The Walt Disney Co. will begin shipping small batches of Asian-made merchandise for the Disney World resort in Orlando, Fla., through the Port of Miami early next year when an intermodal yard becomes available there, James R. Hertwig, the chief executive and president of Florida East Coast Railway, said in an interview.
The $45 million to $50 million public-private partnership to develop a rail facility on port property is expected to be fully functional sometime in the first quarter of 2013 and Disney has committed to let the FEC move its cargo to Central Florida, the veteran railroad and motor carrier official told American Shipper.
“We’re looking to gain traffic from Disney once we’re on-dock rail in Miami,” Hertwig said.
The news underscores the competition between ports for cargo and represents potential further erosion of a major importer’s business from the Port of Savannah in the wake of Disney’s announcement in June that it was shifting a large amount of inbound volume to the Port of Jacksonville in northern Florida. In September, Savannah is also scheduled to lose a joint Maersk/Hamburg Sud service, between the U.S. East Coast and Australia and New Zealand, to the Port of Charleston, S.C.
Disney made the move to Jacksonville in June because the Japanese firm MOL, one of its major ocean carriers, operates a new terminal there as its hub for the Southeast. The company said it expects to ship about 2,500 TEUs a year – 75 percent of its merchandise destined to Florida — through Jacksonville. The remaining 25 percent continues to be routed through Savannah, Ga., and trucked to Orlando.
Hertwig did not disclose which container line has a contract with Disney and would divert some of its freight from Savannah to Miami. Currently, three vessel operators serving Asia call at the Port of Miami. They are Maersk Line, CMA CGM and APL.
Disney World spokesman Bryan Malenius declined to name the company’s other East Coast ocean transportation provider and said he had no information so far in advance about whether Disney might change its logistics strategy.
Hertwig said a positive trial moving Disney merchandise by rail to Cocoa Beach and then shuttling it 35 miles west to Orlando by truck could lead Disney during annual negotiations for ocean contracts next May to opt for full delivery to Miami instead of Savannah.
If successful, the FEC and the Port of Miami also have their eyes on capturing Disney imports now being routed through Jacksonville.
“In my opinion, once they get used to using the Miami service, they’ll find that’s a better option,” Hertwig said.
Bringing trains directly to the wharf is expected to make the FEC more competitive by eliminating the expense and extra step of trucking international containers from the Port of Miami to the FEC’s main rail yard in Hialeah several miles to the west.
The FEC is in the process of extending its rail line to the container terminals in Miami and building a facility for ship-to-rail transfer of intermodal boxes. The regional railroad, which runs 351 miles along the coast of Florida between Miami and Jacksonville, has restored its neglected main line to the rail bridge connecting the mainland with the Port of Miami. Along with the port, it expects to rehabilitate the damaged rail bridge by September. The intermodal facility will be completed in the fourth quarter and be fully functional sometime in the first quarter of 2013, according to Hertwig.
The project, which includes modifying the Hialeah yard to accommodate the increase in intermodal traffic, is supported by a $23 million TIGER grant from the federal Department of Transportation, and up to $9 million from the Florida Department of Transportation and $5 million from Miami-Dade County. The FEC is contributing $9 million to the effort.
The on-port facility will take 60,000 trucks off the road each year, he said.
Hertwig said once the FEC proves its reliability, it will have a cost advantage over Jacksonville because its truck fleet will only have to travel 35 miles compared to 200 miles for truckers hauling cargo from Jacksonville to the amusement park.
The FEC started operating its Cocoa Beach intermodal facility in the first quarter of the year and is now handling 30 to 50 loads per week, the former CSX Intermodal executive said. The facility was developed to reach the entire state, but primarily because the FEC considers Orlando one of its new growth centers.
“It will enable us to service the entire state overnight,” he added.
Some analysts have dismissed Miami’s potential to attract more ocean carriers because of infrastructure constraints on the narrow port footprint and the consumption market not extending beyond the metro area given its southernmost location. Last year, the port handled more than 900,000 TEUs.
Projects to dredge the navigation channel to 50 feet, install direct rail access, and build a tunnel shortcut between the port and nearby Interstate 95 are part of Miami’s attempt to position itself as a first port-of-call for super-size container ships from Asia that will be able to transit the Panama Canal once a wider set of locks is available in 2015. And FEC officials say they can help Miami reach as far as the Ohio Valley for shippers because of their low-cost, reliable service that connects with the Norfolk Southern and CSX rail networks in Jacksonville, getting cargo up the coast faster than a ship that offloads in Miami before heading to other ports. Miami is also the main U.S. gateway to Latin America.
