Freight Transportation Framework Study A study by the JOINT PLANNING ADVISORY COUNCIL A planning partnership for the Arizona Sun Corridor

Technical Memorandum I – Freight Shipper and Carrier Profile and Commodity Flow Profile

MARICOPA ASSOCIATION OF GOVERNMENTS CENTRAL ARIZONA ASSOCIATION OF GOVERNMENTS PIMA ASSOCIATION OF GOVERNMENTS

Prepared by:

PARSONS BRINCKERHOFF

In cooperation with:

F. Zuniga, Inc. KDA Creative RCLCo Tompkins Associates Trans-Research International Zachary Maritime Consulting TABLE OF CONTENTS

1.0 Background and Methodology ...... 7 1.1 Freight Framework Study Background ...... 8

2.0 Shipper Surveys and Interviews ...... 11 2.1 Shipper Surveys ...... 11 2.1.1 Survey Respondent Profile ...... 11 2.1.2 Sun Corridor Shipper Operations...... 13 2.1.3 Imports and Port of Entry ...... 17 2.1.4 Potential for Future Arizona Operations ...... 22 2.2 Shipper Interviews ...... 23 2.2.1 Shipper Interviews ...... 24 2.2.2 Transportation Service Provider Interviews ...... 25 2.2.3 Government and Others ...... 27 2.3 Consortium Database Best Practices and Benchmarking ...... 28 2.4 Survey and Interview Findings ...... 35 2.4.1 Trends in Goods Movement ...... 35 2.4.2 Trends in the Sun Corridor ...... 36

3.0 Commodity Flow Profile ...... 38 3.1 Introduction...... 38 3.1.1 Data Sources Used ...... 38 3.2 Overview of Sun Corridor Cargo Flows by Direction...... 39 3.3 Inbound Cargo ...... 40 3.3.1 Domestic Inbound ...... 42 3.3.2 International Imports ...... 47 3.3.3 Cross Border Imports ...... 50 3.3.4 Denting Southern California’s Dominance in Distribution ...... 51 3.4 Outbound Cargo ...... 52 3.4.1 Domestic Outbound ...... 53 3.4.2 International Exports...... 56 3.4.3 Cross Border Exports ...... 58 3.5 Through Cargo ...... 58 3.5.1 Overview and Relevance ...... 58 3.5.2 East-West Commodity Flows ...... 59 3.5.3 North-South Commodity Flows ...... 68 3.6 Commodity Flow Findings ...... 72

Freight Transportation Framework Study i Freight Shipper and Carrier Profile Phase I Technical Memorandum 4.0 Ocean and International Cargo ...... 74 4.1 Current Ocean Cargo Goods Movement Affecting Arizona ...... 74 4.2 West Coast Port Market ...... 75 4.3 Impact of the Panama Canal Expansion ...... 77 4.4 Port of San Diego and the Port of Ensenada ...... 79 4.5 US Gulf and Southeastern Ports ...... 79 4.6 Mexican Ports ...... 80 4.6.1 Port of Punta Colonet ...... 80

5.0 Rail Cargo ...... 82 5.1 Railroad Operating Facilities ...... 82 5.2 Multimodal Customer Facilities ...... 82 5.2.1 Railroad Intermodal Terminals ...... 82 5.2.2 Transload Terminals ...... 83 5.2.3 Inland Ports ...... 83 5.3 Sun Corridor Rail Network ...... 83 5.3.1 BNSF...... 86 5.3.2 Union Pacific (UP) ...... 87 5.3.3 Short Line Railroads ...... 88 5.4 Condition and Capacity of the Class I Railroad Network ...... 89 5.5 Proposed Railroad Improvement Projects ...... 92 5.5.1 BNSF...... 92 5.5.2 UP...... 92 5.6 Railroad Traffic Profile ...... 93 5.6.1 Container/Trailer Traffic and Rail Competitiveness ...... 93

6.0 Trucking and Motor Freight ...... 95 6.1 Sun Corridor Highway Network ...... 95 6.1.1 Highway Inventory ...... 96 6.1.2 Truck Traffic Volumes and Potential Bottlenecks ...... 96 6.1.3 Freight Generators ...... 100 6.1.4 Traffic Crash Locations ...... 102 6.1.5 Key Truck Routes and Trade Corridors ...... 102 6.2 Trucking and Motor Freight Profile ...... 103 6.2.1 Driver Availability ...... 104 6.2.2 Limited Capacity ...... 105 6.2.3 Increasing Fuel Costs ...... 106 6.2.4 Regulatory Issues ...... 107

Freight Transportation Framework Study ii Freight Shipper and Carrier Profile Phase I Technical Memorandum 6.3 Truck Load Rates ...... 108 6.4 Arizona Ports of Entry ...... 110

7.0 Air Cargo ...... 112 7.1 Overview of the Air Cargo Industry ...... 112 7.1.1 Types of Air Cargo ...... 112 7.1.2 Types of Carriers ...... 112 7.1.3 Types of Services ...... 113 7.2 Air Cargo Market Trends ...... 114 7.3 Air Cargo Industry in the Sun Corridor ...... 115 7.3.1 Sun Corridor Air Cargo Assets ...... 117

8.0 Freight Profile Summary and Preliminary Recommendations ...... 121 8.1 Supply Chain ...... 121 8.2 Legislative/Policy...... 121 8.3 Infrastructure ...... 122 8.4 Economic Development ...... 122 8.5 Preliminary Recommendations ...... 122

9.0 Appendices ...... 124

Freight Transportation Framework Study iii Freight Shipper and Carrier Profile Phase I Technical Memorandum List of Tables

Table 2-1 Modal Profile of Transportation Spending ...... 13 Table 2-2 Freight Movements within the Sun Corridor ...... 14 Table 2-3 Primary Port Selection Criteria Rankings ...... 17 Table 2-4 Importance of Factors in Port Operations ...... 18 Table 2-5 Forecasted Total Weight Change for Imported Cargo ...... 19 Table 2-6 Share of Imports Crossing from Mexico at Ports of Entry into the US ...... 19 Table 2-7 Forecasted Total Weight Change for Imported Cargo from Mexico ...... 21 Table 2-8 Forecast Total Weight Change by Mode for Imported Cargo from Mexico (2011 vs. 2010) ...... 21 Table 2-9 Shipper Perceptions of Arizona ...... 22 Table 2-10 Supply Chain Consortium Member Profile...... 29 Table 2-11 Transportation Spending by Supply Chain Consortium Member ...... 30 Table 2-12 Origin of Products and Supplies Sourced Outside of North America ...... 30 Table 2-13 Shipper Decision Responsibility Matrix ...... 31 Table 2-14 Supply Chain Consortium Top Five Destination Ports in North America ...... 32 Table 2-15 Forecast Transportation Mode Selection Changes for Next 3 Years ...... 34 Table 2-16 Supply Chain Consortium Reasons for Changing Transportation Modes ... 34 Table 3-1 Total Commodity Flows by Direction ...... 40 Table 3-2 Sun Corridor Inbound Domestic Commodity Flows in 2007 ...... 42 Table 3-3 Commodity Flows from California to the Sun Corridor ...... 45 Table 3-4 Sun Corridor Inbound International Commodity Flows ...... 47 Table 3-5 Sun Corridor Inbound Cross Border Commodity Flows...... 51 Table 3-6 US Imports from Mexico by Land ...... 52 Table 3-7 Sun Corridor Outbound Domestic Commodity Flows ...... 54 Table 3-8 Sun Corridor Inbound Cross Border Commodity Flows...... 58 Table 3-9 Commodity Flows from Los Angeles to Texas ...... 64 Table 3-10 Commodity Flows from Texas to Los Angeles ...... 67 Table 4-1 Shippers Preference for Inbound Port/Gateway ...... 75 Table 4-2 Shippers Preference for Outbound Port/Gateway ...... 75 Table 5-1 BNSF Served Transload Facilities ...... 86 Table 5-2 BNSF Intermodal Frequencies – Phoenix Trains Per Week ...... 87 Table 5-3 UP Served Transload Facilities ...... 88 Table 5-4 FRA Track Classifications ...... 89 Table 6-1 Top 25 Freight Generators by Total Tonnage ...... 101 Table 6-2 Truck Load Rates for Goods Movement between Southern California and the Sun Corridor ...... 110 Table 6-3 Arizona Ports of Entry Hours of Operation ...... 111 Table 7-1 Air Cargo Growth Rates by Market ...... 114

Freight Transportation Framework Study iv Freight Shipper and Carrier Profile Phase I Technical Memorandum Table 7-2 North American Airport Cargo Traffic ...... 116 Table 7-3 Sun Corridor Air Cargo Facilities ...... 117

List of Figures

Figure 1-1 Arizona Sun Corridor Megaregion Location ...... 7 Figure 1-2 Data Mapping Flow Process ...... 8 Figure 1-3 Membership Profile of Supply Chain Consortium ...... 10 Figure 2-1 Company Category of Survey Participants ...... 12 Figure 2-2 Company Size of Survey Participants ...... 12 Figure 2-3 Transportation Spending by Survey Participants ...... 13 Figure 2-4 Operational Facility Type in Sun Corridor Region ...... 14 Figure 2-5 Importing Goods From Asia, Pacific Rim or South America ...... 15 Figure 2-6 Volume of International Goods Moved (in TEUs) ...... 16 Figure 2-7 Share of International Goods Exported from the U.S...... 16 Figure 2-8 Mexican Points of Origin with Shipper Facilities or Vendors ...... 20 Figure 2-9 Transportation Mode of Inbound Shipments at Distribution Centers ...... 33 Figure 2-10 Transportation Mode of Outbound Shipments at Distribution Centers ...... 33 Figure 2-11 Poll of Top 100 “Blue Chip” Multinational Shipper Priorities...... 35 Figure 3-1 FHWA Freight Analysis Framework Geographic Zones ...... 39 Figure 3-2 Inbound Goods by Value ...... 41 Figure 3-3 Inbound Goods by Tonnage ...... 41 Figure 3-4 Sun Corridor Inbound Domestic Cargo Value by State of Origin and Mode...... 43 Figure 3-5 Sun Corridor Inbound Domestic Cargo Tonnage by State of Origin and Mode (for 2007) ...... 44 Figure 3-6 Sun Corridor Inbound Import Cargo Value by Gateway State of Origin and Mode (for 2007) ...... 48 Figure 3-7 Sun Corridor Inbound Import Cargo Tonnage by Gateway State of Origin and Mode (for 2007) ...... 49 Figure 3-8 Outbound Goods by Value ...... 53 Figure 3-9 2007 Outbound Goods by Tonnage ...... 53 Figure 3-10 Sun Corridor Outbound Domestic Cargo Value by State of Destination and Mode (for 2007) ...... 55 Figure 3-11 Sun Corridor Outbound Domestic Cargo Tonnage by State of Destination and Mode (for 2007) ...... 55 Figure 3-12 Sun Corridor Outbound Export Cargo Value by Gateway State of Destination and Mode (for 2007) ...... 57 Figure 3-13 Sun Corridor Outbound Export Cargo Tonnage by Gateway State of Destination and Mode (for 2007) ...... 57 Figure 3-14 East-West Interstate Highway Corridors through Arizona ...... 60

Freight Transportation Framework Study v Freight Shipper and Carrier Profile Phase I Technical Memorandum Figure 3-15 East-West Class I Rail Corridors through Arizona ...... 61 Figure 3-16 Possible Domestic Through Cargo Value from Los Angeles to Texas and Eastern States (for 2007) ...... 62 Figure 3-17 Los Angeles to Texas Cargo by Value ...... 63 Figure 3-18 Los Angeles to Texas Cargo by Tonnage ...... 63 Figure 3-19 Los Angeles to Texas Cargo by Value ...... 66 Figure 3-20 Los Angeles to Texas Cargo by Tonnage ...... 66 Figure 3-21 Cargo Value between U.S. and Mexico ...... 69 Figure 3-22 Cargo Tonnage between U.S. and Mexico ...... 69 Figure 3-23 US Import Values from Mexico through Arizona Border Crossings by Destination State (for 2007) ...... 70 Figure 3-24 US Export Values to Mexico through Arizona Border Crossings by Origin State (for 2007) ...... 71 Figure 4-1 Port Locations Along the Pacific Coast of Southern California and Mexico ...... 74 Figure 4-2 Container Traffic at North American Port Complexes ...... 76 Figure 4-3 Container Traffic at U.S. West Coast Ports ...... 77 Figure 4-4 Container Traffic at U.S. Gulf Coast and Southeastern U.S. Ports ...... 79 Figure 4-5 Shippers Awareness of the Port of Punta Colonet ...... 81 Figure 5-1 Rail Ownership in the Southwestern United States ...... 84 Figure 5-2 Rail Ownership in Arizona and Northern Mexico ...... 85 Figure 5-3 FRA Track Classification in Arizona ...... 90 Figure 5-4 Railroad Gross Weight Capacity in the Southwestern United States and Northern Mexico ...... 91 Figure 6-1 U.S. Modal Distribution of Containerized Freight ...... 95 Figure 6-2 AM Peak Period Freeway Bottleneck Locations in the MAG Region ...... 97 Figure 6-3 PM Peak Period Freeway Bottleneck Locations in the MAG Region ...... 98 Figure 6-4 Daily Traffic Volumes, I-10 at Dysart Rd ...... 99 Figure 6-5 Daily Traffic Volumes, I-10 at Broadway ...... 99 Figure 6-6 Daily Traffic Volumes, I-17 at McDowell ...... 100 Figure 6-7 Truck Freight Rates to the Sun Corridor ...... 109 Figure 6-8 Truck Freight Rates from the Sun Corridor ...... 109 Figure 7-1 Air Cargo and Air Parcel Facilities within Arizona ...... 118 Figure 7-2 Air Cargo Activity for PHX and TUS ...... 120

Freight Transportation Framework Study vi Freight Shipper and Carrier Profile Phase I Technical Memorandum 1.0 BACKGROUND AND METHODOLOGY

The “Arizona Sun Corridor” has been identified as an emerging “megaregion”. As urban growth in central and southern Arizona has continued, it has resulted in the merging of several metropolitan areas into a single interlocked megaregion with shared economic systems, natural resources, ecosystems and transportation facilities that link the population. The Sun Corridor stretches across central and southern Arizona from Prescott in the north to the US/Mexico border, near Nogales, in the south. As illustrated in Figure 1-1, the Sun Corridor encompasses the Phoenix and Tucson metropolitan areas, and includes the Maricopa Association of Governments (MAG), the Central Arizona Association of Governments (CAAG) and the Pima Association of Governments (PAG) Metropolitan Planning Organization (MPO) jurisdictional areas.

Figure 1-1 Arizona Sun Corridor Megaregion Location

Approximately 85% of the population in Arizona resides within the Sun Corridor. The Sun Corridor's population is projected to reach approximately 12 million people by 2050, which would place a significant strain on the transportation network that connects Maricopa, Pinal, and Pima counties not only from a commuter perspective, but also from a freight operations and safety perspective.

Recognizing the importance of the freight industry to the economy, local and regional government agencies within the Sun Corridor are seeking to partner with private freight- related businesses to “tell the story of goods movement” into, within, through, and out of Arizona. This effort is intended to identify opportunities for expansion or enhancement of the freight industry as a means to diversify the economic base with the region resulting in the creation of additional employment opportunities.

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1.1 Freight Framework Study Background

Several recent studies on freight and the economic drivers of the movement of goods within the State of Arizona have been accomplished by ADOT and others. This study builds upon the State Rail Plan and the Arizona Freight Study of 2008 by going to shippers, carriers and an updated commodity flow data analysis to provide the Joint Planning Advisory Committee of the Maricopa Association of Governments (MAG), the Pima County Association of Governments (PAG) and the Central Arizona Association of Governments (CAAG) an analysis of why shippers make the goods movement decisions they do to enhance their supply chain effectiveness. In many cases, the effectiveness includes the ability to develop and re-deploy their manufacturing, assembly and distribution assets along their supply chain. This study has been tasked with identifying the physical freight inventories and operational freight profile of regional freight activity (Task 3), analysis of commodity flows and economic needs analysis (Task 4), an assessment of inland port market opportunities (Task 5) and the development of a freight transportation infrastructure alternatives analysis (Task 6) all with the purpose of fulfilling three study objectives:

. Identifying the freight data sources most useful for regional planning. . Develop an actionable plan of implementing the data that will leverage the region’s freight asset base as a platform for economic growth. . Identify opportunities to educate the public on the benefit of goods movement into, out of and through the Sun Corridor.

This technical memorandum contains the operational freight profile of regional freight activities. Later project tasks will refer to the freight profile contained here to identify opportunities to provide enhancements to the supply chain that could result in increased economic activity related to goods movement within Arizona. Figure1-2 shows the study “Data Mapping Flow Figure 1-2 Data Mapping Flow Process Process” identifying the several sources of data for the various modal components that drive the requirements of freight in the Sun Corridor.

The Arizona Multimodal Freight Study identified several keys points that indicate increased opportunities for Arizona due to the increased movement of freight into, out of and through the State. These points relate to the “potential” of moving freight based upon increased planning (transportation, land use and environmental), infrastructure improvements and the coordination of economic development activities.

Freight Transportation Framework Study 8 Freight Shipper and Carrier Profile Phase I Technical Memorandum

This study builds on all of those components but places a heavy emphasis on how, where and why cargo moves: the beneficial cargo owner, of “the shipper”. For it is the shipper that determines the economic and operational aspects of their individual supply chains and how they operate and the performance metrics they must meet. What we have found from several shipper related studies is that decisions are not always made on known facts or realities of transportation. In many cases, the decisions are made on perceptions, media and industry press and unless facts are presented to counter the perception, the decision maker may proceed with a long term, critical decisions based on what is known to them and how the communication was presented.

Thus, in order to determine the decision process and how the region’s economic and infrastructure groups can affect those decisions, we have used a tried and proven tool for obtaining shipper’s data - a web based survey and follow-up interviews with the shippers, logistic service providers and carriers. We then compare these results with a larger database of shippers by culling pertinent information from the Supply Chain Consortium’s database. The surveys, interviews and the database query were all focused on shippers (or those who control the movement of freight) that has a direct impact on Southern Arizona, from both a national perspective, a regional (Southwest US) and local (Arizona) perspectives. Thus when our recommendations are provided, they are coming from the perspective of the shipper and what they perceive as critical elements for them and their companies to make a sourcing, routing or economic decision that would benefit Arizona.

Freight movement and opportunities for economic development were analyzed from shippers’ operational decision criteria. For purposes of the study, a shipper is a beneficial cargo owner (BCO) that creates the movement of freight. The study includes carriers, receivers, and others as elements of the complete shipper’s supply chain operations. This definition of a shipper is based on the U.S. Government’s (as defined by Congress in several recent legislation pertaining to goods movement such as the Safe Port’s Act of 2007) definition of a BCO that clarifies the legal responsibility for monitoring, if not controlling, freight movements for which the BCO has jurisdiction.

In many cases, the BCO will contract the tactical functions and daily operations of moving and storing freight to a logistics service provider (LSP) or a transportation service provider (TSP).

In the analysis, interviews and a web-based survey were conducted with members of a consumer goods consortium and several others shippers, carriers, LSP’s and TSP’s. Tompkins Associates administers the Supply Chain Consortium, which consists of more than 550 shippers. These shippers are involved in varied elements of the complete supply chain, which includes manufacturing, retail and wholesale operations of finished goods, consumer products and industrial goods, including raw and in-process materials.

Freight Transportation Framework Study 9 Freight Shipper and Carrier Profile Phase I Technical Memorandum

As illustrated in Figure 1-3, the consortium membership represents numerous elements of decision making associated with supply chain and shipping decisions. The distribution of members enables research that is comprehensive in representation.

Figure 1-3 Membership Profile of Supply Chain Consortium

4% Retail 11%

40% Consumer Product Manufacturer 13% Commercial / Industrial Manufacturer

Wholesaler / Distributor 32% Logistics Service Provider / 3PL

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2.0 SHIPPER SURVEYS AND INTERVIEWS

Three strategies were used to target, query, and document the “Voice of the Shipper” as part of this study effort utilizing the Supply Chain Consortium membership and others representing the goods movement industry. Shippers with a known presence or operation in Arizona were represented in all of the efforts. The strategies were to 1) use a web based survey of consortium members and other BCOs for a broad reach of shippers both from a national perspective and from a regional and State perspective; 2) conduct a series of personal interviews with consortium members and others to provide quantitative and qualitative findings based upon the survey, and 3) conduct a query from the database of consortium members providing more than 17,000 data points from current and recent efforts and similar studies. The findings of these activities are presented in this section.

2.1 Shipper Surveys

More than 4,500 individuals represented in the Supply Chain Consortium membership and other BCOs were sent a web-based survey, representing more than 2,500 firms engaged in all aspects of moving, storing, and distributing freight. A copy of the survey questions are included in appendices to this technical memorandum, as well as a listing of firms invited to participate. This section details the results of the survey process with subsequent Section 2.2 detailing the results of the interviews and Section 2.3 examining consortium database queries and other past similar studies.

A typical response rate of a consortium survey ranges from seven percent (7%) to ten percent (10%). All participants in the survey are provided copies of the survey results with confidentiality of participants maintained in all surveys and interviews. Receipt of the survey results can incentivize survey participation, although when firms do not see the need for obtaining results of the survey, the participation rate drops to around one percent (1%) to two percent (2%), which was the case for this particular survey.

A total of 51 surveys were completed in their entirety, representing 48 separate firms. An additional 15 partially completed surveys were used where appropriate.

2.1.1 Survey Respondent Profile

Profiles of the survey participants are graphically depicted in Figure 2-1 showing the company categories of survey participants, and Figure 2-2 showing the company size of survey participants.

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Figure 2-1 Company Category of Survey Participants

10.9% Consumer Product Manufacturer 30.4% 15.2% Wholesaler / Distributor

Retail

Commercial / Industrial 15.2% Manufacturer Logistics Service Provider / 3PL

28.3%

Figure 2-2 Company Size of Survey Participants

17.0% 19.1% Mega (> $25 billion annual revenue)

Medium (between $1 billion and $10 billion annual revenue)

25.5% Small (between $250 million and $1 billion annual revenue)

Micro (< $250 million annual 38.3% revenue)

Figure 2-3 illustrates the range of transportation spending from the survey participants showing that over 70% of the firms spend less than $199 million on their transportation costs, which is the total amount spent on moving goods and product from origin (normally a manufacturer) to final destination. While the goods may stop at a regional distribution facility or transportation node (such as a port), only the costs associated with the movement of the freight is included as part of the shippers transportation cost indicated in this survey result (i.e. the results do not represent the delivered cost which includes warehousing and transload costs in addition to the transportation costs).

Freight Transportation Framework Study 12 Freight Shipper and Carrier Profile Phase I Technical Memorandum

To put this into perspective, the average cost of transportation was 6.3% of total revenue, with the minimum being 0.2%, the median at 4.4% and the maximum at 35.0%. Typical percentages for a retail/wholesale operation with one or more distribution facilities are from 5% to 15%, with the 15% figure being on the high side with substantial air freight and redistribution costs involved.

Figure 2-3 Transportation Spending by Survey Participants

2.1% 2.1% 6.4% Less than $100 million 6.4% $100 million - $199 million 4.3% $200 million - $299 million

4.3% $300 million - $399 million 2.1% $400 million - $499 million $500 million - $599 million 10.6% 61.7% $800 million - $899 million $900 million - $999 million $1 billion or more

The cost of transporting goods is also based upon the modes and the routings chosen for the movement. The survey results in Table 2-1, Modal Profile of Transportation Spend, indicate that trucking is by far the largest modal carrier.

Table 2-1 Modal Profile of Transportation Spending

Percentage of Spending Transportation Mode Using the Mode Ocean 16.7% Air 6.4% Air Parcel 19.8% Intermodal Rail 5.1% Other Rail (Boxcar, tanker, etc) 1.3% Truck, including FTL and LTL 49.0% Other (Pipeline, U.S. Postal, etc) 1.7%

2.1.2 Sun Corridor Shipper Operations

One of the keys to understanding the above data is to also understand the types of facilities and operations occur in the Sun Corridor region. Figure 2-4, Operational

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Facilities, shows that the majority of the firms do not provide manufacturing or assembly operations in the Sun Corridor, but are more in the administration and distribution (rehandling) of goods.

With the understanding that the majority of supply chain operations occurring in the Sun Corridor region involve the movement of goods and products, Table 2-2, Freight Movement, depicts the type, and the origin and destination of products moving into and out of the region. The survey results in Table 2-2 represent the number of respondents that indicated they conduct each type of freight movement. The survey results do not include goods movement through the region without stopping. Domestic Location means a U.S. origin or destination while a foreign location is goods originating or terminating their delivery in any country outside of the US, including Mexico.

Figure 2-4 Operational Facility Type in Sun Corridor Region

Headquarters or regional office facility 46.5%

Single storage or products handling 27.9% facility Multiple storage or products handling 34.9% facilities

Single manufacturing facility 16.3%

Multiple manufacturing facilities 14.0%

Multiple retail operations 16.3%

Other (please specify) 16.3%

Table 2-2 Freight Movements within the Sun Corridor

Origin/Destination Raw Materials Components Finished Goods

Into State from Foreign Location 8.3% 16.7% 43.8% Into State from Domestic Location 10.4% 18.8% 68.8% Within State 4.2% 12.5% 20.8% Inside State to Foreign Location 6.3% 6.3% 14.6% Inside State to Domestic Location 6.3% 8.3% 18.8%

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As can be seen in Table 2-2, the majority of shippers using the Sun Corridor are involved in importing of finished goods of domestic origin (and to a lesser extend foreign origin) into the region.

Nearly all of the respondents to the survey indicated that their companies imported goods from Asia, the Pacific Rim or South America. As indicated in Figure 2-5, over 80% of respondents confirmed they import goods from across the Pacific. This implies that ocean cargo and port selection will play a critical role in the processing of cargo and the resultant impact to Sun Corridor distribution and processing facilities.

