Railroads without coal

Lehigh Valley. Lackawanna. Reading. Jersey Central. And let’s not forget the Old Woman, the New York, Ontario & Western. What did they have in common? Why, coal, of course. They were the kings and queens of anthracite, and when the fortunes of this hard, high-carbon substance waned in the Twentieth Century, so did the futures of each of these railroads, never to recover. All went bankrupt.

Today, you’d almost think bituminous coal is suffering the same fate. Among the seven Class I railroads, coal carloads are off 8 percent so far this year from 2014. But the trend is snowballing. In the first two months of the second quarter, the decline is 14 percent, for the most recent four weeks, 18 percent and for the latest week (ending May 30), 22%.

On individual railroads, the numbers for the week ending May 30 are even worse. CSX Transportation, -24 percent. Canadian National, -28 percent. Union Pacific, -32 percent. Norfolk Southern and Kansas City Southern, each -33 percent. BNSF Railway is off just 5 percent (its year to date number is actually up 4 percent) and Canadian Pacific is -17 percent.

I’m not going to try to explain (or explain away) the latest weekly stats. They could be related to weather and will improve going forward. But the glory days surely seem to be over. Norfolk Southern’s coal loadings peaked in 2008, and by 2014 had fallen 27 percent, and as noted the plunge is accelerating this year. The story at CSX is much the same—a drop in carloadings of 29 percent in that same 2008-2014 period.

Even at last year’s depressed levels, coal counted for 21 percent of revenues at NS and 22 percent at CSX. So what to do when this traffic disappears is a serious business challenge.

First, you cut costs. With fewer trains on their coal corridors, it doesn’t make sense to maintain them to the same high standard. But that doesn’t get you very far.

So next you disinvest. I could imagine, for example, Norfolk Southern selling its Pocahontas route from Roanoke, Va., to Columbus, Ohio, and associated branch lines to a new regional entity. That regional railroad would share in the revenues from remaining coal traffic and be guaranteed some amount of overhead business, because, after all, this is the Heartland Corridor that NS cleared (with federal government dollars) for double stack trains. But NS would be shorn of this withering appendage and the sizable cost of maintaining it. With smaller overhead and a will to survive, a regional railroad could make a go of it.

Having said this, it would take every speck of resolve by the new NS chief executive, Jim Squires, to do such a thing. After all, coal is the soul of the Norfolk & Western side of Norfolk Southern. It’s like cutting off your arm to save your life. His own executives would resist such a radical move. So maybe Squires will instead look for other underperforming parts of his railroad and sell them. There are probably lots of appendages that don’t do as well financially as the main trunks. Something has to give.

It’s much the same at CSX. I’m told the former Clinchfield Railroad and the connecting Big Sandy Subdivision, an important CSX coal corridor, is down to a couple of trains a day of the black stuff. Maybe it is sayonara time, to let a short line take over. Surely there are ways CSX can concentrate its coal traffic on fewer routes, or spin off big portions. Like NS, CSX has a huge incentive to cut costs and disinvest.

But unless Norfolk Southern and CSX want to go forward as smaller railroads, Squires and Michael Ward, the chief executive of CSX, would be wise to replace their lost business. There aren’t many candidates. Carload traffic generally follows the economy up and down. You’re left with intermodal, which even is this miserable year is up modestly. It’s been this way forever, it seems—this is the commodity that wants to grow.

There’s a catch. Neither CSX nor NS looks very attractive to intermodal shippers today. Truckers strive to operate with near 100 percent reliability. A railroad that isn’t at least 90 percent reliable with intermodal deliveries quickly becomes a headache for its trucking partners. So if they expect a sizable increase in intermodal shipments, these railroads will need to clean up their corridors with the most intermodal business and systemically get rid of impediments. To accomplish this requires capital investment.

And that gets us to the big question: Will they made the investments? So far, no, or at best, at a slow pace. All the railroads are under pressure to raise their depressed stock prices by boosting dividends and buying back shares. You always hear complaints that Wall Street looks only at the short term. Well, here it is in real life.

In the west, matters are a bit different. Union Pacific doesn’t have a true coal corridor; at North Platte, Neb., coal trains join the rest of the crowd and fight for room. Fewer coal trains on UP clears up space for the rest of the traffic and ought to result in a more efficient railroad. From my vantage point, I don’t know whether BNSF Railway is least hit on coal because it is taking business away from UP in the Powder River Basin or because it is busy rebuilding the stockpiles of utilities after a couple of years of poor service. But BNSF does have a sizable corridor devoted almost exclusively to coal, from Montana through Wyoming to Nebraska. At some point it must either begin paring it down or reroute southeast-northwest manifest and intermodal trains through Gillette, Wyo., instead of the roundabout way via Galesburg, Ill., and the Twin Cities. At least that second alternative would partially fill the void left by coal’s decline.

In any event, we appear to have entered the Post-Coal Era of railroading. Coal was a great, profitable business, on a per-unit basis far more profitable than intermodal. The changes that lie ahead will be wrenching, even heartbreaking. But what other choice is there?—Fred W. Frailey