More on capital spending

Readers ask questions about railroad capital budgets and in so doing, reveal what could be misconceptions. The Association of American Railroads says the industry will spend $29 billion in 2015 “to build, maintain and grow the nationwide freight rail network that powers the U.S. economy.” I am told by economists that this is a different definition of capital spending than most chief financial officers would use. But let’s accept it as accurate.

Twenty-nine billion bucks is a lot of dinero, or as AAR puts it, $3 million an hour. Any way you look at it, this is an impressive sum, and by historic standards, a rapidly growing number. But the mistake that some of you are making is to think that this is all expansion spending. The vast majority of this spending is to replace existing track and equipment, not to add capacity.

Let’s use Norfolk Southern as an example, because NS has broken down its capital budget quite nicely. Of the $2.4 billion capital budget, 71 percent will go into replacement of existing assets, and another 9 percent into positive train control. Only 20 percent of that budget will involve physical expansion of the plant, such as new track and terminals.

Is $480 million a respectable number? Of course it is. But you have to judge it in comparison to the need. Norfolk Southern was on its knees, crawling, almost all of 2014, unable to credibly handle a surge of business along its northern lines. Today its service metrics, while improved from their nadir last November, continue to stink. It’s not so much that total traffic has grown, as that it has shifted, from the coal corridors to the northern east-west corridors. Unfortunately, you cannot pick up track and yards and move them from one place to another.

Given these facts, it is kind of startling that Norfolk Southern would spend more than twice as much on share buybacks this year as on expansion of its infrastructure, to handle existing business better and to invite more shippers to sign on.—Fred W. Frailey