Figure 2-5 Importing Goods From Asia, Pacific Rim or South America

2.1%

16.7%

Yes

No

Not Sure 81.3%

Figure 2-6, Volume of International Goods Moved (TEUs), shows the volume of goods, measured in the industry standard of twenty-foot equivalent units (TEUs), moved by respondents that indicated they did import goods from Asia, the Pacific Rim and South America. The results indicate a balance of shippers size by volume of goods moved with approximately one-third moving less that 1,000 TEU’s per year, one third moving between 1,000 and 10,000 TEU’s and one-third moving over 10,000 TEU’s per year. Figure 2-7 further elaborates the share of this volume that is exported from the US, with almost two-thirds of the respondents indicating less than 5% of this volume of international goods movement is exports.

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Figure 2-6 Volume of International Goods Moved (in TEUs)

< 100 10.3%

101 - 1,000 37.6%

1,001 - 2,500 10.3%

2,501 - 5,000 13.8%

5,001 - 10,000 6.9%

10,001 - 15,000 3.4%

15,001 - 20,000 6.9%

25,001 - 30,000 6.9%

> 30,000 13.8%

Figure 2-7 Share of International Goods Exported from the U.S.

0 38.2%

5 23.5%

10% 5.9%

15% 5.9%

20% 2.9%

25% 2.9%

30% 5.9%

35% 2.9%

40% 5.9%

50% 2.9%

70% 2.9%

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In determining the role in which a company can economically participate with a facility in the Sun Corridor, the survey asked how international freight decisions were made and by whom. More than 72% of respondents indicated that the supply chain decisions were made internally (47.2%) or by a company chosen LSP (25.1%), meaning that most of the firms can control their shipments into and out of the Sun Corridor. The remaining firms used vendors (or manufacturers) for 20.6% of their decisions and 7.1% allowed the ultimate customer to make the decisions. An example of the vendor decision model would be Dell Computer. Dell is the official BCO, as defined by the Ports Act of 2007, but Dell will have their component (monitors, motherboards, etc) manufacturer be responsible for importing the components all the way to the Dell assembly facility in Texas.

2.1.3 Imports and Port of Entry

With the emphasis on using ports for both imports and exports, the next series of questions focused on the decision criteria for port selection and the resultant routing of the cargo associated with the port gateway. The survey utilized a ranking process in which the respondent was asked to rank on a scale of 1 to 5, with a score of 5 being the most critical. Table 2-3, Primary Port Selection Criteria Rankings, and Table 2-4, Importance of Factors in Port Operations, shows the rankings and relative importance to the respondents of various criteria in the decision of which port to use.

Table 2-3 Primary Port Selection Criteria Rankings

Primary Decision Criteria for Port Use Rank Geography / proximity 1 Proximity to local markets or distribution centers 2 Carriers available at the port 3 Access to rail and other transportation 4 Lack of congestion relative to other ports 5 Additional surcharges 5 Sufficient Port capacity 7 Efficiency of port operations 8 Port, terminal, and transportation hours of operation 9 Truck driver availability 9 Availability of needed services 11 Port security 11 Lack of additional port or carrier fees 13 Port scheduling practices 14 Port IT systems 15

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Table 2-4 Importance of Factors in Port Operations

Weighted Importance of Decision Criteria in Port Operations Score Geography / proximity 4.34 Proximity to local markets or distribution centers 4.24 Sufficient Port capacity 4.11 Availability of needed services 4.00 Access to rail and other transportation 4.00 Truck driver availability 3.78 Lack of congestion relative to other ports 3.70 Carriers available at the port 3.70 Efficiency of port operation 3.68 Additional surcharges 3.65 Port security 3.50 Port, terminal, and transportation hours of operation 3.47 Port scheduling practices 3.42 Lack of additional port or carrier fees 3.29 Port IT systems 3.17

Any score above a 4.00 typically means that the criterion is highly relevant to the shippers decision making process. As the tables show, geographic proximity, proximity to the local and regional markets and distribution facilities, and port capacity are primary factors in shippers decisions. Availability of necessary services and access to rail and other transportation services are also important factors to shippers and their ability to move cargo into or out of the port in an expeditious and reliable manner.

The results contained in the previous slides highlight critical factors that make the Ports of Los Angeles and Long Beach, by far, the most utilized port complexes for the survey respondents. The Ports of Los Angeles and Long Beach where the first port of choice for 89% of the respondents and these ports were rated the second choice by more than 17%. Other West Coast ports (Oakland, Seattle, Tacoma and Vancouver, BC) were rated second port of choice by more than 52% of the respondents. This is important as many shippers are seeking a secondary or alternative port gateway as a contingency for the primary gateway being closed (due to man-made or natural disaster) or a redundant port gateway to protect their supply chain from other competitive issues. Likewise, the survey indicated that for export cargoes, the Southern California ports were the first gateway of choice by 89.5% of the respondents and the second port of choice by 85.7%. The significance of this latter result is that exports do not demand the same reliability (with contingent and redundant ports) as do the import cargoes.

Imports are the primary international cargoes moved in the Sun Corridor, far exceeding exports and highlighting the trade imbalance in the current U.S. economy. Firms were asked to forecast their weight volume change for imports (from outside of North America) for this year, next year, and five years from now. Over half of the firms project

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the weight volume to change one to ten percentage points this year. Sixty-two (62) percent of firms project a zero to twenty percent increase next year. One in three firms project a ten to twenty percent increase over the short term of five years. Table 2-5 goes into more detail on the forecasted changes in weight volume of imports. This is a companywide indication and does not necessarily directly reflect movements only into Arizona.

Table 2-5 Forecasted Total Weight Change for Imported Cargo

>21% 10-20% < 10% No < 10% > 10% Time Horizon Increase Increase Increase Change Decline Decline

This year (2011) 11.4% 28.6% 37.1% 17.1% 2.9% 2.9% Next year (2012) 8.8% 35.3% 26.5% 20.6% 8.8% - Next 5 years (2016) 15.2% 33.3% 21.2% 24.2% 6.1% -

Historically, Sun Corridor shippers have a vested trade interest with Mexico. More than 56% of the respondents to the survey indicated they imported goods from Mexico either finished (84%), component (36%) or raw product (16%) state of process.

Shippers utilize ports of entry in all four southern border states for their cargo movements to and from Mexico. About sixty percent of all goods enter through a Texas port of entry. The port of entry at Laredo, Texas has the largest share (41.1%) of goods, and serves as a gateway from Mexico to the U.S. heartland and East Coast states. By comparison, Nogales, Arizona, and Yuma, Arizona, combined serve as a gateway for slightly less than 10% of all survey respondents imports from Mexico. Table 2-6 provides more detail regarding the share of imported goods crossing the border ports of entry used by the survey respondents. There is more discussion regarding goods movement to and from Mexico in subsequent sections of this memorandum.

Table 2-6 Share of Imports Crossing from Mexico at Ports of Entry into the US

Percentage of Port of Entry Location Imports Crossing San Diego / Chula Vista, CA 6.9% Calexico / El Centro, CA 3.3% Yuma, AZ 1.2% Nogales, AZ 8.4% El Paso, TX 9.3% Laredo, TX 41.1% McAllen, TX 2.8% Brownsville, TX 4.3% Other locations along the Southern Border 9.0%

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Of the cargo that is imported into the U.S. from Mexico, over 75% of all products and materials comes via truck, in either full or partial loads, with a further 6.2% coming via rail. Approximately 1.7% of all cargo comes as parcels with a further 1.2% as air freight and 2.0% coming via other modes.

One of the most significant findings from the survey is the point of origin in Mexico from which the cargo is traveling. Figure 2-8 indicates the percentage of respondents with facilities or vendors in a particular city or state in Mexico. Based on the survey results, the most prominent centers for U.S. cargo origins are Monterrey, Guadalajara and Mexico City. The results of this question provide a key indicator for this study to seek ways to increase the share of cargo moved into the U.S. through Arizona.

Figure 2-8 Mexican Points of Origin with Shipper Facilities or Vendors

Forecasted weight volume changes for inbound freight from Mexico, as summarized in Table 2-7, are projected to follow trends similar to all imports from outside of North America, as indicated previously in Table 2-5. Over sixty percent of firms forecast the weight volume of cargo originating in Mexico to change zero to ten percentage points this year. Sixty-two percent of firms forecast a one to twenty percent increase next year. One in five firms project a ten to twenty percent increase over the short term of five years.

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Table 2-7 Forecasted Total Weight Change for Imported Cargo from Mexico

>21% 10-20% < 10% No < 10% > 10% Time Horizon Increase Increase Increase Change Decline Decline This year (2011) 8.3% 25.0% 29.2% 33.3% - 4.2% Next year (2012) 12.5% 16.7% 45.8% 20.8% - 4.2% Next 5 years (2016) 20.8% 20.8% 37.5% 16.7% - 4.2%

Due to a significant amount of cargo volume change predicted, we sought to discover the modal aspects of changes in cargo shipments for 2011 (projected) from 2010. Table 2-8 indicates the most notable changes are from LTL trucking to full load trucking, and from full load trucking to intermodal rail, indicating a trend for load consolidation and maximization as transportation costs and economic conditions remain challenging.

It should be noted that air to container ship mode change is expected to be less planned than actual as a significant amount of air shipments are unplanned and are only made to fulfill customer obligations in response to unforeseen circumstances or immediate needs. When operating to plan, ocean transport is the preferred mode of choice for shippers due to the significantly lower cost.

Table 2-8 Forecast Total Weight Change by Mode for Imported Cargo from Mexico (2011 vs. 2010)

From mode in 2010

r Container Ship Ai Manifest Carload Train Intermodal Rail Full Truckload LTL Truckload Other Truck Small Package Container Ship 13%

Bulk Vessel 3%

Air 3%

To mode in 2011 To mode in Unit Train 3%

Manifest Carload Train 3% 3%

Intermodal Rail 28% 3%

Full Truckload 25%

LTL Truckload 3% 6%

Other Truck 3% 3%

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2.1.4 Potential for Future Arizona Operations

Finally we surveyed the firms to find direct impacts to current or potential future Arizona operations. A series of questions were posed that looked at the current “potential” (no one was asked for firm, committed plans mainly due to the state of the economy) of adding supply chain operations or assets to the Southwestern US, and specifically to Arizona. Almost twenty percent (18.6%) of the respondents indicated they were going to add facilities on the West Coast, and 42.9% of these respondents indicated they would consider Arizona as a potential site for future expansion or new development.

Table 2-9, Shipper Perceptions of Arizona, attempts to indicate what factors were considered strengths and weaknesses to shippers, and thereby potentially influenced their decisions regarding investment within the state. The table identifies several important factors that shippers have expressed in the past, and indicates their perceptions of Arizona regarding these factors (realizing that perceptions may or may not reflect reality, and do not necessarily reflect an official corporate concern or position)

Table 2-9 Shipper Perceptions of Arizona

Factors/Perceptions Strength Average Weakness Not sure

Transportation costs / issues 18.4% 18.4% 5.3% 57.9%

Highway capacity 13.5% 18.9% 8.1% 59.5%

Rail capacity 8.1% 27.0% 8.1% 56.8%

Population 7.9% 21.1% 7.9% 63.2%

Labor costs / issues 5.3% 26.3% 10.5% 57.9%

Legislative business climate 5.3% 15.8% 21.1% 57.9%

Transportation service reliability 2.7% 27.0% 5.4% 64.9%

Respondents cited transportation costs and highway capacity as perceived strengths, and labor costs, legislative climate and transportation reliability as perceived weaknesses. However, the most significant finding is the high proportion of “not sure” responses from survey respondents indicating a general lack of knowledge about conditions in Arizona. Realizing that the respondents may or may not be physically located in Arizona, the respondent is typically in charge of decision criteria for the company’s supply chain, meaning they should have an opinion as to why they do or don’t use Arizona as a base of operations or part of their supply chain. This result suggests there is great opportunity to educate potential and current shippers, manufacturers and others in charge of moving goods and product as to the strengths Arizona has to offer.

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Respondents were asked to prioritize the importance of transportation costs versus travel time. This is always an important point to investigate as shippers will very clearly state they want reliability first with costs and time in transit in a distant second place. As noted in later sections, and especially from the interviews, infrastructure both road and rail plays an important role in the perception of both time and costs (and reliability). When asked if shippers would seek lower transportation costs or reduced travel times in response to infrastructure improvements, 63% indicated they would opt for lower transportation costs. This is useful information for seeking potential Arizona operations, and especially those handling Mexican cargoes, indicating the need to establish a cost performance structure that ensures reliability over rapid delivery.

2.2 Shipper Interviews

Interviews and discussions were held with shippers, carriers (truckers, drayage firms, railroads, and ocean carriers), customs brokers, freight forwarders, and the Ports of Los Angeles, Long Beach and San Diego. In addition, brief discussions were held with the San Diego MPO (SANDAG) and the Southern California MPO (SCAG) to identify freight planning issues that may or may not affect Arizona. Personal interviews were conducted with a total of 45 entities, with Tompkins Associates performing interviews with 25 shippers and LSPs. Each interview participant was provided a guarantee of confidentiality meaning that their name, title and company would not be made public nor would any of their comments or insights be attributable to them directly. Confidentiality is the only way to get firms to directly respond to a survey or agree to participate in the interview process.

This section summarizes the results of the 25 focused interviews with select stakeholders in the Arizona Sun Corridor Distribution System and Southern California by Tompkins Associates. The interviews were a component of a stakeholder-based program that also involved the online survey, documented in section 2.1 of this memorandum. In all cases, the survey questionnaire and the results of the survey were shared with the interviewees to create a discussion point if the interview guide was not sufficient for the points to be made or discussed.

The interviews were conducted over a 4-week period that included design of the Interview Guide, identification of the target market, 30-minute or more telephone discussions, and the summary report.

The appendix contains the contact list and interview summaries by shipper, transportation service provider (TSP) and Government/Consulting contacts.

The objectives for the interviews were:

. To gain insights into the interviewees’ business in shipping, receiving, distributing, and/or handling of freight moving into, out of, or within the Sun Corridor Region. . To solicit views on what about the Regional infrastructure is attractive to their businesses;  What limitations or barriers exist that hinder the flow of their goods?;

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 What ideas they might have for improving the Region’s freight distribution system and attracting new business? . To obtain their views on the future of freight movements in the Region based on some known infrastructure improvements:  The South Mountain Freeway and I-11  Planned improvements for congestion relief in Tucson  Compared to other Metro Regions, what other key infrastructure investments are needed?

The methodology for the interviews were to identify the firms and individuals to be interviewed, prepare an interview guide, provide an introductory email or phone call to set up interview, conduct the interview, document the interview and provide a copy of the documentation to the interviewee for review. The list of potential interviewees was categorized into Shippers, TSPs, and Government or other entities.

The Interview Guide was created based on experience conducting these types of interviews and included specific questions, as well as more open-ended probes that are designed to extract true views and ideas. A copy of the interview guide can be found in the appendices.

2.2.1 Shipper Interviews

Shippers noted (almost 100%) that the Sun Corridor is primarily an inbound transportation region. Most inbound freight is brought in to support the consumers in the market. This results in a cost imbalance as more outbound freight needs to be generated to get competitive rates for the total transportation cost structure.

The Sun Corridor’s main transportation challenge was highway congestion, especially during peak travel times. Although it was noted Phoenix is in general positive as compared to other urban areas on a national scale, the potential construction of the proposed South Mountain Freeway was considered to be a positive by almost all contacts in reducing congestion and transportation costs due to congestion. Also, the I- 11 corridor was seen as positive for business development and may make sense for manufacturers. However, we noted that there is significant confusion regarding the I-11 Corridor and the CANAMEX Corridor as most felt they were one and the same.

Rail is not often used by shippers in the region due to cost, time and service reliability issues. However, non-intermodal rail is currently being used for a variety of commodities. Rail is a potential marketing point for future companies interested in investing in the Sun Corridor but in almost every interview where interest was expressed in rail, the issue of a lack of direct competition between the Union Pacific and the BNSF was cited as a constraint. This is a perception that is not uncommon in this environment where the access to a facility doesn’t have physical connections by two railroads; many shippers do not realize the facts of railroading where they can obtain competitive rates from both railroads regardless of the physical operational layout.

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Transportation service providers see an increase use of rail in the future with escalating fuel costs and the passing of CSA 2010 increasing the potential for rail. Many believe these factors will cause many independent truck drivers to be forced out of business due to increased costs.

Most of the interviewed shippers with warehousing and distribution centers Foreign Trade Zone (FTZ) indicated their facilities were located in Southern California because of proximity to A foreign-trade zone in the United States is the Ports of Long Beach and Los Angeles as a specially licensed commercial and their major marine gateway. They were industrial area in or near ports of entry unanimous in the perception that it is more where foreign and domestic goods, economical for business to be in close including raw materials, components, and proximity of the port. finished goods, may be brought in without being subject to payment of customs duties. Shippers that import or export through Goods brought into these zones may be stored, sold, exhibited, repacked, assembled, Nogales would like to see an improvement in sorted, graded, cleaned, or otherwise the border crossing, including setting up a manipulated prior to re-export or entry into foreign trade zone (FTZ) in Tucson or near the the country's customs territory. Goods border. The limited hours of operations at the entering an FTZ are included in General Arizona border crossings was also discussed as Imports but not Imports for Consumption. a constraint, compared to 24/7 operations at They are considered Imports for California and Texas ports of entry. Consumption if they leave the FTZ for domestic consumption Most shippers cited the availability of land and lower costs as the main decision in locating their facilities in the Sun Corridor, with transportation costs a minimal consideration for location choice. Most interviewed stated they assumed the infrastructure will be adequate for future operations.

2.2.2 Transportation Service Provider Interviews

The Arizona Sun Corridor Economic Development agencies should consider more participation in trade shows and seminars to improve the Region’s visibility. A prime example was identical to that of the shipper’s with the confusion over the I-11 and the CANAMEX Corridors as they all felt there needs to be more promotion of the corridors to distributors, manufacturers and retailers.

Several comments were received concerning the ability for private investment and how the Region should encourage private investment. Examples cited included the development of an intermodal facility and warehouse park to support the import of produce from Mexico and companies in Mexico that have warehouses in U.S. and will distribute nationwide.

The political process is perceived to be slow in Arizona and private enterprise can be faster to build facilities and create jobs and economic development if given the right incentives (none were specifically offered).

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Most shipments from Asia were identified as coming through the Ports of Los Angeles or Long Beach. Many of the TSPs did not see any advantage with Punta Colonet and most shipments from the Ports are shipped to the Sun Corridor by truck because it is not cost advantageous to ship by rail over this relatively limited distance.

The Sun Corridor is an area perceived to have a lot of congestion and several of the TSPs will use alternative routings during different times of the day to save time and money. Several TSP’s indicated they will route via I-8 to I-10 in order to bypass Phoenix as it can delay a delivery up to two hours.

The TSPs felt that growth for the Arizona Sun Corridor will be in the agriculture and mining business in additional to international business through the shipping of raw material to China. They also felt that Mexico, and more specifically the shift in sourcing to Mexico, will provide a significant opportunity for distribution and value added service in the Sun Corridor.

The advantages of the Sun Corridor region, as compared to peer areas including Las Vegas and San Diego, are considered to be less congestion, lower cost and expense to get into and out of the delivery and distribution points, and the region’s location in relation to the rest of the growing southwestern United States. However, several interviewees expressed a desire to have the transportation committee work closer with the GPAC; they have brought in 11 new solar companies in the past few years which resulted in 4,000 new manufacturing jobs to the Sun Corridor. All of these industries will require transportation and distribution of solar parts and panels around the country.

From the TSP perspective, most felt that the one major infrastructure element that is missing is a viable rail ramp for container stack trains to deliver and receive containers in the Sun Corridor.

Labor is considered very competitive in the area with the educational level of the warehouse labor being perceived better than that in California. Also, the cost and availability of land is considered more attractive than Southern California.

The I-11 (and CANAMEX Corridor) will be extremely beneficial to the southwestern U.S. as the I-5 corridor is viewed as often congested and I-5 is currently perceived as the only viable route to Oregon or Washington from the southwest.

The TSPs expressed significant interest to have dedicated truck travel lanes from Nogales to Tucson (and even to Phoenix). They also indicated a desire to have the free trade zone extended to Tucson as it would be more effective to come in and unload in Tucson versus unload in Nogales and reload.

In general, little benefit was seen to the Punta Colonet port as there will be continuing border crossing issues. However, it should be noted that most of the interviewees did not fully understand the nature of the Punta Colonet development.

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2.2.3 Government and Others

Several interviewees suggested the examination of intermodal facilities and service into the Sun Corridor for the potential of a duty free area; such as an interception point from Los Angeles to Chicago and use the Sun Corridor as an inland port that would take pressure off of the Ports of Los Angeles and Long Beach.

Supply chain consultants identified, from their experience, that companies locate in a region partly from incentives received to relocate, but it is not the dominate reason. Companies will want to see that the region is improving key infrastructure and not only in the planning stages but must be actively creating the infrastructure.

Punta Colonet provides no real advantage to the Arizona area as the perception was that it will only help Southern California. Again, there is significant misunderstanding of the Punta Colonet project as the proposed port is intended to actually take significant traffic away from Southern California and potentially redirect it through Arizona, New Mexico and Texas.

A lot of recent transportation supply chain activities in the Sun Corridor, including investments by Don Edwards, Niagara Bottling, Conair, Amazon, and Gap have all added new facilities along with increased employment. A common perception is that these companies have a higher employee count for distribution activities than required but they are locating to the Sun Corridor as an alternate to Los Angeles because it is cheaper. Phoenix is considered less expensive for real estate costs, although real estate costs alone are not enough considered to be enough to influence the decision to locate outside Southern California. The Inland Empire is still perceived to be the number one choice for distributors. Availability of a good workforce is also considered very important in the decision of where to locate.

I-11 will be an excellent opportunity for the area. Mexico is perceived to be a sleeping giant and will soon have a large consumer market to be served. It will be important to establish free trade zones in place along I-11 for the proposed tax benefits. Amazon chose this location because of the proposed tax benefits of being in a free trade zone.

The South Mountain Freeway will help alleviate some of the Phoenix traffic and be a benefit to some companies as the buildings are less expensive on the west side of Phoenix. Similar comments were received about Tucson’s congestion issues and the effect of proposed infrastructure improvements.

SCAG is actively looking at creating more distribution facilities and transportation corridors, including supporting the development of inland port complexes with intermodal facilities utilizing a “shuttle train” concept between the ports, inland intermodal yards and the Inland Empire. However, the recent discussions regarding trucking emissions air quality control (licensing of trucks by the Ports of Los Angeles and Long Beach), a State infrastructure tax and the NIMBY (not in my back yard) effect by the neighboring communities has created significant concern that cargo will be diverted from San Pedro Bay to East Coast and Gulf of Mexico ports.

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The extent of diversion of cargo from the expansion of the Panama Canal is unknown as several U.S. Ports on the East Coast and the Gulf Coast all are claiming to be the direct beneficiaries of the diverted cargo. The general feeling by virtually everyone in the goods movement industry in Southern California was that the Ports of Los Angeles and Long Beach would lose a maximum of 11% of the cargo but that is the equivalent of two to three years of growth at current (early 2011) growth rates. The common theme is that the ports will be capped at 24 million to 30 million TEUs (they handled between 14 million and 15 million TEUs in 2010). Thus the ports will continue to grow regardless of the Panama Canal expansion and other projects (including Punta Colonet). The critical issue is the inland transportation leg by both rail and truck.

Interviewed shippers intend to shift modes for cargo that moves north across the US/Mexico border. For example, 28% of the survey respondents indicated they were shifting some of their cargo from Full Truckload to Intermodal Rail and this was confirmed by the interviews.

Multiple firms indicated they would be very interested in creating a value-added activity in a foreign trade zone in Tucson or near the border. Value-added activities could be wide ranging, but those mentioned were packaging (or re-packaging), assembly of parts into a finished or semi-finished components, machining or applying a finishing process to raw or partially finished goods, and testing/quality control activities.

2.3 Consortium Database Best Practices and Benchmarking

The Consortium published database was reviewed for best practices and benchmarking. Analysis and compilation of national and regional data was collected from the Consortium database. Data points for national shippers using Arizona, Southern California, and Mexico for their operations were selected to compare trends for these subject areas:

. Trends regarding major transportation and distribution activities . Perceptions related to economic conditions included fuel surcharges . Infrastructure investment related to the Panama Canal expansion . Regulation related to environmental concerns in Southern California . Inflection points that could cause shippers to modify or significantly change their sourcing and distribution networks

The database is valuable for obtaining data that is not typically readily available to a respondent during an interview. Thus, on this project, the database was queried for responses to data points and benchmarks (best practices) as to freight storage, freight movements, distribution strategies and modal (including port) selection criteria. This includes typical questions such as:

. What is percentage of international cargo vs. domestic cargo moves and what routing criteria is used for each?

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. What gateways or ports of entry/departure are being used; will there be a change in these ports within the short and medium terms; and what volume is being shipped through each port/gateway? . What is the breakdown of freight by mode and the decision criteria for modal selection? . Is a regional or national distribution process used and what is the decision criteria and selection process for locating Distribution Centers specifically in Arizona or the U.S. Southwest region? . What percentage of cargo is moved with internal logistics staff versus 3rd party logistics contracts/firms (LSP’s) or carrier (TSP) staff? . Is there current planning or contemplated change in sourcing (product and services) that would affect current distribution and warehousing patterns, again specifically for Arizona or the U.S. Southwest?

