After years of retrenchment, railroads across North America are reporting record profits and rolling forward with massive expansion projects of the kind that haven't been seen in decades.
The growth has been fueled by a continuing flood of cargo containers filled with Asian products, which ended the coal industry's 102-year streak as rail's biggest revenue generator in 2003 and has surged farther ahead since then.
Railroads are gaining ground on the rival trucking industry, which has been suffering from sharply higher diesel costs and a shortage of long-haul drivers. But companies that move their goods by train are complaining about increasing rates and delays.
"It's a new day dawning for the railroads," said Don Hodges, whose Hodges mutual fund lists railroads as some of its largest investments. "The railroads have been underperformers for so many years that people stopped paying attention to them. I think there is a lot ahead of them even yet."
The change is most evident along the route from the ports of Los Angeles and Long Beach, Calif., to Chicago, the nation's busiest freight corridor for intermodal shipping traffic: the large steel cargo containers and truck trailers that can move by ship, rail or truck.
Southern California's biggest movers of intermodal traffic, Union Pacific Railroad and the BNSF Railway Co., posted strong earnings for 2005. That performance contrasted with the railroads' struggle in 2004 to keep pace with crushing congestion that began at the ports and crept inland to the tracks, which had to turn away cargo or leave it sitting for as long as two weeks before moving it east.
Union Pacific Corp. of Omaha, Neb., the nation's largest railroad, reported 70 percent growth in 2005 net income to $1.03-billion while revenue jumped 11 percent to $13.6-billion. Burlington Northern Santa Fe Corp. of Fort Worth, Texas, which owns the second-largest railroad, earned a record $1.5-billion, up 93 percent, on revenue of $13-billion, up 19 percent, for 2005.
No. 3 CSX Corp. reported 2005 net income rose 237 percent to $1.2-billion and 2005 revenue increased 7 percent increase to $8.6-billion. No. 4 Norfolk Southern Corp. saw its net income rise 39 percent to a record $1.3-billion in 2005, while revenue rose 17 percent to $8.5-billion.
"I am particularly pleased that we converted strong revenue growth into a significant increase in operating income," Union Pacific chief executive James Young said about his company's 2005 performance in a conference call with investors and analysts. BNSF chief executive Matthew K. Rose, in a similar call, described "a systemic change in the demand for rail transportation . . . and this new environment creates tremendous opportunities for us to grow business."
Despite its turnaround, Union Pacific is receiving relatively little praise on Wall Street.
A.G. Edwards & Sons analyst Don Broughton, for instance, took Union Pacific to task for its "anemic" 5 percent growth in intermodal cargo volume, which would have seemed strong in almost any other year. BNSF managed nearly 10 percent intermodal growth. Industrywide, intermodal rail freight rose nearly 7 percent to 11.7-million containers and trailers in 2005; total volume, which includes freight moved in rail cars, rose 2.4 percent to $1.69-trillion ton-miles.
"The industry for many years was cursed with overcapacity. Now, we aren't. It's a sea change for us. We have gone from having to chase freight business to having freight customers chase us," said Tom White, spokesman for the Association of American Railroads.
Railroads move more than 40 percent of the nation's freight tonnage compared with nearly 30 percent moved by truck, but railroads reap about 10 percent of freight revenue while trucking companies take in about 80 percent, according to the rail trade group. Railroads are gaining more of that revenue because the goods moved in cargo containers tend to be more expensive than the coal, grain and other commodities that ride in rail cars.
In addition, the greater fuel efficiency of trains in an era of volatile prices and dearth of truck drivers are having an effect on long hauls, transportation analysts said. The American Trucking Association said that the nation is 20,000 short of the drivers it needs.
Business has been so brisk that railroads are having trouble maintaining their targeted average speeds and delivering goods on time. Meanwhile, they've been able to pass along fuel-price increases and raise rates for the first time in years, by an average of 15 percent between November 2004 and November 2005 for intermodal cargo, according to Logistics Management, a trade magazine for supply chain professionals.
Neither trend sits well with customers.
YRC Worldwide Inc., the Overland Park, Kan., company that until recently was known as Yellow Roadway, moves intermodal freight with its trucks and by rail. YRC chief executive William D. Zollars last month blamed railroad rate increases, new charges for trailers that formerly were free and service problems for reducing company earnings.
"On-time rail performance continued at well below acceptable levels, which has caused additional inefficiencies in our networks," Zollars told analysts.
Atlanta-based package shipping giant United Parcel Service has paid out $1.5-billion to "every railroad of consequence in North America" since the start of 2004 to send items moving by ground to their destinations. Deteriorating on-time performance has become intolerable, spokesman Norman Black said.
Jim Hathaway, general manager of the Dunn Energy Cooperative in Menomonie, Wis., said the co-op will need to charge its 9,000 electricity customers as much as 15 percent more because BNSF has raised rates on the utility's coal shipments.
Hathaway is urging the coop's customers to support a bill introduced by Rep. Mark Green, R-Wis., in 2005 that would strip the railroads of antitrust protections.
To accommodate the freight deluge and cool customer anger, railroads began investing heavily in building track and buying equipment in 2004.
BNSF says it will increase capital spending by about 10 percent to $2.4-billion on new track, 9,000 new double-stack cars and 310 locomotives in 2006. Union Pacific will spend about $2.7-billion, down slightly from $2.9-billion in 2005, on 145,000 tons of new rail, 200 more locomotives, 2,700 new or leased rail cars, and to hire 3,600 trainmen and engineers.
But rail experts and customers fret that even that pace of investment among the big railroads won't be enough.
BNSF provides a clear example. Railroad analysts point to BNSF as a good model of how to run a railroad, but even it is running into trouble.
BNSF saw its freight car velocity drop from more than 205 miles a day in 2004 to 183 miles in 2005. BNSF's on-time performance has fallen from 92 percent of its trains in 2002 to 71 percent in 2005, systemwide.
"Railroads are like juggling," said Randy Cousins, a railroad analyst for BMO Nesbitt Burns. "If I keep tossing more balls at you, it's not going to work. The railroads have had so much volume coming at them and the track miles really haven't changed that much."
The railroads say they are doing what they can to keep pace.