DIGITAL TRANSFORMATION IN SURFACE TRANSPORTATION · 2020. 9. 13. · Rail’s current business context – reduced traffic volumes & complicated regulatory hurdles for AV – presents

© Oliver Wyman | NYC-MXD15901-001

DIGITAL TRANSFORMATION IN SURFACE TRANSPORTATION

Rodney Case Global Rail Practice Head

NOVEMBER 17, 2016

1 1 © Oliver Wyman

Defining elements of Rail Renaissance II A rapidly changing competitive marketplace & transformational technology will require freight rail adaptation in four key areas

1 Supply Chain Transparency Growth-driven model • Beyond the train • Smaller lots, less distance

2 Convergence in Planning Leverage customer demand • Parallel flows of different LOBs, clients • Broader capacity management

3 Mission Completion Develop credible reliability • Not necessarily faster • Robustness will be key

4 New Social Compact Engage multifaceted public • All politics are local • Rail is great in abstract, but…

2 2 © Oliver Wyman

My great grandfather said that had he asked his customers what they really needed, they would have said a faster horse.

– William Ford Jr, Executive Chairman Ford Motor Company

3 3 © Oliver Wyman

Customer demand is driving supply chain transformation, but the supply side has significant & growing issues

Supply chain orientation • Transportation portion more subordinated • More differentiation than simply distance

Photos top to bottom: Wikimedia Commons, Getty Images, Amazon.com media photo

Level of service • Maintenance deficits • Urban congestion in key markets

Labor market dynamics • Increasing regulations • Continued retention & attraction issues

The Evolution of Trucking & Logistics

5 5 © Oliver Wyman

Online platforms Telematics &

fleet management Robotics &

self-driving trucks Transportation

software solutions • On-demand delivery

platforms – Local/peer-to-peer – Food/beverage

• Freight transportation marketplaces connecting shippers & carriers

• GPS tracking & fleet management integrated solutions

• Mobile-based solutions for truck drivers

• Shipment tracking & support solutions

• Automated/robotics logistics solutions

• Self-driving solutions for multiple truck types

• Self-driving enabling technology/sensors

• Autonomous last-mile delivery: Drones, ground robots

• Trucking management software

• Supply chain management software & integrated logistics software solutions

• Analytics/specialized software solutions

Non-traditional players in the trucking & logistics space are increasing

Source: CrunchBase, Capital IQ, Quid, Oliver Wyman analysis

6 6 © Oliver Wyman

Investments in startups have grown significantly in the past three years Investments received by trucking & logistics startups per group & per year US$M, US & Canada

Source: CrunchBase, Capital IQ, Quid, Oliver Wyman analysis

$3.6 BN

Total Investment Received

Online Platforms

Robotics & Self-driving Trucks

Telematics & Fleet Management

Transportation Mgmt. Software

46

2009

124

CAGR: 29%

141

2008

106

2007

81

2005

37

< 2000 2016 2012

271

2015

637

251

2014 2013

179

820 860

2011 2010 End of

September

7 7 © Oliver Wyman

Autonomous trucking: Safety alone can make it happen Labor savings Safety • Could reduce need for OTR drivers • Driver wage/benefit savings will likely

accrue to trucking companies & their customers

• Little to no effect on consumer pocketbook • Likelihood of more congestion, more road

damage, so not persuasive for politicians & their constituencies

• Estimated savings: up to $92 billion per year in driver wages & benefits

• Safety is the strongest selling point for regulatory authorities, politicians & drivers

• 2014 large truck crashes: – 3,903 deaths (11.9% of total) – 111,000 injuries (4.7% of total) – 438,000 large truck accidents

• Estimated savings: almost $180 billion a year in economic & societal costs

Source: Oliver Wyman analysis

More than lower operating expenses will be needed to get autonomous trucks past government regulation & on the road

Substantial safety improvements for the general public will propel the implementation of autonomous trucks

8 8 © Oliver Wyman

Initial savings from reduced risk & fuel efficiency will fund further investment in disruptive trucking technology

