John T. Gray June 3, 2011

Senior Vice President - Policy & Economics

The Honorable Cynthia T. Brown

Chief, Section of Administration

Office of Proceedings

Surface Transportation Board

395 E Street, SW.

Washington, DC 20423-0001

Dear Ms. Brown:

 This submission is the AAR forecast of the third quarter 2011 All-Inclusive Index and

Rail Cost Adjustment Factor, filed in Ex Parte No. 290 (Sub-No. 5) (2011-3) Quarterly Rail

Cost Adjustment Factor. The versions of RCAF-related indices covered in this filing are: the 

All-Inclusive Index (initiated in the second quarter of 1985), the Unadjusted RCAF (produced 

since October 1982), the Adjusted RCAF (first published in the second quarter of 1989), and 

the RCAF-5 (created by the STB in its Ex Parte No. 290 (Sub-No. 7) decision served October 

3, 1996). The table below summarizes the third quarter 2011 results on the fourth quarter

2007 base, and shows the percentage changes from the previous quarter.

2011Q2 2011Q3 % Change

All-Inclusive Index 115.7 118.6 2.5

Preliminary RCAF 1.157 1.186 2.5

 Forecast Error Adjustment 0.019 0.020

RCAF (Unadjusted) 1.176 1.206 2.6

 Productivity Adjustment Factor 2.2487 2.2566

RCAF (Adjusted) 0.523 0.534 2.1

 PAF-5 2.3752 2.3823

RCAF-5 0.495 0.506 2.2

425 Third Street, SW  Suite 1000  Washington, DC 20024

Phone (202) 639-2319  Fax (202) 639-2499  jgray@aar.org

Third Quarter 2011

All-Inclusive Index

Ex Parte No. 290 (Sub-No. 5) (2011-3)

Quarterly Rail Cost Adjustment Factor

Surface Transportation Board

Policy and Economics Department

Association of American Railroads

June 3, 2011
Table of Contents

Subject Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Index Weights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

All-Inclusive Index - Third Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Forecast vs. Actual All Inclusive Index - First Quarter 2011 . . . . . . . . . . . . . . . . . 4

Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Rail Cost Adjustment Factor - Third Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 6

Appendices

A Labor

B Fuel

C Materials & Supplies

D Equipment Rents

E Depreciation

F Interest

G Other Expenses

H Railroad and Union Abbreviations

Quarterly RCAF Association of American Railroads
Introduction

On January 2, 1985, the Interstate Commerce Commission (ICC) [now the Surface Transportation 

Board (STB)] adopted the All-Inclusive Index of Railroad Costs as the basis for the Rail Cost 

Adjustment Factor (RCAF). The quarterly projection of railroad costs, as documented herein, employ

the All-Inclusive Index as required by the regulations. Also presented in this submission is the RCAF,

both Adjusted and Unadjusted, as required by the ICC in its decision in Ex Parte No. 290 (Sub-No. 4),

Rail Cost Recovery Procedures - Productivity Adjustment, served March 24, 1989. In addition, the

AAR has included (but does not endorse) the RCAF-5, which was instituted by an STB decision

served October 3, 1996 in Ex Parte No. 290 (Sub-No. 7), Productivity Adjustment - Implementation.

This quarter's projection of railroad costs is for the third quarter 2011.

Quarterly RCAF Association of American Railroads Page 1
Index Weights

RCAF Weights

Previous Current

2008 2009

 Labor 30.2 % 34.7 %

 Fuel 25.2 14.9

 Materials & Supplies 5.1 5.1

 Equipment Rents 6.3 7.1

 Depreciation 10.4 13.9

 Interest 2.3 3.0

 Other 20.5 21.3

In the Ex Parte No. 290 (Sub-No. 2) final rules, issued in April 1981, the Interstate Commerce 

Commission mandated that the weights of each major cost component be updated annually. These 

"external" weights are calculated using data from Schedules 410 and 210 of the R-1 annual report 

filed with the Surface Transportation Board by the Class I railroads. The weights are typically 

updated with the fourth quarter projection.

