U.S. Railroads on the Move

Stephen DeAngelis

July 19, 2012

I don’t believe I’ve previously written a post specifically about the U.S. railroad industry. Increasingly, however, the railroad industry is playing a larger role in supply chain discussions. The most attention that the industry had received in years was back in 2009 when Warren Buffett acquired the Burlington Northern railroad. Buffett’s timing was pretty good. By early January of 2011, things were looking up for the railroad industry. Bob Ferrari reported, “The Wall Street Journal noted that the largest North American railroads hauled more of most everything in the fourth quarter [0f 2010], generating more optimism, hiring and previously idled equipment resource deployment.” [“Positive News on the North American Rails,” Supply Chain Matters, 27 January 2011] Ferrari went to provide some of the positive reports being received. He wrote:

CSX Corp. and Union Pacific indicated that business is so good that they are rehiring more previous idled workers. Union Pacific recorded a 31 percent increase in operating income and noted that 2010 was the most profitable year in the company’s 150 year history. Business volumes were up 9 percent with all 6 business groups reporting shipment volume growth. CSX recoded a 46 percent increase in Q4 profit and noted growth across nearly all markets. The railroad plans to invest $2 billion in its business operations in 2011.

Norfolk Southern recoded a 14 percent increase in revues and a 31 percent increase in year-on-year profits. Coal revenues increased 18 percent, intermodal was up 16 percent and general merchandise was up 10 percent.

Canadian National Railway reported a 19 percent increase in Q4 profits with strong growth noted in all freight segments. For 2011, CN predicts continued increased freight activity in overseas container, metal products and iron ore, along with export demand in lumber, petroleum and chemicals. Canadian Pacific Railway reported a 34% increase in Q4 operating income and also noted strong demand across all lines of business. CP has allocated up to $1 billion for capital improvement programs in 2011.”

Although many people associate railroads more with the industrial age than the information age, back in 2011 Daniel Machalaba reported that “the digital revolution is coming to freight rail.” [“The Little Engine Really Could,” Wall Street Journal, 22 May 2011]. He noted, “Major railroads are installing digital communications, global positioning receivers, sensors and computerized controls on their trains and tracks.” He continued:

“New systems can gather intelligence on locations, size and speeds of trains and make automated decisions about when the trains should stop or go. Digital cameras and microphones on the tracks are working on monitoring train conditions to determine when equipment needs to enter a shop for maintenance. Some of these high-tech tools are already in limited use; others are still being tested. But in the next 10 to 15 years, freight-rail executives hope to put together the best solutions available and to transform one of the earliest network businesses, the railroad, into an integrated digital network that carries more trains and more freight at faster speeds and lower cost.”

Lower cost rail rates would be welcomed by most shippers. Back in 2011, Christian Wetherbee, a senior transportation analyst for Citigroup, noted “that rates for container ships have fallen ‘significantly,’ while ‘rail rates have gone nothing but up.'” [“Speed Is Key for Railroads, Ports in ‘Post-Panamax’ Era, CNBC, 25 February 2011] Whether the new technologies actually bring down rail rates or not, they are going to make the rails safer and more efficient. Robert Gallamore, a transportation consultant in Rehoboth Beach, DE, told Machalaba, that implementation of new features “could be the biggest surge in railroad technology since diesel locomotives replaced steam engines a half century ago. Technology will soon be able to produce a railroad that doesn’t derail, collide, break down or fall off schedule.”

By mid-2011, the good news for railroads continued to come in. In June of 2011, the Association of American Railroads (AAR) announced that May 2011 marked the 18th straight month of intermodal transportation gains. “The gains in intermodal [were] attributed to several factors, including growing international trade, better service, large investments in infrastructure and equipment by railroad companies, fuel costs, highway congestion and truck driver shortages, and the conversion of boxcar traffic.” [“May Was 18th Consecutive Month of Gains in Intermodal Traffic,” SupplyChainBrain, 9 June 2011] The AAR also announced that railroads were hiring workers. By end of 2011, the editorial staff at Supply Chain Digest was writing, “Warren Buffet certainly seemed to know what he was doing when he took rail carrier Burlington Northern private two years ago.” [“Rail Carrier Profit Engines Roll On, While LTL Sector Slowly Crawling Out of Its Hole,” 7 December 2011] The staff reported, “Net income in the sector for the quarter was up a very strong 19% in aggregate, led by Kansas City Southern’s 98% gain. Increases in net income for UP, CSX and NS were up 16%, 12% and 24.5% respectively. This once not very profitable sector now finds itself with operating ratios (operating costs as a percent of operating revenues) of 70% or lower – meaning margins are fat.”