Issue priority

Up to 10% Cost Advantage Disruptive Impact

Fuel cost Risk/insurance Driver shortage Highway congestion #2 #3 #1 #4

• Truck fuel efficiency improving faster than for locomotives

• Platooning will likely improve more

• Fuel prices will rise again

• Automation increases safety

• Risk reduction financing first wave of automation

• Humans cause most accidents

• Drives up insurance costs

• Automation reduces driver fatigue, need for OTR drivers

• Reduction in drivers due to ELD’s, drug testing

• Automation = more vehicles per lane

• Fewer accidents = better highway fluidity

• Aging infrastructure • Underfunded financing

environment

9 9 © Oliver Wyman

With asset turnover every three years, large trucking companies can adopt new technology quickly, without retrofitting existing fleets

• Average fleet age: ~18.4 years • Long-lived assets

– Cannot size fleet to business levels easily – Lower utilization – Minimal secondary market

Class I rail industry technology cycles

• Average fleet age (some larger companies): 1.5-1.7 years

• Operate tractors half their warranty life – High resale value – Low maintenance cost

Trucking industry technology cycles

Fast technology adoption • Better asset utilization & capital turnover • Quick fleet size adjustment for business cycles • Less risk averse

Slow technology cycle • More market reactive • Cycle economics driven by unit reduction

– Larger & larger locomotives – Larger train sizes

Year 0 Year 30

1

1

2

3

4

5

6

7

8

9

10

Year 0 Year 30

10 10 © Oliver Wyman

Federal agencies & states are actively focusing on the study, testing & regulation of autonomous vehicles

Source: National Council of State Legislatures, DOT/NHTSA Policy Statement Concerning Automated Vehicles, 2016 Update

State level AV legislation

WA

OR ID

CA NV UT

AZ NM

CO

TX

OK

KS

MT

WY

ND

SD

NE IA

MN WI

IL MO

AR

MI

IN

KY TN

MS AL

NC SC

GA

FL

OH PA

VA WV

DC MD DE NJ

NY

CT RI MA

NH VT ME

AK

HI

LA

Executive order Enacted

Under consideration AV regulation suggested

No action

• AV is not currently prohibited if a driver is in the vehicle

• 34 states plus DC have considered legislation or executive action in the past 5 years

• Commercialized testing is happening: – Uber testing in Pittsburgh, PA – AV distribution of beer in Colorado

Regulatory activity (as of May 2016)

State DOTs likely will lead adoption & establish regulatory frameworks, as was the case for truck length & weight limits


With highway maintenance funding declining, conversion to toll roads may facilitate autonomous trucking Toll road mileage growth, 2003-2013 • Tolling is an attractive way to fund

infrastructure deficits – Chicago Skyway – $2.8 billion – Indiana Toll Road – $5.7 billion

• Private toll roads need to maximize revenues • Density increase from AV could eliminate the

need to add additional lane miles • Unrestricted AV access on the existing

road network, however, would eliminate incentives for private funding

Source: Federal Highway Administration, https://www.fhwa.dot.gov/policyinformation/tollpage/miletrends.cfm

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2003 2005 2007 2009 2011 2013

Interstate Non-interstate

Dedicated autonomous vehicle lanes could support >40,000 tractor-trailers/day, which equals more than 100 double stack trains


Commercial on-road AV implementation is likely to be gradual

NOW NEAR TERM STRATEGIC HORIZON FULL DEPLOYMENT

Auto Route Following • Reduced fatigue • Increased safety • Fuel economy

Manned Platoons • Coordinated braking • Automated “tailgating”

Photo source: Getty Images

Driver assist • Lane departure alert • Collision prevention • Driver awareness alert

Highway AV Platoons • Multiple units led by

one driver • Automatic cruising if

platoon separated

Driverless Linehaul • Drop-off/pickup by

driver at highway staging areas

• Highway dedicated lanes or navigation infrastructure

Fully Driverless • Remote control

if necessary • “Rescue” crews in

case of malfunctions or accidents


We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.