Reweighting of the index is accomplished by calculating both the current quarter (normally the 

fourth) and prior (normally the third) quarter indexes with the new weights. The relative change 

between the two quarters is then multiplied times the prior quarter (usually the third) linked index. 

Use of this method ensures that the weight change, by itself, does not cause a change in the level of 

the All-Inclusive Index.

Internal weights in the labor and equipment rents components are updated at the same time as the 

external weights. When these weights are changed, they are also linked using the procedure 

described above in order to eliminate the effect of the change in weighting.

The 2009 (current) and 2008 (previous) weights are shown below. The previous (2008) weights were 

used for the fourth quarter of 2009 through the third quarter of 2010. Beginning with the fourth 

quarter of 2010, the 2009 weights are used. The year 2009 was different from recent years. Instead 

of increases in the expenses used for the calculation of weights, declining demand for freight service 

caused the variable portion of expenses to decrease. Fuel is probably the most variable expense 

category, and fuel expenses dropped even more because of a lower cost per gallon and improving 

efficiency for locomotives. Not surprisingly, Fuel's weight decreased from 25.2 percent to 14.9 

percent. Labor expenses decreased, but did not decrease as much as many of the other categories. 

Thus, Labor's weight increased from 30.2 percent to 34.7 percent. Depreciation and Interest expense 

have little or no variability, and those expenses actually increased. Weights for those two categories 

increased. Changes for the remaining categories were less than one percentage point.

Quarterly RCAF Association of American Railroads Page 2
All-Inclusive Index

Third Quarter 2011

Forecast

2009 Previous Current Percent

 Weights 2011Q2 2011Q3 Change

1. Labor 34.7% 379.6 382.1 0.7 %

2. Fuel 14.9% 368.4 392.3 6.5

3. M&S 5.1% 249.0 257.8 3.5

4. Equipment Rents 7.1% 203.1 208.8 2.8

5. Depreciation 13.9% 204.6 206.1 0.7

6. Interest 3.0% 84.5 84.5 0.0

7. Other 21.3% 212.9 222.3 4.4

8. Weighted Average

 a. 1980 = 100 290.1 297.5

 b. 1980 = 100 (linked) 284.4 291.7 1

 c. 4Q07 = 100 115.7 118.6 2 2.5

1 To calculate the 1980 = 100 Linked Index:

Index80 = (Current Index / Previous Index) * the Previous Quarter Linked Index

 = (297.5 / 290.1) x 284.4

= 291.7

2 To calculate the 4Q07 = 100 index:

Index4Q07 = (Current Linked Index / 4Q07 Linking Factor) * 100

= 291.7 divided by 245.9 times 100

= 118.6

Indexes based on other periods: 4Q02 based index = 291.7 / 192.1 x 100 = 151.8

4Q97 based index = 291.7 / 173.2 x 100 = 168.4

4Q92 based index = 291.7 / 156.9 x 100 = 185.9

4Q87 based index = 291.7 / 132.2 x 100 = 220.7

The components and values of the current and previous All-Inclusive Indexes are shown below. 

Details of the construction of each component of the index are contained in the Appendices.

Quarterly RCAF Association of American Railroads Page 3
Forecast vs. Actual All-Inclusive Index

First Quarter 2011

Because of data availability, the forecast error adjustment has a two-quarter lag from each filing.

As shown below, the first quarter actual index of 112.8 is 2.0 index points above the forecast

value of 110.8. Therefore, the forecast error adjustment for third quarter 2011 is 2.0 index points.

