports all have to be part of an integrated system. If we want to have a national or statewide freight system, we have to have policies and use our money in a way that will allow us to maximize the benefit of that.
Jennifer Symoun
We will continue with our next presentation, given by Chris Steele of CWS Consulting Group.
Chris Steele
Thank you very much. Building off of some of the concepts Vann has put in front of us from the carrier's point of view, what I'd like to do is share with you a little more from the existing point of view from the public sector as well as from the actual users of freight facilities. How are they looking at this game and how are they making location decisions? A lot of what you are about to see comes from a research project we did for the Transportation Research Board that is now available as National Cooperative Freight Program (NCFRP) Report Number 13. That work was done over a period of a little more than a year. We headed up the project, along with Resource Systems Group, Fitzgerald & Halliday, Halcrow, and HDR. What you are about to see in part has everything to do with how this was then put forth into a guide for the public sector to help them to better understand the framework, geography, how these companies were making location decisions, and what they could do better to become better partners and maximize their own opportunity.
CWS Consulting Group is known here in North America as CWS Consulting and outside of North America as Investment Consulting Associates. We help companies make location decisions on an everyday basis. It is our job to spend time with our clients, to understand the business pressures they are facing, and to help them find the communities that can help house them.
In terms of what this did for the research on freight facilities, I'll give you a little bit of information on freight movement basics, as we explained it to the public sector; how the selection process works for freight facilities; the public sector role and how that might be optimized in terms of best practices and lessons learned; and direction on how to find the NCFRP Report documents - both the guidebook we produced and the report of the supporting documentation and all of the analysis we did. We spent a considerable amount of time talking to both anybody that's carrying freight in terms of warehouse operators and 3PLs, as well as manufacturers, retail companies, and everything on that side of the private sector equation that could be considered a freight company. We also spent quite a bit of time speaking with the public sector to find out what their level of awareness was and where the holes were, and turned that into guidance so they could better understand.
The first part was to explain what we meant by a freight facility. That required a step backward to explain what freight is in the first place. Logistics is the movement of goods, people, and supplies from one place to another. A freight facility is the point on the map where that stuff is stopped for a moment to re-sort it, store it for a period of time, add value to it, or bring it to a point where it's going to be brought to end point of its consumption. In plain English, facilities are the transition points in the supply chain.
To underline why this is important, why the public sector needs to understand what these things are, what they do, where they go, and why, it's important to remember that freight is the lifeblood of the American economy. The ability to walk to the store and buy something off the shelf means it has to be produced somewhere and brought back to that shelf so that we can purchase it. This impacts things like domestic and international trade, the access to raw materials, all sorts of finished products, and consumer goods.
Putting this into numbers, over 60 million tons of freight moves through the U.S. freight transportation system. This represents about $40 billion in goods. Trade is increasing as a share of the gross domestic product. The processing of freight and intermediate processing - something that's going to play importantly to economic development professionals - represents a real opportunity in terms of jobs and investment. The efficient movement of freight lowers costs; allows for the best use of transportation facilities across the different uses - both freight and passenger; protects the environment; and reduces energy requirements.
As we started to look into what the current state of affairs was, a couple themes came through, both in terms public understanding as well as the private sector's thoughts as to what the public understanding was.
There was a lack of regional cohesiveness. As you moved from community to community and across state lines, there's a lack of regional cohesiveness. The actions at one local level may have applications and implications for other areas around the country, but often those conversations don't take place.
There's an incomplete understanding of how freight facilities work, as well as their role in the economy. That has all kinds of economic development implications. There could be misunderstandings of individual communities' and regions' roles in the global, regional, and local transportation network. That has all sorts of implications with regards to (as Vann was pointing out) how you can determine whether a facility makes sense at a place, and with regards to preparing for when freight is naturally going to want to move into an area because there is a large concentration of demand.
There's a lack of coordination among planning, economic development, and transportation agencies, and these agencies tend to get in silos; they might not necessarily understand how their different activities might impact or have ramifications for other areas. Lastly and importantly, there's a lack of public and private coordination, which results in a lack of understanding of how the actions of one might impact the other.
