News Release

BNSF CEO Matt Rose Addresses AREMA Today

Hilton Washington & Tower, Washington D.C. Sept 24:

Thank you, Mike (Armstrong). It is a privilege to be here with this group of professional railroaders. Many times, our members of the maintenance and engineering groups are the “unsung” heroes of the industry. I want to starts today by thanking you for the valuable contribution you make to the industry every day.

We’ve known for years that we have a tremendous amount to learn from each other. And, even though the programs and innovations we discuss in organizations such as AREMA may not apply to every railroad or every situation, we get better and stronger every year as a result of the dialogue.

This exchange of ideas is especially important today, as we’re facing a time when we may well have to re-imagine our industry. As we all know, our industry has changed tremendously in the past twenty years. In the first decade after the Staggers Act and rail deregulation, we were coming to grips with competitive and market forces and selectively addressing excess capacity. In the 1990s, we focused on efficiency initiatives and the need to re-invest and to tailor our network to meet customer requirements, with increasing traffic levels.

Today, we’re handling more traffic with higher service requirements than ever before. We’re running longer trains with heavier axle loads. We’re challenging our network capacity at a level we never could have anticipated twenty years ago. At the same time, competitive market forces have made it difficult for us to charge the rates we need to maintain and expand the infrastructure to meet customer demand. This industry needs to improve its financial returns to sustain our ability to reinvest in our infrastructure.

Over the past twenty years, these changes have had tremendous implications for our engineering forces. We’ve been caught between two opposing forces for a number of years. We’re all feeling the financial and operational challenge of obtaining higher efficiency and performance from our physical plant while working with ever scarcer financial, and even human, resources. This has been especially true over the past eighteen months as we have been dealing with a weak U.S. economy.

In many ways, I think today we’re coming to terms with the implications of deregulation...and this is leading us to change our business model to meet the shipper demands of the 21st century.

When I spoke to you at the AREMA conference in 1999, I issued several challenges to our railroad engineering leaders and suppliers. I urged you to continue looking for “quantum leaps” in technology and techniques for scheduling and managing track time, increasing track reliability, and reducing unit costs as part of productivity advances. In the three years since, I think we’ve made significant progress in each of these areas, as an industry as well as in our individual organizations.

Today, I’ll review some of the innovations we’ve made at BNSF and in the industry in these areas, which have helped us on the road toward re-imagining our industry. At the same time, despite our advances in technology and efficiency, I think we all realize we can’t “save our way to prosperity.” As I’ll talk about a little later, it may be time to re-examine some of our paradigms and assumptions and to develop a new understanding of our industry’s vital role in our nation’s transportation infrastructure.

Two days ago, on September 22, we celebrated our seventh anniversary as BNSF. These seven years have flown by at lightning speed. As you know, combining the Burlington Northern with the Santa Fe triggered a round of mergers and consolidations. Our merger led to a huge capital investment program. By the end of 2002, BNSF will have spent about $14 billion (or $5.5 million per day) to improve our infrastructure and expand our network – including new facilities, double and triple track projects, and acquiring about 1,700 new locomotives and thousands of freight cars.

We had to spend that money to provide better service to meet our customers’ expectations, which goes to the vision of our company. Unfortunately, our returns on that capital have lagged over the past several years. And we are not alone. In the rail industry overall, our cost of capital is exceeding our returns on capital, which we know is not attractive to investors over the long term.

To improve the returns for our industry, there are only two options. One is to boost top-line growth, but we have been somewhat constrained by the economy these past eighteen months.

The other is to reduce our capital expenditures. We’ve had to scrutinize our workforce levels, our planning processes, our equipment and materials procurement and distribution, our use of contractors, and every other area of our operation to ensure we achieve the greatest possible efficiency without sacrificing the quality and reliability of our service or infrastructure.

At BNSF, despite a one billion dollar annual reduction in capital spending since 1998, the capital devoted to maintenance of our infrastructure has remained steady, reflecting our commitment to a safe, reliable infrastructure and consistent service for our customers. In 2002, our maintenance program will be about $800 million. The key is to ensure that we’re spending those dollars in the most efficient ways. We must have the tools and processes in place to be sure we’re making the right investments, at the right time, in the most efficient and cost-effective way, with the right short- and long-term results.

(Understanding and measuring the network)

With a 33,000-mile network that varies greatly in traffic densities and climate -- from California’s dry Mojave Desert to the humid Gulf Coast to the sub-zero temperatures of the Dakotas – we see significant variations in track life and even construction materials and methods. We must maintain these lines to meet today’s requirements, but we also have to factor in expectations for continued growth, with an eye toward where we’ll see the most consistent payoff. We must also consider the type of freight handled on these lines. The high-speed, high-density intermodal traffic we handle on several major corridors has implications not only for the quality, reliability and track speed of our physical plant, but also limits the track time available to perform maintenance and expansion work.

