There are reports that the Alameda Corridor, the heavily used, 20-mile-long, grade-separated railroad intermodal corridor connecting the Port of Los Angeles and Port of Long Beach with the BNSF and Union Pacific main lines, has been seeing year-over-year maritime container volume drops, with a resulting decrease in rail traffic. The Alameda Corridor Transportation Authority (ACTA) oversees the corridor, which was built through a public/private partnership (PPP) and opened in 2002. One outlook is that perhaps “if current trends continue, ACTA will experience significant cash flow deficits beginning in 2024 … growing in size out toward 2038.”
The Alameda Corridor consists primarily of a below-grade, double-track main line connecting central Los Angeles with the region’s ocean port complex to the south. Its construction (along a former at-grade Southern Pacific right-of-way) eliminated road/rail congestion delays at about 200 locations along its 20-mile length. The original capital expenditure investment totaled about $2.4 billion. UP and BNSF are the primary users, paying TEU-based tolls—initially, $15 for a loaded twenty-foot-equivalent (TEU) container, $4 for an empty TEU and a separate toll of $8 per railcar for other commodities, adjusted up over the years.
ACTA is not a railroad-owned asset. Instead, think of it as special tollway authority with the capacity for numerous double-stack trains per day. ACTA, financed by a series of privately financed public debt measures, is administered as a state-chartered authority.
Has that rail project worked? Absolutely. Consider in Figure 1 the dense freight train operations that used the corridor in the 13-year period 2002 to 2014. That is a lot of trains—more than 17,000 in 2014, or close to 50 per day. No other special-service intermodal route in the world sees this kind of volume.
In 2006, the Alameda Corridor marked its highest number of trains per year, followed by three years of decline during the 2007-2009 Great Recession. Yes, traffic has slumped before.
How much of the port complex traffic moves inland by rail? Not as much as you might think. Trucking is still the primary freight mode. Rail’s intermodal market share was calculated back in 2007 at about 20%. It varies by year. Figure 2 shows 2013 rail intermodal share at about 33%.
Many proponents of the corridor project expected a much larger rail share, perhaps up to 25% to 50% of the total. That didn’t happen. Trucks continue to dominate because of the basic high load-on/load-off lift costs for rail when the movement is a short haul between the port and the southern or central California distribution processing and holding centers. Trucks rule on short distances until those terminal rail costs are somehow lowered.
Debt Coverage Fundamentals
Who might be on the hook? Is there a backup plan? What about traffic recovery? Is a financial crisis as some allege a likely outcome? Few predicted this outlook uncertainty in the 1990s when the Alameda Corridor was conceived, designed, engineered and then built. Rail intermodal 25 to 30 years ago was growing strongly. Linked to global trade, the port complex’s container trade was often growing at nearly 7% annually. Rail-related port and container traffic growth was stimulated by the 1983-84 APL Lines introduction of the double-stacked container train.
The issue in the 1990s was how public policy could support that environmental mode shift. The new all-grade-separated railway line was the public solution. Local special purpose financing was adopted. No big share of federal funds or federal grants were required. What could go wrong? More and more ships with containers were coming.
Realistically, all projects face risks. A deeper examination does reveal increasing risks not in the original strategic assumptions. History teaches us that at least three competitive forces can change project outlooks. They are:
- Geographic re-sourcing.
- Unexpected innovation moves by a party.
- Geopolitical change.
Many global projects miss these signals during the buildup excitement and construction. The board and management of ACTA have paid attention to the occasional traffic volume shifts. This 2019 report is not the first debt service review. Now there is a challenge predicted by experts from the international consultancy Mercator. It released a report with risk calculations for the combined San Pedro Bay port complex in the face of complex competitive challenges from other ports and routes. Figure 3 stands out to this economist.
This wasn’t the growth pattern back in the 1990-2006 era. If this is the correct long-term 20-year outlook, it does send a message of lower railroad intermodal growth instead of the previous much higher pace (often in the 4% to 7% range). No North American Class I railroads has issued a similar long-term low intermodal growth outlook. Not yet.