We did a survey, followed by direct conversations with the public and the private sectors to see how they saw this picture. Interestingly, there was agreement both on the public and private sector side that the public side does not have an adequate understanding of freight operations or business drivers. They simply did not really understand how freight works and why certain changes would happen to that network. This has a variety of different ramifications, including that some of the companies we spoke with had dropped the communities that did not plan for transportation infrastructure or had policies that didn't adequately accommodate freight facilities. Companies also noted they would recommend guidance in the form of inventories of things like sites, tax incentives, and the infrastructure that the public sector wanted to be used for freight. Lastly, the folks on the public sector side, the community and the regional side, encountered compatibility issues in siting freight logistics facilities. "Compatibility issues" is pretty much a euphemism for public hue and cry.
In short, the challenges and opportunities for the public sector are, first of all, that the public sector needs to build on their understanding so that there is a better appreciation of how freight facilities contribute to economic development of the area. Interestingly, that has implications both for freight-related uses as well as the constellation of services that surround those kinds of activities. It's important to understand the freight facilities' role in intermodal connectivity and encouraging use of non-highway modes; in other words, being able to build capability for non-freight uses so that it cuts down on some of the conflict. Speaking of potential conflicts, the public sector needs to be able to plan ahead so that - for example - having industrial uses next to residential or public uses can be avoided. There is an opportunity for better coordination amongst economic development, planning, and other officials at local, regional, and State levels. Lastly, there needs to be a better understanding at the public sector level that the private sector is driving site selection for very distinct business reasons. Participation early on to understand those pressures can allow for better awareness of the kinds of things that could be coming down the road in the future.
Again, going back to the public sector side, it's useful to define what a freight facility is. I would assume everybody on this call has a pretty good appreciation as to what these different facilities are. I bring them up here because each one is going to have a slightly different interaction with the transportation network and a different set of business drivers, which is going to be manifested in how it chooses a location on the map. The location decisions behind each one of these is made by the private sector. It's a network decision that is driven by fulfilling a business process need. The network is set up so that it optimizes a business driver in terms of serving and market franchise. If you think back to the maps Vann showed a moment ago with the megapolitan areas and how BNSF and some of its peers set up their logistics networks to solve these particular problems of moving from origins to destination such that at the end of the day, the location process itself is an expression of that network strategy.
As they go through the location process, companies will usually go through some form of the flow chart that you see in front of you. It's a progressive and a narrowing/winnowing process where one starts with the universe of just about any location on the map and gets down to things that meet various business thresholds. It starts on the left by having a key understanding of the problem that this particular location or network of locations is to solve. From there, it moves to a point of understanding what the "must haves" are. What are the basic thresholds we have to have in order to have success for this network or location? Once we understand that, we can carve off the bits of the world that don't meet those requirements and move onto something else. That allows us to do a location screening where if we pick the things we're allowed to tradeoffs on, we can apply different weightings and start to see the different locations that consistently come to the top and, just as importantly, those locations that consistently come to the bottom. The ones that come to the bottom, we no longer have to worry about. The ones that come to the top are the ones we continue to look at to see if they will continue to perform as we apply other tests to them. At some point, we'll go out into the field and validate whether what we have seen in the model is presented by the reality on the ground, and then move into final negotiations and location selection.
Another reason it's important for the public sector to understand this process is that increasingly, the left three boxes on this are done through data which has become readily available, both to the private sector in the form of those companies themselves as well as to the consultants that aid them. As a result, the communities themselves have much less insight into when they are under consideration for a new facility as things move forward. They only start to get awareness in the last stages. It's useful to know this so that communities can get an understanding as to if they start to meet the thresholds for things that they might be under consideration for, they can plan for them better. Also, as one takes into account the economic development side of this, if one can understand those thresholds and understand the things they would want to get into that community, they can do a better job of preparing themselves and marketing themselves for the strengths that might be looked for on the left side of this equation.