We must be extremely precise in identifying, planning and executing our engineering projects, especially under such demanding conditions.

How can we ensure precise strategic decisions with a network so large and complex? We begin by measuring our infrastructure. “Measure everything” and “good decisions require sound data” could be the watchwords of BNSF’s engineering group.

As a baseline, we have what may well be the most aggressive track geometry program in the industry. Our two track geometry cars test at a rate of 110,000 miles per year, meaning that each mile of highly traveled main line track is tested about six times a year, with precise laser measurements of crucial track features.

Rail detection equipment ultrasonically inspects the rail for internal defects. We have two track measurement hy-rail vehicles equipped with the same laser systems found on track geometry cars, for use in confined areas such as yards, sidings and industry tracks. We’re also equipping our overall fleet of hy-rail vehicles with a GPS-based “authority limits compliance” system that helps ensure the safety and efficiency of our track inspections.

To define tie condition, we worked with Zeta-Tech to develop the TieInspect system, which allows us to record tie conditions, tie-by-tie and mile-by-mile. In 2001, BNSF tie inspectors mapped over 6,000 miles of track using twenty-three TieInspect units. Using this data and specially developed software, we can identify ties to be replaced based on the condition of adjacent ties, class of track, and other features.

This tool allows our roadmasters to objectively plan their tie renewal programs each year and use their maintenance dollars in the best possible way to ensure a safe and reliable physical plant. We’ve been pleased to see other railroads, including the Swedish railway, adopt the TieInspect system, because it brings our industry to another level in precise planning.

We also measure our rail, with the goal of extending rail life as long as possible without jeopardizing safety and reliability. We achieve this through rail lubrication, aggressive rail testing for defects, and extensive rail grinding, especially on curves, to eliminate and prevent defects.

Since 1997, when we phased in our current rail grinding strategy, our need for new rail on curves has decreased 48 percent and our defect rate on curves has decreased 22 percent, saving us about fifty million dollars million annually in rail replacement costs.

The biggest challenge in maintaining any of these assets is predicting future needs. Our computer software models help us do this too, allowing us to use our measurements to track historical patterns and predict future needs for capital and operating expenditures.

The Track Predictive Indices (TPI) built into our planning software use successive historical data to predict when and where maintenance is required, reflecting current and expected volume levels, climate, track component life, and other variables, giving us further precision in planning and using assets.

(Quality materials)

Our measurements also give us insight into the durability and reliability of track components and help us identify improvement opportunities. We collaborate globally with rail producers to enhance rail life and explore new rail metallurgy and products. We also press for improvements in tie technology. Although most of our ties are hardwood, approximately 7.4 percent of our track, or about 2,000 miles, has concrete ties, particularly our high-tonnage segments. We also continue to test steel, plastic, composite wood, and other tie materials.

As we look at our materials, much is to be gained by joint industry efforts. For instance, BNSF and Union Pacific standardized ballast specifications in 2001, with simple adjustments in the gradation of our ballast. We expect that we’ll now be able to exchange ballast and reduce our combined transportation expenses.

Another joint industry effort, RailMarketplace.com, has improved our negotiating leverage in many cases. From what I understand, it has also resulted in efficiencies for our suppliers. This industry has countless opportunities to unify standards, from turnouts to concrete ties to rail, with potential savings and service improvements for all. I challenge you to take up these opportunities, perhaps using AREMA as your forum for discussion.

(New Equipment Technology)

In addition to measuring our infrastructure, we also measure the performance of our equipment and workforce, with an eye toward ever greater efficiency. We’ve piloted Plasser’s THS2000 selective tie replacement technology with good results.

In a continuous operation that replaces ties and rebuilds track in a single track window, we are approaching productivity of well over 300 ties/hour. Not only does this productivity exceed what we’d see with conventional equipment, it improves our material handling capabilities and leaves the track in service-ready condition, with no follow-up tamping or clean-up needed by local section gangs. The THS2000’s capacity for selective tie replacement dovetails nicely with the tie specific data we have from our TieInspect equipment, and enhances our ability to maximize the life of our ties.

In another supplier partnership, BNSF approached Herzog in 2000 with the concept of a high-speed ballast train.

