Railroads Haul the Future

Note: The following was published in the Fall, 2012, edition of  Phi Kappa Phi Forum, the quarterly journal sent to members of the National Honor Society of Phi Kappa Phi.

A Pivotal Junction for Railroads

By John T. Harding

The term “making the grade” perhaps originated from a freight train’s efforts to reach the crest of a slope. And, like The Little Engine That Could, the American railroad industry is struggling to get back on track to financial strength after decades of stifling regulation, competition from truckers, and the recent recession.

Class I railroads, those carrying freight long distances between major metropolitan areas,

“account for approximately 68 percent of U.S. freight rail mileage, 89 percent of employees, and 93 percent of revenue,” according to the Association of American Railroads (AAR).¹More than 560 freight railroads navigate a 140,000-mile system nationwide with some 175,000 employees.² They annually move 1.5 million carloads of food products, 2 million carloads of plastics, fertilizers and other chemicals, and 7.3 million carloads of coal, among other items.³

Stifling regulation

“By the late 1970s, counterproductive and unbalanced regulation had brought America’s rail industry to the brink of ruin,” AAR explains.⁴ “Rail bankruptcies were common, and tracks and equipment were falling apart because railroads could not afford the cost of upkeep.”

Things began to improve in the early 1980s when looser regulation enabled marketplace demand to determine routes, services, and prices. As a result, average U.S. freight rates, adjusted for inflation, dropped 51 percent from 1981 to 2010 (based on revenue per ton-mile). “That means the average rail customer today can ship twice as much freight for about the same price it paid nearly 30 years ago.”⁵ Meanwhile, the industry consolidated from 14 Class I railroads to seven, a process that bolsters the bottom line in any number of ways.

Competition from truckers

For years, freight railroads in America faced falling revenues and declining profits partly because of rising fuel costs and competition from the trucking industry. But through innovations and adaptations, rail carriers have recovered and become the most cost-efficient way to ship goods.

Intermodal transportation, for instance, transfers sealed boxes from ships to trains for long-distance hauling and then to trucks for local delivery. Intermodal and container traffic grew 6.4 percent and 8.9 percent, respectively, last spring from the year before, even as total freight carloads slid 3.48 percent.⁶ “[B]etter rail service and new intermodal service offerings have resulted in conversions from long-haul trucking to intermodal service that uses railroads for a large portion of the total move,” remarks Standard & Poor’s Rating Services, adding that “trucking capacity is shrinking because of stricter safety requirements … so shippers may turn to railroads to carry cargo containers for segments of lengthier journeys.”⁷ Moreover, freight trains use “far less energy to move cargo than through trucking.”⁸   

Recent recession

Railroads, like almost all business sectors, suffered during the national downturn. For example, operating revenues for Class I rail freight lines plummeted from $61.2 billion in 2008 to $47.8 billion in 2009.⁹ 

But an uptick occurred in 2010 to $58.4 million.¹⁰Another encouraging economic sign: having the cash flow for building and maintaining roadbeds (unlike in trucking, which utilizes public roads and highways); the railroad industry plans to spend some $13 billion in private capital to improve its infrastructure.¹¹ 

Chugging along

Taken together, the rail freight industry is looking to a brighter future as it hauls itself up from a trough. Consider, for example, just two of the seven Class I freight rail carriers. Norfolk Southern, operating approximately 20,000 route miles in the U.S., reported a 17 percent increase in operating revenues for 2011, to $11.2 billion, and net income was $1.9 billion, up 28 percent. And Union Pacific, at 31,900 route miles, reported net income of $3.3 billion for the full year, a jump of 18 percent from the prior year. Operating revenue, the company said, was a record $19.6 billion for the year, up from $17 billion in 2010.

           

Footnotes:

¹Association of American Railroads (October 2011). “Overview of America’s Freight Railroads.” Retrieved from http://www.aar.org/~/media/aar/Background-Papers/Overview%20of%20US%20Freight%20RRs%20October%2019%202011.ashx.

²Ibid.

³Ibid.

⁴Association of American Railroads (October 2011). “The Cost Effectiveness of America’s Freight Railroads.” Retrieved from http://www.aar.org/~/media/aar/Background-Papers/The-Cost-Effectiveness-of-Freight.ashx.

⁵Ibid.

⁶“The Zacks Analyst Blog Highlights: Canadian Pacific Railway, CSX, Union Pacific, Canadian National Railway and Norfolk Southern.” (March 12, 2012). Zacks.com, property of Zacks Investment Research, Inc. Retrieved from http://www.zacks.com/pr/71115/the-zacks-analyst-blog-highlights-canadian-pacific-railway-csx-union-pacific-canadian-national-railway-and-norfolk-southern.

⁷Standard & Poor’s Rating Services. (March 27, 2012). “Infrastructure Spending Keeps Rails and Trucks Moving.” Retrieved from http://mobile.reuters.com/article/bondsNews/idUSWNA349920120327.

⁸“Recent Performance Review For 5 North American Railroads.” (March 29, 2012). SeekingAlpha.com. Retrieved from http://seekingalpha.com/article/467351-recent-performance-review-for-5-north-american-railroads.

⁹Association of American Railroads. (June 2011.) “Class I Railroad Statistics.” Retrieved from http://www.aar.org/~/media/aar/Industry%20Info/AAR-Stats-2011-0617.ashx.

¹⁰Ibid.

¹¹Standard & Poor’s Rating Services. (March 27, 2012). “Infrastructure Spending Keeps Rails and Trucks Moving.”