What are the things we would think of during a location screening? Site selectors typically are surveyed on a regular basis on what is the most important thing with regards to locating a new facility? It's not a real useful question, because a successful location for a facility will meet a constellation of needs. That being said, if we talk about freight facilities in general, there are some things that tend to be looked at and have more importance than others. The top two on this chart - the ability to access key markets and customers, and the ability to interact with the transportation network that moves between those markets and customers - are must haves. That interaction with the transportation network goes back to what Vann had said earlier that it's not necessarily the same to be able to say there is a rail facility or highway that goes nearby. It's not as useful until someone can say we can provide you access to that rail network or highway. Labor and workforce as well as the total cost environment were also consistently noted by a lot of the companies we spoke with - being able to find the right workforce, the different levels of talent. There is a whole spectrum of talent that might be required by anything from a distribution facility up through and including manufacturing. It can be a very key consideration with regard to location strategy. Total cost environment speaks for itself. The next six or so on this chart tend to vary in importance. The fact that they are shown here in a slightly less intense color of orange doesn't mean they might not be a complete gating factor for a particular kind of use, but it does suggest that their importance is a little less uniform across the spectrum.
Here's a chart that shows some of those same characteristics and how they move between the different kinds of facilities we described before - distribution facilities, intermodal facilities, and the various kinds of terminals. One thing I did want to point out, however, is that the four in the red box tend to be quite critical across the board. They have slightly different kinds of reaction; however, for the most part they really do have to be very much in place to some degree or another to push for success.
It's also important to note that anything we talk about with logistics is by its nature something that is constantly changing. We only scratched the surface so we could pick up some of the major trends to advise the public sector. Our message to the public sector was if you stay in touch with the private sector, you'll have a much a better handle on it, but while you are doing that, keep the following things in mind. There are global factors in terms of trade patterns, prices of oil and energy across the board, as well as infrastructure and global facility adjustments that are constantly changing how things could shift. Paying attention to those is absolutely critical in order to be able to put together a strategy from the public sector that's going to work. It's also important to note that the different private sector companies are looking at different ways to make themselves more competitive as well as to address other pressures that they are facing, such as just in time delivery and trading that off against other things in terms of flexibility and resilience; sustainability overtime; and carbon footprint concerns. We are seeing some of our clients pay more attention to this, and it has implications for other things as things move on.
This comes back to the challenge for the public sector as to how do we maximize public benefit in terms of revenue and jobs while at the same time managing other impacts to the community in terms of transportation and congestion, environmental cost, as well as controversy and other issues with regards to the relationship between the private and public sector.
There are three main areas for action. The first is pretty straight forward and should be obvious, but isn't necessarily, and that is to learn more about the logistics field and the overall movement of goods. Understanding how the freight location drivers turn into a location requirement that could impact your community is going to provide you with the best ability to plan effectively. Understanding the community outcomes, both positive and negative in terms of real job growth, investment growth, and impacts on traffic and the environment, can lead to better education of the public sector later on as well as high quality decisions that take into account not only the type of impact, but also the real magnitude of the impact. This requires having the public sector ask questions of itself. Where does my community or region lie within the freight network? What facility types and functions best match the location and the characteristics of my community? What strengths do my community or region have that give us a competitive edge or might also draw facilities or networks through our area that I need to plan for? What are the benefits and costs of having those facilities and networks come through my community or region?
From there, the next challenge is to communicate. By developing a regional and local dialogue on the role of freight in planning and economic development, a lot of issues can be discussed in an honest fashion. Educating and engaging the residents and business community on the costs, benefits, and goals for freight development allows for a better discussion of how one can determine which of those benefits will be fitting for the community, as well as which risks should be outright avoided and which should be mitigated.
The next step is to plan. By going through the initial stages of understanding and learning, as well as the conversations, one can better understand the vision and values. Through that, one can put together a plan that ensures that the strongly held and understood vision for regional and local development can be turned into reality. It's important to make sure that economic development, land use, and transportation planning are coordinated appropriately. It also is important that one understands how the community could fit into the global, regional, and local freight network. The community should set forth a plan for infrastructure that's to be developed for this, as well as appropriate sites and areas for development going forward. This all takes expression through effective zoning, regulatory, and incentive policies.
I wanted to come back to something Vann said before that has become very obvious to us. "Build it and they will come" is not necessarily going to be an effective strategy if it ignores a lot of the other factors that we've been talking about. The converse of this is also the case. Living up in the congested northeast corridor, trying to block freight from coming in when there is a strong need for it due to consumer and industrial patterns and trying to put the barriers up is not necessarily going to make it go away. Being able to take a look at what the opportunities are and what the pressures are is the best way to understand what one needs to plan for.