After all efforts, the “shipper” in this study is represented from the interview and survey responses of 110 individuals or 2.5% of the total. In addition the database query produced result from several consortium studies, surveys and “hot topic” papers published for consortium members that are directly applicable to the Sun Corridor efforts. The response rate and profile of participants provides validity to the survey responses and more importantly, for this study, provides further details and insights into the priorities and decisions making criteria those shippers employ. While the database consists of national trends (and even international trends), it is important to pick up on these factoids and relate them to the Sun Corridor opportunities.

As mentioned previously, the Supply Chain Consortium has more than 550 members (as of July 1, 2011) representing all components of the goods movement industry. Table 2- 10 provides an overview of the Consortium membership profiles.

Table 2-10 Supply Chain Consortium Member Profile

Participants Percentage Retail 39.5% Consumer Product Manufacturer 32.3% Commercial / Industrial Manufacturer 13.0% Wholesaler / Distributor 11.2% Logistics Service Provider / 3PL 4.0%

Similar to the survey results in Section 2.1, the consortium database tracks closely to the survey results in respect to transportation spending by mode, as indicated in Table 2-11. Trucking represents the primary mode with almost 65% of transportation spending by consortium members using this mode. It is interesting to note that in a recent (2009) survey, 60% of the consortium membership indicated that they source their products and supplies from inside the US, with only 6.4% coming from Canada and Mexico and 33.7% from overseas locations.

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Table 2-11 Transportation Spending by Supply Chain Consortium Member

Percentage of Spending Transportation Mode Using the Mode Ocean 9.6% Air 7.2% Rail (boxcar, tanker, etc...) 1.6% Rail-intermodal 4.9% Truckload 49.1% LTL 15.1% Parcel 12.9%

Of the 33% of products and supplies that consortium member’s source overseas, the vast majority (69.5%) comes from China, elsewhere in Asia and the Pacific Rim. As indicated in Table 2-12, an additional 11.1 % is sourced in Central or South America, while 19.3% is sourced in Europe (reflecting the national nature of the membership).

Table 2-12 Origin of Products and Supplies Sourced Outside of North America

Origin Share Sourced China / Hong Kong 57.8% Other Asia 5.6% Other (non-Asian) Pacific Rim 6.1% Western Europe 17.5% Eastern Europe 1.8% Central / South America 11.1% Africa / Middle East 0.1%

A recent study (summary published in the American Shipper Magazine) by the AlixPartners (July 8, 2011) showed that of the 80 largest global trading companies:

. 37 % of U.S. Firms source oversea . 15% of the U.S. Firms surveyed will move the current sourcing within a year . 12% will move their sourcing within 2 years . 9% will move with 4-10 years

In the same survey, of the entire global surveyed firms:

. 9% have already relocated their sourcing from Asia to North America . 33% have contingency plans to follow suit . 63% are looking very strongly to Mexico . 9% are relocating back into the US

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As expected, for products sourced overseas, almost 84% is moved by ocean freight and 16% is moved by air.

While sourcing occurs in various places, the database of the consortium membership indicates that 90% of the sales occur in the United States and an additional 6% in Canada and Mexico with only 2% in Asia and the Pacific Rim, and 2% in Western Europe. Since the majority of sales are occurring in the US, a key issue relevant to the Sun Corridor is how much of the sales effort is directly related to the Sun Corridor. Part of understanding the applicability to the Sun Corridor is who makes the decisions on supply chain activities for the shipper.

Table 2-13 indicates the various supply chain functions and who makes the decisions. The database query indicates that approximately 80% of port selection decision and routing choices are made by North American staff, with approximately 40% in each case being the LSP.

Table 2-13 Shipper Decision Responsibility Matrixes

North Logistics Ocean / Overseas Vendor / Decision American Service Air Staff Supplier Staff Provider Carrier Origin point selection 71% 28% 55% 14% 3% Order release 83% 26% 8% 3% Export compliance 36% 28% 61% 55% 9% Ready to Ship verification 26% 28% 57% 43% 4% Shipment compliance with P.O. 53% 37% 50% 41% 5% Destination port selection 82% 18% 9% 42% Routing (mode / service selection) 78% 21% 16% 37% Carrier selection 71% 11% 13% 42% Carrier volume commitments 62% 12% 11% 46% Shipment booking on carrier 21% 8% 26% 74% 9% Expediting 87% 24% 16% 8% Shipment scanning 13% 3% 28% 37% 16% Shipment status reporting / visibility 39% 8% 24% 79% 36% Shipment monitoring 61% 16% 11% 76% 16% International inventory management 62% 11% 18% 13% Main carriage payment (collect freight) 71% 9% 11% 28% Customs entry and compliance 70% 8% 22% 53% 9% Return of empty containers 45% 8% 7% 46% 25% Performance metric monitoring 78% 12% 13% 50% 14%

Table 2-14 identifies the consortium memberships top five destination ports both from a current year (2010) to a three forward projection. For Arizona, is should be comforting to note that 46.2% of the current consortiums volume enters the U.S. via the Ports of Los Angeles and Long Beach. This equates to about 5 million of the 14 million TEUs in 2010.

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However, while consortium members indicated that the Panama Canal was not a critical decision point in their choice of port location, the consortium membership is looking at shifting cargo from Los Angeles/Long Beach to Norfolk (which when the survey was completed, included the Ports of Charleston, Savannah, Jacksonville and Norfolk) shifting 6.4% (320,000 TEU’s) of their cargo.

Table 2-14 Supply Chain Consortium Top Five Destination Ports in North America

Port 2010 Volume Port 3yr Projected Volume Long Beach, CA 24.0% Los Angeles, CA 26.3% Los Angeles, CA 22.2% Seattle, WA 22.6% Seattle, WA 20.6% Norfolk, VA 20.2% Norfolk, VA 14.2% Long Beach, CA 13.5% Tacoma, WA 5.1% Tacoma, WA 5.2% New York, NY 3.5% New York, NY 2.8% It should be noted that although the results are presented for destination ports, shippers typically operate in terms of port complexes (i.e. West Coast, Southeast Coast, Gulf Coast). Cargo shifts between individual ports in the same complex (i.e. between Los Angeles, Long Beach, Seattle and Tacoma on the West Coast) is a standard practice and not necessarily an indicator of anything significant. The key observation is the shift in volume between West Coast Ports and other complexes, as observed in the volume increase at Norfolk in the Southeast port complex.

When compared to the survey results for transportation costs, the consortium membership indicates average transportation costs of 2.9% of revenue of revenue versus 6.3% for the survey group respondents. When queried about the percent of sales based on products manufactured in company controlled plants and facilities versus product manufactured by others:

. 33% indicated the product was manufactured “in-house” . 21% had product manufactured by 3rd parties under contract . 46% bought the product from vendors using general specifications

The number of Distribution Centers (DCs) and warehousing facilities in the supply chain network also gives an indication of how product is moved and delivered. The median number of DCs per member firm was 4, with a mean of 6.6. The maximum was 98 DCs. Based on this finding, and acknowledging that most of the shippers already have a Southern California DC, the reality of having a DC within 500 miles of Los Angeles is limited when the average number of DCs by firm is only 7 and most firms are distributing nationally.

However, Figure 2-9 illustrates the share of consortium membership shipments that arrive at DCs by each mode. While ocean freight (port located) is 22%, trucking is almost 69%, which represents a significant opportunity for the Sun Corridor where the provision of trucking oriented infrastructure and amenities could increase attractiveness to locate. For outbound modes illustrated in Figure 2-10, ocean drops considerably and trucking is increased to more than 80%, again representing a significant opportunity for the Sun

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Corridor. These findings are further enhanced in Table 2-15 which shows the forecasts in modal changes in the next three years, with further potential for the Sun Corridor indicated with the increasing inbound consolidation, increases in trucking mode, and increases in intermodal rail being anticipated.

Figure 2-9 Transportation Mode of Inbound Shipments at Distribution Centers

2.7% 4.1%

Truckload (live unload)

28.5% Truckload (drop trailer) 22.3% LTL

Rail

Ocean freight

2.2% Air freight 13.0% 27.3% Parcel

Figure 2-10 Transportation Mode of Outbound Shipments at Distribution Centers

17.4% Truckload (live unload) 1.0% 21.2% 1.2% Truckload (drop trailer) 0.4% LTL

Rail

17.3% Ocean freight

Air freight 41.6% Parcel

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Table 2-15 Forecast Transportation Mode Selection Changes for Next 3 Years

Weighted Average % Mode Decreasing Increasing No Change Shipment Change Truckload 19.6% 50.8% 19.6% 5.7% LTL 45.5% 29.7% 24.8% -3.0% Inbound Consolidation 8.4% 51.6% 40.0% 8.5% Rail-Intermodal 4.1% 61.9% 33.3% 10.5% Rail-Boxcar 5.4% 19.4% 75.3% 3.5% Air Freight 28.1% 11.5% 60.4% -1.3% Parcel 20.6% 24.7% 54.6% 2.0%

Table 2-16 indicates reasons for changing transportation modes as indicated by consortium members. These findings are the decision criteria that will cause the changes to the supply chain that the Sun Corridor needs to understand, pursue and build upon. Total reduced costs in both transportation and the total supply chain are obvious considerations for consortium members. From the surveys and the interviews, this is a critical point for the Sun Corridor to develop and emphasize as opportunities to shippers. On-time performance and predictable transit times are also favorable measures for the Sun Corridor compared to Southern California.

Table 2-16 Supply Chain Consortium Reasons for Changing Transportation Modes

Reasons for Changing Key Minor Not a Factor Transportation Modes Consideration Consideration Reduced Total Supply Chain Costs 88% 13% 3% Reduced Transportation Costs 84% 6% 7% Improved On-time Performance 67% 13% 4% More Predictable Transit Times 66% 5% Global Sourcing 55% 8% 2% “Just in Time” Delivery 45% 9% 1% Smaller, More Frequent Shipments 41% 4%

Finally, network optimization has potential as a tool for the Sun Corridor to differentiate from peer markets. As in almost every operation, there are a significant percentage of respondents who believe their operations are not optimized providing the opportunity to enhance operations. Fifty-two percent of Supply Chain Consortium members indicated they felt their vendor and supplier operations were not optimized, while 43% indicated their product manufacturing operations were not optimized. These two operations represent a significant opportunity for the Sun Corridor to enhance product manufacturing, and vendor and supplier operations to service the supply chain and increase the attractiveness of Arizona for these purposes.

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2.4 Survey and Interview Findings

2.4.1 Trends in Goods Movement

The Coalition for America’s Gateways and Trade Corridors, which represents virtually every modal organization, published a study in 2010 indicating that shipper’s are seeking reliable and consist service, competitive freight rates, and transit time and speed. Figure 2-11 graphically demonstrates that these three components make up 93% of the total shippers concerns.

The key finding of the research presented in this section is the overall understanding of how major shippers in a global supply chain currently view the system, and what parts or components of the system they control versus what components they choose not to control. Decisions over single components are not centralized with any large shipper.

Approximately 25% of the companies surveyed use outside LSPs or 3PLs to make port of entry and modal selection decisions. When decisions are made in-house, typically the domestic side determines the mode and inland routing whereas the international side will pick the ocean carrier and the port of entry.

Figure 2-11 Poll of Top 100 “Blue Chip” Multinational Shipper Priorities

38% 42% Competitive Freight Rate Schedule Reliability & Consistency

12% Transit Time & Speed

Source: Coalition for America's Gateways and Trade Corridors

The key finding of the research presented in this section is the overall understanding of how major shippers in a global supply chain currently view the system, and what parts or components of the system they control versus what components they choose not to control. Decisions over single components are not centralized with any large shipper.

Approximately 25% of the companies surveyed use outside LSPs or 3PLs to make port of entry and modal selection decisions. When decisions are made in-house, typically the

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domestic side determines the mode and inland routing whereas the international side will pick the ocean carrier and the port of entry.

In a 2008 study for the Federal Government1, 37 separate functional components of an import supply chain were identified. The maximum number of components that were typically visible to a BCO was 26 and the maximum number of components typically controlled by a BCO was 20, with the majority of the BCOs only controlling between 12 and 18 of the components of the supply chain. This finding indicates that there are many elements of the supply chain that can be influenced, there are always multiple entities that control shipments within the supply chain, and the specific functional components are not always apparent to the BCO. This provides the opportunity for the Sun Corridor to influence any of the multiple parts of the supply chain to increase the regions role.

2.4.2 Trends in the Sun Corridor

In the Sun Corridor, potential opportunities exist through examining the separate functional components from a systems approach versus attempting to look at one component in isolation. An example of a single functional component is trucking costs from Los Angeles to Phoenix.

Trucking (when LTL is included) represents almost 50% of the total transportation spending of shippers surveyed (Table 2-1). The domestic component comprises the majority of the goods movement with freight coming from North America. Within the international component, over 80% of the companies surveyed import goods from Asia, the Pacific Rim or South America, primarily by ocean carrier, with almost 90% using the Ports of Los Angeles and Long Beach as the major gateway.

Consortium database query results forecast a shift in gateway ports over the near term. Major shippers will decrease West Coast gateways’ share of imports. A decrease in volume of nearly four percent is projected for the United States West Coast ports. Projections provided indicate ports in the United States southeast will increase share of cargo (including Charleston, Savannah, and Jacksonville). If projections prevail, cargo that would be coming through a West Coast gateway with a potential of being handled, stored, value-added, or distributed in Arizona decrease in percent share of volume. Four percent of West Coast cargo (containerized) represents almost 1 million TEUs or 515,000 containers.

Shippers apply varied ratings in the selection of the North American gateway. A 2010 survey of companies similar to the study participants ranked the factors on a scale of 1- 5 with 5 being the most critical. The results indicate that the choice to move away from a Southern California port would be “moderately” based upon the lack of efficiency.

1 Operation Safe Commerce, Report to the U.S. Congress submitted December 2008 by the Ports of Seattle, Tacoma, Los Angeles, Long Beach and the Port Authority of New York/New Jersey.

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The efficiency would be in the perception of the shipper. Factors include costs, congestion, and other issues.

Shippers factor freight costs associated with moving goods to their ultimate market. When the cost of freight (from all modes) is compared to other key metrics, the transportation and logistics costs are a higher percentage of costs compared to distribution center (DC) costs. Study participants lease, own or have managed (for them by an LSP) DCs and on average they manage or operate 6.6 DCs. One study firm controls 98 separate distribution center locations.

If a company focuses only on a single component, the systematic total costs savings of a strategic distribution network does not become apparent to a shipper.

The modal split of inbound (to the DC) and outbound cargo by mode, identifies a significant reliance on trucking. Rail and air freight comprise less than six percent in both inbound and outbound shipments by consortium members, again indicating the heavy reliance on trucking and motor freight as the primary source of transportation of freight.

The consortium database query results forecast a change in modal selection. Decisions are based upon sourcing strategy as well as components including cost, reliability, and local legislative issues.

Changes in goods movement also reflect a continued desire of shippers to optimize their supply chain. Supply chain optimization is defined as the ability to accurately predict the outcome of getting goods to their ultimate market location by using the application of processes and tools to ensure the optimal (costs, functional control of operations, return on investment) operation of a manufacturing and distribution supply chain. This includes the optimal placement of inventory within the supply chain, minimizing operating costs (including manufacturing costs, transportation costs, and distribution costs) in a reliable manner. By operation, most shippers self identify their master DCs to be “optimized” or “close to optimum”. Regional DCs and product manufacturing operations are predominantly categorized as “not optimized”. A continued desire to optimize supply chains may provide new opportunities for select shippers to locate certain operations to the Sun Corridor, particularly related to product manufacturing, and vendor and supplier operations, which were cited by consortium members as most in need of further optimization.

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3.0 COMMODITY FLOW PROFILE

3.1 Introduction

To supplement the understanding of goods movement in Arizona derived from the survey and interviews of shippers and carriers, this section provides an overview of commodity flows into, out of and through the Sun Corridor. In addition to the flow of goods into and out of the Sun Corridor, there are substantial commodity flows through the region that have little connection to the region’s economy. These include goods moving to and from Southern California to the rest of the United States and goods moving through Arizona’s border between Mexico and U.S. states other than Arizona.

Commodity flows are further detailed by U.S. domestic, overseas international and cross border components. The objectives of the analysis are to:

 Provide a high-level overview of commodity flows that involve the Sun Corridor.  Provide an initial characterization of whether subsets of current commodity flows may offer economic development opportunities for adding value in the Sun Corridor, specifically by modifying the design of supply chains in the regions.

3.1.1 Data Sources Used

Commodity flows reviewed in this section are based on Federal Highway Administration Freight Analysis Framework (FHWA FAF) data released in January 2011. These freight flow estimates are based on a variety of information sources including the U.S. 2007 Commodity Flow Survey and International trade data from the U.S. Census Foreign Trade Division. Documentation for FAF is included as an attachment. Further information is available at: http://www.ops.fhwa.dot.gov/freight/freight_analysis/faf/

FAF data include flows of value and tonnage (in metric tons or 1,000 kilograms) between 123 domestic regions including 74 metropolitan areas, 33 state remainders (where detail is available for a state’s metropolitan areas) and 16 individual states. For international cargo flows, the data also includes detail for eight foreign trade regions. Figure 3-1 provides a visual display of these regions. For the purposes of this study, three FAF regions in Arizona have been examined:

 Phoenix MSA  Tucson MSA  State Remainder

The Phoenix and Tucson MSAs have been combined into an aggregate region referred to as the Phoenix/Tucson region or the Sun Corridor.

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Figure 3-1 FHWA Freight Analysis Framework Geographic Zones

Source: Federal Highway Administration Freight Analysis Framework Documentation

3.2 Overview of Sun Corridor Cargo Flows by Direction

Table 3-1 displays volumes of commodity flows between the Sun Corridor and regions outside of Arizona. This excludes cargo flowing within the Phoenix and Tucson MSAs, between these two MSAs and with the remainder of the State of Arizona. These local flows are very large compared to U.S. inter-regional flows which are most important for the purposes of the study. Given the region’s geographic location and border with Mexico, detail for cross border moves is included.

Commodity flows through the Sun Corridor are, at best, very difficult to estimate. The large inter-regional flows between Los Angeles and Texas are those most likely to move through the Sun Corridor and those flows are included in the table below as “Through Cargo”. Cross border commodity flows between Mexico and U.S. states other than Arizona are also generally considered as traffic likely moving through the Sun Corridor. Highlights include:

 Cargo flowing into the Sun Corridor is significantly larger than outbound flows: more than 1.5 times the value ($107 billion in versus $70 billion out) and double the tons.

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 Los Angeles-Texas commodity flows are imbalanced eastbound ($64 billion versus $36 billion westbound) but flows in both directions are smaller than Sun Corridor inbound or outbound flows.  At $12 billion dollars, cross border through traffic is about one-eighth the size of cargo flows moving between Los Angeles and Texas.

Table 3-1 Total Commodity Flows by Direction (for 2007 in millions of dollars and thousands of tons)

Direction Trade Sun Corridor Share Value Tons Value Tons Inbound Total 107,313 37,502 100.0% 100.0% Domestic 97,989 32,739 91.3% 87.3% Overseas 4,236 2,442 3.9% 6.5% Cross Border 5,087 2,321 4.7% 6.2%

Outbound Total 69,860 18,462 100.0% 100.0% Domestic 62,708 13,664 89.8% 74.0% Overseas 2,188 1,376 3.1% 7.5% Cross Border 4,963 3,422 7.1% 18.5%

Through Los Angeles-Texas Total 64,272 13,126 100.0% 100.0% Domestic 26,720 4,474 41.6% 34.1% Imports 34,299 7,333 53.4% 55.9% Exports 3,253 1,320 5.1% 10.1%

Texas-Los Angeles Total 35,899 23,968 100.0% 100.0% Domestic 18,532 15,808 51.6% 66.0% Imports 7,376 2,532 20.5% 10.6% Exports 9,991 5,627 27.8% 23.5%

Cross Border Total 12,360 3,612 100.0% 100.0% Mexico-US 9,712 2,413 78.6% 66.8% US-Mexico 2,647 1,199 21.4% 33.2%

The following sub-sections presents a breakdown of trade flows by direction. Inbound and outbound detail includes domestic, imports, and cross border moves.

3.3 Inbound Cargo

The majority of inbound movement is comprised of domestic cargo. Accounting for 37.5 million tons and an aggregate value of $107 billion, the major commodities moved are high value manufactured goods, such as transportation equipment,

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pharmaceuticals and electronics, and food and beverage products. This commodity flow is very typical of a strongly consumer based regional economy and is consistent with the information communicated by the shippers. The figures below present the breakdown of inbound goods by value and tonnage.

Figure 3-2 Inbound Goods by Value (for 2007 in millions of dollars)

Cross Border Overseas $5,087 $4,236

Domestic $97,989

Figure 3-3 Inbound Goods by Tonnage (for 2007)

Cross Border Overseas 6% 7%

Domestic 87%

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3.3.1 Domestic Inbound

Goods moving into the Sun Corridor from U.S. states excluding Arizona totaled $98.0 billion and 32.7 million tons. In terms of value and tons, domestic inbound commodity flows represent the largest segment of cargo flows reviewed in this analysis. For these commodity flows the basic question for the study is whether value and supply chains involved in creating and moving these goods could be modified so that design, manufacturing, distribution or other value-added processing or services could occur in the Sun Corridor rather than in other regions of the country or world. Influencing such changes involve numerous factors with the supply chain representing one subset of these factors. However, as indicated in the shipper surveys, opportunities do exist to influence these commodity flows as it relates to the supply chain, particularly with regard to optimization of suppliers and vendors, and manufacturing.

A majority of inbound value is comprised of high value manufactured goods especially electronics (16%) and motorized vehicles/parts and transportation equipment combined (~16%). Table 3-2 presents a breakdown of domestic inbound commodity flows.

Table 3-2 Sun Corridor Inbound Domestic Commodity Flows in 2007 (for 2007 in millions of dollars and thousands of tons) Domestic Origins to: Sun Corridor Product Share Value Tons $/kg Value Tons Total 97,989.7 32,738.7 2.99 100.0% 100.0% High Value Mfg 67,340.8 4,466.2 15.08 68.7% 13.6% 21 Pharmaceuticals 7,261.8 89.9 80.78 7.4% 0.3% 29 Printed prods. 1,881.1 339.4 5.54 1.9% 1.0% 30 Textiles/leather 6,448.6 369.8 17.44 6.6% 1.1% 33 Articles-base metal 2,957.2 569.6 5.19 3.0% 1.7% 34 Machinery 4,856.3 335.9 14.46 5.0% 1.0% 35 Electronics 15,979.0 319.7 49.98 16.3% 1.0% 36 Motorized vehicles 8,101.9 906.8 8.93 8.3% 2.8% 37 Transport equip 7,326.3 27.1 270.34 7.5% 0.1% 38 Precision instruments 4,842.1 275.5 17.58 4.9% 0.8% 39 Furniture 1,905.0 296.5 6.42 1.9% 0.9% 40 Misc. mfg. prods 5,781.5 936.0 6.18 5.9% 2.9% Food & Beverages 8,011.4 5,369.5 1.49 8.2% 16.4% 05 Meat/seafood 2,215.4 680.4 3.26 2.3% 2.1% 06 Milled grain prods 1,019.3 803.7 1.27 1.0% 2.5% 07 Other foodstuffs 3,554.8 2,934.5 1.21 3.6% 9.0% 08 Alcoholic beverages 1,221.9 950.9 1.28 1.2% 2.9% Other 22,637.8 22,903.0 0.99 23.1% 70.0%

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3.3.1.1. Geographic Detail

The largest originating states for both value and tons are California and Texas. States with high inbound value include Washington and a number of Midwestern and Northeastern states. Concentrations in tons are from the neighboring states of Colorado, Utah, New Mexico and Nevada. Figure 3-4 depict origins of volumes of inbound domestic cargo based on value, while Figure 3-5 depicts volumes of inbound domestic cargo to the Sun Corridor by weight.

Figure 3-4 Sun Corridor Inbound Domestic Cargo Value by State of Origin and Mode (for 2007) Circle size represents millions of dollars

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Figure 3-5 Sun Corridor Inbound Domestic Cargo Tonnage by State of Origin and Mode (for 2007)

Circle size represents thousands of tons

A. California

As shown in the Figure 3-4, California represents the largest source of inbound goods to the Sun Corridor supplying 30% of value and 29% of tons. Consistent with the findings of the shipper surveys and as illustrated in Figure 3-5, most goods from California were shipped by truck (85% of tons and 67% of value). Given the relative importance of inbound goods from California, product detail is presented in Table 3-3.

i) California Regional Shares

Over 70% of California goods shipped to the Sun Corridor originates in the Los Angeles CSA, emphasizing the significance of I-10 and a primary freight corridor. These domestic cargos include imported goods that are transloaded in, or distributed from, Southern California’s Inland Empire (Riverside and San Bernardino Counties). These cargoes are separate from imported goods, which move directly from California international gateways (e.g. Ports of Los Angeles and Long Beach) to Arizona and other inland areas.

