Cross-border bonanza

Privatization is paying off for Mexico's railroads, and U.S. carriers, suppliers, and shippers are reaping the benefits of North/South traffic growth.

By William C. Vantuono, Editor

	The Gunderson-Concarril plant in Sagahun, Mexico, is a virtual beehive of freight car and locomotive building. Much of the activity centers around the increase in equipment acquisition by Mexico's three principal carriers-TFM, Ferromex, and FerroSur. Freight cars and locomotives for the U.S. market are also built here. The Greenbrier Companies Photo

If you aren't already convinced that privatization of Mexico's railroad network is one of the most significant, successful undertakings the industry has ever seen, just take a look at the numbers.

Transportación Ferroviaria Mexicana (TFM), which handles 60% of all rail traffic flowing across the U.S.-Mexican border, has one of the lowest operating ratios of any North American railroad, about 68%. Even lower is Ferrocarril Mexicano (Ferromex), whose operating ratio in the second quarter of this year was 66%. The only other large North American carrier in this league is Canadian National.

TFM's accomplishments in the four short years since it took over the Northeast Railway from the Mexican government have turned it, and its "NAFTA Railway" partners Kansas City Southern and Texas-Mexican, into a giant North/South funnel for intermodal, automotive, and other types of traffic. TFM's efficiency is bolstering cross-border traffic on Union Pacific and Burlington Northern and Santa Fe, which have direct border connections, and on carriers like Norfolk Southern, CSX Transportation, and Canadian National, which do not.

Since 1997, TFM has increased its freight car fleet size by more than 70% through long-term lease agreements for over 5,800 cars. The locomotive fleet has been bolstered by 150 new high-horsepower a.c.-traction units from EMD and GE. Bad-order cars dropped from 20% in 1997 to just 5% today. Equipment availability is high, as TFM is a full AAR interchange railroad subscribing to car-hire rules. Operationally, Nuevo Laredo/Laredo bridge capacity has more than doubled, with 3,000 cars crossing the border every day, up from 1,300. Transit times on average have been reduced by 36%: It now takes an intermodal or motor vehicle train 34 hours to reach Mexico City from the border 700 miles north, down from 60. Other types of trains require 41 hours.

"Equipment," says TFM Vice President-Operations Jorge Licón, "is properly assigned by type and number in more than 85% of customer requests. Train schedules maintain 85% accuracy. Average train speed has improved from 11.2 mph to 16.1 mph, a 44% increase, and cargo theft is down 80%. Cars delayed in yards for more than 48 hours are less than 5%, down from 40%." Most significant, traffic volume is up 50% compared to 1996, 15% since 1997, TFM's first year. Labor productivity has more than tripled.

Ferromex's numbers are also impressive, as related by Vice President-Operations Lorenzo Reyes Retana. The railroad has seen an 8.3% increase in volume, a 43.1% reduction in accidents, a 78% reduction in cargo theft, and a 23% improvement in labor productivity, compared to 1999. Revenue has increased by $335 million since start-up. And with assistance from 26%-owner Union Pacific, Ferromex has established a transportation plan. The locomotive fleet now boasts 50 new GE AC4400s.

Ramping up for intermodal
The big news in North/South NAFTA traffic is in intermodal. Both TFM and Ferromex are making major investments in intermodal facilities. TFM's operations in particular have been the subject of a study conducted by Hansen-Wilson for the U.S. Trade Development Agency with assistance from The Kingsley Group.

"Since the privatization of Mexico's railroads, intermodal transportation has acquired more importance due to new investments and market growth," the study says. "Mexico City and Monterrey are the two most important markets in Mexico. TFM's intermodal strategy is based on increasing market share within the NAFTA, steamship, and domestic markets." TFM's new plan includes a terminal network project that will develop strategically-located regional intermodal hubs along its main route within Mexico's industrialized central corridor. TFM will locate these regional hubs at five main areas: Nueva Leon, Monterrey, San Luis Potosi, Queretaro and Toluca. In addition, the Pantaco intermodal terminal, which is jointly owned by TFM, Ferromex, FerroSur, and TFVM (Mexico City Terminal Railway), will be upgraded.

Why does intermodal have such potential? Basically, there's no where else to go but up, provided the facilities and services can be established. "Truck transportation dominates the surface freight market in Mexico," the study says. "It represented 87% of the total land tonnage vs. 13% for rail in 1999. Truck crossings through the Laredo/Nuevo Laredo Gateway, the first points of entry between the U.S. and Mexico, were expected to reach 1.9 million annually by 2000. Intermodal volumes in Mexico are estimated at approximately 1.1 million units, with 75% being water port moves and 25% overland border traffic. Domestic rail intermodal activity is almost non-existent."