As noted before, the report itself is available now. This is a view of the cover. It's NCFRP Report 13. It's readily available off of the Transportation Research Board's website. It allows for a much more in-depth conversation as to both the findings of the research itself as well as some of the implications for the public and private sectors. Also available is a link to the original research report itself so you can see much of the backup on this. We have also set up a new web site that discusses some of these issues and provides a handy place for getting the information: www.freightlocation.org. If you go there or to the TRB website, you should have direct links to the reports. Both reports are available to no cost. Jennifer, that's it for me.
Jennifer Symoun
Thank you, Chris. Our next presentation will be given by John Morris of Cushman and Wakefield Global Consulting.
John Morris
Thank you very much. I'm with Cushman and Wakefield. We are a $2 billion global real estate services company, and we have a 120 person consulting team within that company. It's a location and supply chain and labor incentives group, primarily. We do a significant amount of international site selection, but about half of our work is in North America. We've done some of the biggest site projects in the U.S. in the last few years. One that was significant and recent was ThyssenKrupp Steel. It's a mile-long processing steel line in Mobile, Alabama. That was a huge project in the southeast U.S. It had incentives packages between $1-2 billion being offered. It was a huge capital project and really indicative of the kind of project that teams like ours and teams like Chris' work on quite a bit.
I'm sure we talked about big trends in distribution and manufacturing. Here's a quick list I've put together over the past few months. I'm not going to go through each of these, but I'm sure they are familiar to the group: oil prices; inventory; near shoring, meaning things going to Mexico instead of China or to Kentucky instead of Mexico; e-commerce as a percent of sales; intermodal; larger space overall, and that's significantly about the real estate market and having the opportunity for people to upgrade; and the Panama canal and a growth in the markets for South America, which is a big deal for the southeast U.S. Our team's work is focused around location strategy being the point of connectivity between distribution network requirements and real estate strategy.
Let's go into a few of these trends. A location project is about balancing operating costs and conditions. Operating conditions are things like labor supply, proximity to customer, utility, infrastructure and cost, transportation infrastructure, and equipment access. Obviously, any location project is about cost, people power, transportation, taxes, etc. The interesting thing about any location is fundamentally, when a company makes a network decision and where to invest in capacity, they are effectively locking in 80% of the future cost and value of their network. That location decision sometimes isn't thought of as being this significant, but really when a company makes that decision, they are saying we realize we can only address 20% of our cost going forward, and 80% will be locked in from that decision.
A network study is a linear program. It's a big math tool that optimizes multiple costs concurrently, and those costs are things that vary as location and volume vary. Things that go down as the number of facilities goes up are things like freight and transfer freight, but almost every other cost increases at the number of facilities increases such that there's an average cost curve which for some companies is finite and for some can be broad. For example, as the price of transportation goes up, the number of facilities their network should have goes from 6 or 7 to 9 or 10.
What does that mean in terms of fuel? Looking at the upper right for a moment, that's the EIA's publication of short-term energy cost; that's the U.S. diesel prices. Many of us remember when diesel went to $4.85/gallon in summer 2008 and how quickly thereafter it fell. It's been on a similarly steady climb since then. If you look at the growth of the curve and the rate of the change in the price of fuel, before the spike and after the spike, they're growing at about the same rate. The network model picture below is from an actual client. When we did a network study for them in 2005 when diesel was just over $2, our network model said they needed four mixing centers. When we look at that model again a couple years later, what we find is that with fuel going up $2/gallon, they need six more DCs. That's the impact of fuel; now company's network prefers space over freight.
If you are a real estate company, that's not necessarily bad news. This chart is the relationship between the red bars, which are occupied warehouse inventory in millions of square feet, and the cost of a barrel of oil. You can see there's a fairly direct relationship between how the price of fuel grows and how the amount of space in this country is absorbed. If you are seeing that transition of the choice to use miles and freight and the choice to use space, there is a distinct tradeoff. As the price of oil remains unstable, I think you'll see more companies choose space over freight.