Early Railroad Market View Conclusions
Some might ask if this port/rail access is like a Ponzi scheme—technically, a fraudulent investing scam. ACTA’s pattern of due diligence review isn’t consistent with withholding due diligence data. The Great Recession of the 2008-09 period was one of those re-examination periods. Now comes the freight recession “wave” of 2019.
Will Pacific Rim-Southern California port container volume rise again in the coming 2020-2025 period? Or in the 2040 timeframe? There is too much uncertainty. Mercator’s report sees a significant slowing. Its solution seems to suggest another port side investment project. Would that promoted expansion address the geopolitical trade uncertainty and produce significant rail volume? No one knows. Volume growth and new share gain remain a calculated business risk.
Re-sourcing of overseas manufacturing for the U.S. market is taking place. Some of that re-sourcing is moving manufacturing production bound for the American market out of China toward southern Asia and west toward the India subcontinent. That westward shifting of manufacturing will result in a trade route shift that favors shorter distance and transit times via the Suez Canal and U.S. Atlantic coastal ports. We see evidence of this re-sourcing and competitive route shifts already in the U.S. commercial 2018-19 data published both in FreightWaves SONAR graphs and in the trade war report by Lori Ann LaRocca.
Will the Alameda Corridor fail? Failure is not likely. The potential of new refinancing terms and re-pricing are, however, likely. Figure 4 identifies the first responsibility for debt coverage shortfalls. Note that the major railroad companies in the first instance are not liable. Clearly, there is a plan for which parties might be “on the hook” for the coverage shortfall. And if traffic stagnates into 2020 and perhaps beyond—regardless of the reasons—ACTA has the ability to increase the toll charges per train unit (railcars or containers) that use its toll-railway tracks.
Of course, an increase in the per-railway-unit charge could exacerbate the California ports’ Suez re-route competition problem. Higher West Coast port and inland rail costs would favor shifts toward the Port of New York/New Jersey and the Port of Savannah, among others (such as Lázaro Cárdenas on Mexico’s Pacific coast, served by Kansas City Southern).
One part of the mystery is how the Los Angeles and Long Beach ports served by BNSF and Union Pacific will adjust their contract and spot rates over time as they respond to new source and global route competition. Will they first preserve unit margins or re-price for both volume/share gains? No one knows. In the interim, the two ports are the first recourse for investors. How do you see this issue evolving?
Recommended references based on my recent research
- Alameda Corridor Transportation Authority reports and PowerPoint documents available on line.
- Mercator – Economic Impacts of San Pedro Bay Port’s Share Losses – On the Alameda Corridor Transportation Authority (prepared for the Pacific Maritime Association).
- Independent reviews of the financial issues and possible market and strategy reactions by Ari Ashe and the Journal of Commerce staff; transport analysis by Bill Freeto, DePaul University, and intermodal/port published notes – Jean-Paul Rodrigue, Hofstra University.
- Lori Ann LaRocca, TRADE WAR: Containers Don’t Lie – Navigating the Bluster; Marine Money, Inc., November 2019.
Independent railway economist, Railway Age Contributing Editor and FreightWaves author Jim Blaze has been in the railroad industry for more than 40 years. Trained in logistics, he served seven years with the Illinois DOT as a Chicago long-range freight planner and almost two years with the USRA technical staff in Washington, D.C. Jim then spent 21 years with Conrail in cross-functional strategic roles from branch line economics to mergers, IT, logistics, and corporate change. He followed this with 20 years of international consulting at rail engineering firm Zeta-Tech Associated. Jim is a Magna cum Laude Graduate of St Anselm’s College with a master’s degree from the University of Chicago. Married with six children, he lives outside of Philadelphia. “This column reflects my continued passion for the future of railroading as a competitive industry,” says Jim. “Only by occasionally challenging our institutions can we probe for better quality and performance. My opinions are my own, independent of Railway Age and FreightWaves. As always, contrary business opinions are welcome.”