About 50 U.S. truck lines interchange trailers in and out of the Mexican market in the Laredo area. "All these truckers have established offices in the main Mexican cities," the study says. "They are focused on promoting northbound transportation services to make their operations more profitable. They have also developed equipment interchange agreements with Mexican motor carriers, who are responsible for the haulage as well as the maintenance of equipment while it resides in Mexico. There are over 200 Mexican motor carriers established at Nuevo Laredo moving cargo into Mexico. Most of them have established main offices at Monterrey, which ranks second in industrial productivity and first in business income in Mexico."

For import traffic, "motor carriers perceive rail to be more cost effective than trucking when traffic moves directly from their origin on rail." For export traffic, "truckers expect to maintain their market domination. The imbalance of equipment in Mexico's major industrial cities creates low freight tariffs for northbound traffic. Thus, empty trailers/containers that return to Nuevo Laredo usually stop in Monterrey to take export freight." For steamship services, "truckers expect to maintain a competitive position against the railroad from Monterrey to Altimara due to the short distance between these cites."

For domestic service, "traffic from Nuevo Laredo and Monterrey to San Luis Potosi, Queretaro, Mexico City, and Toluca seems attractive for intermodal due to the distances between these cities. At the moment, trucking companies are not considering the possibility of moving their own trailers using railroad services. TFM must offer the same transit times that are currently seen over road to be more competitive." However, "motor carriers consider the railroad a real competitor in terms of costs, due to the greater distance from these cities to the main ports as well as higher traffic levels from Monterrey to Manzanillo."

New intermodal services are growing swiftly on TFM, which has established an integrated logistics management team to handle customer service, billing and documentation, customs clearance, container and trailer tracing, and other functions. It's described as "a seamless interface between truckers, railroads, terminals, shippers, and intermodal marketing companies." Information can be accessed over the Internet on the TFM website. Included in this system are the operations of the NACS (North American Container system, shared by nine railroads), and UP's and NS's similar EMP (Equipment Management Pool). Also included are intermodal services like UP's Aztec Eagle, KCS's NAFTA Express, and TFM's Cross-Border Express. These services use pre-cleared, pre-blocked trains that bypass customs services at the border. The latter takes freight out of south Texas and northern Mexico and ramps it at Texas-Mexican's Serrano Yard or TFM's Nuevo Laredo yard. New to Mexico is a service called the "NAFTA Run-Through," which originates in Chicago and terminates at Pantaco. Like the other services, it's also pre-cleared and pre-blocked.

"A vote for business"
Mexico's president-elect, Vicente Fox, takes office Dec. 1. Fox is a member of the PAN (Partido Acción Nacional) political party. His election, which marks the end of the 72-year domination of the PRI (Institutional Revolutionary Party), "was a vote for business," says The Kingsley Group's Declan Brown. "We see this as a tremendous opportunity for business, both domestic and international. Fox's election is an endorsement of the direction that says, 'We want leadership that's going to help us compete in a global economy.'" Brown notes that many Mexican businesses have relocated to where they can better-serve the international market. Automotive sub-suppliers are one example, as U.S. manufacturers are projecting strong growth in Mexico. Ford, for example, expects to increase its Mexico-based production from 600,000 to over one million units. TFM is already the preferred carrier for DaimlerChrysler.

"Fox is a strong supporter of NAFTA," says Brown. "Though for the rail industry the border is already open, there are still some customs issues to be resolved between the U.S. and Mexico. Under Fox, we expect this process to speed up. Trucking is still going to be very hard to fix, as there's a lot of transloading and extra handling that takes place. But when you look at the cooperation at the border among the railroads, you know the problems are going to be solved. Railroads are in a great position to take advantage of Fox's interest in furthering open trade."

On the domestic front, "one of the changes we see taking place is formation of a transportation commission similar to the U.S. Department of Transportation," says Kingsley's Juan Carlos Villa. "This will replace the SCT, and will be the key to solving the trackage rights and interline settlement agreement problems in Mexico. The main complaint Mexican railroad customers have is that they can't easily get a rate quote."

Vicente Fox may not turn out to be the salvation for all of Mexico's domestic problems, but his election has infused many Mexicans with a sense of hope. What is certain is that his pro-business, pro-trade, pro-competition economic philosophy will help Mexico's railroads continue the remarkable progress they have made in the last four years.