Here's a quick trivia question. What is the percent of retail sales in this country that is e-commerce? This chart is from mid-2010. Effectively, e-commerce represents about 5% of retail. What's more compelling is the growth of that curve. The volume of e-commerce doubled almost every other Christmas season. What that means for location strategy is something unique and distinct. For a traditional warehouse model, the two biggest priorities for where to put a DC are outbound freight and labor cost and supply. When you are talking about an e-commerce facility where most of the orders are shipped parcel small package, the location for that facility from a freight perspective becomes much less important than other priorities. This is an example from a clothing retailer. Their first DC was in Columbus, Ohio. When they added their second DC to service the western half of the U.S., it was a paradigm shift in terms of savings; it was significant and worthwhile. For where that DC wants to go, we modeled Phoenix, Los Angeles, Stockton, and Lodi, and the differences and tradeoffs between those locations that are far from each other is 1-2%. That's good news, however, because it now lets a retailer or shipper focus more on other variables under their control, like labor and incentives. It really adds flexibility into a shipper's location priorities.
An example of that is Target's facility in Tucson. Tucson is not normally thought of as a distribution corridor, though it does have a good inbound supply of rail. This is the 30th of 32 facilities in Target's network. Our recent meeting with them would indicate that all of the facilities in Target's broad network, this e-commerce facility is the number one performing facility. The first day to receive applications for 300 positions, they received 16,000 applications. It's the top performing labor pool in their entire company.
We all hear quite a bit about the Panama Canal and its impact. There was a tide of support for the idea that the Panama Canal would be a paradigm changing event and all of the freight going to LA/Long Beach would want to go to Savannah, Charleston, and Norfolk. You are hearing a more rational take from people lately, which is that while the Panama Canal will be beneficial, it's probably about the discretionary freight that may have wanted to go all water in the past and may now want go all water in the future because of the lower cost per pound. We're seeing companies like Maersk develop significantly sized vessels. Effectively, 5,100 TEU is the biggest ship that can go through the Panama Canal today, and it will be close to 15,000 TEU in the future. It does require a bigger channel, but if you look at the size of the Emma Maersk vessel on the right compared to S Class vessel on the left, which is a huge ship today, you can see the scale impact we're talking about. What that means is a lower cost of freight for all shippers, and therefore if the cost of all water traffic goes down, you would think the cost of land bridge traffic from LA/Long Beach through Chicago would go down as well. Interestingly, if you look at the history of freight generally and what parts of the country it lands at, there has already been a gradual migration going on in this country. Port volumes are up all over the world, but the share of freight has been changing, and the Atlantic Coast share of total has been down over the last 10 years. I think what the Panama Canal investment means is that that share could stabilize or increase, but based on where people live and where merchandise comes from (significantly from Asia), this country already receives a significant amount of import goods into the western ports.
In a recent survey, labor cost, which has been a consistent concern for executives, ranked as the number two factor in site selection. It was number one in 2009. Clearly, labor matters. Labor is becoming more and more challenging to manage for clients these days. There are multiple issues compounding to really make companies rethink how and where talent is sourced: the aging of the workforce; the fact that it is an employee market; generational change and the fact that the kinds of jobs that younger people are training themselves for are different than they were 20 years ago; urbanization and the gradual migration of the population away from rural and into urban areas, which isn't traditional a fit for where plant and warehouses go; and, finally, the concept of the flat world, that people are really the strategic differentiator between competitors The value of your labor becomes a bigger point of competitive differentiation than ever before.
If you look at a couple of distribution labor markets, it's interesting to see some disparities here. This is a heat map for the presence of distribution labor in two markets. On the left you are seeing Chicago, and on the right, you are seeing Harrisburg, PA, which is obviously a big distribution market. If you look at that Harrisburg map, you will see a significant volume and density of Target workers. If you look at the Chicago map, you'll see a significant density of Target workers within a half hour of the city limits, but as you go more rural and into the western suburbs of Chicago, that density becomes scarcer. I think what that means in a place like Chicago is that while the population moves closer to the city and while your freight costs are lower closer to the city, and given that that is where you can find a higher volume of Target workers, the space, real estate, power, incentives, and everything else will be cheaper further out. If you look at Harrisburg, there are not many places to go wrong there from a labor perspective. It's dense and deep. The issue in Harrisburg is the saturation. Harrisburg is a distribution market where people change jobs for 25 cents; where sometimes workers are vanned in from 45 minutes away. In either market, the point is there's a challenge in finding the right labor, training the right labor, and keeping the right labor at a manageable cost.
