Segment 2 Of 2     Previous Hearing Segment(1)

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PRESENT AND FUTURE TRENDS IN GROUND TRANSPORTATION

WEDNESDAY, FEBRUARY 3, 1999
House of Representatives, Subcommittee on Ground Transportation, Committee on Transportation and Infrastructure, Washington, D.C.

    The subcommittee met, pursuant to call, at 10:05 a.m., in room 2167, Rayburn House Office Building, Hon. Thomas E. Petri [chairman of the subcommittee] presiding.
    Mr. PETRI. I guess the hour having come and gone, we may as well begin this hearing. The subcommittee will come to order. I would like to welcome all members to this, the first meeting of the newly constituted Subcommittee on Ground Transportation. The new subcommittee is comprised of our old Rail and Surface Transportation Subcommittees, and it is common in this town whenever such events occur to speculate as to who the winners and the losers might be when a change occurs. In my view and I hope it is the view of the parties concerned, we are all winners in this instance. As my colleague Nick Rahall commented previously, we are one family now and it is not my intention that we become a dysfunctional family. We will deal openly and fairly with all modes now under our jurisdiction.
    Since it is the first meeting of the subcommittee of the 106th Congress, I want to take a few minutes to talk generally about the subcommittee's agenda for the coming year. Our first task will be to conduct hearings on the status of motor carrier safety and the proper organizational placement of the Office of Motor Carriers within the Department of Transportation. This arises in part from a proposal made last year during the appropriations process to transfer the Office of Motor Carriers from the Federal Highway Administration to the National Highway Traffic Safety Administration, a proposal that clearly falls within the jurisdiction of this subcommittee. Our upcoming hearings will follow through on a commitment made at that time.
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    Let it be clear that we approach these hearings with an open mind, with no preconceived notions contemplated. We will go where the facts lead, and do what is necessary to promote and improve safety.
    To that end, we will hold a series of hearings on this issue over the next several weeks. Our first hearing will be held next Thursday, February 11, when we will gather background information on the Office of Motor Carriers. It is our intention to hold at least two more hearings after we return from the President's Day recess.
    The subcommittee will also look at two reauthorization bills, the reauthorization of the Surface Transportation Board and a rail safety bill. I know both the former Rail Subcommittee and the Surface Transportation Subcommittee conducted hearings on these matters during the last Congress. Certain progress was made in identifying and attempting to resolve some issues but no final action was taken. We hope to move a bill in the near future.
    The same may be said in terms of moving forward with the rail safety bill. Last year the Railroad Subcommittee held four hearings on railroad safety. Only a couple of issues remain outstanding and we are hopeful that agreements can be reached shortly so that we can move forward with the bill.
    On June 9, it will have been 1 year since we gathered at the White House for the signing of the Transportation Equity Act for the 21st Century, now known as TEA–21. We anticipate holding oversight hearings on the implementation of that historic piece of legislation, programs under the jurisdiction of this subcommittee, including highway, rail, transit safety and research programs.
    At this point, I would like to note that Congressman Bob Franks will serve as the Vice Chairman of the subcommittee. As you know, Congressman Franks served as Chairman of the Railroad Subcommittee in the previous Congress and his experience on rail issues will be essential to the subcommittee this year. I would also like to introduce the new Republican Members of Congress who have been assigned to the Ground Transportation Subcommittee, although I think they are attending one of our first conferences of the year so perhaps we will hold off on that until they get here. You might be interested in knowing, however, that the new Members are Lee Terry from Nebraska, Gary Miller, District of Columbia, John Sweeney from New York and Jim DeMint from South Carolina.
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    Today's hearing will focus on the present and future trends in ground transportation. This is intended to be a general overview of the transportation sector which will provide some sort of context as we consider ground transportation issues in the future. It is not intended to be a discussion of policy matters that will be examined in the future or to consider legislative agendas.
    We will look at the general role that transportation plays in our economy and in our national productivity. We will also consider the outside forces that will affect transportation in the future such as changing economic conditions, the aging of the population and population growth, international trade, financing, and environmental concerns.
    Transportation obviously affects each of us on both a micro and a macro level. This morning, many of us probably have been in traffic on the highways or were jostled on a crowded transit train or bus to get to this hearing.
    Transportation is also important in ensuring the overall general prosperity of the Nation. It represents about 11 percent of our gross domestic product. More than 10 million Americans are employed in transportation and transportation related industries.
    Other industries rely on a safe and efficient transportation network, and customers have become more demanding in their transportation needs both in service and in cost. So transportation truly does impact every one of us each day in a myriad of ways.
    We have assembled a varied panel of expert witnesses who will, I know, provide us with an interesting overview of where we are today and where we may be headed in the future.
    And at this point, I yield to the Ranking Member of the subcommittee, Representative Nick Rahall, for any comments.
    Mr. RAHALL. Thank you, Mr. Chairman. As you noted, this is the first meeting of the newly configured version of the Surface and Railroad Subcommittees, now consolidated into the Ground Transportation Committee. No longer will highway and trucking interests and the railroads be separated in their own enclaves. Rather, as we approach the new century, the merger of legislative jurisdiction involving these entities reflects the realities of the intermodal nature of today's transportation of people and commodities.
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    The Chairman had discussed the subcommittee's agenda for the year. I simply want to note it is a bipartisan agenda. We discussed it and I fully concur with the leadership of our Chairman.
    Last month we met to discuss these matters and as in the past we were moving forward not as Republicans or Democrats but as people who are committed to improving the transportation infrastructure of this Nation. The challenge the subcommittee faces in the coming year in fulfilling our legislative responsibilities will be met and they will be met with camaraderie and attentiveness to the needs of all of our Members.
    With that noted, we have two new Democrats on the subcommittee and they know the proper time to make their entrance. One has just arrived, and I would like to introduce him. Ronnie Shows of Mississippi is a new member, but the one who just arrived is Shelley Berkley of Nevada. Shelley, we welcome you to the subcommittee. I will introduce Ron further when he arrives. But for her part, Shelley served in the State assembly, was a university regent and has a business background. We welcome her and Ronnie to the subcommittee as well as all of our returning members as well.
    Today's hearing, the Present and Future Trends in Ground Transportation, is meant as an introduction to the members on the breadth of our responsibilities. For instance, trucking remains the most used means of moving freight in the country, accounting for slightly over 50 percent of all movements on a commodity tonnage basis and 72 percent on the basis of shipment value. By comparison, railroads haul 13 percent by tonnage and 4 percent by value. Yet these figures belie the fact that for long hauls, railroads account for about 42 percent of the ton-miles of freight shipments of 100 miles or more. To put this into perspective, we are talking about the annual shipment of over 12 billion tons of raw materials and finished goods in this country valued at over $6 trillion.
    Thank you, Mr. Chairman, and I look forward to our distinguished panel of witnesses today and to our agenda for the year.
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    Mr. PETRI. Thank you. Statements by both Chairman Bud Shuster and Ranking Democrat Jim Oberstar will be included in the record if they so desire. Do any other members of the subcommittee wish to make an opening statement?
    If not, we will turn to today's very distinguished panel and we are so pleased that you were able to make time to come to make this presentation and help educate us and hopefully the concerned public with what is happening in transportation and is likely to happen in the future.
    The panel consists of Mr. Donald Schneider, who is President of Schneider National, Green Bay, Wisconsin, a leading logistics corporation in the world today; Mr. Alan Pisarski, who is an Independent Consultant; James Valentine, a Principal at Morgan Stanley; and William Rennicke who is Vice President, Mercer Management Consulting, Lexington, Massachusetts. All are close observers and experts on the transportation sector in America. Don, do you want to begin?
TESTIMONY OF DONALD SCHNEIDER, PRESIDENT, SCHNEIDER NATIONAL, GREEN BAY, WI; ALAN E. PISARSKI, INDEPENDENT CONSULTANT, FALLS CHURCH, VA; JAMES J. VALENTINE, CFA PRINCIPAL, MORGAN STANLEY & COMPANY, INC., NEW YORK, NY; AND WILLIAM J. RENNICKE, VICE PRESIDENT, MERCER MANAGEMENT CONSULTING, INC., LEXINGTON, MA

    Mr. SCHNEIDER. Thank you, Mr. Chairman. I have prepared a few slides. Let me start off, and if you could get the lights, the first is just a background on Schneider National. We are—we run the largest fleet of equipment in both the United States, Canada, and Mexico, and yet as you will note, we are an asset-based logistics company and our primary business is moving our customers' freight; and we move that with a lot of our equipment. But whatever is the most economical and logical is what the market demands we move. And so we are a very extensive user of truck-rail along with a number of other carriers.
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    I am an advocate of increased productivity in logistics, and I am an advocate because I have also just completed a 6-year term on the Federal Reserve Board and logistics is a very important component in our economy. About 11 percent of the average cost of everything that the average consumer uses or buys in this country is logistics, and so as we continue to try to keep the inflation rate well at this very attractive 1 percent, logistics is a very important component in that particular endeavor to do that kind of thing.
    I have put together a couple of macroeconomic slides that I want to make some comments on. And the first is a trend that is continuing and will continue in the future that has productivity implications: the continuing decline in inventory levels in order to service the average consumer in this country.
    Inventory is important because there are costs of capital involved but also a lot of inefficiencies whenever you have to carry inventory. But this also says that there is a major trend toward more and more requirements for precise on-time 100 percent, not to shut plants down or to let consumers sit without particular product that they need.
    Another macroeconomic chart is the continuing decline in logistics cost. And this chart shows from 1981 through 1997 a continuing reduction in logistics cost and then a plateauing of that. And that is my concern is the fact that this trend should continue.
    I have also put together some reasons that I know have created this decline and what we need to do to continue to keep that going. And one of them is the continuing work that we do with our shippers in improving the product supply chain efficiency. This is a result of the fact that the government is no longer involved in regulating what we can and can't do, and, as a result, encourages our creativity.
    Another is the continuing decline in inventory and a recognition of the fact that too often inventory is in the wrong place and creates multiple movements that ultimately the consumer has to pay for.
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    Another is equipment carrying capacity. If we take a look at what has happened to truck size and weight since 1982, while this trend is continuing on, you can see a continuing increase in capacity. We use very little doubles or triples. It doesn't work very well in our end of the business, but from the standpoint of the size of the freight we can get in the vehicle and the weight that we can carry, this is extremely important.