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Table 3-3 Commodity Flows from California to the Sun Corridor

(for 2007 in millions of dollars and thousands of tons)

California to: Sun Corridor Product Share Value Tons $/kg Value Tons Total 28,929 9,508 3.04 100.0% 100.0% Top 10 High Value Mfg 16,013 1,497 10.70 55.4% 15.7% 21 Pharmaceuticals 819 22 37.05 2.8% 0.2% 30 Textiles/leather 2,076 73 28.56 7.2% 0.8% 33 Articles-base metal 1,143 172 6.63 4.0% 1.8% 34 Machinery 946 52 18.13 3.3% 0.5% 35 Electronics 3,752 78 48.17 13.0% 0.8% 36 Motorized vehicles 2,060 276 7.45 7.1% 2.9% 37 Transport equip 662 2 315.24 2.3% 0.0% 38 Precision instruments 1,705 256 6.67 5.9% 2.7% 39 Furniture 623 122 5.09 2.2% 1.3% 40 Misc. mfg. prods 2,227 443 5.03 7.7% 4.7% Food and Beverages 3,417 2,733 1.25 11.8% 28.7% 05 Meat/seafood 651 204 3.19 2.2% 2.1% 06 Milled grain prods 287 254 1.13 1.0% 2.7% 07 Other foodstuffs 1,706 1,740 0.98 5.9% 18.3% 08 Alcoholic beverages 774 535 1.45 2.7% 5.6% Other 9,499 5,278 1.80 32.8% 55.5%

ii) California’s Product Concentrations

In terms of product value shipped to the Sun Corridor, California originates a very high share of the U.S. total (>40%) in just a few product groups. These include food and beverages, and resource-based products as listed below:

03 Other agriculture products 71% 07 Other food stuffs 48% 08 Alcoholic beverages 63% 17 Gasoline 97% 28 Paper articles 43% 31 Non metallic mineral products 47%

With the possible exception of gasoline where oil refining could be developed in Arizona, replacing the current inbound flows of gasoline, it is expected that significant transformations in the supply chain are unlikely for most of these products.

For a wide variety of consumer-oriented of products, California’s share of Sun Corridor goods is a relatively high 30% to 40%. These product groups include textiles/leather, base metal products, chemical products, plastics/rubber, furniture, and miscellaneous

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manufactured goods. Many of these products may have been originally manufactured overseas with value-added processing or distribution occurring out of Southern California.

The opportunity for changing production and supply chains may exist in niches for some of these product categories, but in many cases would require changing the location of distribution and value added services to the Sun Corridor rather than locations in Southern California. This change could be based on specific distribution advantages offered by the Sun Corridor or where the region could provide competitive value- added processing capabilities.

B. Washington

Washington State was the next most significant origin of goods shipped to the Sun Corridor in terms of value. Transportation equipment was largely shipped by air and represented the single biggest commodity group between Washington and Arizona. This commodity group reflects the relatively strong presence of aviation and defense related industries in the Sun Corridor, and specifically the presence of Boeing and other similar transportation equipment manufacturers and suppliers. Shipment by air further reflects the high value of these commodities.

C. Texas

Texas is the third largest originating state in value moving to the Sun Corridor, as illustrated in Figure 3-4 previously and the second largest in term of tonnage as illustrated in Figure 3-5. In addition to being an important supplier of natural gas and petroleum products to the Sun Corridor, the electronics product group represents over 30% of total product value moving to the Sun Corridor reflecting the strong presence of electronic equipment manufacturers, like Dell Computer, in Texas. Other product groups with relatively high shares of value include machinery and miscellaneous manufactured goods.

D. Southwestern States

The neighboring states of Nevada, Utah, Colorado and New Mexico originate a relatively small 5% share of goods value to the Sun Corridor as displayed in Figure 3-4, but a much higher share (13%) in terms of tonnage as displayed in Figure 3-5. This reflects the significance of mining and the shipment of raw materials in the goods moved into the region from these surrounding states.

E. West South Central States

The West South Central states of Oklahoma, Louisiana and Arkansas supplied 11% of inbound tons to the Sun Corridor, but just 2% of total value, with a heavy concentration of tonnage transported by pipeline. Combined with the petroleum products provided by Texas, these three states originated nearly half of the total cargo tons moved to the Sun Corridor by pipeline.

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According to the U.S. Energy Information Administration, Arizona’s major pipelines transport petroleum products (e.g. oil, gasoline, distillate, kerosene) and natural gas. The Sun Corridor currently has no oil refineries or pipelines handling crude oil although such a development has been investigated in the past and could offer some economic development potential. Beyond the addition of refining capabilities, the potential for altering the supply chain for oil, petroleum and natural gas into or through Arizona does not appear to offer significant potential for adding value in The Sun Corridor.

3.3.2 International Imports

Goods moving to the Sun Corridor from overseas sources in 2007 (excluding entry through Arizona) totaled $4.2 billion and 2.4 million tons. These volumes were relatively small compared to the domestic volumes described above (approximately 4% of total inbound cargo value and 6.5% of total inbound tonnage). Principal products imported are electronics (22% of value), machinery (11% of value) and textiles (9% of value).

The potential for modifying value and supply chains for products imported overseas directly into the Sun Corridor is likely minimal due to the distance from ocean ports of origin for these goods. However, long supply chains for products manufactured in Canada and imported through Michigan (like automobiles) could suggest that alternative manufacturing or value added services in the Sun Corridor rather than in Canada might offer potential savings in transportation and manufacturing costs that could attract such activities to the Sun Corridor.

The major imports destined for the Phoenix-Tucson region are listed in the table below.

Table 3-4 Sun Corridor Inbound International Commodity Flows (for 2007 in millions of dollars and thousands of tons) International Origins to: Sun Corridor Product Share Value Tons $/kg Value Tons Total 4,236.5 2,441.9 1.73 100.0% 100.0% High Value Mfg 2,338.1 257.4 9.08 55.2% 10.5% 21 Pharmaceuticals 8.9 0.3 29.67 0.2% 0.0% 37 Transport equip 95.3 2.4 39.71 2.2% 0.1% 38 Precision instruments 44.0 3.5 12.57 1.0% 0.1% 35 Electronics 935.5 81.0 11.55 22.1% 3.3% 30 Textiles/leather 399.6 50.1 7.98 9.4% 2.1% 40 Misc. mfg. prods 173.6 21.8 7.96 4.1% 0.9% 34 Machinery 473.5 66.7 7.10 11.2% 2.7% 36 Motorized vehicles 207.7 31.6 6.57 4.9% 1.3% Other 1,898.5 2,184.4 0.87 44.8% 89.5%

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3.3.2.1. Geographic Detail

As could be expected, the largest U.S. origins of international imports into Arizona are coastal port states including California, Washington and Texas. Michigan is also a significant gateway state for imports from Canada. Figure 3-6 present a breakdown of import values and tonnage by gateway.

Figure 3-6 Sun Corridor Inbound Import Cargo Value by Gateway State of Origin and Mode (for 2007)

Circle size represents millions of dollars

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Figure 3-7 Sun Corridor Inbound Import Cargo Tonnage by Gateway State of Origin and Mode (for 2007)

Circle size represents thousands of tons

A. California

California was the largest gateway of Sun Corridor imports accounting for nearly half of cargo value and 27% of cargo tonnage. Los Angeles (including the Ports of Los Angeles and Long Beach) was the primary California region for imports accounting for 90% of tonnage and value of cargo destined for the Sun Corridor. More than half of imports entering through California come from Northeast Asia (55% of tonnage and 71% of value); products include electronics (31% of the California’s import value to the Sun Corridor), machinery (11%) and textiles (10%).

B. Washington

Washington State, which includes the Ports of Seattle and Tacoma, was also a significant gateway for international imports to the Sun Corridor accounting for 10% of import value and 28% of tonnage. The primary commodity moved is wood products from Canada, a majority of which was transported by rail. This product group includes sawn lumber, plywood and other such wood products primarily intended for construction and manufacturing. The process for creating these products tends to occur close to the sources of the raw materials and does not suggest a potential for processing closer to end markets in the Sun Corridor.

C. Texas

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Imports through Texas represented 12% of value and 18% of tonnage. The principal commodity groups imported through Texas were base metals and electronics products, both originating from Mexico and the rest of Central and South America.

D. Michigan

Imports through Michigan represent 9% of total import value and 4% of tons. Product concentrations are in machinery, electronics and vehicles/parts and originate almost entirely in Canada.

3.3.3 Cross Border Imports

Mexico is the third largest trading partner of the US. Imports from Mexico account for approximately $229 billion, or 12% of total U.S. import value in 2010 (and 63% of the level of U.S. imports from China). Of this import value, nearly 80% entered the U.S. by land through border crossings in California, Arizona, New Mexico and Texas.

Cross border imports into the Sun Corridor through the Arizona border ports of entry in 2007 totaled $5.1 billion and 2.3 million tons. Nearly all of the product value and tons crossing the border at the Arizona port of entry locations originate in Mexico.

Import volumes into the Sun Corridor through Arizona border crossings were larger in value than international imports from all other origins. The $5.1 billion in cross border import value was more that the $4.2 billion in overseas imports and about equal in tons. The fundamental questions for this set of commodity flows are:

1. Can value and supply chains be modified in a way that provides distribution services in the Sun Corridor, closer to the end markets for products? 2. Can production and distribution networks be competitively developed in Mexico that will benefit the Sun Corridor in response to significant changes in global supply chains (e.g. near sourcing of U.S. imports)?

Cross border imports are concentrated in high value manufactured goods, especially electronics and machinery, and in agricultural products. Table 3-5 presents a listing of principal commodities moved cross border from Mexico.

An examination of Arizona’s shares of total U.S. imports raises at least two important questions for this study. First, for the relatively limited sets of products where Arizona’s share of U.S. imports is very high, is there potential for adding value in Arizona rather than in Mexico or adding distribution services in the Sun Corridor to better reach disproportionately large Arizona markets? For example, Arizona imports 50% of the $1.5 billion of tomatoes imported from Mexico and 60% of the $500 million of imported grapes. Does this represent (1) natural sourcing from closer local markets (2) that Arizona has a higher per capita consumption of these products or (3) that Arizona adds value to these products in food processing or distribution?

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Table 3-5 Sun Corridor Inbound Cross Border Commodity Flows (for 2007 in millions of dollars and thousands of tons) Cross Border in Arizona to: Sun Corridor Product Share Value Tons $/kg Value Tons Total 5,087 2,321 2.19 High Value Mfg. 2,825 273 10.36 55.5% 11.7% 21 Pharmaceuticals 1 0 0.0% 0.0% 29 Printed prods. 1 0 5.00 0.0% 0.0% 30 Textiles/leather 234 35 6.76 4.6% 1.5% 32 Base metals 267 52 5.10 5.2% 2.3% 34 Machinery 794 105 7.59 15.6% 4.5% 35 Electronics 1,210 63 19.36 23.8% 2.7% 36 Motorized vehicles 16 3 6.04 0.3% 0.1% 37 Transport equip 105 0 350.00 2.1% 0.0% 38 Precision instruments 157 14 11.24 3.1% 0.6% 40 Misc. mfg. prods 40 2 25.19 0.8% 0.1% 03 Other ag. prods 1,607 1,776 0.90 31.6% 76.5% Other 655 272 2.41 12.9% 11.7%

3.3.4 Denting Southern California’s Dominance in Distribution

For many large consumer products, Arizona currently has a very small share of U.S. imports from Mexico. Table 3-6 displays a subset of these products totaling $75 billion in U.S. imports and shows that Arizona imports just 0.3% of this product value. This prevailing pattern does not indicate that Arizona’s consumption is exceptionally small, but rather that these products are imported to distribution facilities in other states (e.g. California) and then distributed to Arizona from those states.

This situation presents a substantial opportunity for modifying the supply chain on large consumer products to bypass Southern California-based distribution systems to more efficiently reach consumers in Arizona, the Southwest and the U.S. as a whole. These products currently move northbound by land through U.S. border crossings, including the ports of entry in Arizona, so changes to more complex overseas supply chains would not be required. Arizona has the potential to capitalize on its strategic location in the desire line for the flow of large consumer products from Mexico to the U.S. to become a logical hub for related distribution facilities. Furthermore, the results of the shipper surveys and interviews highlighted concerns with costs and legislation in California enhancing Arizona’s attractiveness for these activities.

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Table 3-6 US Imports from Mexico by Land (for 2007 in millions of dollars) Arizona From Mexico by land to: US Total Arizona Share

All Commodities 181,398.5 5,562.7 3.1%

Subtotal (Large Consumer Products) 75,021.3 218.1 0.3% 22 Beverages, Spirits And Vinegar 2,422.7 5.1 0.2% 40 Rubber And Articles Thereof 1,304.6 0.4 0.0% 61 Apparel Articles And Accessories, Knit Or Crochet 1,151.4 5.8 0.5% 62 Apparel Articles And Accessories, Not Knit Etc. 2,074.7 5.1 0.2% 8450 Washing Machines, Household- Or Laundry-type, Parts 465.5 0.0 0.0% 8471 Automatic Data Process Machines; Mag Reader, Etc 11,919.1 3.7 0.0% 8517 Electric Apparatus For Line Telephony Etc, Parts 8,609.2 17.5 0.2% 8527 Reception Apparatus For Radiotelephony Etc 740.7 0.4 0.1% 8528 TV Recvrs, Incl Video Monitors & Projectors 15,658.3 0.2 0.0% 8703 Motor Cars & Vehicles For Transporting Persons 12,502.6 6.5 0.1% 8708 Parts & Access For Motor Vehicles 11,688.0 135.1 1.2% 94 Furniture; Bedding Etc; Lamps Etc; Prefab Bd 5,599.3 29.7 0.5% 95 Toys, Games & Sport Equipment; Parts & Accessories 541.1 5.3 1.0% 96 Miscellaneous Manufactured Articles 344.2 3.3 1.0%

3.4 Outbound Cargo

Similar to inbound movements, domestic cargo represents the majority of outbound movements, totaling 18.5 million tons with an aggregate value of $70 billion. Domestically, outbound cargo is heavily concentrated in high value manufactured goods such as electronics, pharmaceuticals, and machinery. For overseas and cross- border trade, outbound goods are comprised mainly of metallic ores and agricultural products. The figures below present the breakdown of outbound goods by tonnage and value.

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Figure 3-8 Outbound Goods by Value (for 2007 in millions of dollars)

Cross Border Overseas $4,963 $2,188

Domestic $62,708

Figure 3-9 2007 Outbound Goods by Tonnage (for 2007)

Cross Border 19%

Overseas 7%

Domestic 74%

3.4.1 Domestic Outbound

The value of products shipped from the Sun Corridor to U.S. states outside Arizona totaled $66.7 billion in 2007, or about two-thirds the inbound total. As indicated in Table 3-7, outbound value was heavily concentrated in high value manufactured goods especially electronics, pharmaceuticals, miscellaneous manufactured goods and machinery, which together represented 60% of 2007 outbound value.

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Goods shipped from the Sun Corridor to U.S. states excluding Arizona totaled 13.7 million tons in 2007, or about 40% of the inbound volume, representing a significant imbalance between inbound and outbound commodity flows. Over 90% of domestic outbound goods were transported by truck.

Table 3-7 Sun Corridor Outbound Domestic Commodity Flows (for 2007 in millions of dollars and thousands of tons) Domestic Destinations from: Sun Corridor Product Share Value Tons $/kg Value Tons Total 62,737.8 13,665.4 4.59 100.0% 100.0% High Value Mfg 46,467.0 2,194.7 21.17 74.1% 16.1% 21 Pharmaceuticals 10,003.3 154.0 64.96 15.9% 1.1% 23 Chemical prods 729.7 113.5 6.43 1.2% 0.8% 29 Printed prods. 452.1 23.3 19.40 0.7% 0.2% 30 Textiles/leather 658.8 83.4 7.90 1.1% 0.6% 32 Base metals 1,755.6 292.0 6.01 2.8% 2.1% 34 Machinery 4,014.8 166.3 24.14 6.4% 1.2% 35 Electronics 17,450.0 406.8 42.90 27.8% 3.0% 36 Motorized vehicles 962.5 121.1 7.95 1.5% 0.9% 37 Transport equip 2,310.0 7.6 303.95 3.7% 0.1% 38 Precision instruments 1,868.3 19.3 96.80 3.0% 0.1% 40 Misc. mfg. prods 6,261.9 807.4 7.76 10.0% 5.9% Food & Beverages 3,289.6 2,371.5 1.39 5.2% 17.4% 05 Meat/seafood 645.8 218.1 2.96 1.0% 1.6% 06 Milled grain prods 646.6 691.0 0.94 1.0% 5.1% 07 Other foodstuffs 1,933.5 1,452.7 1.33 3.1% 10.6% 08 Alcoholic beverages 63.7 9.7 6.57 0.1% 0.1% Other 12,981.2 9,099.2 1.43 20.7% 66.6%

3.4.1.1. Geographic Detail

The largest destination states for outbound domestic value from the Sun Corridor were California (20%), Texas (12%) New Mexico (9%), and Nevada (5%). The following maps depict the states that are the largest destinations for products originating in the Sun Corridor in terms of value and tonnage.

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Figure 3-10 Sun Corridor Outbound Domestic Cargo Value by State of Destination and Mode (for 2007) Circle size represents million of dollars

Figure 3-11 Sun Corridor Outbound Domestic Cargo Tonnage by State of Destination and Mode (for 2007) Circle size represents thousands of tons

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A. California

Similar to inbound cargo, California was the largest destination for goods shipped from the Sun Corridor with 20% of value and over a third of tons. A majority of these goods were shipped to the Los Angeles CSA (56% of value and 51% of tons). This freight moves primarily by truck (69% of value).

Product groups where a disproportionate share of the Sun Corridor value is shipped to California are food and beverage groups including meat/seafood, milled grain products, other foodstuffs and alcoholic beverages.

B. Texas

While Texas is a large destination state for product value at 12% of the outbound total, the outbound product mix is skewed towards relatively high value goods including concentrations in pharmaceuticals and electronics.

C. Southwestern States

Shipments from the Sun Corridor to New Mexico, Utah, Colorado and Nevada accounted for over 40% of shipments measured by tonnage and 20% by value.

3.4.2 International Exports

Exports from the Sun Corridor through U.S. gateways in 2007 totaled $2.2 billion and 1.4 million tons, which are both relatively small values compared to domestic outbound cargo and to international imports. As indicated in Figures 3-12 and 3-13, over half of total Sun Corridor export tons were transported to Canada through the northern border states of Michigan, Montana, New York and North Dakota, and were comprised primarily of metallic ores and agricultural products. Given the small volumes and resource-based products exported, this category of product flows does not appear to offer significant opportunities for adding value or additional distribution services from the Sun Corridor.

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Figure 3-12 Sun Corridor Outbound Export Cargo Value by Gateway State of Destination and Mode (for 2007)

Circle size represents million of dollars

Figure 3-13 Sun Corridor Outbound Export Cargo Tonnage by Gateway State of Destination and Mode (for 2007)

Circle size represents thousands of tons

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3.4.3 Cross Border Exports

Mexico is the second largest destination country for U.S. exports after Canada. U.S. exports to Mexico were $163 billion in 2010, or 13% of total U.S. exports. Of this total, about 85% was transported by land. Exports through the Arizona border were comparable to imports at about $5 billion in 2007, although tons were comparatively greater given the prevalence of heavy, low-value metallic ores.

Like imports, export value was concentrated in electronics and machinery. Metallic ores were dominant in tonnage.

Table 3-8 Sun Corridor Inbound Cross Border Commodity Flows (for 2007 in millions of dollars and thousands of tons) Cross Border in Arizona from: Sun Corridor Product Share Value Tons $/kg Value Tons Total 4,963.4 3,422.1 1.45 100.0% 100.0% High Value Mfg 2,947.4 388.5 7.59 59.4% 11.4% 21 Pharmaceuticals 6.8 0.8 8.50 0.1% 0.0% 30 Textiles/leather 84.4 20.1 4.20 1.7% 0.6% 34 Machinery 697.4 62.4 11.18 14.1% 1.8% 35 Electronics 1,474.7 270.6 5.45 29.7% 7.9% 36 Motorized vehicles 116.2 24.9 4.67 2.3% 0.7% 37 Transport equip 339.8 0.7 485.43 6.8% 0.0% 38 Precision instruments 171.8 5.7 30.14 3.5% 0.2% 39 Furniture 9.8 2.0 4.90 0.2% 0.1% 40 Misc. mfg. prods 46.5 1.3 35.77 0.9% 0.0% 14 Metallic ores 84.4 1,979.3 0.04 1.7% 57.8% Other 1,931.6 1,054.4 1.83 38.9% 30.8%

3.5 Through Cargo

3.5.1 Overview and Relevance

Goods flowing through the Sun Corridor include domestic and international cargos flowing east-west, especially those bridging between Los Angeles and Texas. Through flows also include north-south cargo that is U.S. imports from, and exports to, Mexico not originating from or destined to the Sun Corridor.

While precise routing of goods between U.S. regions is not known and can be volatile in practice due to the multiple routing options available and changes in conditions such as fuel costs, traffic and weather, it is possible to identify regional origin and destination pairs for which goods are most likely to move through the Sun Corridor based on highway routes and rail networks. These flows include a share of east-west truck traffic on Interstate Highway 10 (I-10) and I-40, and shares of rail traffic on the UP and BNSF

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railroads, in addition to commodities moved in pipelines crossing Arizona. Principal east- west cargo flows include domestic cargo but also international imports and exports.

Previous sections provided an overview of commodity flows into and out of the Sun Corridor. Flows into and out of the Sun Corridor are clearly relevant for examining economic development potential. Each inbound flow represents goods consumed in or distributed from the region. Conversely, each outbound flow represents a good produced in or distributed from the region. Examination of these supply chains can highlight regional successes and opportunities to build upon with future economic development activities to support goods movement.

Specific through traffic flows in the Sun Corridor are much less relevant for the purposes of this study. Assessing through traffic is important to understand whether truck traffic travels on I-10 or I-40 affecting levels of congestion and new capacity needs within the Sun Corridor. However, the fact that cargo is routed through the region does not substantially increase the potential for economic growth in the Sun Corridor, except for development of trucking support services. This is because although it may be potentially relevant one day because cargo was routed through the Sun Corridor on I-10, extraneous factors could make it irrelevant the next day if the trucker decides to seek an alternative routing around the Sun Corridor on I-40.

Economic development potential is tied more to activities in the region that could that intercept the supply chain by providing improved distribution services, vendors and suppliers, or manufacturing that would necessitate goods movement to and from the Sun Corridor. The transportation cost component that could be minimized for current product flows in most cases represents a very small factor in designing supply chain networks, especially for very high value products where transportation costs are a relatively small part of overall delivered costs. Which product values and supply chains can be changed to benefit the Sun Corridor and how they could be modified to accomplish this represent the most critical factors in identifying supply chain related economic development potential.

The following sections that follow describe various commodity flows that likely move through the Sun Corridor.

3.5.2 East-West Commodity Flows

East-West commodity flows through Arizona generally occur on I-10 or I-40 for cargo carried on trucks, the BNSF or UP railroads for cargo carried by rail, or by pipeline for petroleum products or natural gas.

3.5.2.1. Highway Routes

Based on minimizing highway distances, it can be seen in Figure 3-14 that commodity flows between Southern California and Texas and the Gulf Coast are more likely to move through the Sun Corridor on I-10 rather than on I-40. However, routing to more northerly markets such as the Plain States, Midwest, and points east are more likely on I 40.

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Figure 3-14 East-West Interstate Highway Corridors through Arizona

3.5.2.2. Rail Routing

For goods moving by rail, determining which goods move through the Sun Corridor is more difficult to assess. If goods are carried by BNSF, they generally do not move through the Sun Corridor. However, if the goods are transported by UP, then the volumes between California and Texas, southern states and the Midwest are likely moved through the Sun Corridor, as illustrated in Figure 3-15.

Attempting to estimate railroad market shares for commodity flows would, at best, be of questionable validity given that such information is highly confidential. In addition, as described above, such estimates are not necessarily useful for the purposes of this study. Therefore immediately following sections review the most relevant east-west commodity flows, recognizing that only a share of aggregate flows are transported through the Sun Corridor.

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Figure 3-15 East-West Class I Rail Corridors through Arizona

3.5.2.3. Most Relevant East-West Cargo Flows

Figure 3-16 displays domestic cargo flows between Los Angeles and states to the east that have the most likelihood of moving through the Sun Corridor. These include rail and truck traffic to southeastern states and rail traffic to Midwestern and Northeast states.

As can be seen, the Los Angeles-Texas corridor is the most dominant in terms of product flows that may move through the Sun Corridor, and the major flows that are most certain in terms of routing through the Sun Corridor. Based on this assessment, the following sections on east-west commodity flows focus on this most important and relevant corridor.

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Figure 3-16 Possible Domestic Through Cargo Value from Los Angeles to Texas and Eastern States (for 2007)

Circle size represents millions of dollars

A. Los Angeles to Texas Cargo Flows

Because more than half of the goods coming out of the Los Angeles area heading to Texas are Northeast Asian imports, they are primarily consumer goods including electronics, machinery, and textiles. The total volume of cargo moved from Los Angeles to Texas is approximately 13 million tons with an aggregate value of $158 billion. Imports accounted for more than half of the value and tonnage moved. Below are figures depicting Los Angeles to Texas cargo flows

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Figure 3-17 Los Angeles to Texas Cargo by Value (for 2007 in millions of dollars)

Exports $3,253

Domestic $26,720

Imports $34,299

Figure 3-18 Los Angeles to Texas Cargo by Tonnage (for 2007)

Exports 10% Domestic 34%

Imports 56%

Table 3-9 presents major commodities moved from Los Angeles to Texas broken out by domestic, import and export cargo.