Here's a quick map of the density of labor around Chicago. This is the density of Target workers, the kind of workers that fit well in an industrial environment. Where the map is red is where there's a higher density of Target workers, and there's a lower density where the map is blue. What you can see here is there's almost a ring around Chicago about 100 miles out to where when you are inside of that ring you are closer to population and your transportation costs are lower, but your density of Target workers is also much lower. That's the constant tradeoff in the Chicago market of where to put facilities.
Here's another quick example from Atlanta. It's a similar concept. There are very good beneficial industrial markets south of the airport, but generally speaking, in the Atlanta area, to find a greater density of Target labor environments, you have to be outside of the city.
I have a quick comment on near shoring and off shoring. The labor arbitrage opportunity to manufacture in China has been as high as 22:1 over the last 10 or so years. That gap became about 10X in 2010, and is forecast to be as low as 5X by 2015. When you factor in inventory costs and transit costs, if the labor arbitrage/delta is only a factor of five, you are going to begin to see more manufacturing here in the U.S., and I think this is great news.
By the way, I see a question "what is a Target worker?" That's really more of a 10 minute topic. What we mean by Target worker is the right demographics, cost, attitude, aptitude, and skills for a good fit in a manufacturing and distribution environment.
Another key variable, particularly where the location is flexible, is power costs. Power costs can vary by 100% within this country. This is a county-level distillation of the U.S. EIA information on power cost, in cents per kilo watt hour, between 2008 and 2010. Where the graph is darker is where power costs are higher. In this case, we're mapping about 100% delta, so about 7 cents/hour where the map is light pink and 14 cents/hour where the map is dark red. Power costs are really driven by the delivery and the cost and age of infrastructure. As we go forward for site selection in this country, power cost becomes a bigger point of distinction in site selection.
The final topic for me is incentives. There's an interesting bifurcation in state fiscal environments today where some states are becoming so fiscally and financially strapped that their ability to participate in business attraction competitive situations is becoming limited. There are also some states where their business attraction budgets are growing, and I think you'll see that become more and more a point of competitive advantage in the future. This map shows the top 10 states in 2011 in terms of overall tax climate, published by the Tax Foundation. You can see the top 10 states are not very surprising: Nevada, Utah, Wyoming, South Dakota, Indiana, Montana, New Hampshire, Florida, and Alaska. You would think that overall tax climate states would be those that would draw more economic development projects, but when you compare that to the top 10 states for number of projects in 2010, you can see that while incentives are part of business attraction, there aren't many states on both lists. These are the top states for business attraction; Texas was number one. There are a couple of strong states in the Southeast U.S.: Louisiana, Georgia, North Carolina, Virginia. There are a couple of Midwestern states, too: Indiana, Illinois, Michigan, Ohio, and Pennsylvania. The message here is that while incentives are critical, it's things like proximity of population, availability of labor, and availability of space that are more important.
When you add together all the points we talked about, let's say you're a company looking for space in Chicago and your warehouse space is represented by the ISO bars in terms of annual rental cost per square foot. If you are going to be close to population centers and closer to the city, you might be paying mid-4s in terms of dollars per square foot. You have an opportunity to look further out where your costs of occupancy would be half that, so now you are asking yourself where to go. There are multiple factors that would drive a client to be closer to the population centers or further away. Certainly, fuel prices and the cost of emissions would make a company want to reduce its transportation miles, would drive a company to be closer in. Requirements for service levels would make a company want to be closer to population. Cost of space would drive shippers further from markets. Things like hours of service and congestion pricing tolls would drive clients closer in. Equipment restrictions and hour restrictions would drive companies closer in. As we've been saying, labor cost and fit are better outside of market. Availability of infrastructure or a "not in backyard factor" would driver shippers further out. Urbanization drives companies further in. There are multiple factors, which are different for every client and in today's environment make every location decision just that much more difficult. With that, Jennifer, thank you.