    In a contrast to what people normally can do with larger vehicles, you take vehicles off the road and as a result during this period of time, we have seen a continuing decline in fatal accidents with major trucks from 4.9 million per million miles to 2.5, or about half of where it was during this period of time.
    Another is mode optimization, the ability of the railroads to be used where they have density and where they can run on time with sufficient length of haul. One of the challenges obviously with railroads versus truck is too often people look at these as competitive when they really aren't. They are very complementary. Railroads should not be used where there is a sparsity of freight and, as a result, fixed costs are so high that they have to charge the customer for that. And on the other, hand where they have density, we move our equipment on rail.
    And then lastly, technology. We were the first large carrier to put computers in our tractors and to use satellite to communicate with all our drivers. We are presently experimenting with another major innovation. We have got a number of them in operation that are transponders located in trailers using low-orbit satellites that will allow us to continue to track where the trailer is, not just where the tractor and the trailer is. This will allow us to continue to use this technology when a trailer is on truck-rail or in a customer's yard.
    In summary, what I would ask the committee to do for the good of North America is to continue to be an advocate of increased productivity that is mode neutral. It doesn't matter what particular mode. If the railroads can find ways to increase productivity, we are very excited about that. On the other hand if trucks can, and so as a result of freezing size and weight it just doesn't make any sense if, as we have proven, there isn't a safety issue here.
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    Thank you for the opportunity.
    Mr. PETRI. Thank you. Mr. Pisarski?
    Mr. PISARSKI. Thank you, sir. I am delighted to be here to participate in this first hearing of the new Subcommittee on Ground Transportation. I think it is easy to miss some of the broad sweeping trends when we are in the middle of them, so we need to have greater sensitivity in an attempt to recognize trends that are affecting national patterns and growth.
    There are three trends that I have used over the years to gain my sense of what is happening out there both with respect to passengers and freight. The first of those is the trends in ton-miles per capita in the country of an affluent society in its relationship to freight movement. As we grow richer as a Nation, we consume more tons of 'stuff', and we consume more ton-miles of things. Since World War II, ton-miles of freight per capita has grown by about 85 percent and I think this is something that we can expect to continue to see out over time. Although we are beginning to see some downsizing in the quantities and the weights of things, I think that trend will still continue.
    A second trend is the relationship between ton-miles and the GNP or the GDP. The amount of 'stuff' that we need to produce a dollar's worth of GDP today has been declining over time. The amount that goes into producing a dollar's worth of services is much less than what might go into producing a dollar's worth of steel in the past. And so since World War II, we have seen about a 30-percent decline in the amount of ton-miles required to produce a dollar's worth of GDP. But we have also seen in recent research that the services industries are highly dependent upon freight movement as well. As the value of the products that are moved increases, the sensitivity to speed, the need for speed, reliability and security increases, which tends to equal a greater tolerance to higher transport cost modes such as air freight, trucking, and intermodal movement.
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    The third trend I follow is the growing travel activities of an affluent population. Since 1977, total travel by the population has increased by about 80 percent. If we look at long distance travel, that is to say, tourism and business travel, we see that travel over a hundred miles has grown by 115 percent in that period. We also need to recognize the prodigious growth in foreign visitors to our shores and their impact on our transportation system. The World Tourism Organization indicates that the U.S. in the year 2020 will be receiving about 100 million visitors a year, second in the world only to China.
    As when I turn to the future, I want to mention two trends that I think we have missed in the past which have really had a negative impact on our transportation capability, and then look at some of the trends that I think we can't afford to miss in the future. The two that we missed briefly are a product of the baby boom, the tremendous increases in workers that came out of the baby boom in the seventies and eighties, and women's sharp arrivals into the workplace which changed the nature of our commuting patterns and changed the nature of our other travel activities.
    The second trend that we missed is the tremendous growth in truck travel that Mr. Schneider was talking about as a share of total activity, as a share of the flows on our highways, and as just a component of total activity in the country.The lack of recognition of these trends, has hurt us badly.
    With respect to trends in the future, I think we are going to see trends that are forces of stability in the society, and then there are going to be trends that are strong forces of change.
    Just to list briefly the forces of stability: lowest population growth right now in any time in our century; the leveling off of young people joining the labor force, which gets to be a problem for Don Schneider because he can't find young truckers; the leveling off of automobile ownership; the leveling off of travel growth. All of those will be stabilizing effects on travel that I think we are going to be seeing.
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    On the growth side I will mention five items. The first is increasing specialization in the economy. The second is what I call the democratization of mobility, the last segments of the society gaining access to the automobile and participating fully in the society. The third item is immigration. The fourth is shifting age groups, something that was mentioned in the opening statements. And finally the improving incomes and dispersion of the population and jobs throughout the country.
    With respect to specialization, recent research has shown that America's economic future lies largely with improved competitive access between suppliers, manufacturers, and consumers. That research conducted in the Midwest showed that two dominant factors in competitive success cited were communications and transportation.
    The State of Wisconsin in related work has shown that in the smallest hinterland towns in the State—and this is work that Mr. Schneider and I were involved with a couple years ago with the State DOT—they saw that in the smallest towns in Wisconsin, there are many small companies that have exports as their major markets. And it was really a revelation, I think, to the State DOT. It certainly was to me and to some others.
    This division of labor and this change, I think, yields our tremendous productivity in our present society.
    In the economics sphere, it is a period of globalization of almost everything—production, markets, supply and demand—new economic arrangements. It is becoming increasingly clear that our domestic markets are sharply affected by the activities in the international realm, both in services and competition.
    There are a serious number of information gaps in this area that I have listed in my document that I won't mention here but I would commend them to you.
    With respect to the second trend that I wanted to talk about, I call it the ''democratization of mobility.'' If we look over the years, we will see that we went from about 20 percent of our households without automobiles 20 years ago down to about 10 percent of the households in America today still without vehicles. But if we look at that in terms of ethnicity and racial trends, we see that 8 percent of the white population are without vehicles, but almost 20 percent of the Hispanic population, and 30 percent of the black population. I think this situation is certainly not going to be anywhere near permanent in the future and we can expect those minority populations to, in a sense, mainstream with respect to vehicle-owning characteristics, suggesting that we will be somewhere around 1.7, 1.8 vehicles per household in the country.
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    The recent American Travel Survey that looked at long distance travel noted that minorities actually grew faster in their long distance travel than did the white non-Hispanic population, but still their levels of long distance travel just reached about the same as what the white population's was in 1977. So there is an immense source of growth and potential activity coming in the future from that quarter. The fact that we don't understand that and have not measured it well, I think is a serious concern.
    Immigration I will mention just briefly. U.S. population growth in the nineties has been the lowest in this century short of the Great Depression. Immigration today accounts for about a third of our total population increase. Where they go and what they do and how they behave is going to have dominant influence, I think, in the next decade.
    With respect to shifting age groups, it is really a very simple factor. The history of our era since World War II is the history of the baby boom slowly working its way through the society, affecting our grammar schools, our high schools, our road systems. And now we have a situation in which in this decade, from 1995 to 2005, there will be a 50-percent increase in the number of people in their fifties. Because this is the age group that is the highest travel age group in our society, we are going to see a very sharp increase in the kinds of travel that that age group produces.
    Finally, I would say that with improving incomes we are going to see dispersion of people and jobs, as an important aspect of our economic structure. Along with increasing incomes comes an increase in people's value of time. The pressures of time on our citizens will dominate travel decisions, emphasizing trip-chaining, faster modes, the single occupant vehicle, long distance travel, longer trips but shorter duration trips, and more frequent tourism.
    The dominant economic reality of the new century will be a shortage of skilled professionals. Employers will go where access to skilled workers is high to gain advantage over their competitors. Many of the logistical needs of businesses are now ubiquitously available. Employer location choices will be guided by the fact that they can locate almost anywhere: near a mailbox, a telephone, an airport, with access to skilled workers, access to capacity in the road system and in the air system.
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    The good news in all of this is, I think, that we have largely passed through a period of great change. Our problems in the future will be much more operable. We will add about 25 million to our population in the next decade and for the foreseeable future, as we have since 1950. Our ability to respond to that growth will grow faster than that. Our public infrastructure investments won't be overwhelmed by the dramatic growth levels we have seen in the eighties and nineties.
    I would just like to close by saying that most of these trips that we make have important economic transactions at their end, and when they don't, they have important social interactions that are of great value to the society. And responding to those and reducing distance as a factor in our social and economic structure will be a key to our future.
    Thank you very much, Mr. Chairman.
    Mr. PETRI. Thank you. Mr. Valentine?
    Mr. VALENTINE. Mr. Chairman. Just as background, I am Morgan Stanley's North American freight transportation equity analyst. I research the publicly-traded freight railroads and trucking companies. First let me give you an overview in terms of the two industries, in that I am fairly content with the state of the trucking industry, and I believe that the medium and the large carriers, trucking companies, especially the non-union carriers will continue to flourish into the foreseeable future.
    I am not nearly as optimistic towards the Nation's freight railroad industry. Let me first start with trucks and then move on to railroads. If we are to discuss the trucking industry in a manner that it deserves, we have to first separate truckload from less-than-truckload. The truckload carriers are those carriers that are hired to haul an entire truckload of freight from origin to destination and they operate in a very fragmented market. The largest truckload carriers include Schneider National, J. B. Hunt, Werner Enterprises and and Swift Transportation just to name a few.
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    Since the trucking industry's deregulation in 1980, there has been some consolidation but the Nation still has over 10,000 truckload carriers. As major shipping customers such as retailers and manufactures continue to pare back the number of carriers they use, otherwise known as the core carrier concept, the larger truckload carriers will continue to get bigger. In other words, the customers are driving the industry consolidation for the truckload carriers. Given this healthy consolidation trend that is taking place, we are confident that the larger truckload carriers will continue to have healthy prospects at adequate margins.
    The other trucking sector, less-than-truckload or LTL, is made up of carriers that consolidate less than truckloads of freight for the customers. The large carriers include Consolidated Freightways, Con-Way, Roadway Express, Yellow Freight, and U.S. Freightways, once again just to name a few.