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Table 3-9 Commodity Flows from Los Angeles to Texas (for 2007 in millions of dollars) Los Angeles to Texas Total Domestic Imports Exports Value Share Value Share Value Share Value Share Total 64,273 100.0% 26,720 100.0% 34,299 100.0% 3,253 100.0% Live animals/fish 2 0.0% 1 0.0% 0 0.0% 1 0.0% Cereal grains 15 0.0% 6 0.0% 1 0.0% 8 0.2% Other ag prods. 505 0.8% 274 1.0% 131 0.4% 101 3.1% Animal feed 62 0.1% 26 0.1% 21 0.1% 15 0.5% Meat/seafood 717 1.1% 299 1.1% 395 1.2% 23 0.7% Milled grain prods. 448 0.7% 421 1.6% 22 0.1% 5 0.2% Other foodstuffs 1,331 2.1% 995 3.7% 178 0.5% 158 4.9% Alcoholic beverages 31 0.0% 0 0.0% 28 0.1% 3 0.1% Tobacco prods. 1 0.0% 0 0.0% 0 0.0% 0 0.0% Building stone 3 0.0% 0 0.0% 3 0.0% 0 0.0% Gravel 1 0.0% 1 0.0% 0 0.0% 0 0.0% Nonmetallic minerals 5 0.0% 0 0.0% 3 0.0% 2 0.1% Metallic ores 1 0.0% 0 0.0% 0 0.0% 0 0.0% Gasoline 76 0.1% 12 0.0% 64 0.2% 0 0.0% Coal-n.e.c. 132 0.2% 95 0.4% 3 0.0% 33 1.0% Basic chemicals 868 1.4% 183 0.7% 391 1.1% 294 9.0% Pharmaceuticals 1,022 1.6% 909 3.4% 17 0.0% 95 2.9% Fertilizers 8 0.0% 0 0.0% 8 0.0% 0 0.0% Chemical prods. 1,364 2.1% 956 3.6% 287 0.8% 120 3.7% Plastics/rubber 3,618 5.6% 1,612 6.0% 1,784 5.2% 222 6.8% Logs 1 0.0% 0 0.0% 1 0.0% 0 0.0% Wood prods. 498 0.8% 121 0.5% 372 1.1% 5 0.2% Newsprint/paper 269 0.4% 139 0.5% 105 0.3% 25 0.8% Paper articles 162 0.3% 56 0.2% 81 0.2% 25 0.8% Printed prods. 275 0.4% 151 0.6% 116 0.3% 8 0.2% Textiles/leather 7,470 11.6% 3,705 13.9% 3,691 10.8% 74 2.3% Nonmetal min. prods. 1,129 1.8% 270 1.0% 733 2.1% 127 3.9% Base metals 1,328 2.1% 912 3.4% 357 1.0% 58 1.8% Articles-base metal 3,126 4.9% 1,259 4.7% 1,807 5.3% 61 1.9% Machinery 6,761 10.5% 971 3.6% 5,116 14.9% 674 20.7% Electronics 15,480 24.1% 5,720 21.4% 9,304 27.1% 456 14.0% Motorized vehicles 4,344 6.8% 1,792 6.7% 2,239 6.5% 313 9.6% Transport equip. 1,231 1.9% 908 3.4% 272 0.8% 51 1.6% Precision instruments 4,047 6.3% 965 3.6% 2,996 8.7% 86 2.7% Furniture 2,135 3.3% 733 2.7% 1,378 4.0% 23 0.7% Misc. mfg. prods. 5,150 8.0% 2,647 9.9% 2,376 6.9% 127 3.9% Waste/scrap 45 0.1% 3 0.0% 17 0.1% 25 0.8% Mixed freight 602 0.9% 577 2.2% 0 0.0% 25 0.8% Unknown 12 0.0% 2 0.0% 0.0% 10 0.3%

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i) Domestic Cargo from Los Angeles to Texas

Domestic cargo moving from Los Angeles to Texas totaled $27 billion and 4 million tons in 2007. Of cargo value moved, 65% was transported by truck, 35% by rail/multiple modes and 6% by pipeline. This cargo includes international imports that are transloaded in or distributed from Southern California’s Inland Empire.

Principal product flows from Los Angeles to Texas include electronics (21% of total value), textiles/leather (14%), and miscellaneous manufactured products (10%).

ii) International Imports from Los Angeles to Texas

As indicated in Table 3-9, international imports through Southern California ports destined for Texas total $34 billion and 7.3 million tons, which are about 36% greater in value than domestic product flows. Electronics products are a principal concentration in import value at 27% of the total, while machinery represents a large 15% share. Other large share product groups include textiles/leather (11%) and precision instruments (9%).

iii) International Exports from Los Angeles to Texas

As may be expected, exports from Los Angeles to Texas are just one-tenth the size of imports on this corridor, with total value of $3 billion. Noticeably large product shares are in machinery (21%), electronics (14%) and basic chemicals (9%).

B. Texas to Los Angeles Cargo Flows

As illustrated in Figures 3-19 and 3-20, domestic cargo accounts for more than half of the value and tonnage from Texas to Los Angeles. Approximately 66% of the cargo tonnage is domestic, followed by exports and then imports. The aggregate value of Texas to Los Angeles cargo is $36 billion.

As indicated in Table 3-10, natural gas (identified as Coal-n.e.c.), petroleum based products (plastics and chemicals), electronics and machinery are major commodities moved.

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Figure 3-19 Los Angeles to Texas Cargo by Value (for 2007 in millions of dollars)

Exports $9,991 28% Domestic $18,532 52% Imports $7,376 20%

Figure 3-20 Los Angeles to Texas Cargo by Tonnage (for 2007)

Exports 23%

Domestic Imports 66% 11%

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Table 3-10 Commodity Flows from Texas to Los Angeles (for 2007 in millions of dollars)

Texas to Los Angeles Total Domestic Imports Exports Value Share Value Share Value Share Value Share Total 35,899 100.0% 18,532.3 100.0% 7,376 100.0% 9,991 100.0% Live animals/fish 2 0.0% 0.0 0.0% 1 0.0% 1 0.0% Cereal grains 30 0.1% 27.0 0.1% 1 0.0% 2 0.0% Other ag prods. 901 2.5% 126.9 0.7% 104 1.4% 670 6.7% Animal feed 306 0.9% 13.9 0.1% 8 0.1% 284 2.8% Meat/seafood 640 1.8% 592.4 3.2% 37 0.5% 11 0.1% Milled grain prods. 203 0.6% 184.5 1.0% 17 0.2% 1 0.0% Other foodstuffs 623 1.7% 432.6 2.3% 171 2.3% 19 0.2% Alcoholic beverages 64 0.2% 0.0 0.0% 60 0.8% 4 0.0% Tobacco prods. 1 0.0% 1.0 0.0% 0 0.0% 0 0.0% Building stone 6 0.0% 4.5 0.0% 1 0.0% 0 0.0% Natural sands 1 0.0% 1.0 0.0% 0 0.0% 0 0.0% Nonmetallic minerals 102 0.3% 4.2 0.0% 7 0.1% 91 0.9% Metallic ores 420 1.2% 121.9 0.7% 0 0.0% 298 3.0% Coal-n.e.c. 3,854 10.7% 3,734.1 20.1% 5 0.1% 115 1.1% Basic chemicals 2,790 7.8% 1,069.8 5.8% 699 9.5% 1,021 10.2% Pharmaceuticals 413 1.2% 264.6 1.4% 63 0.9% 85 0.9% Fertilizers 4 0.0% 1.0 0.0% 1 0.0% 2 0.0% Chemical prods. 1,376 3.8% 617.4 3.3% 72 1.0% 687 6.9% Plastics/rubber 4,213 11.7% 1,526.2 8.2% 162 2.2% 2,524 25.3% Logs 1 0.0% 0.1 0.0% 0 0.0% 1 0.0% Wood prods. 134 0.4% 69.0 0.4% 41 0.5% 25 0.2% Newsprint/paper 270 0.8% 147.8 0.8% 12 0.2% 110 1.1% Paper articles 155 0.4% 113.8 0.6% 32 0.4% 10 0.1% Printed prods. 173 0.5% 151.8 0.8% 7 0.1% 14 0.1% Textiles/leather 799 2.2% 307.8 1.7% 249 3.4% 243 2.4% Nonmetal min. prods. 311 0.9% 158.8 0.9% 97 1.3% 56 0.6% Base metals 523 1.5% 236.9 1.3% 237 3.2% 48 0.5% Articles-base metal 1,300 3.6% 598.2 3.2% 597 8.1% 104 1.0% Machinery 4,681 13.0% 1,936.5 10.4% 1,204 16.3% 1,541 15.4% Electronics 4,967 13.8% 2,560.1 13.8% 2,124 28.8% 283 2.8% Motorized vehicles 1,219 3.4% 275.1 1.5% 792 10.7% 152 1.5% Transport equip. 282 0.8% 241.0 1.3% 11 0.1% 30 0.3% Precision instruments 618 1.7% 297.4 1.6% 186 2.5% 135 1.4% Furniture 601 1.7% 365.5 2.0% 186 2.5% 49 0.5% Misc. mfg. prods. 1,787 5.0% 1,562.3 8.4% 95 1.3% 129 1.3% Waste/scrap 1,220 3.4% 68.0 0.4% 0 0.0% 1,152 11.5% Mixed freight 816 2.3% 719.3 3.9% 97 1.3% 0 0.0% Unknown 95 0.3% 0.1 0.0% 0.0% 95 0.9%

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i) Domestic Commodity Flows from Texas to Los Angeles

Large volumes from Texas to Los Angeles are dominated by natural gas moving by pipeline (at 20% of total value). High value manufacturing product groups of electronics, machinery, miscellaneous manufactured products and plastics/rubber products each represent shares of 8% to 14% of value with these four product groups totaling over 40% of value.

ii) International Imports from Texas to Los Angeles

Los Angeles international import value through Texas totaled $7.4 billion in 2007, over half of which was from Mexico through Texas land border crossings. Most product value moves by truck. Principal products imported are electronics and machinery.

iii) International Exports from Texas through Los Angeles

Of the $10 billion in exports from Texas in 2007, 70% was destined to Northeast Asia with almost all of the remainder going to other Asian countries. Principal products exported include plastics/rubber, machinery, basic chemicals and waste/scrap. Waste/scrap exports to Northeast Asia generally include ferrous metals and recycled paper.

3.5.3 North-South Commodity Flows

North-South commodity flows bridging the Sun Corridor consist of bi-directional trade between the U.S. and Mexico. Imports through Arizona border crossings to other U.S. states totaled $ 9.7 billion in 2007 and 2.4 million tons. Exports through Arizona border crossings to Mexico totaled $2.65 billion and 1.2 million tons. Imports exceed exports at a ratio of two to one in terms of tonnage. Figures 3-21 and 3-22 present the breakdown of cross border flows through the Sun Corridor between other U.S. destinations and Mexico.

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Figure 3-21 Cargo Value between U.S. and Mexico (for 2007 in millions of dollars)

US to Mexico $2,647

Mexico to US $9,712

Figure 3-22 Cargo Tonnage between U.S. and Mexico (for 2007)

US to Mexico 33% Mexico to US 67%

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3.5.3.1. Mexico to U.S. Imports

As illustrated in Figure 3-23, Michigan is the largest state destination for imports through Arizona border crossings with 41% of total value and 26% of tons. Principal products transported to Michigan are vehicles and automobile parts being shipped by rail.

Figure 3-23 US Import Values from Mexico through Arizona Border Crossings by Destination State (for 2007)

Circle size represents millions of dollars

California is the second largest destination for imports for both value (16%) and tons (24%). Most products were moved to California by truck. In value, the primary imported product groups include electronics, agricultural products and machinery while agricultural products make up most tonnage.

The next four largest states in terms of import value were Illinois, Texas, Pennsylvania and New York, each with between 5 and 7% of total import value. Texas share of imports by tonnage are especially large at 18% of the total. These include agricultural products transported by truck and non-metallic minerals by rail.

3.5.3.2. US to Mexico Exports

Total cargo volumes between the U.S. and Mexico through Arizona border crossings in both directions totals approximately 3.7 million tons with an aggregate value of $12.3 billion. Of that amount, the largest share is represented by U.S. imports described previously, which account for nearly 70% of volume and 80% of value.

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US exports through Arizona are significantly smaller than imports. Export value was $2.6 billion in 2007 or less than 30% of import value. Export weight was 1.2 million tons or about half the import level.

As with imports, Michigan is also the largest state exporter by both value and tons. The largest export commodity is vehicles and vehicle parts.

As illustrated in Figure 3-24, California is the second largest export state in terms of value with electronics representing the largest product group. Other significant export product groups include machinery, agricultural products and plastics and rubber products. Texas is the third largest export state by value with a product mix similar to that of California.

Figure 3-24 US Export Values to Mexico through Arizona Border Crossings by Origin State (for 2007)

Circle size represents thousands of dollars

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3.6 Commodity Flow Findings

This section has provided an overview of commodity flows into, out of and through the Sun Corridor. This information quantitatively portrays a picture of a region that is at the center of massive flows of goods through the US, but a center that participates to a limited degree in the commerce involved in those commodity flows.

It is well known that Southern California is a major gateway for international trade, especially trade with China, and most U.S. imports moving through the Ports of Los Angeles and Long Beach to U.S. destinations move through Arizona by rail or truck. Other imports that move from the ports to Southern California’s Inland Empire for transloading, value added services or later distribution largely follow this same pattern. These patterns have become more pronounced over the last decade as China’s share of imports has increased, and especially as Mexico’s share has declined. While Arizona is not likely to become the new Inland Empire, possible shifts in U.S. sourcing (e.g. back to Mexico) could change the dynamics of value and supply chains for specific industries and products.

Mexico is the United States’ third biggest trading partner in import vale and second in exports. Arizona border crossings currently accommodate 8% of import value by land, but flows through California, New Mexico and Texas destined for other U.S. destinations add to the share of trade moving through Arizona and the Sun Corridor. The fact that the Sun Corridor directly imports less than 0.5% of many consumer oriented goods imported through the Arizona ports of entry from Mexico offers some indication of potential opportunities for modifying distribution networks, especially if the sourcing of imports into the U.S. from Mexico increases.

Commodity flows between California and Texas are especially large with movements covering a range of commodity types and directional flows, although the routing of cargo through the region does not substantially increase the potential for economic growth in the Sun Corridor, except for development of trucking support services. Goods movement related economic development potential more likely lies with providing improved distribution services, vendors and suppliers, or manufacturing that would necessitate goods movement to and from the Sun Corridor. The review of commodity flows suggest that possibilities for value added development more likely exists with north-south movements in the Sun Corridor, including examples such as automotive-related trade between Mexico, the Sun Corridor, and Michigan, or the transloading, distribution and redirection of north-south to east-west and vice versa movements of various commodities including electronics, large consumer products and fresh produce.

The overview of commodity flows based largely on current value and supply chain networks provides the context of current conditions. However, identifying large commodity flows through the region may be largely irrelevant since minor (or even major) changes to the transportation network may have little impact on whether the flows of these goods can be modified, because transportation typically represents only a small portion of the overall delivery cost or value of good moved. The success of the Sun Corridor to stimulate goods movement related economic develop necessitates

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changing overall networks for products and industries so that the region can become an increasingly more significant part of those supply chain networks.

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4.0 OCEAN AND INTERNATIONAL CARGO

The ocean ports along the West Coast represent critical linkages in the global supply chain serving as a gateway for the shipment of goods from Asia, the Pacific Rim and South America to the United States and elsewhere in North America. Arizona’s proximity to the West Coast ports, and the traversing of the state by major road and rail transportation corridors that provide direct linkages between the ports and markets across North America, make the influence and impact of international ocean cargo potentially significant to the Sun Corridor.

Figure 4-1 indicates the proximity of the Sun Corridor to existing and proposed ports along the Pacific coast of Southern California and Mexico, with multiple major ocean port activities being located within 500 miles of the region. Figure 4-1 also illustrates the highway and railroad network that traverses the Sun Corridor linking the West Coast ports to the region, Arizona and the rest of North America. This section will describe ocean port and international cargo factors relevant to Arizona drawing in part from the information obtained in the surveys, interviews and data base search described previously in Section 2.

Figure 4-1 Port Locations Along the Pacific Coast of Southern California and Mexico

4.1 Current Ocean Cargo Goods Movement Affecting Arizona

The survey results indicate that 82% of respondents import goods from the Pacific Rim including Asia, Australasia and South America. The West Coast overseas container market moved more than 22 million TEUs in 2010. Nearly one in ten Arizona shippers moved more than 30,000 TEU’s per year, representing about 16,050 containers annually. The top 10% of shippers in the Sun Corridor represent a small overall percentage of the West Coast container market. Of the surveyed firms, nearly two out of five firms have zero exports.

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Shippers indicated that port location (geographical location), and proximity to local markets and distribution centers were the primary criteria in their decision for selecting a gateway port location. Port capacity and operations, access to rail and other modes, and availability of needed logistics services were also factors that were deemed important by shippers in their selection of gateway port location. Consistent with these criteria, almost 90% of the shippers doing business in Arizona and the Southwest indentified The Ports of Los Angeles and Long Beach as their first choice for importing and exporting cargo.

Table 4-1 Shippers Preference for Inbound Port/Gateway

1st 2nd 3rd Port Location choice choice choice

Long Beach / Los Angeles, CA 88.9% 17.4% - Oakland, CA 5.6% 17.4% - Other West Coast Port(s) 2.8% 34.8% 33.3% Other Gulf Coast Port(s) 2.8% 8.7% 16.7% Mexican Port(s) - 13.0% 16.7% Houston, TX - 8.7% 33.3%

Table 4-2 Shippers Preference for Outbound Port/Gateway

1st 2nd 3rd Port Location choice choice choice

Los Angeles/ Long Beach 89.5% 85.7% 50.0% Bay Area 10.6% - - Pacific Northwest - 14.3% 50%

4.2 West Coast Port Market

The port market on the west coast of North America has, for many years, been very competitive with an estimated 70% to 85% of the total amount of goods arriving at a particular port complex considered to be “port discretionary” meaning that those goods could enter the United States through any port gateway. This number is based upon an intermodal strategy that was developed with the passing of the Stagers Act in the early 1980’s which deregulated the railroads and provided the opportunity for ocean carriers such as American President Lines to own and manage their own fleet of rail equipment.

The impact of the age of intermodalism has been pronounced. Prior to intermodalism, less than 10 unit trains per week were transiting the rails between the West Coast ports and Chicago. Under current conditions, close to a thousand trains per week traverse the U.S. to and from every major marine gateway and several inland intermodal centers.

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From the American Association of Port Authorities, 2010 Port Statistics, Figure 4-2 identifies the share of container traffic at U.S. West Coast Ports compared to other North American Port Complexes. The strength of the U.S. West Coast port market in overseas container shipments is clearly demonstrated in this exhibit showing approximately 44% of all container traffic using this port complex.

Figure 4-2 Container Traffic at North American Port Complexes (in 2010 by TEUs)

2,475,818 1,228,947 1,938,441 2,857,675 United States ‐ Pacific Coast United States ‐ Atlantic Coast 2,815,388 United States ‐ Gulf Coast 22,203,507 Canada ‐ Pacific Coast Canada ‐ Atlantic Coast 17,264,506 Mexico ‐ Pacific Coast Mexico ‐ Gulf Coast

A review of U.S. West Coast Ports container traffic reveals the current dominance of the Ports and Los Angeles and Long Beach, as illustrated in Figure 4-3. In 2010, the Ports and Los Angeles and Long Beach handled approximately two-thirds of all overseas container traffic at U.S. West Coast Ports, and approximately 28% of all overseas container traffic in North America.

The key aspect of container traffic, as identified by the American Association of Railroads (AAR), the American Association of Port Authorities (AAPA) and the Intermodal Association of North America (IANA), is the volume of inland intermodal containers moved by both rail and truck. Based on interviews with the Ports of Los Angeles and Long Beach conducted specifically for this study effort, they estimate that 45% to 60% of the import containers received by both ports are transferred inland by rail and thus, in part, transit through Arizona.

As indicated by the shippers, and confirmed by both the Ports of Los Angeles and Long Beach, the ports are actively marketing shippers and their LSPs to increase the amount of cargo that moves through Southern California. The issue of capacity is a significant point. While the “practical sustainable capacity” for both Ports of Los Angeles and Long Beach is estimated to be over 40 million TEUs per year, the capacity is limited by both inland infrastructure, and by environmental and other political needs of the communities in Southern California. Both ports indicated that, together, they will

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probably not be reasonably allowed to handle more than 30 million TEUs, which is approximately double 2010’s actual volume.

Figure 4-3 Container Traffic at U.S. West Coast Ports (in 2010 by TEUs)

1,916,989

1,455,466 Los Angeles, CA Long Beach, CA Oakland, CA 7,831,902 San Diego, CA 181,100 2,133,548 Portland, OR 90,789 2,330,214 Seattle,WA Tacoma, WA Other

6,263,499

The consensus from the Transpacific Maritime Conference (TPM) is that West Coast container trades would continue to grow from 3% to 8% per year for the next 15 to 20 years. A 6% annual grow rate would result in double the volume of containers at the ports in ten years. Thus, both ports can be expected to be out of effective capacity within the next 10-15 years based on current expected growth rates.

Capacity at other West Coast ports can be expected to handle double the 2010 volume based upon known land expansion capabilities, and operational and productivity improvements. While the Sun Corridor receives cargo from other West Coast ports, as indicated in Table 4-1, the vast majority of port related trade affecting the region comes through the Ports of Los Angeles and Long Beach. As capacity constricts, it is expected that the markets served by the respective ports will become more focused (i.e. Pacific Northwest ports serving northern tier states, and Southern California ports serving southern tier states.

4.3 Impact of the Panama Canal Expansion

The U.S. Maritime Administration (MARAD) is currently conducting a study effort to analyze the potential impacts to U.S. ports from the expansion of the Panama Canal that is expected to be completed in 2014. Although the study will not be completed until early 2012, the Panama Canal Authority (ACP, or the Authoridad Canal de Panama) has presented the following facts related to the benefits and impacts of the canal expansion:

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 Project Elements . Deepening and widening of canal entrances. . Deepening and widening of Lake Gatun and Culebra Cut navigational channels. . Excavation of a new access channel for the new Pacific locks . Elevation of Lake Gatun’s maximum operating level. . Construction of two new Post-Panamax locks parallel to current locks, one on the Atlantic (North) and another on the Pacific (South) ends of the Canal.  Worldwide Container Vessel Fleet . Post-Panamax fleet (5,100 TEU and above) will increase from 41% to 50% of the total fleet by 2014. . Largest size class generating nearly half of the cumulative TEU growth of the fleet. . All but six of the 10,000-14,000 TEU ships will be deployed in the Far East – Europe trade lanes. . 7,500-9,999 TEU Vessel Size deployments:  60% in Far East – Europe markets.  30% in Far East – U.S. West Coast markets.  10% in the Far East – Suez Canal – U.S. East Coast

The targeted U.S. market for increased Panama Canal traffic is the Midwest, Southeastern U.S. and the lower Mississippi Valley states. The Panama Canal Expansion has the potential for diversion of cargo away from the West Coast, which would result in Arizona and the Sun Corridor not receiving any direct benefit from the diverted cargo.

The components that would cause a significant diversion of cargo away from west coast ports are:

 Reduction of costs from: . Reduced rail and inland transportation costs (when compared to current BNSF and UP rail charges) . Reduced port costs (when compared with current ILWU labor costs affecting the West Coast ports) . Reduced ocean carrier costs . Higher logistics costs from West Coast ports (environmental, infrastructure, legislative, etc)  Re-deployment of shipper assets and facilities

The current estimate from the industry is that around 11% to 15% of today’s container volume will be diverted from the West Coast due to transit through the Panama Canal. Even with this diversion, the container growth rate described previously could be expected to offset the impact of diverted traffic from the Ports of Los Angeles and Long Beach. While the Panama Canal expansion does not necessarily help to bring economic activity to the Sun Corridor, based on current cargo growth projections, the Canal will not likely have a long term effect on goods movement into or out of the region.

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4.4 Port of San Diego and the Port of Ensenada

Both the Port of San Diego and the Port of Ensenada have the potential to take cargo away from the Ports of Los Angeles and Long Beach. However, neither existing port has the facilities, the infrastructure or the current vessel deployment strategies by the ocean carriers to have a significant effect on containerized traffic. A major reason for this constraint in San Diego is the lack of on-dock or near dock intermodal rail facilities, and that fact that all rail currently must go into the heart of Los Angeles before it can travel east. Ensenada does have a rail connection with the UP in Calexico, but the rail infrastructure is not capable of significant intermodal volume.

The Port of San Diego is most utilized by the auto industry for importing vehicles, and for project and bulk cargo commodities. However this activity does not make San Diego a major port as they are ranked the 62nd largest port in the U.S. for import tonnage by AAPA in 2009 (with 945,400 tons). Therefore, the Port of San Diego and the Port of Ensenada do not represent a significant opportunity for the Sun Corridor.

4.5 US Gulf and Southeastern Ports

For European cargoes, cargoes transiting the Suez Canal, and South American East Coast cargoes that are destined for California, Arizona and other western states, the cargoes can enter at virtually any port in the Southeastern U.S. or the U.S. Gulf Coast that has good intermodal rail connections. The Port of Houston is the a significant gateway for this type of cargo, if the carrier has a gulf deployment strategy. If the strategy does not exist, cargo would mostly likely enter the U.S. via Charleston, Savannah or Jacksonville due to the existing rail connections, especially the Crescent Corridor for Norfolk Southern and the National Gateway Corridor for CSX. Figure 4-4 illustrates the comparative container traffic at the various U.S. Gulf Coast and Southeastern U.S. Ports.

Figure 4-4 Container Traffic at U.S. Gulf Coast and Southeastern U.S. Ports (in 2010 by TEUs)

213,286 793,227 Houston, TX New Orleans, LA 1,812,268 Gulfport, MS 847,249 427,518 Other Gulf Coast 857,374 223,740 Savannah, GA 351,862 Charleston, WV 265,074 Wilmington, NC 1,364,504 2,825,179 Jacksonville, FL Miami, FL Port Everglades, FL

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4.6 Mexican Ports

Figure 4-2 includes data for the existing Mexican ports on the Pacific Coast and on the Gulf of Mexico. As they currently function, Mexican ports handle approximately 7% of all container shipments in North America, and none provide a significant potential to increase activity that would affect the Sun Corridor. The Pacific Ports of Lazaro Cardenas and Manzanillo, while moving a reasonable amount of containerized cargo in 2010, are not an economical gateway for cargoes that could directly utilize the Sun Corridor due to location and routing from the primary container origins and destinations in Asia. Vessels destined for these Mexican ports from Asia would effectively travel by the Ports of Los Angeles and Long Beach on their voyage. South American west coast and Panama Canal cargoes could be discharged at these Mexican ports, but the rail linkages between these ports and markets in the United States are not cost effective and experience level of service or reliability issues. South American or Panama Canal cargo entering Mexican Gulf Coast Ports have similar issues regarding rail connections and the fact that most of the cargo would pass by a U.S. port prior to arriving in Mexico.