Jennifer Symoun
At this point we'll go into our Q&A session. I encourage you to continue typing in questions for the presenters. We'll start with questions for Chris. The first question is on key locations criteria: are any of the companies you surveyed considering air quality impacts or community exposure concerns in selecting sites?
Chris Steele
The way they are starting to look at it is in terms of total carbon footprint. It kind of varies whether we're talking about an American company or Canadian or European. American companies are starting to pay attention to air quality in terms of press relations and things of that nature as well as what the regulatory changes mean for operational efficiency. European and Canadian and some other companies have started to adopt some of these issues as core business issues. They've moved from being cultural issues to business issues, and they are using them as location requirements.
Jennifer Symoun
Do you know of any examples of freight siting being well-integrated into "smart growth" planning guidance?
Chris Steele
Not directly; however, if you noticed, I didn't go into any of the descriptions of freight facilities. That would be an entire discussion in itself, but you'll notice the integrated logistics center concept that was there. That is also known some places in the U.S., particular in the northeast, as Freight Village, and it's often referred to as smart growth for freight. It is a form of development that builds industrial capability at key nodal points on the freight transportation network, usually incorporating both truck and heavy rail. It's meant to concentrate development in a particular area in a smart growth fashion a really leveraging the transportation network to minimize traffic and emissions impacts.
Jennifer Symoun
With your slide 13, isn't it fair to say that the location criteria listed at the top are important early on in the process when a company is selecting the right market(s) for a facility, and the factors on the bottom become more important when specific sites in a market are being evaluated and ultimately chosen?
Chris Steele
That is one way of looking at it. I would say that while the ones at the top tend to be gating issues at the front, there can be things down at the bottom that can become a gating issue. I'll use the example of an available facility of a given size and configuration. There have been projects we have worked on where while the network access and market access were critical, at the same time, the company has had to move with such speed that having a facility in place or being able to get one out of the ground in a certain period of time in order to meet a business requirement for getting a product out to market has become a "must have" rather than a "like to have."
Jennifer Symoun
This question is for John: how does facility location strategy change with different types of products in the supply chain (functional vs. innovative products) being moved? For instance what you think fuel price change would affect location strategy or industrial space change needed, for innovative products (e.g. smartphones) compared to your "large food company" example?
John Morris
The real distinction here is the percent of total cost of goods. If you are a high tech company and freight is 1-2% of cost of goods, the impact of fuel price changes on your network is going to be limited, or even insignificant. But if you're a distributor, a retailer, where freight as a percent of costs is over 10%, that fuel impact on your most efficient, most effective network will be significant. At this point, we are seeing that fuel as a percent of total transportation costs in some points in time is becoming more expensive than equipment, and sometimes more than labor. If you're a distributor and shipper and manufacturer, and freight is 1% of cost, that doesn't really matter. It's freight as a percent of total cost that's the driver there.
Jennifer Symoun
Thank you. Chris, we'll go back to a question for you. I heard USDOT Secretary Ray LaHood make the statement "build it and they will come" in a manner that implied his support of that older philosophy to infrastructure construction. I think that attitude needs to change at the highest levels and wonder what you might suggest to change those attitudes.
Chris Steele
It was an interesting comment, and within the context of where it was offered it was actually a reasonable point. I think that Secretary LaHood was pointing to the fact that we have not kept up with our infrastructure needs in terms of investment where congestion and high demand are in place. We have fallen behind on investment in those particular areas, and as a result, some facility location decisions that would naturally have gone to a certain place because of demand and access to labor and other factors has been held off because the infrastructure simply cannot support it. A lot of this comes back to a point I made early on, which is a good understanding at a regional, multi-state level with regards to where supply chains are moving and the dynamics pressing upon them, whether they're fuel costs, congestion, or access to nodes, etc. We have to have a better understanding as to what those pressures are and then make the investments appropriately based on what the opportunity is for that region.
Jennifer Symoun
Vann, we have a question for you. What is the significance of the different colors in the megapolitan map?