Applying their experience and foresight, Herzog developed a ballast train that uses GPS (global positioning satellites) and a portable computer to give exact control over the timing, placement and volume of ballast dumped. In 2001, the efficiencies we gained from a 54-car Herzog high-speed ballast train allowed us to reduce our 2,000-car ballast fleet by 150 cars and to save substantially on work train costs.

We plan to lease a second high-speed ballast train later this year. This will help us further improve the precision and efficiency of our maintenance and capital work.

(World Class Maintenance)

Efforts to improve our measurements, materials, and equipment would be for naught, if we didn’t also look at how we manage our people and work processes.

Our World Class Maintenance (WCM) System is, in many ways, the process that pulls everything together. Our goal with WCM is to provide a comprehensive planning and scheduling process that eliminates waste and idle time and improves manpower and asset utilization, work process flow, material handling, and physical plant reliability.

That’s a pretty tall order, I know, but effective WCM tools help us achieve those objectives, including our Work Order System, our Lean Process and Six Sigma. As in every other area, measurement is critical.

We have established goals for each key operation, and we use “score cards” to track each work team’s performance against those goals. This encourages each work team to take ownership and be proactive in identifying the best ways to do the work.

In the past, we estimate that we were proactive about 30 percent of the time in our maintenance planning. With WCM, we are well on our way to a target of 80 percent.

A key WCM tool, our work order system, helps field managers plan and schedule maintenance activities. Supervisors use a laptop computer to link to a central work order database, where they can find repair histories, work orders submitted by other supervisors, labor and material use, and best practices. They can input and prioritize work orders based on clear criteria, and organize their workdays in a systematic way. Because everyone is working from the “same set of rules,” we have much greater consistency in our maintenance practices across the railroad. From a system perspective, this database allows us to identify maintenance patterns and persistent trouble spots, which helps us plan capital spending.

The Lean Process, another WCM tool, focuses on eliminating waste and creating value. Employees from all levels of a work team help review their work processes, identify bottlenecks and implement corrective action. We’ve used the Lean Process to significantly improve our work gang procedures, eliminate unnecessary steps and reconsider the sequence of work and placement of materials, improving their productivity by about 20 percent. Interestingly, our most efficient gangs are also our safest.

Finally, we use Six Sigma techniques when the problem to be resolved is variation, and the source of variation is unknown. Six Sigma furthers quality and consistency with the goal of zero defects. In 2001, we applied Six Sigma techniques to improve rail lubrication, a process difficult to manage though crucial to extend rail life.

We found a lubrication product that was not meeting our standards, and also figured out a way to calculate the amount of rail lubrication needed from site to site and to measure lubricator output. We’ve also used Six Sigma to examine subgrade issues and understand the failures of certain field welds.

We’ve seen many additional benefits with improved planning and communication through WCM. For instance, this year we successfully allocated 97 percent of our planned track work windows. This advanced planning and cooperation not only enhances the productivity of our work gangs, it also makes for more predictable performance for our freight. We’ve also made substantial reductions in slow orders on our system, including a 20 percent reduction from 2001 to 2002 on our ten major transportation corridors. We’re definitely spending our money in the right places, and realizing improved performance and return on assets.

All of these advances – the precision of our planning and scheduling, advanced equipment technology and improved work processes – are helping us address the pivotal issue of increasing the amount of track time available to operate our trains. As rail traffic demand grows and service consistency continues to be our customers’ number one concern, this will be our number one challenge.

With the success of World Class Maintenance, we’re now extending these processes to other parts of our organization. Our Value Engineering and Strategic Analysis (or VESA) group, established this spring, is using WCM tools, for instance, to improve cycle times for key unit trains, reduce crew costs at some locations, measure how specific operating practices promote fuel conservation, and determine the cost/benefit scenario for ECP brakes.

(“Stress State” Of The Railroad)

Taking efficiency to another level, we agree with Dr. John Samuels at Norfolk Southern [senior VP operations planning and support] and others, who look at maintaining the track not just as an isolated element, but take a holistic look at how railcar design, maintenance and operation impact track life.

The “stress state,” as they refer to it, has become especially relevant as we see new car designs and heavier loading cars, up to 315,000 pounds. We’ve found that we can reduce the stress on the track by making relatively simple changes in our railcars, such as frequent center-plate lubrication and improved suspension trucks and side-bearing maintenance.

We are also installing Truck Performance Detectors that measure the forces created by trucks on curved track to help prevent wheel climb, wide gage, or rail rollover derailments. Wheel Impact Load Detectors, which identify high-impact wheel loads, also can improve operational safety and reduce stress on the track.