The primary opportunity for the Sun Corridor with respect to existing Mexican ports is seeking ways to become a part of the value added supply chain. As an example, cargoes being imported through Mexican ports for assembly into finished goods prior to shipment to ultimate markets in the U.S. could provide the opportunity for the Sun Corridor to attract assembly or distribution facilities to support this supply chain. However, the limitations at existing Mexican ports, and the constraints in the rail transportation system limit the potential for this type of activity to occur.

4.6.1 Port of Punta Colonet

For several years, the Mexican government has been proposing the development of a major new ocean port at Punta Colonet on the Pacific Ocean in Baja California. The Mexican Government has recently indicated that it is conducting preparations to seek bidders to complete what would be the one of the largest infrastructure projects in the country’s history.

Estimated to cost between US$4 billion and US$5 billion to construct, the Port of Punta Colonet has the potential to become a major West Coast cargo hub to compete with the Ports of Los Angeles and Long Beach. The mega-port, proposed to cover a minimum of 30 km², would be as large the Ports of Los Angeles and Long Beach combined. The projected multimodal maritime center would make Punta Colonet the largest port in Mexico and the fourth-largest in the world, after Shanghai, Singapore and Hong Kong. The port, located approximately 400 miles south west of the Sun Corridor, as illustrated in Figure 4-1, will also require a new 250 mile plus rail line from the port to reach the United States border, likely through a port of entry in Arizona.

The port would be the focal point of a new shipping route linking the Asia/Pacific Rim to North American markets. Containers shipped from Asia, the Pacific Rim and South America would be connected with the rail line at this location to be transported to assembly plants, distribution centers, intermodal facilities and ultimately consumer markets throughout the United States and Canada. Arizona’s proximity to the proposed

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port, and the desire to provide connections to the existing road and rail transportation networks in the Southwestern United States, provides a significant opportunity for the Sun Corridor to pursue economic development activities that capitalize on the proposed ports activity.

Based on the finding of surveys and interviews conducted as part of this study effort, about half of the shippers with freight activities in the Sun Corridor have heard of the Punta Colonet and the proposed port complex, with only about one in ten being somewhat aware of the details of the project. For most of the shippers that indicated they had heard of Punta Colonet, they sourced their information from news reports. As illustrated in Figure 4-2, about half of the shippers indicated they had not heard of the port or were not knowledgeable with any aspects of the port.

Figure 4-5 Shippers Awareness of the Port of Punta Colonet

Port of Punta Colonet

3% said it could replace LA/LB 46% unfamiliar 3% said they would not use the Port

5% said they would use it as a contingent or overflow Port 43% read an article

The port does not provide an immediate or short term opportunity (within the next 5 to 10 years) for the Sun Corridor as the most optimistic schedules suggest it will take at least 5 to 7 years to fully develop the port, the connecting infrastructure (road and rail) and obtain all of the environmental permits needed to open the port to cargo. As evidenced by major port expansion activities completed at Prince Rupert on the Pacific Coast in British Columbia, it can take another 3 to 5 years after opening for the ocean carrier industry to respond to the opportunity provided by a new facility before significant cargo flows through the port.

Long term, the Sun Corridor could be in a very good position to take advantage of the port’s throughput, but the extent the region could benefit from the port is largely dependent on the rail connection developed between the port and a U.S. port of entry. As of June 2011, there has not been any decision on the location or the operational aspects of rail to the port and therefore it is difficult to assess the potential benefit to the Sun Corridor at this time.

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5.0 RAIL CARGO

Rail represents a key element of goods movement providing a predictable and economical option for shippers to move goods over land. Rail facilities in Arizona provide strategic linkages in the North American supply chain with major national railroads traversing the state from west to east connecting the ports along the West Coast to the rest of the United States. While Arizona is strategically positioned along the path of these railroads, the proximity to the West Coast ports, the layout of the rail network and the nature of the goods movement industry place some limitations on how rail can be used as an economic development tool in the state. However, some opportunities do exist, and this section examines rail cargo movements in the Sun Corridor to help identify where these opportunities exist.

5.1 Railroad Operating Facilities

The railroad network includes not only the track over which the rail carrier operates and its trains, but also terminals and facilities. There are two principal categories of facilities. One category comprises facilities that serve the purpose of supporting the railroad’s operations, effectively a component of a railroad’s “factory.” An example of this type of facility is the rail classification or marshalling yard. A “yard” is a series of tracks used for sorting and consolidating cars into trains. Railroads had operated as a hub and spoke system long before airlines adopted a similar operating model.

Rail yards where trains from all parts of railroad’s network converge to exchange freight cars can be large covering several thousands of acres. The proposed Red Rock Yard to be located in the heart of the Sun Corridor near Eloy, Arizona, is an example of yard where trains from Tucson and Phoenix will be combined into larger trains destined for the east or west. Yards can also be less sizable facilities performing the function of distributing and collecting cars on trains serving local industries. The Buckeye Yard on the western edge of the Phoenix metropolitan area is an example of this type of terminal.

5.2 Multimodal Customer Facilities

5.2.1 Railroad Intermodal Terminals

Traditionally, railroads would serve all its customers at their loading docks. The introduction of intermodal trailer and container services required shippers to truck their freight to specially designed terminals that had the equipment for transferring trailers and containers to or from flat cars. These facilities are located strategically on the Class I railroad network to take advantage of large markets and concentrated movements of containerized freight, most often near major metropolitan areas or adjacent to major marine port facilities.

There are approximated 200 intermodal terminals in the United States and Canada. The larger facilities exceed 500,000 containers per year. These facilities usually deal with both domestic and international containers. However, some in major metropolitan

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areas are becoming more specialized, serving only a specific segment of the market. The existence of multiple terminals within a specific area allows specialization.

5.2.2 Transload Terminals

Railroads also recognized that by providing central facilities for loading or unloading other types of freight cars, they could both penetrate a competitor’s market without direct access to a shipper and provide rail service to customers lacking spur track access. By also serving multiple shippers through these “transload” or transfer terminals, railroads enjoy the added benefit of avoiding the high cost gathering and delivering individual freight cars to shippers. Railroad customers, in turn, benefit from the value- added services that can be provided at these transfer terminals. These facilities are often equipped with specialized equipment to facilitate expedited loading/unloading. These may include specialized pumps and piping, conveyors, and cranes.

5.2.3 Inland Ports

Inland ports expand on the concept of intermodal and transload terminals. An inland port will include commercial facilities co-located with transportation terminals. The commercial facilities can include logistics operations such as distribution centers or warehouses, or manufacturers and other types of shippers. The Alliance, Texas, complex is an example of an inland port. It spans 17,000 acres and includes an intermodal terminal and airport. The inland port facility contains a full spectrum of logistic services, and includes capabilities to handle non-containerized rail freight. It even has a residential development to provide convenient housing options for employees.

Inland ports can also be landside counterparts to ocean ports, providing similar services such as customs clearance and free trade zone capabilities. This type of inland port serves the purpose of expediting the movement of containers unloaded from (or loaded onto) ships. Rather than trucks contributing to roadway congestion at port and support activities such as chassis storage, which consumes valuable land otherwise usable for waterside operations, containers are placed on shuttle trains for movement to a satellite inland port location to be put on trucks or onto intercity intermodal trains. The Virginia Inland Port is an example this type of operation.

A third example is the virtual port, an example being Kansas City Smart Port. Here transportation, logistics facilities, and other types of shippers are not necessarily co- located on the same property, but rather linked through information technology and supply chain management systems.

Any of these facilities can serve to stimulate economic activity, including potentially in the Sun Corridor. However, the inland ports and container terminals, by virtue of the industries they serve and the higher value products shipped, have proved to be the more significant economic engines.

5.3 Sun Corridor Rail Network

The Sun Corridor is served by two major (Class I) freight railroads, as illustrated in Figure 5-1 indicating rail ownership in the Southwestern United States. These major freight

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railroads are the Burlington Northern/Santa Fe Railway (BNSF) and the Union Pacific Railroad (UP).

Figure 5-1 Rail Ownership in the Southwestern United States

Both the BNSF and UP rail lines in the region act as a bridge for rail container traffic moving between the Southern California ports, and manufacturers and markets in the Midwest and East, as well as other traffic originating or terminating in the Los Angeles Basin. The BNSF and UP have major east-west corridors traversing the state, but also have lines connecting the corridors to the Phoenix area to provide service to this vibrant metropolitan area. UP’s mainline passes through Tucson and Pinal County, serving their markets, and providing a connection with Ferromex, the national railroad in Mexico. Figure 5-2 shows the ownership of rail lines in Arizona and Northern Mexico.

Within the Sun Corridor, each railroad operates its own network, typical of any location with multiple railroads. Although the railroads operate their own lines, they do cooperate with each other. For example, the Union Pacific Reciprocal Switching Circular lists 25 company locations at which it will pick-up and drop off cars on behalf of BNSF, which has the inter-city move. BNSF provides similar services for UP at 31 industrial locations. The railroads charge each other for such services.

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Figure 5-2 Rail Ownership in Arizona and Northern Mexico

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5.3.1 BNSF

5.3.1.1. BNSF Rail Network

BNSF’s “Transcon” line moves across the northern part of the State of Arizona connecting Chicago to Los Angeles. This double track route passes through as well as serving Kingman, Williams, Flagstaff, Winslow, Holbrook and other northern Arizona communities.

The BNSF Transcon line is a high speed, high capacity route. The line is double-track with permitted freight train operating speeds of 70 miles per hour. The Transcon is designed to move freight expeditiously through the state. This 390 mile route in Arizona carries approximately 120 trains per day. Primary commodities carried on the route are intermodal containers, coal, automobiles, cement, chemicals, lumber, and general merchandise.

BNSF has access to Phoenix through its Phoenix Subdivision, otherwise known as the Peavine. The Peavine is a 209 mile line that connects with the Transcon at Williams Junction west of Flagstaff. The line is a single track with a maximum train speed of 49 miles per hour due to the condition of the track. The restricted speed coupled with the single track limits the capacity of the line.

5.3.1.2. BNSF Multimodal Facilities

In addition to providing direct service to rail customers in the Phoenix metropolitan region with sidings, BNSF also accesses several modal transfer facilities. Table 5-1 describes the BNSF served transload facilities that are located in the Phoenix region.

Table 5-1 BNSF Served Transload Facilities

Operator Location Facility Type

Dry bulk, principally Venture Transfer 707 N 20th Street, Phoenix petrochemicals Break bulk products; Freeport Logistics 4625 N 45th Street, Phoenix warehouse storage 4710 W. Camelback Road, Break bulk products; Warehouse Specialists Glendale warehouse storage

BNSF also operates an intermodal container and trailer terminal in Glendale with an annual lift capacity of approximately 150,000 units. The terminal principally serves the domestic market with scheduled container and trailer services between Phoenix and Chicago, Kansas City, and Alliance, TX. Table 5-2 describes the weekly train services utilizing the Glendale terminal to service the Phoenix metropolitan area and greater Sun Corridor.

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Table 5-2 BNSF Intermodal Frequencies – Phoenix Trains Per Week

Service Origin/Destination Inbound Phoenix Outbound Phoenix

Alliance, Texas 6 1 Chicago, Illinois 7 4 Kansas City, Missouri 6 4

Table 5-2 clearly indicates that inbound frequencies are higher than outbound frequencies. This imbalance in rail service frequencies reflects the Sun Corridor regions economic status as a predominately consumption center. This imbalance also increases the cost of shipping goods to the Sun Corridor versus from the Sun Corridor because of the additional cost incurred by the railroads to “deadhead” equipment back to the service origins after delivery to Arizona.

5.3.2 Union Pacific (UP)

UP’s “Sunset Corridor” connects Southern California to El Paso, Texas, and on through the State of Texas and Midwest to Chicago. The Sunset Corridor is UP’s principal corridor connecting the Los Angeles Basin, including the Ports of Los Angeles and Long Beach with markets in the Midwest and East. Although the line is currently a mix of double and single track, UP is completing improvements that will eventually double track the Sunset Corridor in its entirety. The line serves communities and economic centers in the southern part of the State of Arizona, including Yuma, Wellton, Gila Bend, Maricopa, Casa Grande, Eloy, Marana, Tucson, Benson, and Willcox. Primary commodities carried on the route are intermodal, coal, metallic ores mined in Arizona, automobiles and general merchandise.

While UP serves Tucson and Pinal County directly through the Sunset Corridor, UP, like BNSF accesses the Phoenix area by a lesser used line, the Phoenix Subdivision. This 125 mile route connects to the Sunset Corridor near Eloy and terminates at a point west of Arlington, west of Phoenix. Maximum operating speed on the line is 60 mph with train activity currently at less than 10 trains per day.

UP also has direct access to markets in Mexico through its Nogales Subdivision that connects Tucson to Nogales, Mexico, as illustrated previously in Figure 5-1. At the US/Mexico border near Nogales, the UP connects with Ferrocarril Mexicano (Ferromex) giving the railroad (and the region) access to the maquiladora industry and Mexico’s industrial centers. Ferromex also serves the Port of Guaymas. The line has a maximum speed of 40 mph. The line to Nogales as well as the connecting Ferromex line is also restricted to lower capacity freight cars, a disadvantage to shippers because of the higher operating cost per ton being transported.

Despite the crossing location at Nogales, currently, the majority of UP’s Mexico traffic flows through the U.S. Ports of Entry at Laredo, Texas (37 percent) and Eagle Pass, Texas (32 percent). Nogales is UP’s third largest border crossing with 12 percent of the traffic.

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5.3.2.1. UP Wellton Branch Line

The Phoenix subdivision includes a line segment, the Wellton branch, that provides another linkage between Phoenix and the Sunset Corridor connecting at Wellton Junction. Besides UP freight trains, Amtrak at one time operated over this line. Currently, the Wellton branch is inactive between Roll and Arlington, although the line is still in place. That portion of the line was removed from operation in 1997 when UP modified its operations to serve Phoenix over the east leg of the Phoenix subdivision.

With the closure of the Wellton branch, freight traffic destined for the Phoenix area is delivered to UP’s yard in Tucson by a mainline train. There it is consolidated with other traffic into a train for delivery to Phoenix. The opposite occurs for traffic originating in Phoenix. The new Red Rock yard is intended to improve and expedite the classification process.

5.3.2.2. UP Multimodal Facilities

Union Pacific serves three transload facilities in the Sun Corridor. Table 5-3 describes the facilities.

Table 5-3 UP Served Transload Facilities

Operator Location Facility Type

Breakbulk products: metals, Freeport Logistics 431 N 47th Avenue, Phoenix paper, canned goods; warehouse storage Breakbulk products, dry bulk Precision Components, Inc. 1820 S 35th Avenue, Phoenix food, dry bulk non-food; warehouse storage 6964 E Century Park Drive, Breakbulk products, produce, Port of Tucson Tucson frozen foods

UP serves one intermodal terminal, located in Wilmot. Train service is four trains per week in each direction between the facility and the railroads Global 4 terminal in Chicago.

5.3.3 Short Line Railroads

The State of Arizona is served by fifteen short line (Class III) railroads. Six short lines have common carrier status and provide service to various shippers on their lines. The other nine smaller railroads are owned by specific customers and provide dedicated service to those customers. Short lines are in most cases the direct link to economic development. This is especially true in Arizona, where the two Class I railroads primarily serve as bridges connecting the west coast to Midwest and eastern destinations. By contrast, many of the short line railroads and the communities in which they are located are seeking new rail related economic development opportunities. The short lines providing service in the Sun Corridor are as follows:

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5.3.3.1. Common Carriers Short Lines

. Arizona and California Railroad (ARZC) - This railroad is a subsidiary of RailAmerica, a major short line railroad holding company. The railroad operates over 190 miles of track, 106 of which are in Arizona. The portion of the railroad operating in the region is a short line segment, traversing the very northwest corner on Maricopa County, however, the railroad provides the most direct rail route between Phoenix and the Los Angeles basin. The ARZC has rights to operate over the BNSF’s Peavine line from Matthie to BNSF’s Mobest Yard in Phoenix. The line operates at a maximum speed of 49 mph. All of the AZRC is capable of handling 286,000 pound rail cars. . Copper Basin Railway (CBRY) - This 55 mile long railroad connects to the UP at Magma. Operating speeds cannot exceed 25 mph. Primary products carried on this line are copper ore, copper concentrate, coal, coke, smelting by-products, petroleum products, plastic resins, and sulfuric acid.

5.3.3.2. Customer Owned Short Lines

. Port of Tucson – This inland port connects to the UP in southeast Tucson and is located off the UP’s Wilmot siding. The port’s facilities are served by its own short line railroad. The five miles of track within the Port facility carries 9,000 to 10,000 rail cars per year. The Port’s access to the UP line is a 3,000 foot siding. . ASARCO RR – This railroad operates within the ASARCO smelter facility near Hayden. Six thousand carloads of copper concentrate are moved yearly over the 2.5 mile long railroad. . Freeport McMoRan Sierrita Mine Industrial Railroad – The 2 mile long railroad carries copper concentrate, copper, and sulfuric acid.

5.4 Condition and Capacity of the Class I Railroad Network

Rail line condition is best summarized by its Federal Rail Administration (FRA) designated Track Classification, which dictates the permissible train speed as listed in Table 5-4.

Table 5-4 FRA Track Classifications

Maximum Freight Track Class Train Speed Excepted Less than 10 mph Class 1 10 mph Class 2 25 mph Class 3 40 mph Class 4 60 mph Class 5 80 mph

As shown in Figure 5-3, freight trains on the UP east-west corridor can operate up to 60 miles per hour (Class 4). BNSF trains have a higher speed limit on its transcontinental

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corridor (Class 5). As described earlier, both the BNSF and UP lines into Phoenix have a maximum speed limit of 40 miles per hour (Class 3). Similarly, UP trains to the Mexican border are also restricted to 40 miles per hour.

Figure 5-3 FRA Track Classification in Arizona

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Another important measure of track condition is the allowable maximum weight of freight cars permitted on the line. As carrying capacity of a freight car increases relative to the “tare weight” of an empty car, the lower the operating cost per ton being transported, and in most instances, an efficiency passed on to shippers as lower freight rates. This has become so important to shippers that many rail users refuse to do business with other rail users if the rail route connecting the two cannot accommodate larger cars. The accepted universal standard today is a Gross Weight on Rail (GWR) representing a combined weight of the rail car and contents of 286,000 pounds, with a rating of 315,000 pounds GWR.

As shown in Figure 5-4, the two transcontinental lines crossing the state can each accommodate the larger cars, as can UP’s line into Phoenix. The BNSF line into Phoenix also meets today’s acceptable standard. The UP line connecting Tucson and Nogales, as well as the Ferromex line are lower rated. By contrast, the U.S. and Mexican rail lines serving the El Paso, Eagle Pass, and Laredo gateways can all accept the more cost- effective, larger cars, which is one reason they serve substantially higher volumes of goods movement.

Figure 5-4 Railroad Gross Weight Capacity in the Southwestern United States and Northern Mexico

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5.5 Proposed Railroad Improvement Projects

The Class I railroads have identified several infrastructure projects in the 2011 Arizona State Rail Plan that could lead to more rail freight opportunities to stimulate Arizona’s economy in the future.

These projects are as follows:

5.5.1 BNSF

. Triple tracking of the Transcon with some possible quadruple tracking along the northern tier of Arizona paralleling the I-40 Corridor. The line is double tracked throughout Arizona. The Transcon has less than 100 miles of single track remaining in Texas. . Consolidate downtown Phoenix classification yards to a new facility in Surprise. The consolidation will improve the efficiency of local operations. Long trains that currently move south from Flagstaff on the line adjacent to Grand Avenue delivering freight cars into Phoenix will now terminate in Surprise with shorter trains used for local distribution. This will permit the exclusion of freight train activity during rush hour periods, which will reduce motor vehicle congestion on Grand Avenue due to grade crossing blockages; the relocation of freight car classification will also permit commuter rail operations . Improvements to the Ennis Spur by constructing a new wye at Grand Avenue. This would provide more efficient switching movements related for serving local industries than exist today.

5.5.2 UP

. Complete double tracking of the Sunset Corridor in southern Arizona. The section east of Tucson is completed but double tracking continues between Tucson and Maricopa in northwest Pinal County. . Expand the classification yard in Buckeye to complement yard activities in downtown Phoenix. Due to lack of space in downtown Phoenix for UP’s rail traffic growth, this yard will allow expansion into the western part of the valley. . Develop the Red Rock Classification yard near Eloy to relieve congestion in the Los Angeles area’s West Colton Yard. This yard will also serve the Sun Corridor’s industries. The Red Rock Yard is also proposed to serve as a regional yard for the Sunset Corridor providing services for Phoenix, various mining operations and traffic between Arizona and Mexico.

The proposed rail initiatives are principally directed towards improving the operations of the railroads with improved service and reduced operating costs as an important outcome. The improvements on the BNSF Transcon and UP’s Sunset Corridor will benefit the container traffic passing through the state as well the general merchandise carload shipments and intermodal container shipments originating or terminating in the study region.

Both the new Surprise (BNSF) and Red Rock Yards (UP) and the expanded Buckeye Yard are operations related improvements that would reduce the costs of the railroads.

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Presumably, local shippers will share in those benefits through improved service or lower costs of rail transportation.

5.6 Railroad Traffic Profile

Commodity flows within the Sun Corridor, including those transported by rail, have been described previously in Section 3.0. While the majority of goods shipped to and from the Sun Corridor travel by truck, rail serves as a key mode, particularly for specific commodity types. Examples include the import of wood and lumber products from Canada to the Sun Corridor, and the export of mineral ores and other mining related raw materials from the Sun Corridor and greater Arizona, both of which almost entirely occur on rail.

The majority of rail shipments occurring in the Sun Corridor are through shipments of cargoes bridging the region east-west between Southern California and the rest of the United States. Commodities being shipped east-west through Arizona by rail range from mining raw materials to finished manufactured goods. Vehicles and vehicle parts represent a primary commodity type being shipped north-south through the Sun Corridor bridging manufacturing and distribution facilities in Mexico and Michigan.

5.6.1 Container/Trailer Traffic and Rail Competitiveness

The ability of the railroads in the Sun Corridor to compete for a greater share of containerized traffic is dictated by the economics of moving freight by rail. Rail transportation is a cost-effective alternative to truck for products that move in large volumes over long distances. But it should be noted that not all freight is suitable to be moved by rail, including fragile items that may be damaged by the shock of shunting rail cars during consolidation activities, or perishable and other time sensitive goods. Significant front-end gathering and back-end distribution costs including terminal operations as well as train-start costs require longer, heavier hauls to produce unit costs that are competitive with trucking.

For many years, 1,000 miles represented the minimum distance that intermodal rail transportation proved to be competitive with trucking. Over time through a combination of improvements in rail operations and increases trucking costs due to increases in energy costs (rail transportation is much more energy efficient than truck in terms of fuel consumption per mile of freight weight moved), the competitive distance has decreased to 550 miles. This distance is expected to decrease even further not only due to anticipated increases in fuel costs, but also due to projected truck driver shortages. More restrictive safety requirements and reductions in permitted hours of service for truck drivers will affect the number of drivers. Phoenix is located approximately 375 miles from the Ports of Los Angeles and Long Beach, while Tucson is approximately 500 miles.

This change in the cost effectiveness of rail making it more competitive over shorter distances is particularly critical for the Sun Corridor based on proximity to Southern California. As economic conditions and trucking related policies continue to change, the ability for railroads to be competitive for moving goods over shorter distances will

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provide opportunities for the Sun Corridor to seek related economic development activities, including intermodal facilities, transload facilities and inland ports. Additionally, capitalizing on the presence of specific supply chains, like the shipment of vehicles and vehicle parts between Mexico and Michigan, to find ways to intercept and add value by optimizing vendor, supplier, manufacturing and distribution capabilities also provides potential goods movement related economic development opportunities for the Sun Corridor

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6.0 TRUCKING AND MOTOR FREIGHT

Every part of the United States has a vital interest in having an efficient motor carrier system. Goods movements across the U.S. rarely complete their journey from origin to destination without relying upon a truck or motor freight carrier for a segment of the trip. A review of the survey findings in Section 2.0 and the existing commodity flow profile in Section 3.0 reiterates the vital importance of trucking and motor freight to the Sun Corridor with the majority of cargo being shipped into and out of the region taking place on trucks.

Figure 6-1 illustrates the distribution of containerized freight by mode based on tonnage shipped nationally in 2009. Figure 6-1 clearly illustrates the significance of trucking and motor freight in goods movement in the U.S. with approximately two-thirds of all commodities moving by truck. This pattern is consistent with the nature of goods movement in the Sun Corridor as described previously, although for many commodity types, trucking represents an even higher share of goods movement in this region.

Figure 6-1 U.S. Modal Distribution of Containerized Freight (for 2009 by Tonnage)

2% 7%

5% Truckload LTL 12% 44% Air Parcel Intermodal Boxcar 14% Other

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6.1 Sun Corridor Highway Network

The highway network provides the underlying infrastructure that supports the movement of goods by truck and therefore represents a critical element of the goods movement system. Conversely, the movement of goods on the highway system creates impacts that can affect traffic flows and the ability to maintain the system. Achieving a balance between the need to facilitate cargo shipments on the highway system

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without excessively burdening other users of the system and the facility owners represents a major challenge in the context of goods movement.

