C. F. Lynch & Associates

They're Back...

By Clifford F. Lynch

DC Velocity, June 2006

For over 100 years, the railroad was the driving force behind the expansion of our nation’s frontiers. Beginning with the 13-mile Baltimore & Ohio Railroad in 1828, tracks rapidly sprang up like weeds. By 1840, there were 3,000 miles of rail; and on May 10, 1869, the first transcontinental railroad was completed. Seventy years later, the country boasted 186 Class I railroads, which operated an astounding 386,000 miles of track.

But as for-hire trucking service became more readily available, the railroads’ near monopoly began to crumble. Though innovations such as trailer-on-flatcar (TOFC) transport helped keep the industry afloat, some carriers were forced to curtail capital spending, and tracks and equipment fell into disrepair. Competition only intensified after the industry was deregulated in 1980, resulting in further consolidation and track abandonments. Until recently, it appeared that the six surviving Class I railroads might have to settle for a future hauling heavy bulk commodities, what those in the industry call "slow, dumb freight."

But the weeds have given way to roses, and today the industry finds itself in its strongest position in years. With innovative managers at their helm, the rails have been able to capitalize on surging import volumes as well as the trucking industry’s misfortunes. Today, the railroads are handling record volumes. According to the Association of American Railroads, U.S. rails hauled more freight in 2005 than ever before. Car loadings were up 0.9 percent, and intermodal loadings were up 6.4 percent over 2004, which itself was a record-breaking year. And the rails had the operating income (OI) to show for it. For five of the six Class I railroads, OIs ranged from an impressive $720 million to a whopping $13 billion. (The sixth, KCS, reported only $61 million in operating income after suffering heavy losses from the Gulf Coast hurricanes.)

This growth has not come without problems. Train speeds and service levels have slipped, and in some areas, increased traffic has resulted in significant congestion. Recently UPS was forced to divert some of its traffic from rail to truck because of the rails’ sagging on-time performance record.

These are not problems that can be solved overnight. The necessary infrastructure expansions will require both time and money – it costs more than $1 million per mile to lay new track. But what makes today’s circumstances different from those in the past is that rails have at least some capital to work with and they’re headed by creative CEOs who know how to use it. Notwithstanding the service issues, results have been impressive (and a little surprising to many long-time railroad watchers). BNSF was recognized by Toyota Logistics Services for Excellence in Quality Performance in 2005. CSXT received a similar award from GLOVIS America, the logistics provider for Hyundai. CSXT has also made headlines recently by announcing plans to open a new integrated logistics center in Florida that will accommodate truck, rail and warehousing operations.

And the beat goes on. This year, Class I railroads will spend $8 billion on new track, new equipment and infrastructure improvements. This is 21 percent above 2005 levels, and it’s the highest ever for one year. With all the catch-up work to do, however, there will be a continuing need for significant amounts of capital. Governmental assistance may be necessary, either through incentives or some type of public-private alliance. Some will protest, but it is clear that now, more than ever before, we need a strong rail infrastructure. And it is also clear that the railroads and their management would be good partners. To paraphrase Larry, The Cable Guy, "They’re gittin’ ̓er done."



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