2009 First Quarter 2011 Amt

 Weights Forecast Actual Difference

1. Labor 34.7% 378.3 378.3

2. Fuel 14.9% 296.5 324.6

3. M&S 5.1% 248.1 248.1

4. Equipment Rents1 7.1% 203.9 206.2

5. Depreciation 13.9% 204.2 204.6

6. Interest 3.0% 84.5 84.5

7. Other 21.3% 208.6 212.6

8. Weighted Average

 a. 1980 = 100 277.9 283.2

 b. 1980 = 100 (linked) 272.4 277.4 2

 c. 4Q07 = 1003 110.8 112.8 2.0

Forecast error 2.0 index points

1 2009 First Quarter 2011

Weights Forecast Actual

Car-Hire 42.2% 186.3 185.6

Lease Rentals 57.8% 208.6 212.6

Weighted Average 199.2 201.2

Weighted Average (linked) 203.9 206.2

2 Linked actual index = (actual index / previous actual index) x previous linked actual index.

277.4 = 283.2 / 273.1 x 267.5

3 The 4Q07 based indexes are 1980 based indexes divided by the 4Q07 linking factor (245.9/100).

Other linking factors are: 4Q02 = 192.1; 4Q97 = 173.2; 4Q92 = 156.9; and 4Q87 = 132.2.

Quarterly RCAF Association of American Railroads Page 4
Productivity

Comparison of Output, Input, & Productivity

2005 - 2009

Output Input Productivity

1

Year Index Index Changes

(1) (2) (3)

2005 1.021 0.956 1.068

2006 1.018 1.024 0.994

2007 1.000 0.996 1.004

2008 0.990 0.970 1.021

2009 0.847 0.861 0.984

Average 1.014

Corrected Previous Avg. (2004-2008) 1.012

Calculation of PAF and PAF-5

 For 2005-2009, use fourth root of avg. productivity change = 1.0035

 For 2004-2008, use fourth root of avg. productivity change = 1.0030

Quarter Year PAF PAF-5

Q1 2011 2.2409 2.3681

Q2 2011 2.2487 2.3752

Q3 2011 2.2566 2.3823

Q4 2011 2.2645 2.3894

Q1 2012 2.2724 2.3978

On February 7, 2011, the Surface Transportation Board (STB) served a decision in Ex Parte 290 (SubNo. 4) which added the year 2009 to the Productivity Adjustment Factor (PAF) and removed the year 

2004. This creates a geometric average annual productivity change, for the five-year period 2005 

through 2009, of 1.4 percent per year. The components of this average annual value are shown on the 

following table in ratio format – therefore, 1.014 is the same as an increase of 1.4 percent. 

Productivity changes are calculated by multiplying each of the five productivity changes together and 

taking the result to the one-fifth power. The quarter productivity adjustment factors (PAF) are 

calculated by increasing the previous quarter's PAF by quarterly versions of the annual rate, which are 

the fourth root of the geometric average annual growth rate. The difference between the PAF and the 

PAF-5 is the timing of the five-year productivity trend.

2004-2008

2005-2009

1 The values shown in Column 3 are based on full float calculations and may not exactly match 

numbers calculated using the rounded numbers displayed in Columns 1 and 2.

Quarterly RCAF Association of American Railroads Page 5
Rail Cost Adjustment Factor

Third Quarter 2011

Previous Current Percent

2011Q2 2011Q3 Change

All-Inclusive Index1 115.7 118.6 2.5

Preliminary RCAF2 1.157 1.186 2.5

Forecast Error Adjustment3 0.019 0.020

RCAF (Unadjusted)

4 1.176 1.206 2.6

Productivity Adjustment Factor5 2.2487 2.2566

RCAF (Adjusted)

6 0.523 0.534 2.1

PAF-57 2.3752 2.3823

RCAF-58 0.495 0.506 2.2

1 See All-Inclusive Index on page 3.

2 All-Inclusive Index divided by the All-Inclusive Index in the base period (100.0). 3 The current figure is from Forecast vs. Actual All-Inclusive Index in

this filing (page 4). The previous quarter figure is shown in a similar

section of the previous quarter's filing.