The Arizona Department of Transportation (ADOT) is ultimately responsible for managing the state highway system in Arizona by insuring good physical condition of roadways, as well as planning for and maintaining adequate lane capacity to allow roads to continue serving as vital links for truck freight travel. In 2008, the Arizona Multimodal Freight Analysis Study was conducted in order to support ADOT’s long range transportation planning efforts. This section summarizes major findings of that study within the context of the Sun Corridor, including data on truck freight travel volumes, specific high-volume truck travel corridors, major freight generators, and safety information such as traffic crash locations.

6.1.1 Highway Inventory

There are approximately 55,000 total road miles within Arizona. Interstate Highways comprise 2.1 percent of the total state system mileage, but represent 25.5 percent of the total travel volumes. The highest volumes of truck travel within the state are also on Interstate Highways, specifically Interstates 10, 17, 19, and 40. Interstate 8 is also a significant segment, but has a comparatively lower volume of truck travel. Several factors affect the movement of truck freight on the highway system, including number of roadway lanes, areas of traffic congestion, locations of steep grades and connectivity between major traffic generators (like adjacent metropolitan areas).

6.1.2 Truck Traffic Volumes and Potential Bottlenecks

The Texas Transportation Institute recently estimated that congestion on our nations’ roadways costs 4.2 billion hours of wasted time at an estimated total cost of $78.2 billion per year.2 A study by the American Transportation Research Institute (ATRI) in cooperation with the Federal Highway Administration (FHWA) Office of Freight Management and Operations indicates that three Sun Corridor interchanges ranked among the 100 worst in the nation specifically for goods movement.3 These include the I-10 and I-17 interchange, also known as “The Stack”, in Phoenix (ranked 36), I-10 and I- 19 interchange in Tucson (ranked 78) and the I-10, SR-51 and SR-202 interchange, also known as “The Mini-Stack”, in Phoenix (ranked 86).

Results of the 2007 MAG Travel Time and Travel Speed Study reiterate the ATRI study findings by highlighting the duration of congestion at bottleneck location within the Phoenix metropolitan area. Figures 6-2 and 6-3 illustrate the AM peak and PM peak bottleneck locations and hours of duration of congestion for the freeway system in the MAG region. Various locations along I-10 and I-17, in particular, present challenges for reliable goods movement to, from and through the Sun Corridor.

2 The 2007 Urban Mobility Report; David Schrank and Tim Lomax, Texas Transportation Institute. The Texas A&M University System. September 2007, pgs. 1 and 45. 3 Freight Performance Measures, 2009 Bottleneck Analysis of 100 Freight Significant Highway Locations. American Transportation Research Institute (ATRI) and the Federal Highway Administration (FHWA) Office of Freight Management and Operations

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Figure 6-2 AM Peak Period Freeway Bottleneck Locations in the MAG Region

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Figure 6-3 PM Peak Period Freeway Bottleneck Locations in the MAG Region

ADOT is required to provide traffic count updates annually to the FHWA. Traffic volume data by vehicle type is also collected as part of this initiative, which allows for the calculation of the average annual daily truck volume by road segment. For the Sun Corridor specifically, the Interstate 10 corridor was the busiest freight corridor with daily truck volumes exceeding 10,000 vehicles.

The following figures illustrate daily traffic volumes, including trucks, at three separate locations along I-10 in the Phoenix metropolitan area. These volumes are derived from the ADOT Transportation Data Management System from counts taken in October 2008

The figures indicate that truck volumes along I-10 remain fairly constant throughout the day with volumes matching almost exactly at each location and ranging from around 300 trucks per hour in the early morning to over 900 trucks per hour during mid morning hours. The almost identical truck volumes at both locations are consistent with a high volume of pass through traffic while the relatively consistent volume throughout the day and night is consistent with a strong presence of long haul traffic.

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Figure 6-4 Daily Traffic Volumes, I-10 at Dysart Rd (October 16, 2008)

I‐10 at Dysart Both Directions 20000

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Figure 6-5 Daily Traffic Volumes, I-10 at Broadway (October 8, 2008)

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Truck volumes generally peak during the late morning and through the early afternoon, which differs from the typical traffic flow pattern of a morning and evening directional peak. The peaking of truck traffic in the mid morning and sustained higher volumes

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through the early afternoon is consistent with the influence of local delivery traffic serving businesses within the Sun Corridor.

Interstate 17 to the north of the Phoenix metro area, and State Route 84 to the south of the Phoenix metro area also accommodate relatively high daily truck volumes ranging between 5,000 and 10,000 trucks per day. Figure 6-6 illustrates traffic volumes, including trucks, on I-17 near McDowell. This exhibit demonstrates a similar truck traffic pattern with a mid morning peak and sustained volumes during the early afternoon, although the overall volume of truck traffic is lower, particularly during the overnight hours. This data suggests the absence of long haul and pass through truck traffic on I-17 compared to I-10.

Figure 6-6 Daily Traffic Volumes, I-17 at McDowell (October 8, 2008)

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6.1.3 Freight Generators

Major freight generators are another important consideration when making long term transportation planning decisions. The Global Insight organization provides data for Arizona on manufacturing and warehousing establishments regarding the types of commodities being shipped, as well as estimates of annual tonnage. Table 6-1 shows the top 25 Freight Generators in Arizona by total tonnage (Inbound & Outbound) for 2010. The top four freight generators were Rinkers Materials Corporation, United Dairymen of Arizona, and the Pepsi Bottling Group in Maricopa County, as well as the Dunbar Stone Company in Yavapai County.

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Table 6-1 Top 25 Freight Generators by Total Tonnage

Company Name County Estimated Estimated Estimated Name Inbound Outbound Total Tons Tons Tons 1 Rinker Materials Corp Maricopa 1,281,813 1,269,580 2,551,393 2 Dunbar Stone Co Yavapai 132,492 1,067,556 1,200,049 3 United Dairymen of Arizona Maricopa 449,166 686,649 1,135,816 4 Pepsi Bottling Group Maricopa 68,779 874,287 943,067 5 Honeywell Aerospace Maricopa 820,253 34 820,288 6 Waste Management Inc Maricopa 115,386 682,725 798,112 7 Boeing Co Maricopa 788,773 1,468 790,241 8 Western Refining Wholesale Pima 30,830 748,647 779,478 9 Cemex Maricopa 383,598 354,513 738,112 10 TPAC Maricopa 54,079 639,533 693,613 11 Intel Corp Maricopa 522,365 68,084 590,450 12 BAE Systems Maricopa 50,808 506,141 556,950 13 Graham Packaging Co Maricopa 549,866 3,738 553,605 14 Cal Portland Rillito Plant Pima 136,248 389,512 525,761 15 Dial Corp Maricopa 203,245 305,960 509,205 16 Cemex Maricopa 255,732 236,342 492,075 17 Salt River Materials Group Yavapai 150,503 337,304 487,808 18 Oldcastle Glass Phoenix Maricopa 434,683 35,318 470,001 19 Kalil Bottling Co Pima 64,442 369,646 434,089 20 Ashton Co Inc Pima 407,707 370 408,079 21 Triple S Fence Co Maricopa 33,735 357,330 391,067 22 Western Refining Wholesale Maricopa 43,142 330,141 373,284 23 Sundt Co Inc Pima 345,386 22,275 367,662 24 BP West Coast Products Maricopa 5,590 341,941 347,532 25 Lowe’s Maricopa 97,282 249,493 346,776

These freight generators are distributed across the Sun Corridor and represent a diverse range of industries shipping commodities from raw materials to high value finished goods like electronics and aerospace components. The dispersed nature of these activities and the range of commodities involved do not present a particular opportunity for economic development, although strategies to optimize supply chains and concentrating complementary industries in a common location could enhance the ability of the region to attract addition major shippers and carriers.

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6.1.4 Traffic Crash Locations

Safety considerations, such a traffic crash locations, are also an important aspect in understanding the status of a highway network for future planning. From March 2001 through February 2006, 147,888 traffic crashes occurred on Arizona highways according to the Accident Location Identification Surveillance System (ALISS) Database. Among all reported crashes over the five year period, over two-thirds of the total were collisions of two or more vehicles, with the second most frequent (14.7%), made up of the collision of one vehicle with a fixed object.

Within the Phoenix metropolitan area, all segments of completed freeways and highways have experienced crashes. A large number of crashes have occurred on the segment of I-10 from the SR-51/SR-202 interchange to the west of the Deck Park Tunnel. Several hundred crashes have also occurred on SR-202 just east of the SR- 51 interchange. High numbers of crashes have also taken place on US-60 in the Tempe and west Mesa area, as well as on Interstate 17 between McDowell Road and Indian School Road.

Data specific to truck crashes was also calculated for the four year period between 2001 and 2006, using information from the ALISS and the Highway Performance Management System (HPMS). Two of the segments having the highest average rates are located within the Sun Corridor in central Tucson, at the junctions of I-10 with I-19, and I-10 at SR-77. Another notable area with a high truck crash rate is the Grand Avenue segment of US-60, extending northwest from downtown Phoenix. This particular segment parallels the BNSF railway, and encounters a number of 5-way and 6-way intersections as it traverses an area of significant freight activity. It should also be noted that this portion of the US-60 corridor serves as the primary path for traffic traveling between Phoenix and Las Vegas which is not otherwise served with a direct linkage by an Interstate Highway or other freeway class facility

6.1.5 Key Truck Routes and Trade Corridors

A large share of the freight moving on Arizona’s highway network originates and terminates at destinations outside of Arizona. Freight from locations such as Southern California and Mexico will continue to exhibit significant demand on Arizona’s transportation infrastructure. More so than passenger travel, freight does not necessarily adhere to boundaries, and ADOT must continue to take an active role in creating multi- jurisdictional partnerships in support of corridor-wide freight solutions. The north-south CANAMEX Corridor and east-west I-10 Corridors are particularly notable and essential to the future of the Sun Corridor.

 The CANAMEX Corridor: The term refers to both the concept of physically linking North America’s three nations by a high capacity roadway, as well as the broader economic development concept for encouraging trade among these countries as part of the North American Trade Agreement (NAFTA). The Corridor has been promoted as a means of increasing tourism as well as facilitating the flow of north-south freight traffic. More recently, ADOT and the Nevada

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Department of Transportation, in cooperation with MAG and other regional agencies, has initiated efforts to further evaluate a future proposed Interstate Highway facility that could fulfill the goals of the CANAMEX Corridor.  The National Interstate 10 Freight Corridor: I-10 is a critical national corridor which traverses the southern U.S. east to west across eight states including Arizona. The entire corridor sees significant truck traffic volumes, and was the subject of the first planning effort to examine the benefits of truck only lanes at an interstate level. I-10 was previously named one of five “Corridors of the Future” by the FHWA as a means to prioritize the allocation of funding and streamline agency approvals to recognize the strategic significance of the corridor to all forms of traffic, including goods movement.

6.2 Trucking and Motor Freight Profile

In 2008, trucks hauled over 8.8 billion tons of freight, approximately 68 percent of the total freight tonnage transported in the U.S. There were more than 26 million total trucks licensed to be on the road, with Class 8 (the dual axle heavy haulers) accounting for 2.6 million of the total number (10 percent). Approximately 5.6 million commercial trailers of all types were registered in the U.S. in 2008

The trucking segment of freight transportation was $5.3 billion in 2009. This represented 81.9 percent of the nation’s freight transportation spending. These figures include both for-hire and private carriage. While 2010 saw some recovery from the economic recession of the previous year, truck tonnage in 2009 was down 8.7% from 2008 and was its lowest volume since 2002. The highest tonnage number was achieved in 2005 and represented the last “good” year for most motor carriers in both revenues and net earnings.

While modal shares shifted from truck to rail during the fuel crisis of 2008, a portion of that tonnage remained on intermodal transport as supply chains adjusted to provide more efficient movements and inventory levels adjusted for a slower economy.

In 2008 trucks of all classes consumed 48.2 billion gallons of fuel, including both diesel and gasoline. Approximately 70 percent of fuel consumed by motor carriers is diesel representing approximately 33.9 billion gallons annually. While driver education, governed speeds and idling regulations have helped increase fuel efficiency, newly mandated emissions systems have presented uncertainty as to fuel efficiency as well as engine life and increased costs. Recent legislative changes in several states and specifically in the Los Angeles area provide an indication of the adverse impact that revised air quality and environmental standards can have on trucking with increases in cost and reductions in the available vehicle fleet.

According to the Federal Highway Administration, there were 2,133,000 commercial trucks registered in Arizona in 2007 and 2,124,000 in 2008. This decrease is in contrast with a slight increase nationwide. In 2007 there were 114,000 trailers and semi-trailers registered in the State and 105,000 units registered in 2008. The decision to register vehicles in a particular state is often based upon tax and financial considerations. One

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concern expressed by truckers is that Arizona has the second highest trailer registration fee in the U.S. While truck and trailer registrations are not necessarily an indication of capacity or service in the state, it has some bearing on trailer availability.

International motor carrier transport is an important segment of the trucking industry and certainly plays a major role in transport in the Sun Corridor. In 2009, trucks hauled 68 percent goods between the U.S. and Mexico measured by value. By comparison, trucks transported 58 percent of the value of trade between the U.S. and Canada that same year. The Sun Corridor is directly affected by this trade. In 2009, Arizona received 3.8 percent of the imports from Mexico and exported 4.4 percent of the goods to Mexico.

The results of the shipper surveys and interviews identified four significant issue that potentially challenge the motor carrier industry: driver shortages, capacity restraints, fuel costs, and regulatory issues. Each will have a major impact on truck transportation in coming years, both nationally and in the Sun Corridor.

6.2.1 Driver Availability

In 2004 and 2005 the shortage of truck drivers, both long haul and short haul, was severe. These were high demand years for the U.S. motor carrier industry. Driver turnover exceeded 125 percent at many larger carriers as drivers were recruited from competing carriers. The shortage reversed itself after 2005 due to a reduction products being shipped, and an abundance of drivers as the motor carrier industry attracted drivers possessing Commercial Drivers Licenses that had been employed by other industries hurt by the slow economy.

Notwithstanding the recent economic recession, driver shortages are beginning to reappear. Moreover, the current driver shortages now unfolding is projected to be much more severe with several industry analysts projecting a shortfall of as many as 400,000 drivers by the end of 2012, assuming the economic recovery continues.

There are several reasons for the projected shortage. One contributor is recent federal regulations such as the Federal Motor Carrier Safety Administration’s Comprehensive Safety Accountability program, known as CSA-2010. According to motor carrier industry officials, the legislation will cause some existing drivers to become disqualified and others will be rendered not hirable due more restrictive driver safety requirements.

Changes have been made to hours of service regulations governing driving times and rest periods. Reductions in permitted driving times will increase the number of drivers required to handle current freight volumes and will compound shortages as economic recovery increases the demand for trucking.

Driver attrition will affect driver availability as the present driver population ages and drivers retire. Based on 2000 census data, an estimated one in six truck drivers is currently over the age of 55; 43 percent of all truck drivers are at least 45 years of age; and only six percent are under the age of 35. Additionally, many drivers laid off during the recent economic recession have turned to other professions. This is especially true for many owner/operators who lost their investments and were forced to enter other

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careers. In addition, many long-haul drivers have turned to local, non-commercial driving positions, which further exacerbates the already critical nature of the shortage in long haul drivers.

According to the Commercial Vehicle Training Association, the average age of new entrants into the truck load segment of the industry is currently 41 years of age. In1979 this figure was 26 years of age. In the less-than truck load segment of the industry, the average age of a driver is 56. The pool of people available to replace the retirees will drop to a half million from 2.5 million people in the next decade.

One solution to the driver shortage and retention challenge is for carriers and shippers to work closely to create a more “driver friendly” environment to improve driver productivity. Shippers can make loading and unloading more efficient as drivers are typically paid for miles driven and not for the time waiting for shipments to be loaded or unloaded which lowers the driver’s earnings capability. Coordination of incoming and outgoing loads can make drivers and carriers more productive.

In addition, carriers also must define an appealing career path for new drivers. Lifestyle issues, such as more time at home, regular routes, and rewarded compensation are being made available by several carriers as drivers build credibility and experience.

6.2.2 Limited Capacity

The full truck load segment experienced capacity reductions in 2010 that continued through early 2011. As the economy slowed and freight demand decreased somewhat in the second quarter of 2011, capacity still remained tight mostly due to smaller, unprofitable carriers going out of business or limiting their routes to those with significant traffic balance. Many shippers rushed to lock-in capacity through longer term contracts with higher rates and guaranteed volumes. Most every carrier issued general rate increases and both truck load and LTL carriers announcing both early and mid-year general rate increases.

In many cases, shippers have increasingly turned to private fleets to assure capacity. Whether owned or leased by the shipper, or outsourced to dedicated contract providers, the industry experienced more and more usage of private carriage to assure capacity and a predictable rate structure.

Several large carriers interviewed indicated they would not be increasing their capacity due to uncertainty about regulatory changes as well as concerns about the re-slowing of the economy. Many of these carriers now have unmanned trucks due to the driver shortage and others are reluctant to attempt borrowing from their financial institutions due to credit constraints. Most carriers are not adding trucks to their fleets to increase capacity.

According to ATA projections, the trucking industry will be short the equivalent of 400,000 units of physical truck capacity in 2012 given even a continued modest recovery in the U.S. economy. The driver shortage is expected to add an additional shortage equivalent to 150,000 units by September 2012. CSA-2010, described earlier,

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will introduce an additional 250,000 equivalent-units as drivers fail to comply with the newer regulations and are eliminated from the industry.

The trucking industry response is for rates to rise as demand for capacity exceeds supply. Truck rates have risen on average nearly 19 percent in 2011 compared to 2010. This will cause a shift towards rail intermodal where the use of rail is feasible for the shipper. Even smaller Third Party Logistics firms are adding Intermodal services to their offering in order to control costs, service reliability and predictability.

Many motor carriers are also using owner/operators to fill the shortages in drivers and equipment. While many of these operators were lost when the demand for trucking declined beginning in late 2007, these drivers are increasingly being seen as an alternative to not only finding and hiring permanent drivers, but to adding power and trailer capacity to a fleet. Some operators that are compensated on a percentage of the freight bill already are experiencing increased revenues as rates have risen. Many carriers are attempting to ”lease” the owner/operator driver and unit for a set period of time (up to three years in some cases) to control the capacity and the costs associated with the owner/operator.

6.2.3 Increasing Fuel Costs

Diesel fuel prices fell to a four year national average low of $2.017 per gallon on March 16, 2009. By comparison, they reached a record national average high of $3.803 per gallon in 2008 and have risen to as high as $3.510 in 2011. The motor carrier industry spent $101.2 billion for fuel in 2010, up from $79.5 in 2009.

Uncertainty due to volatility in fuel costs adversely affects carriers and shippers alike. Motor carriers implemented fuel surcharge that add to the base freight charges to reflect weekly changes in diesel fuel costs. The precise fuel surcharge formula varies from carrier-to-carrier and from shipper to shipper but all include a set “base price per gallon” that escalates or decreases as the price for a gallon of diesel fuel changes.

Carriers face the challenge of matching their fuel surcharges to prices they are paying for fuel whether purchased in bulk, at the pump at truck stops or other fueling alternatives. Fuel costs are immediate to most carriers, especially many smaller carriers and owner/operators. Fuel bills are typically paid weekly while many freight bills are not paid until 30 or more days from delivery of the freight. This cash flow delay often will cause an otherwise profitable carrier to become burdened to the point of actually going out of business as operating credit becomes more difficult to sustain.

Alternative fuel sources for Class 8 tractors are now being offered, although new alternatives technologies have not yet proved to be as effective as diesel engines to move a 90,000 lb. load from a dead start and then sustain the legal speed limit. The torque necessary is most practically provided by diesel power, at least at the present time.

Alternatives are being studied and Liquefied Natural Gas (LNG) offers a promising alternative especially for shorter-haul fleets. While the present cost of LNG is low, the full operating cost of the LNG engine for a Class 8 tractor is higher than the traditional

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diesel powered motor, with maintenance and operational costs being unpredictable. Besides the power train costs, a major obstacle is the lack of regular fueling facilities for long haul routes. However, one truck stop chain has nearly 150 LNG fueling locations in its immediate plans. The future of LNG powered tractors may become proven and dependable as more carriers see this as a viable option, the technology continues to be improved, and additional fueling locations improve availability.

There also has been discussion of “dual fuel” vehicles combining two power sources, LNG and diesel. A recent study did not find a great deal of interest in this power source for shippers and carriers in the U.S., although evidence from countries like Australia, where it is increasing being implemented, indicates that the technology can be effective at lowering fuel costs. As technology advances and this power train becomes more widely tested, it could become an accepted alternative for shippers and carriers in the U.S.

6.2.4 Regulatory Issues

In late 2010, CSA-2010 became reality. This regulation changed the way motor carriers conduct their operations, especially in the area of safety. Driver records now become the mechanism to monitor safe driver performance. For drivers with moving violations, chargeable accidents, multiple licenses, and poor equipment, the regulation will prevent them from driving. Furthermore, while safe truck operation is universally demanded, the strict regulation will likely have a negative impact on the ability to attract new drivers to come into the industry. A recent survey of 300 fleet operators showed that that three out of every four respondents believe that CSA-2010 would reduce their driver pool by three to eight percent.

The Federal Motor Carrier Safety Administration is also proposing changes to the “hours of service” regulations that mandate how many hours per day a driver can drive, and the time definition of other times for waiting and rest and times between runs. The proposed changes would reduce the permissible driving window from 11 hours to 10 hours (with additional discussion of lowering the driving window to as low as 8 hours). Electronic on-board recorders would be used to track driver times.

Reduced driving time will limit driver productivity and earnings capacity by reducing the total number of miles a driver could travel in one day, thereby potentially discouraging drivers from working in the industry affecting driver supply. The situation would be exacerbated by the requirement for more drivers to move the loads due to the loss of productivity from the reduction in individual driver operating times.

A California Air Resources Board (CARB) attempt at controlling the emissions of drayage trucks serving the Ports of Los Angeles and Long Beach has created uncertainty over the potential for more stringent air quality standards related to trucks. The impact of such measures will likely have repercussions in the Sun Corridor because of the quantities of imported goods being moved from the port to this region by the affected carriers. A shortage in capacity to move import/export loads to/from the ports could potentially be very disruptive to supply chain operations. However, this situation may also provide an opportunity as shippers and carriers seek alternatives to bypass these

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regulatory requirements in California. Restrictive air quality regulations in Los Angeles could make it more feasible for carriers to shuttle port shipments by rail to neighboring states, specifically Arizona, for transload and distribution by truck providing the potential for economic development.

Emissions control legislation is evolving and may come from state initiatives in heavily polluted areas or from nationally mandated EPA regulations. The uncertainty of the initial cost and ongoing maintenance of these requirements makes carriers reluctant to embrace them until mandated by law to do so. The affect on fuel mileage, engine life and maintenance costs are difficult to project at this time.

6.3 Truck Load Rates

Truck load rates, like air fares, are calculated based on a number of factors including labor costs, transportation costs and fuel costs, but are most influenced by the relative capacity, demand and shipper competition with a given corridor. A comparison of truck load rates for goods movement to and from the Phoenix metropolitan area highlights the imbalance of imports to the region compared to exports from the region, and the impact this phenomena has on trucking costs. The comparison also highlights the influence of more readily available rail capacity in the Tucson area, and the influence this has to create competition and lower freight rates. To a lesser extent, this review of freight rates also highlights the influence of locally based shippers through the use of discount pricing and incentives.

Figures 6-7 and 6-8 illustrate trucking rates to and from the Sun Corridor, respectively, based on the North American Truck Load Rate Index. The figures indicate the premium that is paid to ship goods to the Phoenix metropolitan area from major North American manufacturing and transportation hubs, like Los Angeles, Chicago, Indianapolis, Louisville, Little Rock, Dallas and Houston, where demand is greatest for the available trucking capacity. In comparison, the rates to Tucson are generally lower for these same origins reflecting a combination of lower demand and greater direct competition for the presence of the UP Sunset Corridor.

By contrast, the rates for shipping from Phoenix to the same major hubs tends to be lowest, reflecting completion between shippers to secure loads for trucks that would otherwise deadhead back empty to these destinations after completing deliveries to Phoenix. This presents a significant opportunity to manufactures and suppliers that locate in the Sun Corridor due to the ability to secure lower rates for exporting their goods from this region to these markets.

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Figure 6-7 Truck Freight Rates to the Sun Corridor

Figure 6-8 Truck Freight Rates from the Sun Corridor

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As described previously, the major goods movement corridor for the Sun Corridor is Southern California. This finding is also reflected based upon freight bill counts from the June 2011 version of the North American Truck Load Rate Index. These data show the major inbound lane to the Sun Corridor being Los Angeles and the adjacent metropolitan area extending as far east as the distribution center-intense Inland Empire. The outbound back to Southern California is also one of the largest outbound areas as trucks return to origin.

Table 6-2 summarizes the latest freight rate data on the Southern California to Sun Corridor lanes based on the North American Truck Load Rate Index.

Table 6-2 Truck Load Rates for Goods Movement between Southern California and the Sun Corridor (for June 2011 based on North American Truck Load Rate Index)

Southern California to Sun Corridor

Lowest rate per mile $ 2.11 Average per mile $ 2.78 Highest rate per mile $ 3.12

Lowest Flat Rate $ 691 Average Flat rate $ 721 Highest Flat rate $ 933

Sun Corridor to Southern California

Lowest rate per mile $ 1.04 Average per mile $ 1.22 Highest rate per mile $ 1.36

Lowest Flat Rate $ 365 Average Flat rate $ 401 Highest Flat rate $ 473

The dramatic difference in import rates compared to export rates can again be seen in the Truck Load Rate data for the Southern California/Sun Corridor shipping lane. Consistent with the explanation provided previously, the difference in this shipping lane is due specifically to the predominance of import traffic coming through the Ports of Los Angeles and Long Beach, and from distribution centers in the same area, to serve consumption based economy of the Sun Corridor.

