The shape of railroading to come

Writing about the welcome but anemic recovery in rail freight volumes a few days ago (see “What Happened to the Railroad Recovery?”) got me to thinking. What’s a reasonable expectation going forward? And do railroads really need to get back to 2007 traffic levels soon to thrive and do well?

I am not in the predictions business these days. Kiplinger’s Personal Finance, the magazine I edited last year, said on its June 2008 cover: “Stocks: The Worst Is Over.” The worst wasn’t over, by a long shot. Now humbled, I confess I have no idea what the economy and the railroad business will be like in 2010 and 2011.

But plenty of other smart people are not as humble as your faithful blogger, and the consensus is that the economy will recover slowly through 2010 and possibly 2011 and that we’ll be a long time returning to the good old days of 2007, when rail carloadings reached a peak. For now, let’s accept that prediction. The truth is, a near-term future of that sort might not be such a bad thing for the railroads.

To give you some perspective, freight traffic for the latest week (ending Nov. 14) was down 9 percent from 2008 and 17 percent from the same week in 2007. The comparisons to a year ago will get better and better as the next 12 weeks go by, because at this time in 2008 rail carloadings were falling off a cliff. But it’s the 2007 benchmark that’s daunting. That 17 percent gap is a lot of lost business to make up.

On the other hand, a surprise to me has been the benefits that recessions bestow on railroads. Train velocity shoots up, yards empty quicker, delivery dates are met with more consistency and in general, everything works more smoothly, thanks to the bad times. The least productive assets, particularly locomotives, are sidelined. All of these trends enhance efficiency. Operating ratios (the portion of revenues eaten up by operating expenses) ought to be spiraling upward when there’s less business to absorb the high fixed costs. Instead, they are declining for some railroads and moving up only a bit at others.

So you have to wonder: Might business levels in 2010 and 2011 that fall somewhere between what we see now and what we had in 2007 be good for everyone other than idled railroad employees? Lean and mean, railroads could absorb 7-10 percent more carloads without their costs rising that much (and without customers complaining about inconsistent deliveries).

Or look at it this way: Every time business goes gangbusters for Union Pacific (to cite just one example), that railroad gums up quickly, with velocity plummeting, terminal delays soaring, and costs escalating out of control. UP has a complex network with many choke points. Back off the business level a bit, and watch how nicely it runs.

My thanks to Jim McClellan for inspiring this little essay.—Fred W. Frailey (ffrailey@gmail.com)