Buffett praises railroaders, says he expects BNSF profit margins to improve

OMAHA, Neb. — Berkshire Hathaway Chairman Warren Buffett’s widely read annual letter to investors, released on Saturday alongside the company’s 2023 financial results, included a long passage on railroads in general and BNSF Railway in particular.

BNSF’s revenue and profits fell last year, which Buffett termed a disappointment. But he noted that the national labor contract that Congress imposed included raises “far beyond the country’s inflation goals.”

BNSF’s profit margins, Buffett noted, have fallen relative to the other big railroads since Berkshire Hathaway purchased the BNSF in 2010. “I believe that our vast service territory is second to none and that therefore our margin comparisons can and should improve,” he wrote.

Buffett also praised railroaders for working in all sorts of weather in dangerous conditions. And he expressed sympathy for train crews that can do nothing but watch helplessly as people chose to end their lives by stepping in front of a freight train.

His full rail-related remarks are below:

Rail is essential to America’s economic future. It is clearly the most efficient way — measured by cost, fuel usage and carbon intensity — of moving heavy materials to distant destinations. Trucking wins for short hauls, but many goods that Americans need must travel to customers many hundreds or even several thousands of miles away. The country can’t run without rail, and the industry’s capital needs will always be huge. Indeed, compared to most American businesses, railroads eat capital.

BNSF is the largest of six major rail systems that blanket North America. Our railroad carries its 23,759 miles of main track, 99 tunnels, 13,495 bridges, 7,521 locomotives and assorted other fixed assets at $70 billion on its balance sheet. But my guess is that it would cost at least $500 billion to replicate those assets and decades to complete the job.

BNSF must annually spend more than its depreciation charge to simply maintain its present level of business. This reality is bad for owners, whatever the industry in which they have invested, but it is particularly disadvantageous in capital-intensive industries.

At BNSF, the outlays in excess of GAAP depreciation charges since our purchase 14 years ago have totaled a staggering $22 billion or more than $11⁄2 billion annually. Ouch! That sort of gap means BNSF dividends paid to Berkshire, its owner, will regularly fall considerably short of BNSF’s reported earnings unless we regularly increase the railroad’s debt. And that we do not intend to do.

Consequently, Berkshire is receiving an acceptable return on its purchase price, though less than it might appear, and also a pittance on the replacement value of the property. That’s no surprise to me or Berkshire’s board of directors. It explains why we could buy BNSF in 2010 at a small fraction of its replacement value.

North America’s rail system moves huge quantities of coal, grain, autos, imported and exported goods, etc. one-way for long distances and those trips often create a revenue problem for back-hauls. Weather conditions are extreme and frequently hamper or even stymie the utilization of track, bridges and equipment. Flooding can be a nightmare. None of this is a surprise. While I sit in an always-comfortable office, railroading is an outdoor activity with many employees working under trying and sometimes dangerous conditions.

An evolving problem is that a growing percentage of Americans are not looking for the difficult, and often lonely, employment conditions inherent in some rail operations. Engineers must deal with the fact that among an American population of 335 million, some forlorn or mentally-disturbed Americans are going to elect suicide by lying in front of a 100-car, extraordinarily heavy train that can’t be stopped in less than a mile or more. Would you like to be the helpless engineer? This trauma happens about once a day in North America; it is far more common in Europe and will always be with us.

Wage negotiations in the rail industry can end up in the hands of the President and Congress. Additionally, American railroads are required to carry many dangerous products every day that the industry would much rather avoid. The words “common carrier” define railroad responsibilities.

Last year BNSF’s earnings declined more than I expected, as revenues fell. Though fuel costs also fell, wage increases, promulgated in Washington, were far beyond the country’s inflation goals. This differential may recur in future negotiations.

Though BNSF carries more freight and spends more on capital expenditures than any of the five other major North American railroads, its profit margins have slipped relative to all five since our purchase. I believe that our vast service territory is second to none and that therefore our margin comparisons can and should improve.

I am particularly proud of both BNSF’s contribution to the country and the people who work in sub-zero outdoor jobs in North Dakota and Montana winters to keep America’s commercial arteries open. Railroads don’t get much attention when they are working but, were they unavailable, the void would be noticed immediately throughout America.

A century from now, BNSF will continue to be a major asset of the country and of Berkshire. You can count on that.