This is Not Your Father’s Railroad

Freight can be a good barometer of economic activity. Simply stated, the movement of goods indicates commerce.

I just finished writing a story for Site Selection magazine, soon to be published, about GE Transportation choosing Fort Worth, Texas,  as the site for a new $96 million plant to build locomotives. On May 12, the same day that GE announced the future plant in Fort Worth, the company also said it would hire an additional 250 workers at its  Erie, Pa., plant, which has been the only place where GE has built locomotives for more than 100
years.

Leave it to say, GE would not be building the new plant in Fort Worth and expanding its workforce in Erie were it not for increased demand for locomotives by an industry once considered almost comatose. But it is pretty clear that our nation’s railroads have made an impressive comeback.

An Admitted Pet Peeve

Please bear with me on this aside, but one of my pet peeves is the pompousness frequently exhibited by “experts” in business and academia, who have a penchant for trying to complicate things far more than they need to be. They do this by speaking in opaque terms so as to impress others that they are endowed with some special knowledge.

But more often than not, you can cut through the clutter and the jargon, and recognize that these puffed-up experts are talking about something that is not all that complicated. Now it may have taken research, study and grunt work on their part to arrive at a conclusion, to which they deserve credit, but please, speak to us in plain English.  It really is a wonderful language.

And now I step off my soapbox to return to my original point — as the economy improves the demand for rail and truck shipments will continue to rise. To which you will rightly say, “No kidding Sherlock.”

You Want Numbers, I Got Numbers

But I will provide you some numbers to make my point and so that you, too, can bore friends and family. So here’s some facts and figures for you to ruminate on.

U.S. rail volumes excluding grain and coal shipments rose 7.9 percent to 4.6 million carloads in the quarter ended March 31, according to data compiled by the Association of American Railroads (AAR) in Washington. It was the second-highest increase in a first quarter, after last year’s 9.3 percent advance.

Locomotive demand is climbing, too. GE Transportation’s first-quarter backlog was about $4.1 billion, 40 percent more than a year earlier, GE Chief Financial Officer Keith Sherin said in an April 21 conference call. First-quarter orders for rail cars, which GE doesn’t make, rose to the highest since 1997.

Investment by railroad operators for product and service improvement is far ahead of other transportation industries. Very few U.S. industries can match the railroad operators with respect to high capital investment rates. Fiscal 2010 witnessed a record breaking $10.7 billion capital investment, and AAR has reported that the freight railroads will spend a record high of $12 billion in 2011 for manpower recruitment, installation of new rail tracks and other capital projects. The railroad industry is expected to hire 10,000 new employees in 2011.

On the trucking side, where a majority of America’s freight is moved, the American Trucking Association, predicts that freight tonnage will grown 24 percent by 2022 with revenue ticking up even more – 66 percent.

“The trucking industry continues to dominate the freight transportation industry in terms of both tonnage and revenue, comprising 67 percent of tonnage and 81 percent of revenue in 2010,” ATA Chief Economist Bob Costello wrote in his forecast.

Some Reasons Why

Whether it is by rail or truck, there are reasons for the pickup in freight movement. They include:

1) Increasing worldwide demand for coal in power generation means that U.S. coal exports to Europe and other Asian countries are likely to remain buoyant in the near future. This is especially important for rail as coal makes up approximately 37 percent of total U.S. railway carloads in 2010.

2) Industrial production in the U.S. is expected to grow more than 3 percent in 2011, particularly with the rebound of the automotive industry. Intermodal traffic, mainly consisting of containers and trailers, is growing at a whopping rate. In the first quarter of 2011, intermodal shipment volume upped 8 percent year over year.

3) The U.S. government has taken several measures to boost American manufacturing and raise its exports. Indeed, President Obama has announced a goal of doubling U.S. exports over five years. His reasoning, which I believe is valid, is that that “Ninety-five percent of the world’s customers and fastest-growing markets are beyond our borders.”

New export orders for US manufacturers in March rose to their highest level in more than 20 years, according to the Institute of Supply Management.

From the customers’ point of view, rail transport is cheaper and more fuel-efficient than truck and ship transport. As a result, railroads are gaining market share from other means of transport. Several truck operators went bankrupt during the peak recessionary period that helped railroads to become default freight  transporters for mid-to-long distances. 

Some industry observers predict rail activity could double by the midpoint of the century, when our country’s population is expected to grow by more than 100 million people.  North American rail-freight rates are predicted to continue to be the lowest or one of the lowest in the world, and the industry is expected to finance most or all of its capital requirements without public support.

Holding Their Own Future

Railroads probably hold their own future by their choice of future investment, Francis P. Mulvey, a commissioner of the Surface Transportation Board in Washington, told the Wall Street Journal.

“Whether the railroads can increase their share of truck-competitive traffic will depend on railroad pricing and service policies, and on the railroads’ willingness to invest in capacity. Capacity investment, in turn, will depend on perceived profitability of those investments. If new rail capacity is dedicated to higher-speed passenger operations or commuter-rail services, the railroads might not be able to handle much more freight business.”

The fact of the matter is that shipping by rail is for the most part less convenient than by truck. But in an era of scarcity and pressure on costs, there has been a growing focus on efficiency. The best thing railroads have going for them is their inherent efficiency, be it in land usage or energy consumption or cost of moving a ton mile of whatever needs to be moved. That plays into railroads’ strength.

In the past, railroads have not been known to put a lot of emphasis on customer service. For years, the attitude of railroad industry was one of arrogance — “You get what you get, take it or leave it.” As a result, there was little emphasis on improved transit times and providing consistent reliability.  Some shippers, who felt they were captive to a single railroad, even have feared that complaining would somehow put them at risk of having to pay higher rates.

Today, the once dying industry is far more responsive to customer needs and that’s good for everyone. Railroading remains a complicated, network business. And while it lacks the flexibility to be as responsive to sudden changes as trucking, it would appear that we are building an innovative rail network than can compete globally.

And that, my friends, is a good thing. This is not your father’s railroad. This is something much, much better.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Red Oak, Texas — www.barberadvisors.com