     This sector has gone through massive change since deregulation in that almost all the players from 1980 have gone out of business as they lost
market share to the more efficient non-union LTL carriers. I expect this trend to continue and that the LTL market will probably grow at about the rate of the economy, but the successful non-union carriers will continue to take market share from the unionized and smaller players in the market.
    To move on to freight railroads, I am concerned about five issues. The railroad industry is much healthier now than it was prior to its industry deregulation in 1950. However, it is still losing market share to trucks, which is a trend which has not stopped since the introduction of the interstate highway system in the early 1950's.
    More recently, I have been concerned about the railroad industry's near-term prospects; once again, for these five reasons.
    Due to time, I will refer to my written comments but let me just talk through the five basic points. First is what I call merger complications. That is, we have had three major Northern American railroad mergers over the past 5 years. In each case they resulted in service disruption, lower revenue growth than expected, higher capital needs than expected and less efficiency gains than expected. I should stress this is not to say that the end result has not been good for the industry and its customers but railroad management and, probably more importantly, Wall Street set too high of expectations in the original planning portion of these mergers, especially in terms of timing benefits. Keep in mind that we still have two more mergers right now on the docket. They will be playing out over the next year.
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    The second concern I have is decelerating efficiency gains. From 1990 to 1995, freight railroads made huge efficiency gains. They lowered their costs as a percentage of revenue from 86 percent down to 81 percent. So you have got about a 500 basis point improvement to your margins. This was helped by reducing locomotive crew size from 5 to 2, improving technology and other cost cutting techniques. Unfortunately this trend has run its course and it appears there are very few major, and I underscore major, efficiency gains left, aside from the synergy benefits that we expect to come from the mergers taking place and the ones that are underway.
    The third concern I have is what I call market share erosion, and that is the freight railroad industries on-time performance ranges between 75 percent and 85 percent, which is completely unacceptable to most shippers in this current technological age where freight needs to be handed off from one carrier to the other with precision accuracy.
    And this goes back to Don Schneider's point about logistics. You have to have precision execution now; 75 to 85 percent on-time performance is unacceptable. Therefore, unless the railroads can substantially improve their consistency, it is going to be tough to stop the market share erosion to trucks.
    The fourth concern I have is regulatory risks. There are two. The first is railroad regulation and the second one is clean air issues. On railroad regulation, as you probably know, the service eruptions that we have seen over the last year or two on the railroads have galvanized railroad customers to push for legislative changes to offer them more options. If anything is done to shift the economics away from the railroads in favor of the customers, the railroad industry's returns are undoubtedly going to decline to unacceptable levels.
    The other regulatory issue I am concerned about is these clean air efforts. That is, if efforts to reduce the particulate matter and carbon emissions they are passed into law, and I don't expect this to be anytime in the next year or two, but I think we are heading in that direction, they will have a devastating impact on the use of coal as a fuel source. Now, this in turn will have a negative impact on the Nation's freight railroads, given coal makes up 20 percent of the industry's revenue and, more importantly, even a higher percentage of the profits.
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    And the final concern I have for the railroads is utility deregulation. As utilities deregulate they become much more concerned about lowering their input cost, with fuel transportation being one of the highest cost components. Coal-fired utilities are using a number of tools at their disposal to exert pressure on the railroads to lower coal hauling rates. This pressure is reducing coal's profitability for the Nation's railroads.
    So, in conclusion, the U.S. trucking industry continues to consolidate, offering growth opportunities and respectable returns for the better players. However, our outlook for the railroads is not nearly as clear. That is, the railroads have a number of issues to address over the next year or two and possibly, for the next decade before we can be confident that they have good prospects for earnings growth and improving shareholder returns. We are at a crossroads with the railroads, and if this is the best it is going to get in terms of revenues and return, then over the long term, it will be tough to attract new capital to the railroad industry.
    I thank you for this opportunity to present this before you here today.
    Mr. PETRI. Thank you. And finally, Mr. Rennicke.
    Mr. RENNICKE. My name is Bill Rennicke and I am responsible for the Surface Transportation Practice at Mercer Management Consulting, Inc. We have about 250 people that last year worked in about 35 countries. My comments will be in the first couple of pages of this document that I gave you, which has some upfront comments plus some recent summaries of studies and analysis Mercer has done, primarily in the area of shipper logistics and customer needs as well as looking at the worldwide situation on track access.
    This morning I would like to focus my comments on really five topics. One, what are the major forces of change in U.S. surface transportation? I think as you start off with your new committee, this may be a good inventory that you can think of in looking forward. Two, how are these forces affecting shareholder value of the surface transportation companies? And then what are the key trends in the railroad, motor carrier, and third-party logistics businesses?
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    If you look at page 4 of that handout that I provided, there really are some very major and significant trends that are facing the industry. And I will just mention a few:
    Globalization. There are very few transportation companies that can basically stay within the boundaries of one country.
    Value outflow to customers and non-asset-based competitors. Much of the value in economic rent that the industry once earned is flowing outward.
    The boundary is really blurring between transportation and logistics, which I agree with Mr. Schneider is a good thing.
    Rising expenditures for capital.
    E-commerce. I will spend more time on that.
    And fundamental changes in customer relations.
    If you look at page 5, there has been a very steady uptick in demand for both motor carrier and railroad tonnage over the years. And it is projected even at a very modest level and a conservative level by DRI to grow really 2 to 3 percent in out years, although I think the economy in the fourth quarter of 1998 would show that these trends were even understated.
    One of the major forces that will affect the transportation industry as well as all walks of our life is E-commerce, and I think we are really in only the early phase of the E-commerce effect on transportation.
    Motor carriers and railroads have used technology in terms of location, booking dispatched communication with their customers really for many years, but for the first time the E-commerce and the Internet will allow customers to totally bypass many types of retail and wholesale entities that existed for years and deal directly with the manufacturer. There will be fundamental changes in those businesses.
    If you look at page 7, there are some comments I have on that. When you can go to a store and buy,or go on the Internet and buy, a pair of shoes—that used to be shipped maybe years ago on a rail car, most recently on a truckload or container to a warehouse at L.L. Bean or Land's End, then that was further broken down into an individual shipment that went by mail or package expressed to your house—many of those parts of the chain can be bypassed, and that customer, whether it is through the name of the vendor like L.L. Bean or directly with the manufacturer, can deal directly. This cuts out huge amounts of transportation activity, actually cuts out the activity of many of the transportation providers and really challenges the transportation industry to create products that will affect them.
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    In this whole world of complexity, we have actually studied in depth a couple of cases, and our company has put out two books, one on the Profit Zone and one on Value Migration, that really look at what happens after the year 2000 and in the late '90's to American businesses. And really it is a situation where, if you are going to survive in this kind of economy, you have to be smart to identify where will the circumstances allow you to make a profit. You have no kind of right to the profit. It is really growing your business to fit those places where you can make a profit, and then what kinds of new business designs will you have to really evolve to almost daily to meet the kind of competition that you are facing, as well as to offer services that fit with the changing markets.
    And if you look at how Wall Street values companies, and I just mention this on page 9, you have a group of companies that are really in the same businesses. On the far left, basically the shareholder value growth was about 4.8 percent for the less-than-truckload business, heavily influenced by the unionized carriers. On the right-hand side you have over 20 percent growth rate, compound growth rate, for non-asset-based businesses. These are basically intermediaries, people who are stepping in with electronics, good skills, intellectual capital, and using some of the hard assets of the service providers in between.
    If I turn now to the railroad industry, we have had a phenomenal effect in this country, I think, since the years of Staggers. Mercer has been involved in about 80 percent of the railroad restructurings and privatizations worldwide. Our most recent one, which doesn't have a lot of bearing on the U.S. was in Gabon, but we have had some larger and more significant ones like privatizing the railroads of Mexico, restructuring three of the railroads in Eastern Europe, and we have worked for many of the Western European railroads. When you look around the world, there is no situation in any other country where you can find that, on a year-after-year basis, rail rates have fallen, either nominally or real terms. We have had an enormous effect in this country. You can say—whether it is because of commodity mix, change, efficiency, competitive pressure—that we have enjoyed a downtick steadily for almost 20 years in our freight rates.
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    The railroads have been able to produce this kind of rate decrease essentially because of productivity. They have been able, as Mr. Valentine pointed out, to harvest years of inefficiencies that came before regulation and to clean up a lot of the work practices that they had, but the reservoir of those kinds of opportunities to fix the problem and to keep your costs below these rapidly declining rates really has run out. There is only so far you can cut the crews. There is only so far you can go in terms of fuel efficiency from a technology standpoint. There is only so much you can do with a signaling system.
    So if you look on page 12 of the presentation, where the next opportunities for growth are going to come for the railroads or for financial improvement are really from capital expenditures. And the railroad industry in the years to come is going to need enormous amounts of capital expenditures not just to buy out companies but to rebuild the network. If you look at what Norfolk Southern and CSX are doing in the East in terms of adding tracks and putting in sidings, if you look at what UP had to spend in Texas to clean up the bottlenecks, the condition of the plant is good but they cannot match the competitive pressures that they are facing in terms of rate reductions anymore from just clear cost improvements.
    In fact, if you look at the railroad industry in relation to other industries, there is no industry in the United States that dedicates more of its revenue or percentage of its financial activity to capital investment—they are at 15–1/2 percent, on page 14, in the presentation—and where paper companies come in second.
    There are some other very significant events that are going to affect the railroad industry. Mr. Valentine mentioned one of them. One of them is the utility deregulation and really the restructuring of the utility business. As I have pointed out on page 15, research that Mercer has completed shows that there is an enormous surplus of generating capacity in the utility business. If you went out there today, just because of the productivity of the utility industry, our regulatory process, and the downturn in some of the heavy industries like steel that use electricity, there is a lot of capacity.
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    At the same time you are having a fragmented breaking up of the electric utilities that used to manage these as a network, so you are going to get a much greater degree of competition between the carriers. We think, for example, that the current price of 4.1 cents per kilowatt hour will basically halve itself to about 2 cents before it increases.
