Let’s suppose, for the sake of argument, that the Class I railroads cannot successfully shift into growth mode. What happens then? Carload business will slowly wither away, except for the few bulk and dangerous commodities that have no other way to move. Intermodal will remain stuck in neutral, with domestic container and trailer traffic unable to break through a ceiling they hit in 2017. And no matter what railroads do, the onetime torrent of coal traffic will become a trickle.
Sure, there will be pockets of growth here and there. But they won’t be able to make up for the overall downward trajectory as more and more freight moves to trucks.
The irony is that the Class I systems are immensely profitable despite hauling less freight today than they did two decades ago. They’re a financial success story driven by higher productivity and higher rates.
In order to continue to produce double-digit earnings growth — something that Wall Street has come to expect — ideally the railroads need to do three things: Gain volume, raise rates faster than inflation, and make productivity gains and/or reduce costs. Analysts say the railroads’ annual rate-increase strategy is nearing an end, meaning they’ll have to push harder on the volume and cost levers.
At the Surface Transportation Board’s September hearing on the lack of carload growth, railroads sketched out their growth plans. Shipper groups made it clear that while they want to ship more via rail, they are instead sending more of their business to trucks due to railroads’ unreliable service, inflexible rates, and lack of rail competition. A look at the direction of the freight car fleet, which is predominantly owned or leased by shippers, backs this up: Excluding coal equipment, cars are being retired at about the same rate they’re being built. This combination of shipper sentiment and stagnant fleet size casts serious doubt on the Class I railroads’ ability to grow in any meaningful way.
Absent volume growth, the only way railroads will be able to make their investors happy is by resuming cost-cutting with a vengeance. You may say that there’s nothing left to cut. Why, look at how Precision Scheduled Railroading has shrunk locomotive fleets, shuttered shops, closed hump yards, reduced local service, pruned intermodal networks, gutted headquarters, and cut overall employment levels. This is, of course, true.
But with too much track and not enough traffic to support it, the Class I railroads eventually will be forced to find ways to wring out even more costs. None of them will be good for the industry.
Railroads can reap operational savings by slowing trains to 40 mph. It would save fuel, require fewer locomotives, and reduce track maintenance costs.
Count on Class I’s ripping up underutilized yards in prime locations and then selling the property to make way for, say, a truck-served Amazon warehouse. The old yard’s switching work can always be moved to smaller, outlying yards.
Main lines won’t be immune. In corridors where two railroads operate parallel routes, they can decide to downgrade or abandon one main line while sending all their trains over the superior main line. An example would be Norfolk Southern shifting trains to CSX’s high capacity former New York Central Water Level Route between Cleveland and Selkirk, N.Y., and spinning off or ripping up the single-track former Nickel Plate, Southern Tier, and Delaware & Hudson mains.
Sharing main lines would further reduce track and signal maintenance costs while creating a golden real estate opportunity. In traffic-clogged metropolitan areas, it’s not a stretch to imagine the conversion of redundant railroad rights-of-way into congestion-free toll roads for trucks. Railroads would get a one-time windfall from selling the property. And they’d forever be rid of the related property taxes.
This is a dark scenario for those of us who are champions of steel wheels moving on steel rails. No one wants to see more freight hauled by Peterbilt rigs and less coupled behind Wabtec locomotives. Yet, thanks to Wall Street pressure, it is a future that may await.
Wall Street’s demand for operating ratios around 60% means that railroads can’t go after freight that might come with a profit margin of 25% or 30% but is otherwise perfectly suitable for rail. At the STB hearing, shippers and regulators questioned whether this focus on only the most profitable traffic was a violation of the railroads’ common carrier obligations. It’s a fair question — and a sign that they believe the industry is heading in the wrong direction.
You can reach Bill Stephens at bybillstephens@gmail.com and follow him on LinkedIn and X @bybillstephens
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Railroads grew freight to record levels after 1980 deregulation. Volumes higher than at any time before. With less resources. Certainly they can continue that rate or increase. Ultimately there are only 3 ways to make economical power and that’s Coal, NG, Nuclear. Most modern plants can burn Coal and NG and that results in the best pricing for the consumer. They can be clean and efficient if allowed to be built rather than artificially held back by extremists groups.
