Railroads: Industry Outlook

"The freight-rail system carries 16% of the nation's freight by tonnage, accounting for 28% of total ton-miles, 40% of intercity ton-miles, and 6% of freight value," said the report. "If all freight-rail were shifted to trucks tomorrow, it would add 92 billion truck vehicle-miles of travel (VMT) to the highway system and cost federal, state, and local transportation agencies an additional $64 billion for highway improvements over the next 20 years. This $64 billion is a conservative figure that does not include the costs of improvement to bridges, interchanges, local roads, new roads, or system enhancements. If these were included, the estimate would double." - Railway Age March 2003

Competition: Railroads operate similar to that of public utilities - they are essentially oligopolies or another way of putting it - monopolies. In general, railroads own the track and land for their rails, of which they are responsible for servicing and maintaining. On the whole, competition is limited by freight type and location, restricting the level of localized competition that is available to affect pricing. Barriers for the industry are extremely high and capital requirements are intensive, particularly considering the capital costs to acquire land, rail networks, and freight cars.

Captive Shippers

Pricing Power: Railroads are able to pass through their single largest variable cost via fuel on to their customers. Depending on the direction of their hedges this may take a favorable or unfavorable position when market prices for fuel diverge. The total transport cost per tonne is much much less by rail than it is by other modes, partially due to the capacity and durability of rail cars. Industry operators are able to pass through their largest variable costs to customers while at the same time benefiting from favorable cost economics and superior operational efficiency.

Power or Perception
BNSF Fuel Surcharge Policy

Political Fervor: In order to solve major road infrastructure constraints, the federal government has begun to take strides to revitalize the railroad infrastructure to reduce road traffic and encourage environmental sustainability.

Historically, railroad operators have had a poor reputation for cleaning up spills and waste due to derailments and hazardous facilities. Fortunately enough this reputation is being worked on, and from what I can see, many of the major railroads are making a conscientious effort to clean up hazardous waste when and where it is identified. It is also important to note that the amount of carbon produced per tonnage of freight provides a short term advantage that other modes of transportation do not receive.

American Railroad Association
Transportation and Infrastructure Committee

2009 brings new opportunities and challenges alike for the railroad industry. With nearly a trillion dollars of fiscal stimulus (bailout money and stimulus bill) in play and more to come, it is clear that rail infrastructure is going to be on the agenda.

A few trends to monitor moving forward include:

• Chinese Coal Consumption
• Governmental Infrastructure Policy
• Motive Technology (Ethanol, Hybrid)