4 Preliminary RCAF plus the forecast error adjustment.

5 See Productivity on page 5.

6 RCAF (Unadjusted) divided by the Productivity Adjustment Factor (PAF). 7 See Productivity on page 5.

8 RCAF (Unadjusted) divided by the PAF-5.

Four RCAF values are presented in this filing. Two are not modified for productivity (Preliminary 

RCAF and RCAF Unadjusted), and two incorporate a productivity calculation (RCAF Adjusted and 

RCAF-5). The All-Inclusive Index and all four RCAF values, plus the percent change for each, are 

shown below. Note that the All-Inclusive Index is on a 2007Q4=100 basis.

Quarterly RCAF Association of American Railroads Page 6
Appendixes
Quarterly Rail Cost Adjustment Factor Appendix A Page 1 of 3

Labor

Third Quarter 2011

The third quarter 2011 Labor Index is forecast to increase 0.7 percent. Three items caused much of 

the increase: cost-of-living allowance increases for three national unions; cost-of-living allowance 

increases for numerous independent unions; and much higher annual profit sharing payments for one 

railroad.

Wage Rate Index

The Wage Rate Index portion of the Labor Index increased 0.8 percent from the previous quarter. 

Cost of living allowances and profit sharing caused the increase.

Wage Increases: There are only three national labor agreements in effect that have any type of wage 

increase scheduled for the third quarter, and those three unions will receive a cost-of-living 

allowance increase of 28 cents effective July 1. Numerous independent agreements also have a 

similar cost-of-livng allowance increase. One independent labor agreement has a 5 percent general 

wage increase scheduled for July 1.

Lump Sums: The third quarter lump sum rate increased 0.3 cents. This increase was caused by 

independent bonus payments paid by two railroads to qualifying employees of unions that signed 

new labor agreements between 2005 and 2010 – all of these agreements delayed the bonus payment 

until July 1, 2011. An additional independent bonus was paid by one railroad to selected employees 

of one union that signed a new labor agreement, and this bonus varied depending upon employee 

service years.

Back Pay: The third quarter back pay rate increased 0.1 cents because of a newly-received 

independent labor agreement that included back pay as part of the agreement.

Other: In wages, "Other" contains the amortization of incentive compensation payments that a large 

railroad makes each year to its dispatchers, yardmasters, and engineers. Last year's payment has now 

been completely amortized and removed from the labor rate. This year's payment, which is based on 

profits in 2010, is much higher than the previous year, causing the hourly rate to more-than double.

Supplements Index 

The Supplements Index increased 0.5 percent from the previous quarter. Almost all of the increase 

was caused by a railroad's independent employee stock plan contribution to employees of one of the 

largest unions.

Health & Welfare: The Health & Welfare rate was unchanged. Changes caused by the addition of 

one labor agreement to the index were too small to have an impact on this rate.

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix A Page 2 of 3

Labor

Third Quarter 2011

Railroad Retirement: The Railroad Retirement rate increased 0.6 percent, as taxable income was 

up slightly.

Unemployment Insurance: The unemployment insurance hourly rate was unchanged.

Other: The "Other" category is a reflection of all other fringe benefits, and currently contain known 

employer contributions to employee 401(k) accounts and employer contributions to employee stock 

plans that are recorded as fringe benefits. The hourly rate increased 4.4 cents, caused by one 

company's annual match and another company's extra bonus match included in the startup of a new 

plan.

Labor Index Calculation

As shown in Table A-1 on the next page, the 0.8 percent increase in the Wage Index and the 0.5

percent increase in the Supplements Index had a combined effect of a 0.7 percent increase in the 

Labor Index. The linked third quarter 2011 index is 382.1.