“We can provide connectivity to 70 percent of the U.S. population with two-day service to Atlanta and Charlotte, and three-day service to Nashville and Memphis,” Hertwig said. “So that’s our real target market, the Southeast. We can basically have cargo at destination by the time the ship would be getting into Savannah or Charleston.”
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Meanwhile, Florida has more consumers that make the state a natural destination for imported freight than many realize, Hertwig added. Florida’s population is about 19 million, 13 million of which are in Central Florida. The state’s population is projected to reach 23 million by 2020, but the region annually hosts about 81 million tourists and other visitors, he noted.
The FEC, which is owned by funds managed by Fortress Investment Group, is making two other significant investments in South Florida to enhance its network’s capability.
The railroad expects to break ground soon on a $73 million intermodal container transfer facility at Port Everglades, 25 miles north of Miami in Fort Lauderdale. In late January, FEC signed a 30-year lease (with two 10-year extension options) to develop the 42.5-acre facility, which will consolidate both domestic and international containers for transport between South Florida and the Southeast.
Most ports are responsible for their on-dock rail operations, with railroads simply bringing in trains to transport containers. Under the Everglades concession agreement, the FEC will operate the intermodal facility too. It plans to use modern, wide-span electric cranes that can quickly transfer containers between rail cars and yard tractors and reach across multiple stacks of stored containers.
The ability to combine both domestic and international freight into large blocks to places like Charlotte, N.C., also makes the terminal different than most port-based intermodal facilities that strictly handle international boxes. International cargo will enter the site on the south side and domestic containers will be processed on the north side.
Having the ICTF on port property will reduce congestion by eliminating the need for trucks with import or export containers to move through downtown to the FEC’s existing rail yard, which handles about 80,000 lifts per year. Port Everglades estimates the new facility will remove 180,000 trucks per year from roadways by 2027. The truck-rail transfer facility will have annual capacity of 400,000 TEUs.
It’s opening is also being timed to the expansion of the Panama Canal to handle expected container growth.
Broward County is donating the land and the state of Florida is chipping in $18 million. The FEC is contributing $35 million, $30 million of which is in the form of a low-interest loan from Florida’s infrastructure bank.
The railroad has issued its request-for-proposal to design and build the facility, will finalize the loan in the third quarter, break ground in the first quarter of 2013 and plans to complete the project in the first half of 2014, Hertwig said.
The rail carrier also provides intermodal service to the Port of Palm Beach, which handles a lot of Caribbean cargo.
The FEC’s other big initiative is a 400-acre, rail-served logistics park with 1.5 million square feet of warehouse space adjacent to Miami International Airport and the Hialeah yard where imports in 40-foot containers can be swapped to 53-foot domestic containers, stored or reconfigured for final delivery. It is designed to connect air, sea, rail and truck modes, and will benefit from designation as a Foreign Trade Zone where duties can be deferred on goods that are re-exported or postponed until entry into the U.S. market.
The land is being developed by FEC affiliate company Flagler Development Co., which is scheduled to start construction on the transload facility in the third quarter, Hertwig said.
Flagler is also owned by Fortress, which separated it into an independent commercial real estate company.
Some inbound cargo will be loaded at the Port of Miami and directly move up the coast, while the FEC will move cargo for other shippers by rail to the South Florida Logistics Center to consolidate shipments in larger equipment. The containers will be moved between the rail ramp and warehouses on a private road.
The logistics center will help address the imbalance of containers in the region and create additional business for the FEC, the company’s CEO explained.
The FEC benefits from Florida’s geography as a peninsula and the state’s status as a net consumer. Florida receives a large amount of freight that has to be trucked to the bottom of the state, but other than agricultural products it doesn’t manufacture a lot of goods for the rest of the country. Some of FEC’s biggest customers are truckload providers such as Knight Transportation, Werner Enterprises, Crete Carrier Corp., Transport America, NFI, and US Xpress. Motor carriers bring trailers to FEC’s terminal in Jacksonville so they don’t have to send tractors and drivers into the Florida interior and make a non-revenue return trip without cargo. The FEC puts empties back on the train in South Florida and returns them to the trucking companies in Jacksonville.
