Riding the Rails
Gulf railcar service reduces cross-border cargo transit times.

11/1/2007

By Dale K. DuPont, Correspondent

Its vessels haul carloads of Corona beer, forest products and chemicals every four days across the Gulf of Mexico.

CG Railway Inc.'s unique rail-ferry operation is selling faster transport times and fewer hassles via an approximately 900-mile ocean highway between Mobile, Ala., and Coatzacoalcos, Mexico.

But much more than suds and boards are riding on the service.

International Shipholding Corp. (ISC) formed the short-line railroad in March 2000 and began service in early 2001 with two single-deck ships to handle the crush of commerce created by the North American Free Trade Agreement (NAFTA). CGR connects major railways serving the U.S. and Canada with the railways of central and southern Mexico.

This summer, CGR reached its goal of double-decking the vessels and upgrading terminals on both ends, a move geared toward moving the operation into the black. Start-up costs, terminal construction, Hurricane Katrina and down time for installation of second decks all contributed to the red ink.

Now CGR will test the market with the Bali Sea and Banda Sea . Each 595' × 117', 21,000 DWT roll-on/roll-off vessel has eight tracks on the top and seven on the bottom totaling about 7,000 linear feet. Adding the second deck increased capacity on each ship from 58 to 115 railcars. The ships' average speed is 10.5 to 12 knots.

The second deck essentially doubles CGR SSRq s capacity, "which in theory would double sales without increasing operating and fixed costs," said Grant Hopkins, an analyst with Ferris, Baker Watts Inc., in Baltimore. "The company has started to see the demand is there."

The rates are cost effective and competitive, and Hopkins said he expects 70 to 80 percent capacity for the fourth quarter and into the early part of 2008. And at 70 percent, the company should be in a position to post an operating profit.

"We're pretty optimistic," he said.

LESS CONGESTION

International Shipholding has a positive outlook, too. "We have to gradually build up to 100 percent [capacity]," said president Erik Johnsen. "We're well on the way to a successful operation.''

Once based in New Orleans and now headquartered in Mobile, the publicly traded company has several businesses, including liner services. In 2006, ISC earned $17 million on $274.9 million in revenue. CGR accounted for $18.4 million of the revenue.

"The whole idea of this was to try to find a solution to the congestion at the Texas-Mexico border," Johnsen said. They considered various alternatives, trying to decide if it was a Texas solution or an eastern Gulf solution. "We came to the conclusion our market was going to be east of the Mississippi River."

When ISC launched the business, "we always felt we needed more capacity than we actually had. We went in knowing we were going to be double decking these vessels," Johnsen said. "We were always hoping we were going to do better than we did. But with start-up costs, you always have a growing period."

CGR can deliver cargo 50 or 60 percent more quickly than by rail via the border, he said. So customers get their railcars back faster and get more use out of the equipment. And with the new terminals, ISC can load and discharge each ship within eight hours. Before, it took four to five hours for just one deck.

CGR upgraded the terminals to handle the newly configured vessels, whose second decks cost about $23 million. Work on both the Mobile and Coatzacoalcos terminals was completed in July. Snnb The $27 million Mobile terminal was funded by $17 million from the Alabama State Docks, to be repaid over the 10-year terminal lease, and another $10 million from the state, ISC regulatory filings said. Upgrades in Mexico, where ISC has a 49 percent interest in the company that owns the terminal, cost ISC about $5.8 million. Snnb

"This is really the icing on the cake," said Judith Adams, spokesman for the Alabama State Port Authority. "We connect with five Class 1 railroads. It gives shippers more options and expands our transportation base."

In its short life, CGR has moved from Mobile to New Orleans and back to Mobile.

With incentives from both the state of Louisiana and New Orleans, ISC decided in late 2004 to relocate the service from Mobile to New Orleans and also agreed to stay at the Port of New Orleans for at least 10 years.

"We knew they made the best decision then from a business standpoint," Adams said.

But Katrina changed everything, putting a halt to operations in New Orleans in August 2005 not long after CGR SSRq s launch. Katrina flooded CGR's facility and it was closed for three months. CGR resumed limited service that November, but the storm's closure of the Mississippi River Gulf Outlet to deep-draft shipping sent them back to Mobile. The MRGO had been a short cut for ships to and from the Gulf of Mexico, and its closure essentially cut off access to the CGR facility.

SUCCESS STORY?

Despite the challenges, "CG has done pretty well," said James Kruse, director of the Center for Ports and Waterways of the Texas Transportation Institute. They've been in business long enough to say they're viable, he said. "It's a niche market."

"The number of points where you can actually have rail service in Mexico aren't that many," said Kruse, whose center several years ago did an analysis of start-up, cross-Gulf shipping with Mexico, focusing mainly on short-sea shipping.

The study noted several container services operating to Mexico and a number that were planned but never started or were short-lived. A few were rail/barge proposals.

One rail/barge that actually ran in the early '90s was a joint venture between Burlington Northern railroad and Grupo Protexa of Mexico.

Protexa Burlington International ran four, seven-track barges with room for 53 hoppers between Galveston, Texas, and Coatzacoalcos. They moved grain, chemicals and industrial products on the three-day trips. The company did not say whether the service was profitable.

A spokesman said it stopped because of "strategy change and merger focus." Burlington Northern and Santa Fe Pacific Corp. merged in 1995, giving Burlington Northern land routes to Mexico.

From Mike Lee Sr.'s perspective, CG Railway "was a great thing to come along at a time when congestion at the border was so bad."

"Our hope is that it will continue to grow," said Lee, president and CEO of Page & Jones Inc., a Mobile customs broker and freight forwarder that works with CGR.

Importers and exporters are pleased with the service, he said, "and very happy to hear about the expansion. They're here to stay."

Wes Bunkley, a logistics manager with Georgia-Pacific Corp.'s building products group, figures the rail/ferry saves them about a week's travel time.

They ship one carload a month of plywood into southern Mexico, about 15 percent of the total business for that commodity. The rest goes mainly by rail direct. The destination usually governs the type of transportation used, and CG Railway is quicker than land transport to southern Mexico.

"We really like the service they provide," he said. CGR takes care of everything so shippers have just a single bill of lading.

ISC is betting on survival. "Anything that can go on a railroad, we can carry," Johnsen said. "We would not have done the double decks if we didn't think we could get the cargo."


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