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix A Page 3 of 3

Labor

Third Quarter 2011

Table A-1 Labor Index

Change

2011Q2 2011Q3 Percent Amount

Base Wage – Straight Time

 & Pay For Time Not Worked $36.039 $36.203 0.5% $0.164

Adjustments:

Lump Sum 0.225 0.228 1.3% 0.003

Back Pay 0.037 0.038 2.7% 0.001

Other 0.087 0.199 128.7% 0.112

Total Wages 36.388 36.668 0.8% 0.280

Health & Welfare Benefits 8.631 8.631 0.0% 0.000

RR Retirement & Medicare 6.963 7.002 0.6% 0.039

Unemployment Insurance 0.606 0.606 0.0% 0.000

Other 0.173 0.217 25.4% 0.044

Total Supplements $16.373 $16.456 0.5% 0.083

Total Labor $52.761 $53.124

Wage Index1 311.4 313.8 0.8%

Supplements Index2 605.1 608.1 0.5%

Total labor Index, 2009 Weights 3 399.2 401.8

Labor Index (linked)4 379.6 382.1 0.7%

1 1980 wage rate $11.685

2 1980 supplements rate $2.706

3 2009 weights: wages, supplements 70.1% 29.9%

4 2011Q3 linked Index = 2011Q2 linked x (2011Q3 / 2011Q2)

 = 379.6 x 401.8 / 399.2

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix B Page 1 of 1

Fuel

Third Quarter 2011

Forecast Fuel Index 392.3

Change from previous quarter forecast 6.5%

Change from previous quarter actual -3.9%

* Diesel fuel used by locomotives is made from refined crude oil, and therefore usually has some price correlation. 

** Heating oil and locomotive diesel fuel are part of a group of closely related products, commonly labeled as distillates, that differ mostly by their 

 sulfur content. Because of these similarities, these fuels are produced together and have similar pricing trends. 

The forecast for fuel is based on: (1) a survey of railroad fuel purchasing officers concerning current 

price and volume levels, (2) expectations of railroad purchasing officers based on their own forecast 

models and discussions with their major suppliers, and (3) a consensus of petroleum industry experts 

and general business publications.

Crude oil futures prices were above $100 per barrel for the month of April, but fell below $100 in 

May.* Inventories were above the average range during that period. In early June, disappointing news 

relating to the U.S. economy contributed more downward pressure on oil prices.

Locomotive diesel fuel prices have trended upward (with a few "dips") since a March 2009 "trough". 

April 2011 is the latest month available for locomotive diesel fuel prices, but data for diesel fuel, 

heating oil and other distillates – which have a reasonable degree of correlation with locomotive diesel 

fuel – are available for later periods**. Data provided by the U.S. Energy Information Administration 

show lower prices in recent weeks and inventories at the high-end of the average range. 

Railroads believe locomotive diesel fuel prices for July 2011 (Q3) will be 3.9 percent lower than the 

second quarter's (represented by April in the Fuel Index) average price actually paid. However, 

because the second quarter forecast was much too low, the third quarter 2011 forecast is 6.5 percent 

higher than the second quarter forecast.

100

200

300

400

500

600

700

800

Jul Jan Jul Jan Jul Jan

Locomotive Diesel Fuel Prices

2008 2009

Index 7/15/90 = 100

2010 2011

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix C Page 1 of 1

Materials & Supplies

Third Quarter 2011

2011Q3 Materials & Supplies Index = 257.8

2011Q2 Materials & Supplies Index = 249.0

Difference 8.8 basis points

or 

3.5 %

The third quarter 2011 Materials & Supplies Index increased 3.5 percent from its second quarter 

value. The increase was caused by higher prices paid for two of the three major materials categories: 

Metals and Miscellaneous products. The index is still below its all-time high of 258.8 set for the first 

quarter of 2009.

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix D Page 1 of 1

Equipment Rents

Third Quarter 2011

2009 Percent

Weight 2011Q2 2011Q3 Change

Car Hire 42.2% 178.6 178.9 0.2 %

Lease Rentals 57.8% 212.9 222.3 4.4

Weighted Average 198.4 204.0 2.8

Weighted Average (Linked) 203.1 208.8 2.8

The Equipment Rents Index consists of two components – car hire and lease rentals. The 

methodology used to create these two components and the final Equipment Rents Index are explained 

below.