Bill, you are “right on” once again. But, I, too, having been in or near the short line portion of the rail freight business for now a quarter of a century, see no miracles on the horizon. EXCEPT for bringing on business that, while perhaps not achieveing the desired gross margin, brings in revenue at virtually no increase in cost. This is where short lines come in. Have the Class I’s work aggressively with short lines to land new carload and (where it can be done) unit train business. The Class I already interchanges with the short line, likely three or five days a week already. If a few more cars are added at the point of interchange by the short line, the Class I incurs virtually no increase in costs. But, somebody, not driven by executive bonuses ties to operating ratio, needs to point the way!
Nationalization… 😀 lol…
Don’t forget that RR’s normally pay property tax on all its inter-structure. No other form of transportation is doing that. It is a major expense, particularly in urban areas.
Please check your facts again Mr. Foster since you are omitting a large portion of the story. The 1980 Staggers Rail Act dramatically reduced the amount and rates of railroad property taxes. In Illinois the valuation is set by an agency of the state government and all railroads in the state receive basically the same valuations.
By my calculations in Illinois railroad property is taxed at a value on slightly above that of active farmland.
Jim,
In PA the railroads annually pay 6% of their accessed value. That’s not a minor expense.
The thing is that no other form of transportation in the country is paying for other than its terminals, freight yards, etc. So it might be less of a burden than pre-Staggers but it is still a burden no other form of USA transportation that I’m aware of has to cope with.
stahher
As long as Wall Street constrains their capital expenditures in order to buy back stock, the only lever left is cost cutting. The rest of their capital has to be used for MoW to keep the lights on. Growth requires a commitment to invest capital and raise their risk floor. If the risk floor is suppressed artificially by pursuing a number like an operating ratio, they will never grow.
Let the railroads manage their capital as they see fit. Let them pay traditional dividends like the rest of the world.
Perhaps Warren Buffett should get five of his uber-wealthy buddies to buy out UP, CPKC, CN, NS and CSX. Then, the whole industry can tell Wall Street where to shove their wallets … and a few other things. America would be so, so much better off for it.
What a sad pathetic group of people talking about a sad pathetic little industry.
First, ALL of you are part of the problem. Once upon a time the railroads moved trainloads of newsprint and then the newspaper all went online (and people started reading them on their smart phones). Once upon a time the railroads move carloads of lightweight coated paper like the kind Kalmbach magazines are printed on. Now we have electronic editions and online forums.
And then there are the whiners and the complainers in the audience (you know who you are). First it was blaming the labor unions until we went to two-man crews, long crew districts and eliminated the caboose. And then it was blaming the Interstate Commerce Commission and until the Carter Administration decided to deregulate the railroads (over their very loud protests at the time I as I might recall).
And if any of you whiners are old enough you will remember that in 1980 everyone seemed to agree that the ability to quickly and efficiently right size the physical plant was an important thing to do. However, without government regulation to prevent railroads from repeatedly shooting themselves in the foot look at what happened
And it was the steamship lines NOT the railroads who first invented the doubletrack concept. And it was a trucking executive (Malcom McLean) in the 1950’s who invented the domestic containers because the management of the Southern Railway was too stupid (as always) to haul his trailers on their trains. So, he used war surplus cargo ships instead to run between the south and the Port of NY.
And btw how many so-called railroad meltdowns have we had in the past 30 years? I’ve stopped counting…
To paraphrase Mr. Shakespeare, “the fault lies not in our stars dear Brutus but in ourselves…”
And for all you “broken records” out there who cannot come up with anything more creative or imaginative than to incessantly whine, moan and cry about the truckers go read my cover story in the Fall Issue of Classic Trains. An extraordinary combination of leadership, creativity and imagination on a scale very rarely seen in our lifetimes produced one of the greatest achievements, accomplishments and breakthroughs in the modern history of railroading. Go figure…
One final thought for all the dumb railroaders in the audience. The newspaper companies have realized they are not in the newspaper business they are in the content management business.
Kalmbach leadership seems to be getting the hang of this too. I used to love watching the late Mr. Wrinn on the Trains videos reciting how many different forms of content delivery he was now involved with. How much of Classic Trains consists of recycling editorial content from 75 years’ worth of Trains magazine? Content is content is content.
If you read my article you will stumble across the secret to our success. It’s called “Be Like Mike!” Mr. Haverty decided that if you can’t beat them join them. At some point in his illustrious railroad career, he decided that he wanted to be in the trucking business but did not want to own a trucking company. And the rest is as they say history.
