CAPITAL INVESTMENT by the Class I railroads in North America continues to rise. We have reported before that the operators are moving rapidly to add extra capacity on key corridors in the face of unprecedented levels of demand.
Rolling back decades of downsizing is not cheap. According to the Association of American Railroads, the US Class 1s will invest more than $8bn in infrastructure and rolling stock during 2006, a 21% increase over 2005 and an all-time record for capital spending. And half as much again is being spent on routine maintenance and repairs.
On April 13 CN announced a $100m project to rebuild and expand its Johnston Yard in Memphis as its main hub to serve the Gulf region. A similar sum is being spent by BNSF to expand intermodal facilities in the Los Angeles area and add extra main line tracks at Barstow. UP and BNSF are to spend $100m on 64 km of third and fourth main tracks on the jointly-operated Powder River coal line over the next two years.
With traffic volumes continuing to climb, and road hauliers under pressure from fuel prices and a shortage of drivers, the railroads have been able to drive up freight rates. The result has been record earnings and improved stock market ratings. At the end of April Norfolk Southern announced a 57% increase in net earnings during the first quarter of 2006, a week after UP reported its profits for the period had doubled. Double-digit revenue growth also drove BNSF’s first-quarter profit up by 28%.
But there is a cloud on the horizon, in the form of protesting shippers dissatisfied with the quality of service on offer. More than 200 rail users lobbied Congress last month, although their message was unclear. Some want tax incentives to encourage investment, and others would prefer open access competition to keep rates down. ’Captive shippers’ reliant on rail to move bulk commodities want the Surface Transportation Board to re-regulate rail freight rates.
Holding down freight tariffs for bulk commodities might improve the profitability of the shippers and utility companies. But preventing the railroads from pricing up in the face of market demand would impact on their ability to invest in much-needed extra capacity. So where’s the big win?