Car Hire

The car hire component is indexed using data from the Car Hire Accounting Rate Master (CHARM) 

file. Car hire rates for the forecast quarter are estimated based on data for the most recent month 

available. For the first quarter, December 1 of the previous year is used. For the second, third and 

fourth quarters; March 1, June 1, and September 1 are used, respectively. Using data retrieved from 

the latest CHARM file, an average rate per car is developed. Next, those average rates are grouped 

into car type categories to create an overall summary of car hire rates. The summary rates are then 

compared from quarter to quarter to determine the Car Hire Index.

Lease Rentals

The lease rentals portion of the Equipment Rents Index uses the Producer Price Index for Industrial 

Commodities less Fuel and Related Products and Power (PPI-LF). The Commission adopted this 

surrogate in its decision served March 13, 1987. The AAR uses six years of historical data to derive 

its forecast for the PPI-LF. The forecast is used not only for lease rentals, but also for the "Other" 

component of the All-Inclusive Index. Appendix G discusses the forecast in more detail.

Equipment Rents Index Calculation

The table below calculates the Equipment Rents Index, which increased 2.8 percent. The third quarter 

Car Hire portion of the Index increased 0.2 percent, caused by small increases (since March) for 

privately-owned cars. A 4.4 percent increase for the PPI-LF (see Appendix G) used as a proxy for 

Lease Rentals, combined with the 0.2 percent increase for Car Hire, caused the Equipment Rents 

Index to increase 2.8 percent. 

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix E Page 1 of 2

Depreciation

Third Quarter 2011

Forecast of Depreciation Index (1982=100) 186.3

Forecast of Depreciation Index (1980=100) 206.1

Change from previous quarter forecast 0.7%

Change from actual first month of previous quarter 0.6%

Change from same quarter of prior year (actual) 1.0%

The Producer Price Index for Railroad Equipment (PPI-RE) is used to index depreciation expense. 

The PPI-RE is forecast using an ARIMA (Auto-Regressive Integrated Moving Average) process where 

a statistical package picks the model that best fits the historical data set (see next page), and that model 

is then used for the forecast. The historical data set contains 6 years of monthly data (a sample size of 

72), where the most recent available data point is the first month of the quarter prior to the forecast 

quarter. For a first quarter forecast, the most recent month of data available would be for October of 

the prior year. For a second quarter forecast, January would normally be the most recent period 

available. April and July would be the most recent months available for third and fourth quarter 

forecasts, respectively. The output from the forecast model is shown on page 2 of this appendix on a 

1982=100 basis. The figure forecast by the model reflects monthly PPI-RE figures that changed by 

only small amounts during 2010, but had some bigger increases in 2011.

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix E Page 2 of 2

Depreciation

Third Quarter 2011

PPI RAILROAD EQUIPMENT

Recommended model: Exponential Smoothing

Forecast Model for PPIRE

Holt exponential smoothing: Linear trend, No seasonality

 Smoothing Final

Component Weight Value

Level 0.91182 185.22

Trend 0.01997 0.27406

Within-Sample Statistics

Sample size 72 Number of parameters 2

Mean 177 Standard deviation 7.584

R-square 0.9812 Adjusted R-square 0.981

Durbin-Watson 2.015 Ljung-Box(18)=20.03 P=0.6691

Forecast error 1.046 BIC 1.094

MAPE 0.004123 RMSE 1.031

MAD 0.7289

Actual Values for the Most Recent 6 Periods:

 Date Actual

 2010-11 184.200

 2010-12 184.200

 2011-01 185.000

 2011-02 184.900

 2011-03 185.200

 2011-04 185.200

Forecasted Values

 Date 2.5 Lower Forecast 97.5 Upper

 2011-05 183.354 185.499 187.644

 2011-06 182.843 185.773 188.702

 2011-07 182.503 186.047 189.591

 2011-08 182.254 186.321 190.388

 2011-09 182.065 186.595 191.125

QTR AVG 182.274 186.321 190.368

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix F Page 1 of 1

Interest

Third Quarter 2011

Interest Expense (Schedule 210)

