Railroad revival
Wed Mar 23, 5:20 PM ET
By Marianne Lavelle
It's the modern version of the race to build the transcontinental railroad. But instead of creating a gateway to the riches of the West, the nation's two largest railroads, Union Pacific and BNSF Railway, are battling it out for the biggest share of the new gold rush from the Far East. Both lines are feverishly laying track, building terminals, and hiring workers to move nearly 48,000 containers of goods per week, many arriving in ships from China, to consumers across the United States. "There's more demand for rail than at any time probably since World War II," says Roger Nober, chairman of the Surface Transportation Board, the federal agency that handles rail rate and service disputes.
• Money & Business
• Education
• Health News
• Washington Whispers
Most businesses would be delighted to see the demand growth that the railroads are facing. But for an industry that has spent more than 50 years scaling back, the surge isn't easy to absorb. The railroads now are being called upon to make billions of dollars in long-term investment and revamp operations that were more suited to chugging down the track with commodities like coal, chemicals, and grain rather than speeding consumer goods like jeans, dresses, and DVD players to the nation's superstores.
So far, the No. 2 carrier, known as Burlington Northern Santa Fe until shortening its moniker earlier this year, has taken the lead. While its larger rival has been beset by congestion, deteriorating financial results, and even bad weather, BNSF of Fort Worth had the best quarter in its history at the end of 2004 and a nearly 80 percent boost in its stock price over the past year. It is winning a larger slice of the new business in transporting consumer goods. But the contest is far from over. Omaha-based Union Pacific, which saw its profits plunge 76 percent in the last quarter of 2004, is working hard to catch up. And for all the potential the global economy has to offer, both railroads face big hurdles, both economic and political.
It's a reversal of fortune for the railroads, which were pushed into a slow decline when the rise of the interstate highway system in the 1950s made trucking the primary means of shipping goods. Many went bankrupt, and after Congress largely deregulated the industry in 1980, the railroads abandoned thousands of miles of track, and bigger companies gobbled up smaller ones. In fact, more than 75 percent of freight revenue today is generated by the four remaining big railroads (UP and BNSF in the West and Norfolk Southern and CSX in the East).
But a funny thing happened after all that consolidation. More shippers began seeing advantages in sending goods by rail than by road. For one, trucking costs are high thanks to a chronic shortage of long-haul drivers and skyrocketing insurance premiums. Traffic jams in urban areas have made truck transport less reliable. High oil costs have hit truckers far harder than they have the railroads, which are three times as fuel efficient. So in the past two years, with Chinese imports flooding ports at the same time that farming, mining, and manufacturing facilities were rebounding from the recession, the choice for shippers was clear. "As Asian imports and economic activity have increased, rail was the most efficient way to take these goods long distances," says Nober.
Turned away. That's why United Parcel Service has become one of rail's biggest customers, spending $750 million last year to ship items by train. "Whenever we have a package sent via our ground service that's going to run 700 miles or more, we will always look for a railroad option," says UPS spokesman Norman Black. "It is the most efficient and environmentally effective way to move that kind of distance." And yet, last year, UPS was forced to put more of its brown trucks on the road, outfitted with two drivers working nonstop, after UP canceled a contract to move the delivery company's packages in a special high-speed, cross-country service.
UPS was just one of many customers that Union Pacific asked to scale back their use of the rails last year, as it tried to get a grip on congestion problems centered on Southern California. The nation's two busiest ports, Los Angeles and adjacent Long Beach, are the intake points for much of the so-called intermodal freight--containers that are easily transferred from ship to train to truck--that is straining the railroads. Intermodal volume on the railroads increased 10.4 percent last year, topping 10 million containers and trailers for the first time. And early statistics show growth continuing at a similar record-breaking pace in 2005.
"Obviously, we always like to have the extra business," says John Kaiser, a UP vice president. "But to some degree we didn't foresee it continuing at this kind of strength as long as it has. We found ourselves short of people and resources." A large number of UP's workers, for example, took early retirement just before the pickup in business began in 2003. And there simply are not enough tracks or locomotives to move merchandise quickly enough for shippers. "In many ways, we've been able to take advantage of investments made decades ago," says Kaiser. "But we're to the point now where in several of these corridors and lanes, we need to spend a significant amount of money."