Although most of the attention in the rail sector is focused on the larger companies, the Financial Times notes that the short-line and regional railways also play an important role. [“US railways: a model business,” 24 March 2012] The article reports:

“Set against their seven national peers (annual freight sales: $60bn), the 560 or so short-line and regional railways (annual freight sales: $3bn) can seem a little like toys. They are not. These stubby railroads, formed when the majors shed lossmaking assets in the 1980s, are a vital link between companies and markets and the trunk routes. A combination of non-unionised workers, careful attention to service, and lower maintenance expenses allows companies such as RA, Genesee & Wyoming, OmniTRAX and Watco, among the largest short-line holding companies, to compete against trucking and earn a living where the national rails could not.”

Clearly, however, when it comes to moving interstate freight the national railroads are kings of the road. They are also leaders when it comes to improving infrastructure. Michael Grunwald reports, “U.S. freight railroads will get $23 billion worth of upgrades this year, and taxpayers won’t pick up the tab. That’s because the railroads build, maintain and improve their own infrastructure and even pay property taxes on their tracks.” [“Back on Tracks,” Time, 28 June 2012] Grunwald continues:

“Also, freight trains are about three times as fuel-efficient as long-haul trucks, which means they help cut smog and reduce the U.S.’s carbon emissions and oil dependence. And forget those accident-prone trains your kids watch on Thomas the Tank Engine & Friends. In reality, shifting freight from roads to rails sharply reduces crashes and congestion. We don’t think much about freight trains except when they make us wait at intersections or blow their horns while chugging through our towns. The industry evokes images of ruthless Gilded Age monopolies and hapless 1970s bankruptcies. But … what’s good for them really does tend to be good for us. It’s not just that they are self-sufficient and fuel-efficient, employ 175,000 workers and have poured $500 billion into their trains, tracks and terminals since 1980. They are also quite literally the engines of our economy.”

Most train enthusiasts long for the golden days of passenger rail, but Grunwald asserts that “America’s passenger rail is a global joke.” On the other hand, he claims, “Our freight rail is the envy of the world, carrying over 40% of our intercity cargo.” He continues:

“Trains carry much less of Europe’s freight, which is why trucks clog Europe’s highways. And America’s rail-shipping rates are the world’s lowest, reducing the cost of doing business in the U.S.; they’ve fallen 45% in real dollars since the industry was deregulated three decades ago. The right should love railroads because they’re proof that deregulation can work and the private sector can upgrade infrastructure. The left should love railroads because they fight global warming and provide union jobs. We all should love railroads because they bring us our stuff and keep prices down.”

Grunwald is not much of a fan of other transportation industries; noting that they “perpetually lobby for government to widen highways and dredge rivers — pressuring it to get taxpayers to foot the bill for what the railroads cover for themselves.” To be fair, most highways, ports, and rivers are owned by the government and not private corporations. The government has to be involved when improvements to that infrastructure are required. Nevertheless, his point that railroads are a good deal for taxpayers (except maybe for passenger rails) is still a valid one. Grunwald concludes:

“Railroads are flourishing, attracting investors like Warren Buffett, and Association of American Railroads CEO Ed Hamberger says their main request of government is to be left alone to continue their renaissance. … These days, Congress won’t spend the bucks on infrastructure, regardless of the bang. But quietly railroads keep spending their own bucks. In an era of austerity, progress chugs along slowly and rarely blows its horn.”

The next time you hear the haunting wail of a train whistle, you can be assured that the engines of the American economy are still running. And once all of the infrastructure upgrades discussed by Machalaba are complete, they will be running, on time, more safely, and with greater efficiency.