April 18, 2012

KCS to make aggressive push into U.S.-Mexican intermodal market

Rail has invested $300 million to upgrade intermodal network in past five years.

By Mark B. Solomon

Kansas City Southern Inc. (KCS), the Kansas City, Mo.-based railroad, is poised to significantly expand its presence in the U.S.-Mexico intermodal market, a move that could not only strengthen the railroad's already-bright future but could also reshape how freight gets moved in one of the world's most important corridors of commerce.

KCS, the smallest in both geography and finances among the five Class I U.S.-based railroads, differs from its peers in one other important way. Unlike the other four, which have focused on the nation's east-west landscape, it has built its franchise around north-south routes extending from the upper U.S. Midwest to multiple points inside Mexico. Today, KCS operates from the Twin Cities of Minneapolis-St. Paul—which it doesn't serve directly but through interline partner Canadian Pacific Railway—to the booming Port of Lázaro Cárdenas on Mexico's Pacific coast.

The KCS network, which encompasses about 3,500 route miles spanning 10 states, is the product of a series of alliances and acquisitions over the past 18 years that, among other things, has made it the only U.S. railroad that doesn't need to interchange traffic at the border.

Up to now, virtually all of KCS's traffic has been measured in carloadings. Intermodal activity has been a non-factor because KCS's Mexican intermodal infrastructure was not sufficiently developed to meet burgeoning cross-border demand. Since 2008, however, the railroad has invested about $300 million to upgrade its intermodal network.

The investments include $180 million alone to expand 100 miles of track on a key line segment between the Texas cities of Rosenberg and Victoria to the south, about 240 miles from the border. Other investments include adding an intermodal facility in San Luis Potosi, Mexico; upgrading intermodal capabilities at Puerta Mexico to the east; and improving intermodal operations at Lázaro Cárdenas.

Wide-open opportunity
Cross-border intermodal currently accounts for slightly more than 1 percent of KCS's overall traffic mix, but the business is "growing very fast," Patrick Ottensmeyer, executive vice president and chief marketing officer, told DC Velocity last week. Intermodal revenues in the fourth quarter of 2011 rose 29 percent from the same period a year ago, albeit off of a small base.

KCS is placing the same bet on its north-south intermodal routes that its brethren are making on their east-west lanes: that it can convince shippers, truckers, and intermodal marketing companies to divert freight from the highways and onto the rails. The potential payoff for KCS and other U.S. rails in the market could be even higher on the north-south routes because the U.S.-Mexico market is dominated by truck transport. Intermodal accounts for about 6 percent of the total cross-border market, according to KCS's estimates.

Ottensmeyer said that between 2.5 million and 3 million truckloads annually move across the border over lanes that his railroad serves. Of those, about 40 percent exhibit the characteristics—namely a truckload move of 800 to 1,000 miles or more—that would make those loads viable for intermodal diversion, he said.

"We've talked to truckers and intermodal marketing companies, and they are very interested in the opportunities here," Ottensmeyer said.

Between 1 million and 1.2 million truckloads originate in or are destined for Texas alone, a key factor in KCS's growth prospects since one of its units owns track that connects the rail's U.S. and Mexican operations at its main border gateway in Laredo. Included in the unit's portfolio is the only rail bridge that links the two countries through Laredo and over which 40 percent of all southbound rail traffic crosses.

Trucks move about 62 percent of shipments through Laredo, and Ottensmeyer sees this as a fertile proving ground for KCS's intermodal conversion efforts. Demand is fairly balanced in each direction, he said.

"I don't see any structural impediment" to expanding KCS's intermodal business, said Ottensmeyer. The one obstacle Ottensmeyer sees is more financial than operational; because ownership of the cargo changes at the border, the financial terms of sale could be different and could cause confusion, he said.

Low-cost option
KCS's strategy mimics that of the four other main U.S. railroads, which are touting their domestic intermodal service as a viable alternative to a truckload market plagued by impending driver shortages, higher fuel costs, and highway congestion.

According to a slide in a 2011 presentation, rail transport from Monterrey, Mexico, to Chicago costs 40 cents per cubic foot, and has a six- to seven-day time in transit. Truck transport on the same lane has a shorter transit time—four to five days—but costs more than double that of rail shipping, according to the KCS presentation.

The combination of ocean and rail transportation from Shanghai, China, to Chicago would cost $2.91 per cubic foot and take up to 25 days in transit, according to the slide. One of the goals of the presentation was to showcase Mexico's economic vibrancy and to highlight the potential advantages for U.S. companies of "nearshoring" their manufacturing and distribution closer to their end markets, especially as an increase in wages for Chinese workers narrows the gap with their Mexican counterparts.

KCS is not the only U.S. rail with its finger in the Mexican intermodal pie. Union Pacific Corp. touches about 95 percent of all intermodal freight running in and out of Mexico, though it doesn't operate trains into Mexico and interlines at the border with Ferromex—a big Mexican railroad in which UP owns about a one-quarter stake—and with KCS's Mexican operations. UP says it is the only railroad with access to the six U.S. gateways in and out of Mexico.

BNSF Railway uses trucks to move cross-border intermodal traffic to and from its hubs in Los Angeles, Houston, and El Paso, Texas. BNSF's 2011 U.S.-Mexico intermodal volume increased 14 percent over 2010 levels, according to Krista York-Woolley, a company spokeswoman.

Because KCS's route network is limited relative to those of its larger peers, it relies on interchange agreements with other railroads to feed U.S.-Mexican freight to points along the Great Lakes, the Southeast, and Southwest. For example, KCS relies on Norfolk Southern Corp. to move freight between KCS's hub in Meridian, Miss., and Atlanta, and it uses UP and BNSF to interline traffic between its Dallas hub and Los Angeles.

Growing KCS's intermodal business to its optimal level, Ottensmeyer said, "will require partners."

More articles by Mark B. Solomon

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