And for all your whiners and complainers Santa Fe helped solve the local intermodal drayage issue when we joined with another group of geniuses named Perot to develop the Alliance intermodal terminal and logistics park in North Texas. Now (30+ years later) Union Pacific is building their own version in Dallas
And then another group of genius with the little brown delivery trucks decided to “buy” a Santa Fe rail yard and we collectively developed the Willow Springs/Hodkins multimodal logistics concept.
Like we used to say back in day, “Always on the move towards a better way”.
I mean if this group is so sad and pathetic.. You could very easily go elsewhere and post….
It’s ironic you just did the same thing here about people’s opinions, and views…
“And it was a trucking executive (Malcom McLean) in the 1950’s who invented the domestic containers because the management of the Southern Railway was too stupid (as always) to haul his trailers on their trains.”
You, sir, are very wrong about this.
Domestic containerization was started in ernest by the New York Central under its president Alfred Holland Smith circa 1923. Smith had McLean beat by 35 years.
Smith’s containers provided better service at lower cost to shippers. All the while making more money for the railroad because of efficiency. The concept grew on the NYC and spread to other railroads.
In 1931 the stupid government regulators put a stop to it by ordering the container rates increased to non-competitive levels. (They didn’t understand what was going on.)
Malcom McLean didn’t invent containerization; he was just the first person the government fools allowed to use it.
Please know your history before you cite it.
@Kenneth Strawbridge, Right on, the ICC’s absurd regulation on the industry allowed Malcom McLean a headstart ..
Right-of-way sharing in order to abandon parallel routes almost sounds like it could be subject to antitrust laws, unless both parties can agree to share ownership and maintenance of the remaining right-of-way and not show preference to either railroad, which sounds like a bigger net cost than savings and ultimately would require more work from both railroads (your specific example encompasses hundreds of route-miles).
If not, whatever railroad abandons its route becomes the other’s tenant and would have to pay the other to move its own freight – meaning whatever railroad owns the segment generally has a pricing influence on all freight moving over a shared segment. An example is the whole trackage rights plan NS intends to run its intermodal train under in CSX’s Pan Am deal.
The exact opposite would be Reciprocal Switching, meaning no routes are abandoned but each competing railroad is allowed to access both routes if they think they can provide better service.
Wall st and PSR will destroy the railroads, I see it first hand every day.
A depressing analysis, Bill, but unfortunately accurate. Somehow, the playing field has to be more level. Rail has been fighting a losing battle since the Interstate Highway act of 1956. Trucks don’t have to worry about infrastructure investment and maintenance and don’t come close to paying for the use of – and damage to – roads. A railroad growth strategy would benefit shippers, the public and the environment, but will not be possible under the current structure of differing infrastructure ownership and pressure to benefit only large shareholders.
I’m a free-market libertarian type of guy. I’m not in favor of the government seizing the railroads, but there comes a time when the government has to act before the last siding is torn up and the last classification yard closes. Our socialist government that regulates every aspect of our lives can’t do its real job, which is to get the trucks off the road.
I streamed that 1970’s classic movie “The Man Who Fell To Earth”, which was set in New Mexico. Not only has lead actor David Bowie since died, but so have those Santa Fe boxcars shown moving in the backgrund.
I question domestic intermodal. Sure it’s better than nothing, but seems to me that it relocates the heavy-haul highway trucking — at both ends of the shipment. We need to go back to boxcars before there’s nothing left for the railroads. Our government can do something useful — for the first time in recent memory — by taxing heavy-haul trucking to the extent of the damage it does and the costs that it causes.
I retire in two years and a few months….it’ll all be moot then…
Not exactly John. We need someone to be paying into RRB after you retire and for my current retirement.
Is rail the only industry under Wall Street’s dominion? Why does rail feel that way? What would happen if they shook off their shackles?
Good question. The simple answer is if a railroad steps outside the operating ratio box, an activist investor will come along and put the railroad back in the operating ratio box. Wall Street won’t tolerate volume growth that erodes the operating ratio.
I would say rail is the only shipper that directly maintains its own infrastructure and has to account for the capital associated with that infrastructure. Most airport, highway, and maritime infrastructure (while paid for through user fees & taxes) is not directly owned by its users. I am not an accountant or financier so I can’t say how this difference specifically impacts rail, but it is a real difference and feel like it is more of burden than a blessing.