Industry observers say that BNSF got a head start down that track. In 2002, BNSF Chief Executive Officer Matthew Rose proclaimed the railroad was spending $5.5 million per day on improvements to handle more intermodal business, including a massive project to lay double and triple tracks along the 2,200-mile length of the Transcon--its big line from Los Angeles to Chicago. By the end of this year, all but 86 miles of that job should be complete. Today, Rose says the need for investment was obvious: "On the trans-Pacific trade, we had seen a pretty strong drumbeat for a number of years."
But when the economy was in the post-9/11 doldrums, it was not always apparent, especially on Wall Street, that BNSF was making the right move. "I'll raise my hand and plead guilty as charged," says transportation analyst Donald Broughton of A. G. Edwards & Sons. "I criticized them for their return on investment," says Broughton, who questioned the railroad's capital spending. "Their answer was, 'We're not building for the next quarter but for the next decade. We want to make sure our systems are capable of handling economic demand when it does develop.' That was strategic thinking." As a result, BNSF has captured a greater share of the consumer-goods business. In the first nine weeks of 2005, for example, its intermodal volume was up 17 percent, while UP saw an 11 percent increase.
UP, which hauls 60 percent more cars on nearly the same amount of track as BNSF, is working to solve its service woes. Last year, it hired 5,500 new train operators, and its board approved $1.3 billion in investments over the next four years on intermodal operations, including new or improved terminals in Dallas, Memphis, and Salt Lake City, among other cities. UP is also laying an additional track alongside its 750-mile Sunset route from Los Angeles to El Paso, Texas, at a rate of 50 miles per year. It has employed industrial engineers to help shave its average dwell time in the terminals, which is currently nearly 30 hours, compared with 10 hours for BNSF. For example, instead of running long trains of cars bound for different locations that need to be decoupled en route, UP plans to split freight into shorter trains of cars all bound for the same location. Despite its plans, UP has had a rough start this year. The deadly mudslides that hit California in January knocked out service on four of its five lines out of Los Angeles. BNSF's service was largely unaffected by the severe weather.
As both railroads have focused their attention on the intermodal business, some traditional industrial customers feel shunted aside. In Houston, Lyondell Chemical saw shipping times stretch from 10 days to 18 days because of delays in UP's service during the pre-Christmas crunch. In the rail business, intermodal freight takes priority over the "carloads" of industrial materials. As Broughton of A. G. Edwards puts it, "No one needs to move coal overnight." Coal, in fact, remains the single largest commodity moved by rail, accounting for 42 percent of the industry's volume. But in 2003, the revenue the rails realized from intermodal edged past coal revenue for the first time, marking what many think will be a permanent shift in the industry.
One-track towns. The capacity squeeze on the railroads, naturally, has led to higher prices for customers, which has created a backlash. Some shippers are even lobbying Congress to reregulate the industry. Legislation is expected to be introduced this month that would give customers greater leeway in challenging rail rates under antitrust laws. Criticism of the railroads is especially severe in parts of the country that have only one rail service, where rates are particularly high. Steve Strege, executive vice president of the North Dakota Grain Dealers Association, complains that growers often have wheat piling up in storage as they wait for word of the next train from the only freight hauler in the state, BNSF. It's a stark contrast to the constant train traffic in and out of the crowded ports of Los Angeles and Long Beach. "They're siphoning off their resources over there rather than putting it here," Strege says. "We pay such high rates here we ought to be getting very good service."
Meanwhile, the Port of Los Angeles last month began discussions with BNSF to develop a new facility near the docks to transfer containers directly onto train cars. UP already has such a terminal, but BNSF has to truck the containers to its rail yard 20 miles away. Los Angeles Mayor James Hahn has touted the move as "benefiting our commuters, our communities, and our environment."
Even more projects are underway to give shippers incentives to use rail instead of trucks to reduce traffic on Los Angeles's famously congested freeways. But as shippers can attest, the nation's train tracks are becoming equally clogged. There's sure to be a lot more working on the railroad ahead.
DOUBLE TRACKS
BNSF Railway / Union Pacific
Union Pacific hauls more freight than BNSF but lags on some performance measures. And higher revenue per car hasn't translated into superior profits.
BNSF RAILWAY Union Pacific
Rail cars in service 199,413 322,009
Total miles of track 32,000 33,000
Train speed 24.3 mph 21.0 mph
Terminal wait time 9.9 hours 29.8 hours
Average revenue per car $1,167 $1,282
Source: BNSF Railway, Union Pacific
Average weekly numbers, Jan. 1-March 11, 2005; fourth-quarter 2004 financials
story.news.yahoo.com |