    Now railroads, if you look at page 16, and the transportation of coal account for, you know, between 20 and 30 percent of the value of coal. Well, if as in the utility business, competition is going to push your electric rates down to half because of efficiencies and the country taking advantage of deregulation and better activities in that business, you are really going to have to scramble to find ways to get your costs down even further, and you are going to be pressured considerably by the utility business to push your rates down even further. So 20 years of rate decreases, and in one of their biggest commodity groups, because of a whole external change to their business, they are going to be facing even greater pressure on their rates and even may see some new types of competitors coming into the business.
    On page 17 I summarize a very interesting phenomenon. Our private sector railroads and, I would say, even our motor carriers are unique in the world, and as the world restructured and began to privatize, one of the exports that the U.S. had was our technology to run private railroad businesses. And the U.S. rail industry has really been a leader worldwide, winning the privatization contracts in Europe, Asia, all through Latin America, which is something that should really be fostered. They have done it without really any assistance from government or pats on the back, but it is really a very interesting phenomenon and it has given us, at least in the railroad business, almost an equivalent, albeit at a smaller level, of a Boeing-type unique export.
    Just turning to the motor carrier industry, it is a very, we think—I am now on page 18—a very healthy business. Truck tonnage has been up. Very capable providers of all different kinds of sizes, in many respects much more flexible and willing to customize their service offerings to the evolving E-commerce or just to the logistics requirements of customers. And I think the wide array of services that Mr. Schneider's company is involved in in the logistics area is just one example of how well that works.
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    Motor carrier rates have been much more stable than rail rates. You can say that maybe there was a greater degree of efficiency there before deregulation, but certainly where they have to face problems, as I discuss on page 20, with really a problem with driver retention, they are going to have to do something about the economics and the life conditions of the drivers, there will probably be pressure in the future to raise rates.
    An issue—and it is not something I think really needs much government involvement—is that the trucking industry in the United States is still very fragmented. Even in any of the sectors, the biggest players still account for a very small percentage of the activity; and yet the customers, the marketplace, is demanding the large-scale, North American, if not global-type transportation companies.
    So, as I pointed out on page 22, we believe there is a very healthy rollup or consolidation going on in the motor carrier business, everything from the flatbed business to the less-than-truckload business to the van and logistics business where Mr. Schneider's firm works.
    Turning more towards logistics, as this business becomes much more complicated, as I explain on page 23 (and we provide some more information in the Appendix), customers want to buy more dedicated services and logistic services from outside providers. They would like to focus primarily on manufacturing their product or running Home Depot or Wal-Mart and they want to turn a lot of this business over to outsiders, so there is really a growing and evolving market. In fact, you know, our analysis and our survey show there is about a $35 billion market which was almost non-existent 10 years ago for these third-party logistics providers. And as you can see, the largest of these right now is Ryder. Mr. Schneider's firm is second. We estimate about $900 million worth of revenue, but this is going to be a very substantial and growing part of our transportation business.
    Finally, who is making the money? Again, domestic non-asset-based businesses, because they can get in and out of transactions very quickly, seem to have some of the better returns. The asset-based businesses follow. And like our railroad industry, the U.S. has been very fortunate that we have had companies, for example, like AEI, non-asset-based, asset-based logistics and brokerage companies who really have become a leader in the worldwide consolidation of logistics service and have in essence exported American technology and know-how to the corners of the world to manage those services. So I thank you for the opportunity for addressing you today and I would make you an offer. We do quite a bit of research all during the year, and as you have other issues I would be happy not just presenting here myself but providing you with written information and output of some of the public studies we do. Thank you.
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    Mr. PETRI. Thank you. We are happy to be added to your mailing list. It will help us. Any questions. Mr. Rahall?
    Mr. RAHALL. Thank you, Mr. Chairman. Gentlemen, you have given us very interesting testimony this morning, a great deal of research and a great deal of perspective from a global viewpoint. And you have discussed growth factors and profitability factors and what leads to enhanced transportation of people and commodities in this country.
    I didn't hear, though, much discussion of I guess how our decisions as legislators, specifically TEA 21 last year, investments in public infrastructure of public monies, where that comes into play, and if I can kind of zero in on from the legislative angle at this point, from the perspective of investing in our public facilities which benefit ground transportation.
    As I said, TEA 21 last year was precedent setting. We broke new ground, a major investment of our people's money in infrastructure. Is this something that you gentlemen take into consideration when you forecast your growth and profitability figures?
    Mr. RENNICKE. Let me just comment on that from a couple of points. First of all, when you look at the world situation and transportation and you look at our economy, it is legislation like TEA 21 that really has provided the infrastructure for us to have the kind of economy that we have here in the United States. I think that no matter where you go, even in Western Europe, it is really hard to find a place where you have had public investment that has been supportive of the private sector, let's say exploitation of that investment to the good of the people. So I think that is kind of on level one.
    The second thing I think that we have, and this gets involved with other types of decisions you make, is a regulatory structure here which gives the private sector as much freedom as possible to behave in a businesslike manner. And after undoing years of government control and regulation in Eastern Europe or Latin America or Asia, you really have no idea of how good our system has been, even at its worst. I would say pre-Staggers and pre- the Motor Carrier Act of 1980, we left the private sector to do more. So I think we have had a great balance of using public expenditures and public policy to build an infrastructure but at the same time not destroying the initiative of the private sector and destroying the opportunity for private companies to earn private capital and to apply it in the business.
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    Mr. PISARSKI. If I may, I discussed this a little bit in my written documentation, but let me just comment briefly. I think one of the things I find very interesting about TEA 21, I think is a real change in the structure by which we justify the program. Historically, the history of the program, has always been one in which we gave rise to arguments about a crisis in the system, the system was falling apart, bridges, et cetera. And I think with TEA 21, we basically transcended that kind of a perspective. We have reached levels of funding where I don't think that we are going to talk about the crises in the system. So future investment levels are not going to be based on a story of the world coming apart. They are going to have to be based on rational arguments, about incremental dollars of investment paying off high degrees of benefits to the society and to the economy. They are going to have to be based on our being better equipped to understand and to quantify and to describe transportation's social and economic benefits to society. So I guess one of the things I see for the future is we are going to have to change the way we approach the subject. Thank you.
    Mr. SCHNEIDER. Definitely the amount of capital you are putting into the highway system is going to have a very positive impact. Again, remember we are talking about 11 percent of our gross national product in logistics, and so investing in it really makes good sense and I think you did the right thing in doing that and I applaud you for that.
    I think there are a couple of things legislatively that you can still add to. One of them is there are some vestiges of regulation that don't make any sense, like having to regulate and still have insurance registered at States and things of that nature and certainly those kinds of things will help productivity. But from the standpoint of what you did, I think it was a great job.
    Mr. VALENTINE. Let me put my two cents in. Don addressed the benefits of the trucking industry. In terms of the railroads, TEA 21, given the large amount of capital that the railroad spend on their own, this year I think it is going to be over $8 billion just for the four major U.S. railroads. TEA 21, the benefits that it may—the amount of capital it may allow the railroads to use will be relatively minor, relatively small, so from Wall Street's perspective TEA 21 had very little impact for the railroads, but once again it is a positive for the trucks.
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    Mr. RAHALL. If I might just continue, since you both have mentioned it, and then I would be glad to yield. Since you both mentioned the release of the regulatory regimes and the fact that both the truck and the rail industries are today pretty much free from Federal economic regulation as a result of deregulation by the Congress, there are still, though, groups of railroad shippers, primarily of bulk commodities, who remain concerned over the reasonableness of both rates and services and are promoting greater Federal jurisdiction over these matters. Would any of you gentlemen wish to comment on those concerns and legitimacy thereof?
    Mr. VALENTINE. Obviously the customers will receive, especially bulk shippers received some poor service from railroads, especially out West in the last year, and I think the railroad management will acknowledge this.
    So the question, I guess, is should there be change? And keep in mind that I come here with the bias or baggage or whatnot of coming from the direction of Wall Street and I guess our perspective is less change is good. So we would rather not see any changes, but obviously the customers have some concerns because there has been service problems. I guess the only thing I would add is clearly things are improving and even talking to customers out there, things have made a huge improvement from where we were a year ago.
    Mr. RENNICKE. I think the issue—there were definitely service problems, and I think there are some legitimate issues that customers have from all areas to try to find some mechanism. But to some extent, you know, in any economy, there are going to be these kinds of issues that come up. Now, sometimes you have to ask yourself, Will the cure be worse than what the problem is? And I can say that there is really no economy in the world that has more private sector capital put into it than the U.S. rail industry. I mean, everywhere else it is the government that is spending. As I pointed out in my comments, if you start changing the rules of the game right at the very time that the railroads have run out of the normal reservoir of productivity improvements that they have used to keep the rates down, in the future, you are going to see private capital have some very serious questions about putting more money into the business. If you just look at railroad stock prices relative to other equities of almost any kind, they are underperforming; and if you start getting into some of the longer-term debt and leasing kinds of issues, you are going to have more problems. I think you certainly have problems. I think if you look back today, the railroads involved have corrected them and it seems that, you know, as long as we have a mechanism where you ultimately fix it, that you might want to stay away from regulation.
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    Mr. SCHNEIDER. From a user of the rail transportation service, the issue of on-time is a serious one. Theoretically, when you merge two railroads and eliminate the connections, you should have an improvement in service levels. From a truck perspective, we are at the point now where most customers, sounds incredible, want a 100 percent guarantee on time service within a half-hour of when that load is supposed to be there. And when you look at 75 to 85 percent that the railroads are presently performing and in many instances with some of the problems out West in the neighborhood of 50 percent, it is a real challenge to use them and still continue to service your customers' needs. So they are going to get—they can run better but it certainly isn't there at this time.
    Mr. RAHALL. I might add, as is characteristic of the railroad's perfect timing ability, just as I asked that question, the President of the American Association of Railroads walked into the hearing room. I do have further questions. I want to yield back to the Chairman.
    Mr. PETRI. There will be several rounds of questioning. Mr. Horn?
    Mr. HORN. Thank you very much, Mr. Chairman. I have enjoyed looking at the material that each of the witnesses has provided. It is very helpful and we all will dig in it some more.