There are four truckloads southbound for every loaded northbound truck. Transloading enables shippers to put the amount of cargo in three 40-foot ocean containers into two 53-foot domestic containers, or five ocean boxes into three 53-footers. In the future, many international containers will be turned quickly near the port where they can be used for export loads or be sent back overseas to be refilled again with merchandise, relieving ocean carriers of the headache of repositioning empty boxes from inland destinations back to the port. At the same time, the FEC can use the excess 53-foot containers/trailers in the region for international merchandise heading north, thereby eliminating an empty backhaul for motor carriers.
Shippers and motor carriers also utilize the FEC to avoid heavy congestion on Interstate 95 and U.S. Route 1, the main north-south highways along the eastern shore.
Intermodal accounts for 80 percent of FEC’s volume. In the first quarter, intermodal revenue increased 11 percent to $33.7 million compared to 2010 because price increases offset a 2 percent decline in volume.
Fifty-five percent of the railroad’s volume comes from outside the state via Norfolk Southern and CSX Transportation. The rest of its intermodal traffic is strictly short-haul, a niche the company has been able to perfect even though railroads have traditionally found lengths of haul between 750 to 1,500 miles, or more, to be most profitable.
“Our biggest competition is truck. So, we’ve got to compete like a truck,” Hertwig said.
The FEC’s infrastructure and operational planning provide the reliability necessary to accomplish that, he explained.
Tracks are supported by concrete ties, instead of wood ones, which allows the railroad to run at higher speeds and mix various commodities with intermodal cars while still meeting the time-sensitive service schedules of intermodal customers. Thirty percent of the company’s main line is double tracked and the track is 136-pound gauge, equivalent to what is found on Class I rail networks.
The FEC also runs four end-to-end trains per day each way and can cover the distance in 8.5 hours, making it competitive with truck delivery times. The FEC has a lot of room to grow. With 12 daily trains in total, it is running at 50 percent capacity.
Hertwig said the backhaul economics — combined with the economies of scale of large container vessels that are expected to reduce shipper costs by $300 to $400 per unit — will make South Florida a desired gateway for importers and exporters. (Some analysts say shippers will only realize savings of $100 or less per box moving all-water to the East Coast relative to transporting cargo through West Coast ports.) The cost of moving an empty by rail is much lower than moving it by truck with all its associated labor, fuel and opportunity costs. The FEC can further reduce rates for the return leg by filling those containers with imports at the transload center, essentially subsidizing the cost with a new source of revenue.
Together, Miami and Port Everglades have container throughput of about 2 million TEUs and expect to more than double it within 20 years. Only about 10 percent of that cargo moves intermodally and “we feel that probably in the neighborhood of 20 to 25 percent of the business will move by rail” in the future, Hertwig said.
The South Florida ports should be attractive to container lines because of they can unload a lot of cargo at one stop for the Florida market as well as the Southeast and Ohio Valley and get it north in the same time as using other ports along the East Coast, Hertwig argued.
FEC lost $37.3 million last year, almost $14 million more than in 2010, and in the first quarter it lost $4.4 million, according to earnings statements. The losses don’t stem from poor performance but from the need to make principal and interest payments on the the large, high-yield debt Fortress pushed on the company after acquiring it in 2007. The private equity firm took on $605 million in debt to finance the deal and the FEC’s liability is now $609 million because it has opted not to pay interest yet on a subordinate loan with a rate of 11.25 percent. The interest rate on the original loan is 8.125 percent.
The FEC’s annual interest expense decreased $8.9 million to $57.4 million last year after it refinanced its debt.
In 2011, the rail carrier had operating income of $35 million, down from $43 million the previous year. In the first quarter, operating profit exceeded $12 million. Adjusted to factor out depreciation, operating profit grew 22 percent to $19.6 million.
Although the FEC is privately held, it’s parent company has to file financial statements with the Securities and Exchange Commission because its debt is freely traded on the market.
On Monday, Fortress Investment announced plans to sell its 60 percent stake in short-line holding company Rail America to Genesee & Wyoming, another large owner of short line railroads. Last year, Fortress broke apart FEC and Rail America, which previously shared back-office functions such as accounting. — Eric Kulisch