– Bill Gates, Founder Microsoft

Railroad Evolution Requirements


Railroads must adopt more technologies than just driverless trains

Class I rail marginal operations costs Trucking marginal operations costs

Enroute work events, especially for local trains, mean that train crew costs cannot go to zero. Railroads will have to look at fuel cost, asset utilization & labor productivity in mechanical & engineering functions for additional cost reductions.

Source: ATRI 2015 Report, STB 2015 R-1s, Oliver Wyman analysis

7%

Equipment lease or purchase

Repair & maintenance Tires

Tolls

Insurance & permits

Driver salaries, wages & benefits

Fuel Fuel

Salaries, wages & benefits Casualties &

insurance

Materials, tools, supplies, purchased services, & other

Repair & maintenance

Equipment lease or purchase

Other

Train Crews


74

Example: AV technology benefits will gradually increase trucking’s competitive pressure on rail – particularly intermodal Truck vs. rail intermodal cost & break-even distance progression with AV implementation Indexed relative cost per unit-mile, 2,000-mile sample

Note: Includes drayage cost. Capital costs account for extra cost of truck Source: ATRI 2015 Report, Oliver Wyman analysis

150

100

50

0 Full AV (with

$0.10/mile toll)

83

Linehaul AV

79

3 Unit Platoon (driver in lead

cab)

96

3 Unit Platoon (driver in all cabs)

122

Current Truck

131

Rail IM

100

Disruptive Driver

Savings Equipment

Savings

Up to 10% cost advantage Fuel

Savings Risk Exposure

Savings


Rail’s current business context – reduced traffic volumes & complicated regulatory hurdles for AV – presents opportunities to test reengineered business models & technologies

1 2 3 New operating

models Reengineered target

markets Technology

competitiveness • Prepare for future state where

labor costs no longer drive aggregation/queuing models

• Consolidate and/or contract “over the road” & terminal support roles

• Prepare for smaller lot sizes, shorter distances

• Orient to supply chain total costs to compete on more than transit price

• Launch of new “LOB”

• Regain competitive position with trucks on technology development & testing

• Actively initiate pilots & collaboration with rail suppliers

Photos L/R: Oliver Wyman, Getty Images


New operating models: Based on service reliability & resilience Over 500,000 unexpected train-based delays impacted 1 in 4 Class I road trains in 2013

Source: CSX & Oliver Wyman analysis

Failures consume capacity & constrain revenue growth potential

Estimated frequency of unexpected train-level events: Class Is in 2013

• Mechanical resilience is important but not the biggest delay source

• Recrews are the largest issue & driverless will mitigate it

• Unscheduled work is a network planning issue

• The majority of failures are outputs of network management decisions

Total est. incidents Recrews 210,000 Unscheduled work 125,000 Crossing protection failures 110,000 Locomotive failures 44,000 UDEs 27,000 Detector activations 12,000 Train separations 2,000 Detector failures 1,000 Total 531,000


Reengineered target markets: Germany Germany’s railways are growing due to strong market innovation

• Germany is a large mature market where rail freight is rapidly evolving: 230 competing freight railways

• Growth is driven by new market offers & operational models that are service intensive & asset efficient

• Growth has occurred within the same network footprint with existing technologies

-2%

7%

-5% 0% 5% 10%

USA .

Germany .

Sources: AAR Analysis of Class I Railroads, Railway Association of Canada Rail Trends, German Railway Market Analysis, UIC database, Oliver Wyman analysis

Traffic growth in a decade Change in revenue ton-km, 2015 versus 2006


Driverless, high tech

Single person, high tech

Single person, low tech 1 2 3

Tech

nolo

gies

2016 Near term Long term

Advanced predictive failure systems

RCLS on mainline fleet

Line of road support systems

Loco-based technologies

Advanced train dispatch

Right-of-way security

End of paper-based communications

Advanced remote train management & control

Technology competitiveness: A roadmap & piloting can help railroads stay in lockstep with trucking technology maturity

Supply chain view Automatic product loading/

unloading

#RailTrends16

Documents

DIGITAL TRANSFORMATION IN SURFACE TRANSPORTATION · 2020. 9. 13. · Rail’s current business context – reduced traffic volumes & complicated regulatory hurdles for AV – presents