    One of you did mention a subject that I want to get into, and that is the technology of change in the energy that moves a lot of our transportation modes. One night at one of these many Capitol receptions, I happened to be talking to an Army general who had headed research for the Army. And since I chair the House Subcommittee on Government Management, Information and Technology, I am always fishing for issues. And that is what I am going to do with you this morning. And a lot of you remember the graduate where he was advised one thing when he got out of college: Plastics. Well, I noticed plastics are going down in some areas. But the general said to me one word: Batteries. And he is really quite right on that because that will relate to ground transit, to ground vehicles, you name it.
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    And I just wonder, what can you tell me on that subject as to where we are headed and what we ought to be doing to meet the air pollution acts? I come from the most rigorous air pollution acts in the country, which is Southern California, and we have cleaned up a lot of that problem that other cities haven't. Not to mention other countries. When you go to Bulgaria and you see this stuff all puffing up into the air, you know that in developing countries, the world has a major problem. What can you tell me about batteries and other technologies that get us away from the hydrocarbon situation?
    Mr. SCHNEIDER. One of the things that we do increasingly for our customers is set up models, computer models that optimize what that load should be, how it should be moved, and at one particular time. And what it does is it drives waste and efficiency and this moves out of the system. The human mind can no longer manage the multiple transactions that have to take place in a normal logistics day for the average customer and, as a result, what you are doing by driving waste out of the system is taking out an awful lot of those moves in the first place and that is the best way to eliminate pollution is to eliminate mismoves in the first instance.
    Mr. RENNICKE. I also think that E-commerce is destroying or eliminating actual transportation transactions or movements. Much in the same way as what Don was referring to, the efficiency will displace the unnecessary burning of hydrocarbons. You will actually cut out whole kinds of components of the supply chain and you will have less transportation there. Beyond that, I am not a technologist and I am not sure where we are going. I know our diesel engines have gotten a lot more efficient, but in terms of alternate technologies I am not an expert on that.
    Mr. PISARSKI. As kind of a tangential observation, I think one of the things we are not recognizing, and it was mentioned by Mr. Valentine, is a big chunk of what we do in the freight system of America is move fuel. We move coal. We move petroleum. We move natural gas. It is a dominant factor in certainly the pipeline industry. It is very, very important in the railroad industry, the barge industries, less so in the trucking industries, but still important. So any changes in fuel efficiencies and the sources of fuels has rather sweeping impacts on the whole flow of ton-miles across the country.
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    Mr. HORN. Mr. Valentine?
    Mr. VALENTINE. Well, the work I have done, and we have done quite a bit of work on utility deregulation, and what we found is that while we would like to all have a cleaner world and get rid of, I guess, with—coal is viewed as a dirty fuel. The reality is it makes up about 55 percent of the electricity we generate in the United States. And given that nuclear power is in a secular decline, we don't want nuclear power as a solution.
    What is there to fill the gap? That is what I struggle with, in terms of Wall Street investment communities, saying, OK, if coal is in a secular decline, what does the country fill the gap with? And it could be natural gas, but right now there is not enough capacity to fill that 55 percent of the power being generated. So I guess I don't see—until we as a country figure out a new way to generate electricity, I don't see we are going to resolve that aspect of the equation.
    Then I turn to the other side, I guess, following on Don Schneider's point, is that maybe we just need to be become much more efficient; and as we go towards logistics providers using on-board computers on trucks, using newer trucks, using newer locomotives.
    Keep in mind the trucking and railroad industry has been spending more capital on new equipment in the last 5 years than in any another 5-year period in its history. So we are getting the new types of technology. And I think that is where the push needs to be, because the whole other side of the equation that is trying to change to cleaner fuels, I think, is going to be—I just don't know where the alternative is.
    Mr. HORN. Well, I thank you. I think it is a significant factor. And I grant you we can't always project the future. And when I hear you talking about the baby boom and women's liberation in jobs, to me those trends shouldn't have been too easy to miss. And I happened to be assistant to Secretary of Labor Mitchell under Eisenhower, and we projected for 20 years out what would be the shape of skilled versus unskilled professional, so forth.
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    I think we hit it right on the mark. We didn't get into the women aspect, but I think that movement could have been seen coming. And—yes?
    Mr. PISARSKI. It certainly should have been seen. I, just as an example, give you the point that at that time I was working for the Metropolitan Washington Council of Governments, working on jobs and population forecasts, and the 1994 forecast of population was right on, based on the population forecast we made in 1970, and the job forecasts were about half what the number of jobs are actual today.
    The number of jobs per capita in America, the jobs per household, is just extraordinary, not only in our history, but in world history.
    Mr. HORN. You are absolutely right. And the immigration point that was made is right on the mark, because that is what is fueling the economy of the Southwest and the Southeast. And those jobs mean a lot of the young people can't get the early access jobs, because it is already occupied by illegal immigrants.
    Mr. PISARSKI. Let me make an observation on that, Congressman. When you add one to the U.S. population by childbirth, you get a commuter 20 years later. When you add one by immigration, you have an instant commuter. The people who come here are basically of working age, and that is why they came. They came for a job and a car, and they very quickly participate in the society in that way.
    So we are seeing much greater levels of growth in such things as commuting and travel activity than we might expect from the population that we are seeing.
    Mr. HORN. Thank you. And I enjoyed the presentation.
    Mr. PISARSKI. Thank you.
    Mr. PETRI. Thank you.
    Mr. Pascrell.
    Mr. PASCRELL. Thank you, Mr. Chairman. I find this to be a fascinating preface to what we are going to be doing, and I am glad we embarked on the path.
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    Short of manipulating the market, how do we get the 7 percent movement of product by rail up to about 10 percent? And what is the positive and negative fallouts if we do that? I am asking the question from a policy standpoint. We have—Mr. Valentine pointed out we have seen significant investment that we have all committed to in terms of roads and bridges. What are we doing in terms of investment in moving product off of those roads onto rail, and what is the fallout?
    Mr. SCHNEIDER. As I mentioned, I am mode-neutral. And you can look at how that has already increased dramatically, and it is fundamentally because the railroads, from an economic perspective, have done two things that have earned that traffic in the marketplace, which is what our customers ultimately demand from us, and that is they have managed, where they have economic advantages on dense lanes, to lower the rates. And at the same time they have to continue, and this is where they fall down, to run better schedules, on time. If they improve their on-time service, which is an operations issue, there isn't any question about the fact that they will pick up more and more traffic. Where the economics aren't sound, this country shouldn't have that on rail, because, ultimately, somebody is going to pay for it.
    Mr. RENNICKE. We have done fairly extensive market research that would show you that if this is—as Don said—if reliability moves even a couple of percentage points and transit time decreases, although reliability is far more important than transit time, you can see multiple point shifts in market share, including the return of a lot of merchandise commodities that let the railroads back on.
    Now they may come on in a different form. They may come on where you have got less-than-truckload and truckload motor carriers who actually book the business using railroads for the long-distance traffic, but it certainly can come back to the railroads.
    And I think the other thing clearly is that up until the service failures this last year, there had been an uptick in intercity transportation. And you have to separate the local from the intercity, because if you look at all the movements, the rail activity seems really small. And not trying to apologize for them, for the railroad industry, we have done research on mergers in all industries in America, and there is an astonishing number. Almost 70 to 75 percent fail in some way and stumble in much greater ways than I think would happen in the West.
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    So you have got probably the most complex of all business transactions, which is a merger and integration. You have got people, you have got cultures, and we certainly stumbled. I don't think that, in my view, that that is a predictor of what the industry can do, once it gets on its feet. And I think—I would say at the end of a year or two, with the kind of capital improvements, you will see a service pattern that will be multiple points better than it is today.
    Mr. PISARSKI. I would observe, looking around the world, the U.S. rail system is by far the most productive in the world. And I think what is in second place isn't even close. So it is a system that is very capable of competing, and as long as there are no regulatory inhibitions to its ability to compete, I think that we can be almost sanguine about letting the marketplace work.
    Mr. VALENTINE. I can't echo Don Schneider's point any more. I mean, it is on time, on time, on time. In this day and age when we can turn around—traffic managers can turn around behind their desk and pull up on the Internet where their truckload is. Even if they only do one load of business a year with Schneider, they can turn around and look and find out where their load is within 50 yards anywhere in the country. And yet when you call a railroad, you still have to find out which railroad originated the load, is it on that railroad, or is it on the railroad that terminated the load or the bridge carrier. And so this on-time issue is critical to getting up to 95 percent or better on-time performance. And I try to be mode-neutral as well, because I have clients that own railroads and they own trucking companies.
    So all I would just add is—the question, you know, what could shift the market share from railroads to trucks from a policy standpoint, and I guess first, you know, there shouldn't be any change to the economic regulations that the railroads currently have, because keep in mind that the businesses the railroads are trying attract is the lowest margin, and that is the intermodal business.
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    Don Schneider is a big user of railroad traffic. He takes his trucks out and puts them on a railroad. That for the railroad is the lowest margin business, because it is the least captive customer. That is what—I would assume as a policymaker that is what you are trying to push for is more of those types of moves.
    So if the regulations are changed to make it even more competitive for railroads or be disincentive to try to attract that, because it is already the lowest margin of business————
    Mr. PASCRELL. Are you saying, if I may from the chair, are you saying that perhaps we need to, in terms of policy, look at further subsidizing of the freight that moves through America? Is that—do you suggest that? You don't suggest that?
    Mr. VALENTINE. Yeah, I don't suggest that.
    Mr. PASCRELL. Why not?
    Mr. VALENTINE. Well, let me just say once again coming from Wall Street's perspective, we would just as soon let the marketplaces play their course.
    Mr. PASCRELL. We are not doing that if we invest a tremendous amount of billions of dollars into roads, into bridges, which obviously the private market, the private side, cannot do. I mean, it depends upon the dollar, the public dollars being invested.
    Mr. VALENTINE. Right.
    Mr. PASCRELL. What is the difference between investing in those roads and bridges so that we can move product and not subsidizing rails, which could have a multiple benefit in taking some trucks off the road, taking vehicles off the road? What is the negative side of that? You tell me.
    Mr. VALENTINE. I think there is definitely some benefits to what you speak of in terms of how the trucks are benefiting from the public monies that go into the highway system. I also would add that trucking companies pay taxes into the system, so, in effect, they are paying for their infrastructure.