6.4 Arizona Ports of Entry

The Sun Corridor is served by three highway ports of entry on the U.S. international border with Mexico: SR-85 at Lukeville near Sonoyta, Sonora, SR-286 at Sasabe, and I-19 at Nogales adjacent to Nogales, Sonora. Arizona is further served by an additional three highway ports of entry at San Luis near Yuma and San Luis Rio Colorado, Sonora, Naco near Bisbee, and Douglas adjacent to Agua Prieta, Sonora. As described in Section 4.0, a substantial amount of goods are shipped across the border by trucks using these various ports of entry.

A key constraint to the ability to accommodate goods movement across the U.S./Mexico border at the Arizona ports of entry are the hours of operation of the U.S. Customs and Border Protection inspection facilities. Table 6-3 summarizes the

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operational hours at the respective border crossings, as provided by the U.S. Customs and Border Protection.

Table 6-3 Arizona Ports of Entry Hours of Operation

Port of Entry Operational Hours Weekday Weekend Passenger Cargo Passenger Cargo Douglas 24 Hrs a Day 9:00 AM-5:00 PM 24 Hrs a Day - Monday -Thursday; 9:00 AM-6:00 PM Friday Naco 24 Hrs a Day 9:00 AM-5:00 PM 24 Hrs a Day -

Lukeville 6:00 AM-12:00 PM 8:00 AM-4:00 PM 6:00 AM-12:00 PM 8:00 AM-4:00 PM, Saturday Nogales 6:00 AM-10:00 PM 8:00 AM-7:00 PM 6:00 AM-10:00 PM 8:00 AM-5:00 PM, Saturday San Luis 24 Hrs a Day 9:00 AM-5:00 PM 24 Hrs a Day 9:00 AM-2:00 PM, Saturday Sasabe 8:00 AM-8:00 PM 8:00 AM-8:00 PM 8:00 AM-8:00 PM 8:00 AM-8:00 PM

The hours of operation for cargo inspection at most Arizona highway ports of entry are limited to daytime hours Monday to Saturday. By contrast, hours of operation for cargo inspections at key border crossings in California and Texas are extended as late as 10:00 PM or midnight in some locations including Sunday hours, and are provided 24 hours a day at ports of entry at Laredo, Texas and Presidio, Texas.

Extending service hours at highway ports of entry can increase the effective capacity for goods to be inspected and moved into the U.S. allowing for greater flexibility and productivity for shippers and carriers, and their drivers bring trucks across the border at these locations. Extending the hours of operations at Sun Corridor ports of entry would potentially make these locations more attractive to shippers and carriers importing goods into the U.S. and therefore could result in the opportunity for additional associated economic development in region. Furthermore, as indicated in the shipper interview findings, the provision of Foreign Trade Zones within the Sun Corridor, in addition to improvements at the Arizona ports of entry, could enhance the attractiveness of the region for importers from Mexico by further streamlining the process of bringing goods across the U.S./Mexico border.

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7.0 AIR CARGO

The Sun Corridor is home to several airports with existing air freight and air parcel services and potential for further expansion. These airports each play an important role the regional economy. This section presents an overview of the national trends and forecasts of air cargo and air parcel activity and a summary of the airport assets located in the region, as well as a discussion of the trends related to air freight in the region.

7.1 Overview of the Air Cargo Industry

The air freight industry can be classified into different categories of freight moved, carriers and services provided.

7.1.1 Types of Air Cargo

Air cargo is generally categorized into one of two types:

 Air Freight is considered to be shipments weighing greater than 150 pounds that are typically of a time sensitive or high value nature (aircraft parts and fresh food products are examples of air freight that are prevalent in the Sun Corridor).  Air Parcel (or express) are shipments of less than 150 pounds that are typically provided by courier services that include commonly known carriers such as FedEx, UPS, DHL and the U.S. Postal Service.

Because of the weight and size, air freight tends to create truck movements with larger truck sizes (such as semi trailers) from contract carriers (truckers) for both local and regional pick-ups and deliveries. Air parcel tends to create more delivery van and smaller semi truck moves in a local area and larger semi-truck moves on a regional basis.

7.1.2 Types of Carriers

Air cargo carriers are generally identified in one of three categories:

 Integrated Express Carriers are companies that provide services by operating a dedicated fleet of cargo aircraft and trucking assets. Prominent examples of integrated express carriers are FedEx, UPS, DHL, and to a certain extent, the U.S. Postal Service.  All-Cargo Carriers operate large cargo aircraft between major airports, especially between large population centers, and international origin-destination pairs. All-cargo carriers handle only about 15 percent of the domestic U.S. market for air freight and air parcels. Prominent examples of all-cargo carriers in the Arizona market include Airnet and AmeriFlight.  Scheduled Commercial Passenger Carriers transport air freight and air parcels in the cargo hold of scheduled passenger airliners. Commercial airlines that serve

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Arizona airports, including both domestic carriers like Tempe based US Airways and Phoenix hubbed Southwest Airlines, and international carriers like British Airways, carry a large amount of air cargo, also referred to as “belly cargo” Currently about 25 percent of all air cargo in the U.S. is transported on commercial passenger airline flights, according to the Transportation Security Administration (TSA), although this share is down significantly from the near 50 percent share observed in 2009, mostly due to the new TSA security cargo screening requirements for belly cargo on all domestic flights.

7.1.3 Types of Services

Air cargo shipments are generally categorized as one of three types of services:

 Integrated Express Service, like that offered by FedEx and UPS, provides door-to- door transportation service almost exclusively for air parcels. The integration lies in the fact that a single company manages the entire shipment, from pick-up to delivery, using truck, air, rail or a combination of modes.  Freight Forwarding Service typically involves brokers that do not directly own or operate aircraft or trucks, but rather serve as an intermediary between the customer, shipper and carrier(s) of freight. Freight forwarders typically do not serve the air parcel market. Freight Forwarding Services typically include TSA security screening and documentation services, and consolidation of packages to expedite shipments and secure the most favorable shipping rates available. Freight forwarders are often involved as an agent in the shipment, arranging for pick-up and/or delivery via ground transportation.  Airport-to-Airport Service is common for all-cargo and scheduled commercial passenger carriers, which offer only transport between airports. Shippers must drop-off or pick-up cargo at the airport. This type of service is predominantly air parcel related.

Trends in the types of carriers and services change quickly in response to market demand and competition. For example, some integrated express carriers have developed two- and three-day delivery options, rather than just overnight “express” options for customers. Carriers are expanding their service offerings to include any shipment of any kind on all modes (similar to a “third party logistics provider, or 3PL).

Airport cargo “hubs” generate greater traffic volume, and generate greater levels of economic activity related to sorting operations, deliveries and other freight services. Hubs serve as centers for air freight sorting, most classically represented by integrated express carrier hubs which receive and sort air freight overnight, and fly out to various locations the next day for overnight delivery. Typically freight forwarders also congregate their assets near these types of facilities to accommodate warehousing and freight services required to move cargo by air. Phoenix and Tucson are the only two “hubs” currently operating in Arizona with several hubs in Southern California.

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7.2 Air Cargo Market Trends

According to the Air Cargo Management Group (ACMG), the worldwide market for air freight and air parcel was approximately $120 billion in 2009, of which the U.S. represents a one quarter share ($30 billion). The global market is equally split between air cargo and air parcel, while the U.S. market is predominately air parcel shipments.

In ten years prior to the economic recession in 2009, world air cargo traffic increased at an annual growth rate of 1.9% annually and according to the Boeing World Air Cargo Forecast 2010-2011 (Boeing Forecast) as presented in Table 7-1. Based on this forecast, air cargo is projected to increase at an annual rate of 5.9% from 2009 to 2029. For the same time period, the Airbus Industrie Global Market Forecast 2009-2028 (Airbus Forecast), predicts that air cargo (freight ton kilometers) will increase 5.2%. These two forecasts are closely tied to the world economic growth forecast of 3.2%, which is consistent with the long term historical trend for air cargo of approximately two times economic growth. While Boeing and Airbus both have robust air cargo growth in the longer term (triple activity in 2029 as 2009), the near term forecast growth is approximately 3.5% from 2009 to 2014 and is more conservative, indicating the same growth trend in the world economy in the near term.

Table 7-1 Air Cargo Growth Rates by Market

Region Historical Forecast Growth Growth

(1999-2009) (2009-2029)

World 1.9% 5.9% Domestic China 13.1% 9.2% Intra-Asia 3.4% 7.9% Asia-North America 1.4% 6.7% Europe-Asia 4.1% 6.6% South Asia-Europe 4.1% 6.5% Middle East-Europe 6.5% 6.0% Latin America-North America -0.7% 5.7% Latin America-Europe 2.5% 5.6% Europe-North America -1.5% 4.2% Intra-Europe 0.1% 3.6% Intra-North America -2.5% 3.0% Source: Boeing World Air Cargo Forecast 2010-2011

Table 7-1 presents a comparison of the historical and forecast air cargo growth rates by world market from the Boeing Forecast. As shown, the trade lanes that are expected to see the greatest growth from 2009 to 2029 are Domestic China, Intra-Asia, and Asia- North America. Intra-North America is forecast to grow at the lowest rate of 3.0%, which is primarily due to the maturity of the market, the dominance of the U.S. integrated express freight market, and the increased use of trucks due to changes in the passenger air carrier fleet resulting in the shift to smaller regional jets.

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According to the Federal Aviation Administration’s (FAA’s) annual forecast published in February 2011, revenue ton miles of U.S. carriers are forecast to increase at an average of 4.7% from 2010 to 2031, which is nearly double the growth rate that Boeing forecasts for Intra-North America. This difference in forecast growth rates is likely due to the inclusion of U.S. domestic passenger carriers cargo to and from international markets, which are predicted to have higher growth rates than the Intra-North America market.

Air parcel shipments tend to remain somewhat consistent over the course of the year with a pronounced peaking occurring during the end of year holiday season. The air freight portion, however, tends to break into two segments:

 Planned Shipments are typically time sensitive cargo that needs to be to market in an expeditious manner. Fashion apparel, frozen fish, new electronics or toys are some of the items in this category. Besides the expeditious service, inventory carrying costs are also an important aspect as in many cases the reduced inventory carrying costs will go a long way in countering the increased costs for air freight. These shipments typically remain consistent throughout the year reflecting their planned and often regularly scheduled nature.  Unplanned Shipments are those shipments that occur either from an emergency situation (natural disaster, major equipment breakdown, unusually harsh weather conditions, etc) or from other unplanned events that affect the timely (and planned) shipment of goods and materials. In many cases, in order to meet customer and consumer demands, air freight is used to ensure accelerated delivery or replenishment of stock. While data for this type of shipment is not readily obtainable due to the sporadic nature of such shipments, it is estimated that unplanned shipments make up approximately 20% to 25% of all air freight shipments. These shipments are inconsistent but tend to be most prevalent during holidays.

7.3 Air Cargo Industry in the Sun Corridor

Most airports with scheduled commercial passenger service have some level of freight activity in the form of belly cargo. Freight forwarders are generally active in every market, and integrated express services like UPS and FedEx serve all major airports within the Sun Corridor. The major difference in the services between airports is the frequency of service and the size of aircraft utilized.

Southern California, mostly because of the regional population, is most attractive to the air cargo industry for hubs serving the southern US, Mexican and Pacific Rim markets. With varying degrees of success, airports (and those associated with moving air parcel and freight) in the Sun Corridor have worked to establish regional air cargo hubs, primarily for their economic development benefits.

Table 7-2 shows the busiest air cargo airports in North America, sorted by volume. Memphis and Louisville represent some of the largest air cargo hubs due to major

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operations of FedEx and UPS, respectively. Anchorage’s geographic location is advantageous for stopover cargo originating in or destined for Northern and Northeastern Asia. Anchorage also serves as a consolidation point and refueling hub for air cargo carriers.

Table 7-2 North American Airport Cargo Traffic (for 2010 by volume in metric tons) Rank City (Airport Code) Total Cargo Service Hub 1 Memphis, TN (MEM) 3,916,811 FedEx*, DL 2 Anchorage, AK (ANC) ** 2,646,695 AS 3 Louisville, KY (SDF) 2,166,656 UPS* 4 Miami, FL (MIA) 1,835,797 AA 5 Los Angeles, CA (LAX) 1,747,629 AA, AS, DL, UA, International 6 Chicago (O’Hare), IL (ORD) 1,376,552 AA, UA*, International 7 New York (Kennedy), NY (JFK) 1,344,126 AA, B6*, DL, International 8 Indianapolis, IN (IND) 1,012,589 FedEx 9 Newark, NJ (EWR) 855,594 FedEx, UA*** 10 Atlanta, GA (ATL) 659,129 DL*, WN**** 11 Dallas/Fort Worth, TX (DFW) 645,426 FedEx, UPS, AA* 12 Oakland, CA (OAK) 510,947 FedEx, B6, WN 13 Toronto, ON (YYZ) 482,486 FedEx, AC*, WS, International 14 San Francisco, CA (SFO) 426,725 AA, AS, UA, VX*, International 15 Houston (Bush), TX (IAH) 423,483 UA*/***, International 16 Philadelphia, PA (PHL) 419,702 UPS, US, WN 17 Cincinnati, OH (CVG) 371,297 DHL*, DL 18 Ontario, CA (ONT) 355,932 UPS, WN 19 Washington (Dulles), DC (IAD) 332,275 B6, UA 20 Seattle, WA (SEA) 283,425 AS* 21 Boston, MA (BOS) 259,539 AA, B6 22 Toledo, OH (TOL) 254,794 DB Schenker* 23 Denver, CO (DEN) 251,777 F9*, UA, ZK* 24 Phoenix, AZ (PHX) 250,704 US*, WN 25 Vancouver, BC (YVR) 228,387 Cargojet, AC, International 26 Minneapolis, MN (MSP) 211,691 DL, SY* 27 Detroit, MI (DTW) 193,344 DL, NK 28 Portland, OR (PDX) 190,117 AS 29 Winnipeg, MB (YWG) 173,034 Cargojet, AC 30 Salt Lake City, UT (SLC) 145,412 DL Source: Airport Council International (ACI) North America, 2010. Notes: Airline Codes: * Denotes the carriers’ primary hub city AA – American Airlines SY – Sun Country Airlines ** Includes transit freight AC – Air Canada UA – United Airlines *** Formerly Continental Airlines AS – Alaska Airlines/Horizon Airlines VX – Virgin America Airlines **** Formerly AirTran Airways B6 – Jet Blue Airlines WN – Southwest Airlines Red typeface denotes Southwest US competitive region DL – Delta Airlines WS – WestJet International designates international gateway airport F9 – Frontier Airlines ZK – Great Lakes Airlines

NK – Spirit Airlines

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In the southwest region, Los Angeles emerges as the leader of air cargo facilities primarily due to its geographic location as an international gateway to the U.S. from the Pacific Rim and Mexico, and proximity to very large population centers, distribution and logistics facilities. Phoenix Sky Harbor International Airport ranks 24th handling volumes comparable to Denver and Vancouver.

7.3.1 Sun Corridor Air Cargo Assets

Within the Sun Corridor, four airports of varying sizes have cargo handling ability, including belly cargo or all-cargo. Table 7-3 provides a list of these airport facilities and their runway dimensions. As shown, these airports each have a runway with sufficient length to accommodate take off and landings for a smaller Integrated Express Carrier or All-Cargo Carrier jet such as a Boeing 727 aircraft (minimum runway length of 5,800 feet). Three airports have the ability to accommodate larger freighter aircraft that would likely be flown by an Integrated Express Carrier or All-Cargo Carrier utilizing an airport facility for a hub operation, such as a McDonnell Douglas MD-10 or Boeing 747 aircraft (runway length greater than 9,800 feet). Such a hub operation would include package sorting facilities rather than straight transfer of packages to trucks.

Table 7-3 Sun Corridor Air Cargo Facilities

Airport Facility County Longest Runway Length x Width (feet)

Phoenix Sky Harbor International Airport (PHX) Maricopa 11,490 x 150 Tucson International Airport (TUS) Pima 10,996 x 150 Phoenix-Mesa Gateway Airport (IWA) Maricopa 10,401 x 150 Marana Pinal Airpark (MZJ) Pinal 6,849 x 150

Figure 7-1 illustrates various airport facilities within the State of Arizona. In addition to the Sun Corridor facilities described in Table 7-3, nine additional airports across the state have facilities suitable to handle air parcel services. In addition to Phoenix Sky Harbor International Airport (PHX) and Tucson International Airport (TUS), Yuma International Airport (YUM) has facilities capable of handling the largest cargo aircraft with a runway exceeding 13,000 feet. Flagstaff Pulliam Airport (FLG), Show Low Regional Airport (SOW) and Page Municipal Airport (PGA) also have facilities capable of accommodating smaller cargo jets, with runways lengths exceeding 5,900 feet.

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Figure 7-1 Air Cargo and Air Parcel Facilities within Arizona

In addition to the runway length, factors that would influence the selection of one of these airports as a hub for air cargo could include air traffic control during night time hours, available land on or surrounding the airport for sorting facilities, roadway access to the interstate system and environmental concerns such as noise control.

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The following bullets provide a brief description of current cargo shipments and the potential of air cargo hub operations at the four airports operating air freight service in the Sun Corridor.

 Phoenix Sky Harbor International Airport (PHX) is located about 3 miles southeast of the central business district of the City of Phoenix. PHX’s cargo terminal is located on the southwestern end of the airfield. As stated in the airport’s statistics report, in 2010 the total cargo and air parcel operations represented 276,338 standard tons, which is a 12.1% increase compared to 2009. About 20% of the airport’s freight is shipped through belly cargo in commercial airliners while 80% is shipped via several cargo airlines, such as ABX Air, Astar Air Cargo, FedEx, and UPS. The company Ameriflight uses the airport as a hub. Officials do not intend to build additional cargo facilities, instead preferring expansion to Phoenix-Mesa Gateway to serve the metropolitan area. The airport is a designated Port of Entry and Service Port, and as one of the busiest airports in the U.S. is categorized with Class B airspace.  Tucson International Airport (TUS) is located about six miles south of the central business district of the City of Tucson. The airport has two air cargo facilities located east of the main terminal. The main carriers providing air freight services at the Tucson International Airport are FedEx, UPS, Sierra Pacific Airlines Matheson, and Flight Extenders, Inc. As stated in the airport’s statistics report, in 2010 the total freight and air parcel operations represented 34,507 standard tons. The airport is a designated Port of Entry and is categorized with Class C airspace typical of airports of moderate size and importance.  Phoenix-Mesa Gateway (IWA) is located in the City of Mesa, southeast of the City of Phoenix. Currently, air cargo service consists of unscheduled charter flights. The 2009 Airport Master Plan forecasts that in the short term, Phoenix-Mesa Gateway Airport will host daily cargo service by two feeder aircraft and one jet freighter the size of a Boeing 727. The airport is a designated Port of Entry as a User Fee Airport with a fee charged for use of Customs and Border Protection services. IWA is categorized as Class D airspace signifying airport tower controlled airspace.  Marana Pinal Airpark (MZJ) is located northwest of the City of Marana, near Interstate 10, UP railway and a proposed UP multimodal facility. Currently, freight shipments are unscheduled, although the airport does serve a unique role as an airplane boneyard for former commercial aircraft indicating facilities of sufficient size exist to accommodate at least smaller air cargo jets. The airpark is not a designated Port of Entry, and is categorized as Class E airspace indicating the absence of a manned airport control tower.

Currently, only Class B PHX and Class C TUS are the only airports in the region with scheduled air cargo service. Figure 7-2 presents a comparison of the air cargo activity

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from 2005 to 2010 at PHX and TUS, including weight of air mail, air express, and air freight, in revenue ton miles for U.S. commercial carriers. Figure 7-2 clearly indicates the effects of the recent economic recession on air cargo shipments between 2005 and 2009, particularly at PHX, and the modest increase in cargo shipments during the last year as the economy recovers.

Figure 7-2 Air Cargo Activity for PHX and TUS

350,000

300,000

250,000

200,000 Tons

PHX 150,000

U.S. TUS 100,000

50,000

0 2005 2006 2007 2008 2009 2010

Source: Phoenix Sky Harbor International Airport; Tucson International Airport; July 2011

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8.0 FREIGHT PROFILE SUMMARY AND PRELIMINARY RECOMMENDATIONS

The following section presents a brief summary of the Freight Profile findings based on the shipper and carrier survey and interview results, the review of shipper and commodity flow data, and the review of existing freight infrastructure within the Sun Corridor. This information will be utilized during subsequent tasks to recommend specific freight related improvements within the region, and to identify related economic development activity potential.

8.1 Supply Chain

. Trucking is the most prevalent mode of cargo transport in to and out of the Sun Corridor, including movements in to and out of Mexico . Most distribution and logistical processes are occurring in Southern California with the delivery of mostly finished consumer goods coming to the Sun Corridor . Any cargo diverted from Southern California ports through the Panama Canal will not increase activity in the Sun Corridor . Rail is not used for Sun Corridor delivery from Southern California. The construction of rail ramps for rail traffic to the U.S. Midwest and East Coast (and the interior of Mexico) must allow for competitive, dual BNSF/UP access to provide any substantial potential for adding value in the region. . There is not a balanced flow of inbound vs. outbound cargo either on truck or on rail. This causes significant cost differentials for cargo shipments to and from the Sun Corridor if the return trip is not hauling cargo. . Shippers have indicated a desire to better optimize vendor, supplier and manufacturing as part of their supply chain

8.2 Legislative/Policy

. California legislative activities are not predictable and changes encourage a shift of cargo away from the Sothern California port gateway. Shippers express major concerns over AB 32 (California Assembly Bill for Global Warming Solutions Act of 2008) which has directly led to the clean truck and green terminal programs at the Port of Los Angeles and Long Beach. Shippers perceive these changes as cost increases on cargo movement through the ports. . Reports of Mexican border violence cause firms to “slow-down” investment in border activities in Mexico. During this period, the Sun Corridor could relieve investment in Mexico for value-added services in Arizona. . Shippers did not identify Arizona legislation as impediments to goods movement in the Sun Corridor. Certain policies could remain detrimental to increased business in Arizona (e.g. Arizona is identified as the second highest trailer licensing fees in the nation). . Shippers using the border crossing in Arizona, both importers and exporters, would like to see significant improvements for freight at the border, including extending hours of operations for cargo inspections at ports of entry.

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. The lack of an internet tax has been a significant boon to internet shopping distributors.

8.3 Infrastructure

. There is significant interest in the development of a future I-11, but very little knowledge was indicated about the CANAMEX Corridor. . Strong support exists for the South Mountain Freeway. . Traffic bottlenecks and related congestion, mostly in the Phoenix area, affected goods movement reliability, particularly during peak travel times . There is a lack of north-south interconnectivity between the two Class I railroads serving Arizona. Shippers expressed a desire for dual railroad access to an intermodal ramp near Phoenix as a means to increase goods movement options and competition in the Sun Corridor. Better north-south rail connectivity could also be a factor in increasing the quantity and reliability of shipments between the U.S. and Mexico using Arizona ports of entry. . The Sun Corridor has a balanced mix of aviation assets that could support increases in air cargo shipments in the region.

8.4 Economic Development

. The political process for business investment and economic development activities should be sped up to ensure private investment opportunities are acted upon in a timely fashion. . Labor rates and other business incentives, when compared to Southern California, are very good for competitive attractiveness for relocating businesses to Arizona. However, the apparent lack of understanding about Arizona by shippers and carriers should be addressed by enhance outreach, education and marketing about the benefits of the Sun Corridor and the state. . Agriculture and mining are becoming excellent export opportunities, especially for the growing Pacific Rim markets. . Strong desire exists for establishing a foreign trade zone in the Sun Corridor to streamline imports from (and exports to) Mexico. . The CANAMEX Corridor should be promoted and work should continue to achieve goals established for the Task Force, including the implementation of the proposed I-11 corridor.

8.5 Preliminary Recommendations

Shippers, carriers, distributors, and manufacturing/retail businesses all have a perception that due to component costs of the supply chain, they need to be physically and financially tied to Southern California, and specifically the influence of the Ports of Los Angeles and Long Beach. Economic development marketing needs to promote the benefits of the Sun Corridor as part of the entire supply chain to both regional and national decision makers. Inclusion of the benefits of land, labor, and operational savings to the supply chain by being in Sun Corridor should be identified. Enhanced infrastructure, including dual rail access (including rail ramps) to customers by both the

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BNSF and the UP, needs to be developed and promoted. The existence of business and transportation friendly legislation and policy must be promoted.

Access to Mexican trade and the ability to easily and efficiently move freight, by both truck and rail, across the border needs to be investigated, developed, and marketed. The CANAMEX Corridor can promote the flow of freight via all modes. The Corridor should consider becoming a Coalition similar to the West Coast Corridor Coalition and promote the trade and development aspects of the Corridor to a higher level of activity. The development if the proposed I-11 corridor presents an opportunity to enhance north-south movement of goods by truck, while similarly improved north-south rail connections within the Sun Corridor and with Mexico could potentially increase flexibility and competition between railroads and increase the attractiveness of the Sun Corridor for cross border rail shipment. The development of a foreign trade zone(s) within the Sun Corridor would streamline import (and export) of goods between Mexico and the U.S.

The Port of Punta Colonet, for the near and short term, does not present a significant opportunity for the Sun Corridor. Any effort expended on positioning infrastructure and facilities based upon the port becoming operational will not enhance short and medium term economic development potential. However, should the port be developed and supporting infrastructure be oriented to the Sun Corridor, this facility could have the potential to generate substantial long term economic development opportunities for the region.

Freight Transportation Framework Study 123 Freight Shipper and Carrier Profile Phase I Technical Memorandum

9.0 APPENDICES

 Shipper Survey Questionnaire  Shipper Interview Summaries

Freight Transportation Framework Study 124 Freight Shipper and Carrier Profile Phase I Technical Memorandum