Line

42 Total Fixed Charges

44 Contingent Interest

less

22 Release of Premium on Funded Debt

Average Total Debt (Schedule 200)

Line

30 Current Loans and Notes Payable

39 Equipment Obligations and Other Long Term Debt Due Within One Year

41 Funded Debt Unmatured - Non-Current

42 Equipment Obligations - Non-Current

43 Capitalized Lease Obligatons - Non-Current

44 Debt in Default - Non-Current

45 Accounts Payable: Affiliated Companies - Non-Current

46 Unamortized Debt Premium - Non-Current

2009 Interest Rate 6.63%

1980 Interest Rate 7.85%

2011Q3 Interest Index 84.5

2011Q2 Interest Index 84.5

Percent Change 0.0%

The Interstate Commerce Commission, in its decision served February 28, 1989, revised the AllInclusive Index methodology to include a specific interest component, which is to track changes in 

the average interest rate from year to year. The interest rate is essentially the embedded cost of 

debt, i.e., total interest expense divided by average total long term debt. The interest rate is 

calculated for the most recent year and used until the next year's figures are available. Typically in 

the fourth quarter filing, the interest rate is updated to the new level. The source for interest expense 

is Schedule 210, column b, from the R-1 annual report. The lines used from current R-1 annual 

reports are listed below. The source for average total debt is Schedule 200 from the R-1 annual 

report. The sums of data from columns b and c (ending and beginning balances) are combined and 

divided by 2 to compute an average balance. The line numbers are listed below. Beginning with 

fourth quarter 2010, the Interest Index is based on data for 2009.

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix G Page 1 of 2

Other Expenses

Third Quarter 2011

Forecast of Other Expense Index (1982=100) 198.3

Forecast of Other Expense Index (1980=100) 222.3

Change from previous quarter forecast 4.4%

Change from actual first month of previous quarter 3.1%

Change from same quarter of prior year (actual) 8.3%

The Producer Price Index for Industrial Commodities less Fuels and Related Products and Power (PPILF) is used to index purchased services, casualties and insurance, loss and damage, taxes (other than 

income and payroll), general and administrative expenses, and lease rentals. These expenses, when 

grouped together, are usually called "Other" expenses.

Like the PPI-RE, the PPI-LF is forecast using an ARIMA process on 6 years of monthly data (a sample 

size of 72) with the most recent available monthly data being the first month of the quarter prior to the 

forecast quarter. For a first quarter forecast, the most recent month of data available would be for 

October of the prior year. For a second quarter forecast, January would normally be the most recent 

month available. April and July would be the most recent months available for third and fourth quarter 

forecasts respectively. The output from the forecast model is shown on page 2 of this appendix for 

1982=100. The figure forecast by the model for the third quarter reflects monthly PPI-LF figures that 

are increasing at higher rates in 2011. Preliminary indications are (see chart) that recent forecasts may 

have been slightly low, which would exacerbate the increase from the prior quarter forecast.

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix G Page 2 of 2

Other Expenses

Third Quarter 2011

PPI INDUSTRIAL COMMODITIES LESS FUELS

AND RELATED PRODUCTS AND POWER

Recommended model: Exponential Smoothing

Forecast Model for PPILF

Multiplicative Winters: Linear trend, Multiplicative seasonality

Confidence limits proportional to indexes

 Smoothing Final

Component Weight Value

Level 1.00000 192.30

Trend 0.99847 1.4992

Seasonal 0.00396

Seasonal Indexes

January - March 1.00000 1.00000 1.00000

April - June 1.00000 1.00000 1.00000

July - September 1.00000 1.00000 1.00000

October - December 1.00000 1.00000 1.00000

Within-Sample Statistics

Sample size 72 Number of parameters 3

Mean 174.5 Standard deviation 9.042

R-square 0.993 Adjusted R-square 0.9928

Durbin-Watson 1.952 ** Ljung-Box(18)=16.57 P=0.4472

Forecast error 0.7657 BIC 0.8194

MAPE 0.003201 RMSE 0.7495

MAD 0.5624

Actual Values for the Most Recent 6 Periods:

 Date Actual

 2010-11 185.400

 2010-12 186.300

 2011-01 188.100

 2011-02 189.800

 2011-03 190.800

 2011-04 192.300

Forecasted Values

 Date 2.5 Lower Forecast 97.5 Upper

 2011-05 192.193 193.799 195.405

 2011-06 191.710 195.298 198.887

 2011-07 191.983 196.798 201.612

 2011-08 192.511 198.297 204.083

 2011-09 193.179 199.796 206.413

QTR AVG 192.558 198.297 204.036

Association of American Railroads
Quarterly Rail Cost Adjustment Factor Appendix H Page 1 of 1

Railroad and Union Abbreviations

Third Quarter 2011

Railroads

BLE Bessemer & Lake Erie Railroad (Part of CN's Grand Trunk Corp.)

BNSF BNSF Railway Company

CC Chicago, Central & Pacific (Part of CN's Grand Trunk Corp. Sometimes noted as CC&P.)

CN Canadian National Railway (Commonly known as CN, owns Grand Trunk Corporation.)

CNGT AAR's abbreviation for Grand Trunk Corporation (Almost all of CN’s U.S. operations.)

CP Canadian Pacific (Also noted as CPR. Owns the U.S. Class I railroad Soo Line.)

CSX CSX Transportation

D&H Delaware & Hudson (Canadian Pacific's U.S. operations, to be included beginning 2011Q4.)

DME Dakota, Minnesota & Eastern (Canadian Pacific's U.S. operations, to be included beginning 2011Q4.)

DMIR Duluth, Missabe & Iron Range Company (Part of CN's Grand Trunk Corp.)

DWP Duluth, Winnipeg & Pacific Railway (Part of CN's Grand Trunk Corp.)

EJE Elgin, Joliet & Eastern Railway (Part of CN's Grand Trunk Corp.)

GTW Grand Trunk Western Railroad (Part of CN's Grand Trunk Corp.)

IC Illinois Central Railroad (Part of CN's Grand Trunk Corp.)

KCS Kansas City Southern Railway

NS Norfolk Southern Combined Railroad Subsidiaries (a.k.a. Norfolk Southern Railway or NS Rail)

SOO Soo Line Railroad (the largest of Canadian Pacific's U.S. operations.)

UP Union Pacific Railroad

WC Wisconsin Central and subsidiaries (Part of CN's Grand Trunk Corp.)

Major Unions Involved with Railroads

ATDA American Train Dispatchers Association

BLET Brotherhood of Locomotive Engineers and Trainmen Div. of the International Brotherhood of Teamsters

BMWED Brotherhood of Maintenance of Way Employees Division of the International Brotherhood of Teamsters

BRS Brotherhood of Railroad Signalmen

IAM International Association of Machinists and Aerospace Workers

IBBM International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers & Helpers

IBEW International Brotherhood of Electrical Workers

NCFO National Conference of Firemen and Oilers

SMW Sheet Metal Workers’ International Association

TCU Transportation Communication International Union

TCU-Carmen Brotherhood of Railway Carmen Division of the Transportation Communications International Union 

UTU United Transportation Union

UTU-Yard United Transportation Union Yardmaster Department (also noted as UTU-YMD)

Predecessor Unions (Some AAR databases use these old abbreviations.)

BLE Brotherhood of Locomotive Engineers (predecessor to BLET)

BMWE Brotherhood of Maintenance of Way Employees (predecessor to BMWED)

BRC Brotherhood of Railway Carmen (predecessor to TCU-Carmen)

IBFO International Brotherhood of Firemen and Oilers (predecessor to NCFO)

Association of American Railroads