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    I think, in terms of policy standpoint, it would be more—maybe a more gentle direction would be to go to in and incentivize the railroads to try to—or the trucking companies for that matter—to improve technology. This whole on-time performance issue, the satellite tracking you can do, the handing off of one company to the other, whether it is trucking to railroad, or railroad to railroad, trucking to trucking, any mode, the point is the technology right now is still in its infancy stage.
    What we can do, going back to Don's point, also addresses this issue of pollution and taking all of these excess moves. The more we can do to try to create links intermodally, where you go from one mode to the other, or even within modes, and try to eliminate the inefficiencies, all the more we can do that the better. That goes back to this whole, whether it is satellite tracking or just computer systems, trying to help the connections.
    Mr. PASCRELL. Just one final point. You are into, because of your job, maybe some economic forecasting.
    Mr. VALENTINE. Right.
    Mr. PASCRELL. Let's take a look at that. And this is my concluding question. Five years from now, has that 7 percent of the market increased, stayed the same, or decreased, in your estimation?
    Mr. VALENTINE. If the railroads can improve their on-time performance to something north of 90 percent, like the 95 percent range—once again, we are not talking about coal and grain. Who cares when that gets in. That can get there within a given week. We are talking about things like Don Schneider moving truckload traffic. If that can get above the 90 percent, 95 percent range, I think the railroads can attract well above 10 percent. They can be hauling billions and billions more of business per year if their on-time performance gets————
    Mr. PASCRELL. And would you encourage the government from our perspective to be involved to enhance those timelines, or should we stay out of it and let the market take care of itself?
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    Mr. VALENTINE. I think letting the market take care of itself is the way we would view it.
    Mr. PASCRELL. All right. I hope we can discuss and debate this in the future. Thank you.
    Mr. PISARSKI. Let me go back to some of the international comparisons again. If you look around the world, particularly in Europe, even through Asia, with the exception of the British, where they have recently privatized their system, in all of those other countries, the railroads are the largest employer in the country. They are the employer of last resort.
    And the level of employment in these systems and the level of productivity is just pathetic. In effect, what you are getting is railroads run by the motor vehicle bureau. The fact that we have developed in the private sector such an immensely productive system, albeit where we have reliability problems to work out, I think that to try to shift toward the other countries as they are now trying to emulate what we have in America would be very inappropriate, and I would very much agree, leave it to the market.
    Mr. SCHNEIDER. Just one comment. I think our experience during regulation indicates that government doesn't regulate efficiently and is very slow to react. The creativity of the management people, if they are ethical and honest, is far greater and much more responsive and that is when we are talking about the market, not the laissez faire, ruthless side of the market.
    But there isn't any question about the fact that if the railroads are the best value long term, they are going to get the freight. There isn't any question about it in my mind.
    Mr. RENNICKE. I think one thing you could look at, and I haven't kept track of it, but I do believe there are certain kinds of taxes or other obligations that railroads paid; that, in addition to paying the right-of-way, they get involved in fuel, and in some States they pay enormous property taxes.
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    So, you know, rather than get into a subsidization, because we have made a living—I have made a living the last 10 years undoing government-run railroads and subsidy programs, I think if you look at those other kinds of places where they are handicapped by local, State or even Federal kinds of policies that take money out of the operating till and move it to some other kind of activity, if they can get tax credits for putting it more in the right way or getting their service up, there could maybe be some creative ways of giving them back some of that money that is going to those funds. And I would say, in my view, that is as far as I would suggest that you go.
    Mr. PETRI. Representative Bentley, do you have any questions?
    Ms. BERKLEY. No. Thank you. I want to thank you for giving me an opportunity to hear you today. I didn't get to hear all of the testimony, and I will be reviewing it.
    I represent the city of Las Vegas, Nevada, which is a sleepy little town. I have got the fastest-growing district in the United States and 5,000 new residents every month. The issues that you are discussing are very important to not only my community, but to the region in which it's located. So I want to thank you for being here and giving me an opportunity to learn.
    Mr. PETRI. I apologize for the Bentley, Representative, it is Representative Berkley.
    Representative Blumenauer.
    Mr. BLUMENAUER. Thank you, Mr. Chairman.
    And I guess I would like to take up just briefly where Congressman Berkley left off. Her district perhaps is one extreme, but we are finding across the country that communities, whether they are in decline or they are growing, are having trouble figuring out how to cope with the massive increase in transportation demand, intermodal connections, the explosion in air, freight and passengers. And people are getting a little cranky about the strains and stresses and the costs, both in terms of airport expansion and how you get there.
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    We were just having a brief conversation about some problems where rail infrastructure was located more than a century ago and things have changed around it, and we are finding that virtually no community has the capacity to pave its way out of auto congestion. And people are getting a little cranky about how the billions of dollars are being spent, in terms of locating and creating it.
    One of the initiatives that we have heard from the administration in the State of Union talked about livable communities. There are 200 State and local initiatives around the country to try and deal with planning our infrastructure and investments a little better, not as was referred to in one of the statements about forcing people, but for God's sake, investing the infrastructure in a way that is planned in a thoughtful fashion, so the pieces will fit together.
    Do you have—any of you have any observations that would be useful for us about the impact of how there are smart growth, livable community initiatives to try and integrate these massive demands on transportation with the impacts on communities that are growing increasingly cranky with what is inflicted upon them, apparently without careful thought and analysis by people like us in the public sector?
    Mr. PISARSKI. Sir, I think one of the two things that the American public hate most are sprawl and living at high density. And I think that they have got—we have got this word that we get very upset about that has all of these negatives.
    Mr. BLUMENAUER. What is the data by which you make the assertion in the latter, because most of our communities where, quote, density is an issue, if you go back and look at them, they have—they have population densities that are actually less than they were 40 or 50 years ago.
    Mr. PISARSKI. Without question.
    Mr. BLUMENAUER. It is not the people that I hear complaints about; it is the trucks, it is the cars, it is the congestion. And it is the uncertainty about whether they leave 20 minutes for a soccer game or an hour for a soccer game.
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    Mr. PISARSKI. What I am saying is that the nature of the economy, the nature of the society, and the nature of the preferences in the society, particularly as incomes rise, is that people opt for dispersal, for spreading out. And it is in the nature of the value system that we have in the society today. All of the technologies that are operating are dispersal technologies. The last agglomerative technology we had was the elevator. The new involvement of e-mail systems and the whole Internet structure and the freedom of companies to be anywhere they want to be is going to continue, I think, to disperse the society.
    One of the questions that comes about is is there an opportunity for orderly dispersement; is there ways for the society to structure itself in ways that it is comfortable with? Trying to force people into high density clearly isn't going to work. If you can—if you can provide opportunities and make sure that there is no regulatory constraints on living at higher densities as a result of local land use regulation, then I don't know much more that we can do in terms of assuring that people live the way we might think they ought to.
    Mr. BLUMENAUER. Mr. Chairman, I would just like to pause the question, and I would appreciate reflection by any of the panelists about where that goes, because I see in the work that I do now in other parts of the country, the most rapidly growing areas, the most attractive communities are often those that are back in the central city. That is truly my community of Portland, Oregon. You are seeing it in Denver. You are seeing it in a number of communities, where people are by choice moving back.
    There is also excellent data that suggests that as people reach a certain level of affluence, they choose more urban living opportunities. I think it was in the recent—maybe it isn't recent now—Scientific American that suggests that when people get to the point where they have enough, they have a propensity for higher-speed transit.
    And having a chance to have your thoughts about how the interaction between planned use of infrastructure and integrating land use and transportation so that we can actually promote freight movement and we can reduce these frictions that are preventing us from making some of the necessary improvements for transportation is something that I would find of great benefit. And I think there is going to be a major issue for this Congress.
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    Mr. PISARSKI. Some of my testimony this morning is based on something called the Distinguished Lecture that I delivered this year at the Transportation Research Board. And that lecture talks about this subject in greater length than my testimony here today. That is available on the National Academy of Sciences Web page, and I would be happy to send it to you.
    Mr. BLUMENAUER. Great.
    Mr. PISARSKI. It is a subject that we need a lot more time to discuss.
    Mr. RENNICKE. Just a couple of points. And I am not exactly sure how far your jurisdiction goes with other forms of people-moving transit, but in general the U.S. is behind the rest of the world in private sector involvement in public transportation. And I am talking about private involvement in building light rail systems and building airports and building—we are at the experimental stage when the rest of the world is delivering.
    For example, the stretch program in transit is the Bergen County light rail, which is the first—which Raytheon and a group of investors participate in. It is primitive compared to the kind of private sector involvement you find in Latin America and Asia. We have a large practice putting those kinds of transactions together.
    The mechanisms are not available. We are working on a confidential project right now to try to get a private developer to build an airport in the United States. The tax rules favor, you know, public entities, not private entities, involved in it. Every one of the jurisdictions—every one of the groups in the DOT has pilot programs and an interest.
    But if you stack us up against the rest of the world, in this one area, even though we have a private sector economy, we have the least ability. I think you would find a far more robust solution or development of private transportation in rural areas or city areas if we could go to the levels of privatization, for example, that exist in Argentina or even other Third World countries, because they can't generate the capital out of the public treasury, so they go to the private sector.
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    And you usually have businesses that are designed quicker. It takes us 8 to 12 years to build an airport in the U.S. If you went to a private company, they said they could go from a greenfield site to getting the airport running in 4 years, you know, 8 years earlier. It takes 12 to 14 years, 15 years to get a light rail system approved and built; a private company could do it in 2 or 3 years.
    Now, I am not talking about 100 percent private funding of the operation out of the fare box, because it doesn't happen anywhere in the world. But they take a negative tender payment, they bid on that from the authorities, and they run it. So even if—I mean, I would say it is embarrassing that we went down to Argentina in 1990 to privatize the railroads, and their city bus system, even under Peron, for the big urban area was totally private. The Bank of Boston was financing—each individual city bus was run like a taxi, very strict safety standards, fair standards, et cetera. So I think that is an important part of it.
    The second thing, I think that in terms of urban congestion, there could be additional monies put into things like grade separation and other kinds of places where you have interfaces between the modes. You know, out in the West, there are issues about, you know, rail congestion, where the train pulls through the town. There are safety issues. I think looking at that from a perspective of fluidity would also help immensely. If there are spending programs, that is a good place—and I wouldn't call it a subsidy, I would call it, you know, a public-private partnership with the railroads or the communities--to build bypasses in the congested areas.