To reduce the stress state, each railroad will need to improve the dialogue across departments. In the last few years at BNSF, we’ve approached our capital planning from a cross-departmental view, with mechanical, engineering, transportation and other groups all participating in the discussion. As a result, we find it easier to determine where capital needs to be applied. Ideally, all groups must work together, each taking responsibility to do what they can to reduce overall costs and improve overall reliability.

But, across the industry, there’s an even broader need for dialogue and cooperation. We must establish consistent interchange rules and maintenance standards for rolling stock based on cost/benefit studies.

When you consider that over 60 percent of the railcars in North America are owned by third parties, including customers, it becomes obvious that partnerships will play an increasingly important role in our ability to lower the stress-state of the railroad. We must make the case to our customers that improved railcar performance is in the best interest of the combined system and, therefore, in their best interest as well.

This cooperation touches on a theme I mentioned earlier – the re-imagining of our industry. The future viability of our industry, I believe, depends on our mutual cooperation and communication at an unprecedented level. We cannot afford to look at ourselves simply as competitors.

We must demonstrate to our suppliers and even our customers that our fates are intertwined.

Consider the unique role that railroads play in the nation’s transportation infrastructure, and how we differ from other modes of transportation. Earlier this month, when Consolidated Freightways closed down operations and announced Chapter 11 bankruptcy, we were saddened by the news. A venerable company with a long history was disappearing from the transportation network, and thousands of people were out of work.

However, unlike the railroads, the fate of a trucking company has virtually no impact on the nation’s transportation infrastructure. The business CF leaves behind is being absorbed by other trucking firms, and the highways will be maintained or will crumble at the same rate they always have.

The same is true for a struggling barge or airfreight operation. But the railroad industry is unique in this respect. When any railroad struggles, it is not just that railroad that is affected, it is America’s entire railroad infrastructure. In many ways, it truly is a matter of all for one and one for all.

(Summary)

This cooperation should extend even beyond the rail industry and our suppliers and partners. My instinct tells me that, over time, the only way to truly address the financial constraints this industry faces is to challenge certain old assumptions and paradigms. Public/private partnerships, for instance, make tremendous sense in ensuring we have the infrastructure we need to meet our nation’s transportation needs.

This April, the Alameda Corridor opened. At a cost of $2.5 billion, it is probably the largest public/private partnership ever undertaken. This 20-mile rail expressway, which eliminated more than 200 grade crossings and reduced noise and vibration through densely-populated areas in east Los Angeles, was funded through bonds that will be paid off from user fees.

An innovative solution that took twenty years to become a reality, it has reduced our rail transit time from the Port of Long Beach to Los Angeles to about 40 minutes from three hours and is improving our viability to move port traffic to our main line en route to the Midwest. We have similar opportunities to reconsider interchanges and infrastructure in Chicago and other densely developed urban areas.

We have to find ways to achieve operating efficiencies in less than the twenty years it took to build the Alameda Corridor. We also need legislative parity with other forms of transportation, particularly the trucking industry, which includes some of our most important intermodal customers. It seems to me that we need a series of infrastructure incentives and investments to provide for the nation’s next century of growth.

The TEA-3 legislation to be discussed by Congress next year is a step in that direction, as it recognizes the need for more public/private partnership initiatives to improve the nation’s rail infrastructure and to respond to public concerns about traffic congestion, safety, transportation flexibility and economic development.

Our rail engineering community can play a critical role in the process of re-imagining our industry. Who better understands the issues that constrain our capacity? Who better realizes the capabilities and limitations of our U.S. rail infrastructure? Who better recognizes where additional efficiencies can be gained? And who can better anticipate how today’s decisions will impact the reliability and safety of our nation’s rail network?

Our rail engineers have a crucial role to play not only in our engineering planning, but in our corporate strategic planning and, in fact, in our national transportation planning.

In closing, let me say that there are no silver bullets to resolve the issues I’ve discussed this afternoon. When we look at our industry, it’s clear that we’ve made financial improvement over the past ten years. I am proud of BNSF and our industry for the tremendous advances we’ve made in the efficiency of our operation and the effectiveness of our capital planning.

But we need to continue to look at every aspect of our business with a new eye and an imagination for the potential contribution this industry can make to our nation’s infrastructure.

We need to listen, to ask tough questions and make tough decisions, but we also need to think broadly and with a sense of vision. Based on our track record and the quality of the discussion we can have in organizations such as AREMA, I am very optimistic about our future.

Thank you for this opportunity to share some of my thoughts with you.

BNSF Headquarters
BNSF Railway Company
2650 Lou Menk Dr. 2nd Floor
P.O. Box 961057
Fort Worth, TX 76161-0057
Phone: (817) 352-1000