Vann Cunningham
You'd have to ask Virginia Tech; I just used the colors on their map. There's really no significance. They simply wanted to differentiate the areas.
Jennifer Symoun
How is the annual volume required for daily service calculated?
Vann Cunningham
The question that was intended to answer was to establish a daily connection between an O-D pair, how many units would you have to have to have daily service? What's the minimum number? For a truck, obviously it's one truck and one load a day, 365 days in the course of a year. For intermodal service, you're talking about a unit train. Let's say for general principles that we're talking about 100 cars on that train. Each one of those cars would be double stacked, so that's 200 units. You take the 200 units a day, multiply it by 365 days a year, and you get the numbers that we've generated here.
Jennifer Symoun
Does BNSF Railway still have a minimum operational threshold for operating/considering the operations of intermodal trains? I had heard (previously) that BNSF would only operate an intermodal train that would travel in excess of 500 miles? In other words, it is my understanding that 500 miles (or so) is the minimum geographic threshold for operating intermodal trains because short-distance intermodal (or piggyback) trains aren't economically viable for the BNSF Railway (and other railroads)?
Vann Cunningham
Going back to the CSX maps, you saw a great deal of density and a 100 mile radius around those particular sites. Ultimately it all comes down to dollars. You are basically competing against the truck. If you have an area that's highly congested and high fuel prices, the higher the prices go, the more congested, and the higher the price of trucking, then the more competitive rail becomes in shorter distances. In the East, they have a 500-700 movement on average for their intermodal traffic. We in the UP and CP and CN are well over 1,000 miles, closer to 2,000 miles. It really is not a matter of how much money you are making on the particular unit, either, because you are talking about trains. You have a limited capacity, so if I take a train that is loaded with freight out of LA and wants to go to Chicago, it's going to move 2,000 miles with very little stop, and I have to take that train away and put a train that's going to move 100 miles to the high desert, there's no way the money I make on 100 miles is going to match the opportunity cost I have of replacing a train that goes to Chicago. So the answer is it depends. As fuel prices get higher, which they are inevitably going to do, as congestion gets greater, as it appears it's going to do, then you'll see somewhat shorter intermodal. As long as we have a fixed size of a pipe and you're replacing a high value train with a lower value train, it's probably not going to happen. Is it 500 miles? Is it 250 miles? At $5/gallon, highway diesel is between the 250 and 500, probably.
Jennifer Symoun
How does BNSF balance the desire to minimize its number of key intermodal corridors with the possibility of disruption events that could temporarily close one of those key corridors? Obviously these events are very unlikely to occur, but would be highly disruptive if they do happen.
Vann Cunningham
We've had some of those events. We had flooding last year, which was a pretty significant impact. It displaced a lot of the coal traffic in the United States. To some extent, it put some of the utilities at risk of running out of fuel. We had to run on other people's railroads, which we do. In the intermodal world, depending on what it happens in that regard, we'll put it on truck. I'm not going to get too detailed, because from a security standpoint, we can't talk about it too much. We do have enterprise continuity plans, which are highly sophisticated plans for how to deal with freight emergencies in the U.S. Fortunately, with the major emergencies we have had, we've generally been able to respond effectively and quickly. It's a risk and something we're conscious of, but it really would not change the way in which we distribute our facilities.
Jennifer Symoun
Thank you. I think we made it through all of the questions, so we'll go ahead and close out for today. I want to thank our three presenters and everybody in attendance. We got through good presentations and good questions. The recorded version of this event will be available within the next few weeks on the Talking Freight website, and I'll send out an e-mail once that is available.
As a reminder, if you are an AICP member and would like to receive 1.5 Certification Maintenance credits for attending this seminar, please make sure you were signed in today with your first and last name, or type your first and last name into the chat box if you are attending with a group of people. Please download the evaluation form and email it to me after you have completed it. In addition, we do have all the presentations from today and the NCFRP report available in the file share box, and those will be posted online as well.
The next seminar will be held on August 15 and will be about Freight Considerations in Traffic Incident Management. Please visit the Talking Freight web site shown on the slide on the screen to register for this webinar. I encourage you to join the Freight Planning LISTSERV if you have not already done so. Enjoy the rest of your day.