    Thank you.
    Mr. PETRI. Representative Shows.
    Mr. SCHNEIDER. One of the challenges that we face is that, with the continuing expansion of the population, that in many of the urban areas where the people are available for employment, the factories that are being built, the new ones are being built on the outskirts, and you are running from part of that region to the other part of the region in order to pick up and deliver loads. And this is also creating a tremendous challenge from an economic perspective, I guess; also from an efficiency perspective.
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    But the fact of the matter is that most of the land in some of those areas is already taken. And if you talk to any one of our customers, they will say, well, this is the only really large enough piece of property that we could get in order to put this plant up. So you have got some realistic views as this population continues to expand things that happen.
    Mr. PETRI. Let's see. Mr. Shows.
    Mr. SHOWS. Thank you, Mr. Chairman.
    Being the transportation commissioner in Mississippi for the last 10 years, it doesn't meet the same kind of level we have here. But one of the problems that I see has been the problem of infrastructure, especially with rail, trying to develop through the urban areas that we are talking about.
    And one of the problems we have in my area in Mississippi, as a commissioner on the Gulf Coast, was the availability of rail coming right through the middle of the most congested area. And one of the things we were looking at was trying to relocate that rail to the north of the interstate, north to where the population is not so populated. And the problem we had, the same thing in Mississippi where we had the same thing with rails, they don't have the money and infrastructure to relocate these lines.
    And I think this is one thing we really need to look at is not so much helping maybe to subsidize; once they are in operation, it is kind of up to them to make a profit. But I do think—I think we really need to realistically look at helping the infrastructure of especially rail, relocating some of their facilities where they will have not be in such a congested area.
    And one of the problems they have in keeping on time, in my experience, is going through these populated areas where they can't maintain the safety record and plus the speed that they maintain to keep their schedule. I do think those are some the things that we need to answer.
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    And I am also interested in what you were talking about in Argentina about the privatization of the airports. We have looked at privatization in my State dealing with roads and toll roads—and, by the way, we don't have one toll road in Mississippi, but—and our citizens wouldn't stand for it.
    But the—you know, I understand trying to privatize some of these elements might be a great idea for airports. I have never looked at an airplane privatization, but I would like to look at some of that information for my own State, for some other projects in my area.
    Mr. RENNICKE. I think just a couple of points. First of all, your comment about relocation is a good one. If you look at the dollars it would take to relocate a rail line, and we talked about what can be done to get their share from 7 percent up above 10, maybe from the people who faced the congestion, maybe they wouldn't agree with this term, but I would call that a nonproductive expenditure because it is being done for social good, and maybe there are some safety aspects to it.
    So I think for those kinds of programs—and that is, you know, standard all over the world--I think, you know, grade crossings, grade separations, safety, that is a real good place for the public to put money. Remember, every time you ask for a dollar from the railroad to do it, that is a dollar that they can't spend on, let's say, those kinds of activities.
    As far as the privatization goes, it is a very complex issue, and I don't think you should necessarily assume that a private participation has to be in the form of a toll road, I mean in the road situation. Most of the privatizations in the world are—you know, how you collect your money is up to you. What you are buying is private sector initiative and private sector responsiveness to a particular public need.
    So you can have a fixed arrangement where the public entity, the highway department, lays out a certain amount of money to pay for the road. You know, Massachusetts, where I live, is looking at that right now for the rebuilding of Route 3, which would be—it would not be a toll road, but it will be a fixed payment. It would be an off-balance-sheet financing where they would have an annual usage payment for a rebuild of Route 3 from the New Hampshire border to downtown; not a toll booth mentioned. But it is a way of getting a private sector company to step up and say, I am going to build it, I have to live with it for 25 years.
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    And the same can be done with airports. The same can be done with any of these kinds of transit systems. Again, I am not saying that you have to go back to the days where you try to support a city bus system totally out of the fare box. It doesn't work. But there are accepted 25-year procedures from around the world where you could get private sector volume.
    Mr. PISARSKI. I would like to add to that, if I may. My comment, I think, goes to your question and also to some of the other comments that Congressman Terry raised. The nature of cities in America has been, for so many of them, that they grew up around their transportation systems, whether the railroad, seaport or the major arterial, and what happens over time is they grow up, and then that thing that made them grow and nurtured them becomes a public nuisance. And they begin to say, we have got to get all of those boats off the water, we have got to get the railroad tracks out of the middle of town.
    And I think this is a part of our productivity issue and part of our transportation issues today where we need to rearterialize, some of our arterials—we need to restructure our ports, provide access for our imports and exports flowing to those ports, get them through the metropolitan system in some more benign fashion. I think we just haven't addressed that subject well enough.
    Mr. SHOWS. Thank you.
    Mr. PETRI. All right. Representative Millender-McDonald.
    Ms. MILLENDER-MCDONALD. Thank you, Mr. Chairman, and let me first thank you and the Ranking Member for providing this very important hearing.
    It is a amazing that as I sat and just kind of looked over some of the material and heard—is it Remmiske?
    Mr. RENNICKE. Rennicke.
    Ms. MILLENDER-MCDONALD. —speak about we are so far behind in many aspects of transportation, it concerns me, because I have just asked for and we are putting together a regional town hall meeting on the transportation in Los Angeles and the broader community, ranging from Palmdale to San Diego, because of the need, given the demographics, given the population growth, given the economy, and it is amazing that you tie all of these together. I had not even thought about it in those concepts.
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    But it is indeed clear that when you talk about moving people from welfare to work, you talk about an economic type of problem, and then when you talk about population growth, who else but California, the most populous State in the Nation, having to deal with the density that is in Los Angeles alone, irrespective of Orange County, and other growth areas.
    So when I hear this, and—notwithstanding the tourism, certainly I thought we were the most populous in terms—popular in terms of tourism in the U.S., and I think California does lead quite a bit on that.
    But what can you tell us; what should we be looking for? We have—I have in my district the ports of Los Angeles and Long Beach; must expand. I have LAX; must expand. We are looking at El Toro, we are looking at Palmdale, we are looking at John Wayne. We are looking at Burbank, we are looking at Long Beach airports, with this whole notion that California has been predicted by the year 2030 we will be 35 million plus; unwieldy, but nonetheless 60 percent of the migration into California migrates into Los Angeles and Los Angeles County. So we are faced with really quite a challenge. And as I listened to you, and you talk about the privatization of a lot of this, we are now dealing with bus ridership, light rail versus subway versus all of other things that I am sure all of you are familiar with, given the California population.
    I am concerned about when I read Mr.-is it Pisarski—
    Mr. PISARSKI. Yes, ma'am.
    Ms. MILLENDER-MCDONALD. —report, and you say we are no longer the safest in the world, that disturbs me. What are we doing, what can we do to address that issue.
    And then, Mr. Rennicke, what can we do to try to catch up with this behind factor that we are with other countries like Argentina?
    Mr. RENNICKE. Well, I think—a couple of things, in the—let's call it the public infrastructure area. Again, I don't know whether you have jurisdiction over all of those, but certainly I am sure you have an interest. We really do not have policies in the United States that promote private sector involvement in airport building. In other words, they will come on as a contractor, as a construction company. There have been some turmoil privatizations in certain places. But there are very few places in the United States where—for example, for your blue line, when you thought of the blue line, you thought of a public agency running the blue line. You thought of bonding, and our whole tax and our whole funding structure from the FTA falls into place around that. And if you look at 80 percent of the rest of the world, where they would look at a light rail system construction like that, they would try to—they would try to put the private sector at risk. Because the—and when I say put them at risk, because when you put them at risk is where you get costs down, and I don't mean where you get shoddy work, but you can really squeeze costs out of the system.
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    And I will give you one example. When we restructured the Argentine railroads that were existing, they had 100,000 workers, and they moved 200 million people a year, which is huge, more than all the commuter railroads in the United States. We found that they had 80,000 too many people running their government-run railway, and we suggested, and they—well, they privatize the operation of these railroads under a concession program. The work force was reduced to 20,000, and the ridership will go to 450 million.
    So there is tremendous private sector productivity that you can get from the ilk of our railroads in the United States from companies like Mr. Schneider's, for people who want to be in the build and operate business, who, it has been our experience, can—can do this much more quickly.
    Financing actually can come—
    Ms. MILLENDER-MCDONALD. And cost-effective as well?
    Mr. RENNICKE. And cost-effective. A lot of the quality and warranty problems that you face with transit go away because you basically—you don't just have them build it, but they live with it for 25 years or 15 years. You give them concessions. So you just don't buy the car, you buy the capability.
    And there are many support structures that are being used in other parts of the world that aren't used in the U.S. to help bolster and make this happen. For example, I have met several times in the last 6 months with the Bermuda offshore insurance industry that wants to write guarantees of ridership so those projects can be financed on a rated bond basis, because if you go to a place like, you know, Cali, Colombia, or certain parts of Mexico, who want to put a light rail system in, they can't provide a solid ridership estimate. So the insurance people will provide guarantees to the banks that, in fact, the riders will show up, based up on ridership estimates, in return for lower or higher debt—better debt rating so the interest can be borrowed.
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    But in going through that whole process, these offshore insurance people said, well, gee, you have given us all the difficult places, Cali, Colombia; Medellin; Lima, Peru; different places in Africa. Where in the U.S. could we use this? And we were hard-pressed. We could not think of one place where a public agency of any kind was putting a private investor at risk to guarantee ridership.
    So we since made some visits. I met with the under secretary of transportation of Pennsylvania last week to talk about could this be used on some products they have. So they are beginning to think about it. But it is our basic going-in assumption that it is funded from public money without private involvement.
    What would have to be changed is the whole—is each of the infrastructure agencies, highway, transit, air, FAA, would have to be encouraged to have more, I would say, creative funding programs where you would really set aside the normal procurement approach and say, meet all the other obligations for equal opportunity, et cetera, but let's do it differently. Give a creative proposal, and we can capture that within the structure.
    Ms. MILLENDER-MCDONALD. And while we do have partnership with private sector, it is not of any great degree, as you are suggesting, that will allow us the autonomy or allow you the autonomy to do one or two full-fledged, I guess, transportation components; i.e., rail system or bus system. But we tend to partnership with you on a percentage type of contract; am I correct on that?
