Mexico: land of opportunity

Rail traffic between the U.S. and Mexico is expanding rapidly, in both directions.

By Lawrence H Kaufman, Contributing Editor

	Mexican business accounted for one-third of Union Pacific's revenue growth in 1999. Photo by Brian Solomon

Cross-border rail traffic between the U.S. and Mexico is growing at double-digit rates as Canada, the U.S., and Mexico integrate their economies under the North American Free Trade Agreement (NAFTA).

NAFTA created the world's largest free trade zone, and Canada and Mexico have become the United States' largest trading partners, consuming 40% of U.S. exports. Two-way trade with Mexico rose from $80 billion in 1994, the first year NAFTA was in effect, to $210 billion in 1999. Rail traffic growth stemming from the increased economic activity is impressive. From 1994 to 1999, the number of railcars going south to Mexico from the U.S. grew 9.75% annually, and the number traveling northbound rose 24.3% annually.

"There is a great opportunity for growth in Mexico," says Declan Brown, executive vice president and partner in the Kingsley Group, which has been involved in the privatization of the former Mexican state-owned railroad system and produces the annual Transporte Internacional conference. "With poor roads and expensive trucks, there is a great opportunity for railroads to capture truck market share. I'm a big believer not only in intermodal, but in boxcar traffic."

Automobiles and auto parts are by far the biggest category of cross-border traffic. While most autos move northbound to U.S. and Canadian markets from Mexican assembly plants, there is growing volume southbound to Mexico. Parts move in both directions as the North American vehicle market increasingly is integrated in the three nations.

Following autos and parts, southbound grain is the biggest traffic category, followed by beer northbound, steel in both directions, cement, soda ash moving southbound to be made into glass, scrap paper, coke, sand, and clay. A growing market is plastic pellets moving in both directions.

Until recently, intermodal between the U.S., Canada, and Mexico was proprietary, consisting mostly of auto parts that went into secure Mexican facilities. Intermodal is growing, and today there are 13 public ramps throughout Mexico. Domestic intermodal is attractive in Mexico because railroads can economically operate service over distances around 500 miles, compared with 750 miles in the U.S.

Class I's reap the rewards

Mexico certainly has been a land of opportunity for Union Pacific, Burlington Northern and Santa Fe, Canadian National, and Kansas City Southern.

UP Assistant Vice President-Mexico Markets Tony Chacon says cross-border traffic grew between 10% and 12% from the 1994 start of NAFTA and the 1997-98 service crisis that followed UP's 1996 acquisition of Southern Pacific. "Since that time, there has been significant growth-12% in 1999, and 20% in 2000," he says. UP leads the U.S. railroads doing business with Mexico, which accounted for one-third of its growth in 1999. With revenue of around $900 million, UP's market share ranges from 75% to 80%, depending on how much grain Mexico imports. UP owns 26% of Ferrocarril Mexicano (FerroMex), the second largest Mexican railroad.

Since acquiring SP, UP accesses Mexico at all of the border crossings between California and Texas. About half its interchange occurs at Laredo, Tex., with Transportacion Ferroviaria Mexicana, the largest Mexican railroad. TFM is 49% owned by Kansas City Southern. The UP-TFM routing is the shortest between Chicago and the Mexican industrial city of Monterrey. The other Mexican railroads-Ferrocarriles Chiapas Mayab (FCCM) and FerroSur-do not operate to the U.S. border, though FerroSur recently became involved in a rail-ferry service (p. 19).

Anticipating growth, UP plans to invest a lot of money at Laredo to increase capacity. While UP once talked about a second bridge across the border, operating efficiencies now allow twice as much traffic to cross the single-track bridge. The inspection process previously done on the bridge has been moved to Port Laredo, a few miles north of the border.

"TFM is actually building a pre-blocked train to the A&S [UP's connection to the eastern U.S. with the Alton & Southern at East St. Louis]," says Chacon. "That traffic doesn't have to stop at Port Laredo at all except to do an inspection and have customs look at it. We have a similar intermodal train that runs from Mexico City to Chicago."

"Basically, TFM has become just like a Class I railroad," says Chacon. "It's doing a great job reducing cycle time." But there still are improvements to be made. TFM and FerroMex are working on EDI (electronic data interchange) and ISS (interline settlement systems) for waybills and should be doing some testing in the first quarter of this year.

At about $200 million annually, Mexico rail traffic accounts for about 2% of BNSF volume. BNSF connects directly with FerroMex at El Paso, Tex., and with TFM at Laredo through trackage and haulage rights over Texas-Mexican Railway.

Improvement in Mexico rail operations "allows us to deliver a rail transportation product much more like what shippers are used to seeing in Canada and the U.S.," says BNSF Director-Mexico Richard Miller. "We have greater expectations of more advancements." BNSF customers now can get a single waybill between origin and destination.

"Changing the point of sale from mid-bridge to a delivered price of grain allows us to run shuttle grain trains to Mexican destinations," Miller says. "That provides much lower cost to everyone involved." TFM has cooperated on interline pricing, he says.

BNSF is expanding its proprietary NACS (North American Container System) network to include Mexican interior points. "We see Mexico not only as a ramp-to-ramp intermodal product, but as an intermodal door-to-door product," says Miller. "We now are able to develop a product that provides for insurance while en route, that has coordination of dray by TFM Logistics, one waybill, a through rate between a ramp at Chicago to door delivery in a suburb of Mexico City. All costs except customs broker and insurance outside the gate are included."

Starting with one marketing representative, CN has added two more, one each to focus on carload traffic and intermodal. "We focus on conversion of truck and vessel to rail," says CN Assistant Vice President-Sales and Market Development Janice Murray. She estimates international rail market share at about 15%, with the rest going by truck or ocean vessel.

CN reaches Mexico by the Alliance routing over its owned Illinois Central and a marketing agreement with KCS. "We work with TFM as a partner both from the receiver side and the origin side," Murray says. Traffic between Canada and Mexico is forecast to reach 80,000 carloads this year, with revenue of $65 million to $70 million. More traffic moves southbound than northbound, and Murray says CN is working to improve balance.

For KCS, "Mexico is an important part of our business," says Executive Vice President and Chief Operating Officer Gerald K. Davies. "It's not double-digit, but getting close." He anticipates the rail growth rate will be greater than the trade growth rate as the modal shift back to rail continues.

TFM, KCS's partner in the "NAFTA Railway," is focusing on north-of-the-border commerce, says Assistant Vice President-Marketing Dick Fields. "Truck conversions are one of our biggest goals. We're still educating the U.S. shipper as to the actual availability of rail in Mexico and the service that TFM can provide." TFM, for example, is concentrating on carload business in the major corridors into Mexico from Chicago, Dallas, Houston, Los Angeles, and eastern gateways.

TFM had slightly more than $600 million in revenue in 2000 and has a goal of $1.5 billion by 2005. Fields says 60% of the growth is expected to come from cross-border traffic with the remaining 40% from domestic traffic and growth through Mexican ports.

"Operationally and commercially, U.S. railroads are working very closely and very well with TFM," Fields says. TFM, which has joined the Association of American Railroads, provides insurance to shippers, and its customer service center in Monterrey can track cars as well as railroads north of the border. "We're working to make potential customers in the U.S. aware that Mexico is not the 'black hole of railroading.'"