    Mr. RENNICKE. Yes. It is typically—there has been a lot of creativity in the execution of contracts from the construction end, a push more and more of—and I think it gets—the most involved is Bergen County and then the San Juan light rail system. But again, that is just at a small fraction of the point of what it was.
    What I think you have to ask yourself is how can you buy private sector initiative investment, kind of cost control revenue creation, in a public business.
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    Ms. MILLENDER-MCDONALD. Let me just add to that before I hear from the other gentleman I asked to talk about the safety aspect. I am right at the ports of Long Beach, Los Angeles. But I am the only—or maybe now the second Californian who represents the aviation subcommittee, who is the only one who is on aviation. So that is why I am having to look at Los Angeles or LAX, and all of the airports in California, because I was and might still be the only Californian who serves on that subcommittee.
    Mr. PISARSKI. I think we really do need to look at the safety side of things.
    Ms. MILLENDER-MCDONALD. Yes.
    Mr. PISARSKI. And, historically, we have been very comfortable with saying we have the safest transportation system in the world, and the fact is that we no longer do. Other countries who were far worse than we have made tremendous progress and have passed us by. And I honestly don't know what the reasons for that are, but I do think that we do need to investigate and look at Sweden and Netherlands and some of the other countries, the United Kingdom, where they have made tremendous progress in highway safety.
    One of the things I recommend in my paper is a much stronger focus on highway investment for safety purposes and safety applications, especially with the aging population. I think it is going to be a critical factor not only in the United States but around the world.
    I wanted to go back to your earlier point about the immense influx of activity in your area. One of the things—and I don't mean this to sound cynical, but one of the things I remember 7 or 8 years ago when Los Angeles was really suffering from serious recession problems, the transportation problems were no longer an issue. So recession is a wonderful cure for some of our transportation problems.
    What I am saying is that a lot of this is a concomitant of a highly effective economy both in freight movements and in passenger flows. It is something that comes along with it.
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    One of the positive things I see in it is that we are adding about 25 million people every decade. We have been doing that since 1950. But the impact on our society of 25 million people today is relatively trivial compared to 25 million back in 1950. We are much more capable of dealing with that kind of a growth than we have in the past. The shift to the Sunbelt, to your part of the world, is nowhere near what it was in the 1980's.
    Having said all of that, Los Angeles is still suffering from dramatic changes, particularly with respect to immigration. But I guess my thought on this is that we are—that the problems are much more operable today than they were 15 or 20 years ago. We had a real shock to the system as the baby boom moved through the system, like a boa constrictor that swallowed a pig, and this thing is just working its way through the system.
    But we are kind of past that now. And I think that we can see opportunities for investment where, in fact, you will see some reward. We won't be overwhelmed by the shocks of growth.
    Mr. SCHNEIDER. Could I make one comment? One of the things I think we need to be careful about is lumping together what is person movement and freight movements. We are the envy of the world in freight logistics. And the European minister has asked me a couple of years ago to come over and show them what we did in this country. So I think—I just wouldn't want the committee to leave with a mindset that we are not better than anybody in the world with the way that we handle that. And that has a big impact also on the standard of living for a lot of people in your district.
    Ms. MILLENDER-MCDONALD. Oh, absolutely. And I appreciate that, because I was rather glum at the whole notion that we just weren't superior someplace.
    Mr. SCHNEIDER. Absolutely.
    Ms. MILLENDER-MCDONALD. We have got to be superior someplace.
    So given that, I thank you so much, Mr. Schneider, for that.
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    Mr. RENNICKE. If I can just be clear on that. And that is absolutely the case. We have by far the best rail and motor carrier industry in the private sector in the world. So on the freight side of things, Canada is second to us, at half the level of productivity. And then from there you don't really get any of the other major countries, or maybe the best is one-tenth of the level of productivity.
    So my comments were more specifically directed at those parts of our transportation system that typically move people that are funded by the public sector.
    Ms. MILLENDER-MCDONALD. And that I can understand now.
    Mr. RENNICKE. I am sorry for the confusion.
    Ms. MILLENDER-MCDONALD. That is fine. I go away feeling a little better here.
    Mr. Chairman and Ranking Member, I would certainly like for us to revisit the safety, or lack of, of our transportation system at a later date. Thank you so much.
    Mr. PETRI. Do you have any other comments?
    Mr. VALENTINE. The only other thing I wanted to mention in terms of railroad and trucking in terms of capital from Wall Street's perspective, that I don't know of any other country that has as many publicly-traded trucking or railroad companies, or even a quarter of them, putting capital in there through the public markets, i.e., meaning the financial markets, as we have in the United States. So going back to the point that we have the best at least freight transportation systems in the world.
    Ms. MILLENDER-MCDONALD. Thank you.
    Mr. PISARSKI. Just to give you a little more comfort, we have been saying that the freight system is the best in the world, and there is no question about that, but our passenger system—and we often tend to deride it and talk about congestion. If you talked to Japanese or Europeans about the average travel time of Americans to work is 24 minutes, they don't believe you.
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    And the ease with which we move the labor force across the country from the West Coast to the East Coast is really rather dramatic. We complain, we have problems, but in broad terms we have a very, very effective system.
    Mr. PETRI. Mr. Rahall.
    Mr. RAHALL. Thank you, Mr. Chairman. I do not have a question, just something I want to state in an effort to be fair for the record, and it goes to what Mr. Valentine has noted in his submitted statement.
    He noted that among the LTLs, the unionized national carriers are experiencing less growth than the regional, predominantly nonunionized LTLs. He stated this in his opening statement earlier. He attributed this in part to what he stated is a considerable cost advantage the regionals have due to a lower wage structure and more flexible work rates. According to the February 1st issue of Traffic World, Consolidated Freightways completed eight straight profitable quarters since its spin-off in late 1996. Earnings last year were $35.2 million on $2.23 billion of revenues compared to $28.9 million on $2.2 billion in 1997. The same with ABF. Last year it enjoyed the largest net income in its history.
    So I am not here as an apologist for the unionized carriers, but I did want to just state this for the record. The fact of the matter is that in 1980, the year Congress deregulated the industry, the three largest carriers were Roadway, Yellow and CF. In 1998 it remained the three largest carriers.
    Unless you have a comment, I yield back the balance of my time.
    Mr. VALENTINE. You are absolutely right. I guess the one thing it is just different ways of how I am slicing it, and that is one thing, and we actually have this in our written testimony, if you go in and look at Exhibit 9, you will see that the five national LTL unionized carriers generated—in 1990 generated $7.6 billion in revenue, and in 1996, they generated $7.8 billion. So you saw virtually no growth. If you looked at the regional carriers—this is Exhibit 9 of my report—if you look at the regional carriers, they grew at 13 percent.
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    All I am saying is there is a cost differential. And I am not pro or antiunion. I am just saying when you are going through the math, you realize there is about a 600-basis-point difference in a company that is unionized versus nonunion in the cost structure, and that is for every dollar of revenue that they bring in, a unionized carrier will spend 6 cents more on the labor costs than a nonunion carrier.
    And to your point, it is well taken that CF has had a very good quarter. In fact, as a stock analyst, I upgraded the stock in the fourth quarter telling people they should buy the stock because they were doing some of the right things. I would just point out that CF's margins are only 3 percent, whereas Conway, which is a nonunion regional carrier, margins are 12 percent. So four times as good margins. American Freightways, which is another company I follow, they are nonunion, and their margins are 8 percent.
    So I am saying there is an economic shift taking place. And like I said, I don't want to come off as being pro or antiunion, I am just saying there is an economic shift taking place where the nonunion employers have a lower cost structure.
    Mr. RAHALL. Thank you.
    Mr. PETRI. In wrapping this up, I would like to first ask, Mr. Schneider, if you would like to take one more kick at the can and basically discuss what you think the greatest challenges are that your industry faces at this point in time and over the next few years.
    Mr. SCHNEIDER. Would you repeat the question again?
    Mr. PETRI. What are the biggest challenges that you have as a logistics practitioner and consultant?
    Mr. SCHNEIDER. OK. One of the biggest challenges is first, from Schneider National's perspective, is continuing to create a work environment where the associates there find themselves stimulated by the opportunities that they have to continue to be very productive and effective.
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    Work is more than just compensation. You should pay your people fairly, but you also want a work environment where people really find themselves realizing they are doing really meaningful, worthwhile things, and that they enjoy that kind of thing. So that is basically how I—what we work at very, very hard.
    Mr. PETRI. Thank you. I think we would be remiss, even though this isn't the direct focus of this hearing, in not asking if any of you, because of your background, have any advice or comments you would like to make about the future of not just the movement of goods in this country, but the movement of people. Particularly mass transit. It is a major Federal commitment, in a variety of areas around the country.
    Where does that fit into the basic underlying trends towards dispersal, and does that mean we need to restructure our approach to mass transit? I mean, are we going at it with blinders, trying to maintain an historical artifact? Or basically what should we be doing differently?
    Mr. PISARSKI. Thank you, Mr. Chairman.
    In some ways, I think we are. The nature of the dispersal of jobs and people and the nature of the new kinds of commuting flows we have, which are fundamentally circumferential rather than suburb to downtown, and the highly dispersed nature of the population and jobs really makes for a dramatic challenge for transit systems.
    I think that other than the big rehab demands that we have, particularly in the eastern transit systems, Washington, New York particularly, and Philadelphia, Boston, Chicago, in the future, I would hope that we would take a more flexible approach and be able to approach transit from the point of view maybe of some of the privatization thinking we have been talking about: Smaller systems, jitney-based systems, small van-based systems to serve suburban-to-suburban needs, particularly to respond to reverse commuting, center-city people trying to get the jobs in the suburbs, which is an important facet of what is happening today.
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    And what we are going to need is much more nimble, much more flexible systems, rather than a heavy rail, radially-oriented approach. That will be effective in some corridors and in some places, but not for the dominant patterns that we are going to need to serve.
    Mr. PETRI. Any other comments?
    If not, we thank you all very much. It was a very informative morning.
    [Whereupon, at 12:02 p.m., the subcommittee was adjourned.]

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