Will the gov't eventually need to step in?

[Anonymous]

There's a lot of evidence to support the theory that Wall Street is running the Class 1 railroads. A lot of decisions are made in an effort to dress-up the financials for the current quarter and less is being done to improve the RR for the longer run. Wall Street wants railroads to provide returns like companies that are in entirely different industries (retailers, technology co's, dot-coms, etc.) Those companies may have higher returns, but they have more risk. How many of those companies have a history nearing 150 years? How many will be around 150 years from now?

That Wall Street mentality is forcing RR management to act short term. It rewards them for doing so. It is also causing them to lag demand in purchasing equipment and in building infrastructure (track, terminals, etc.) They want to run existing capital at "110%" to show superior returns. However, the dangerous downside is that you can't meet demand. Simple minds would say that the simple answer is to raise prices and the market will sort itself out. That will drive some traffic away from the rails to trucks, but then you're forcing freight to a less efficient mode (ie. fuel, labor efficiency) for longer haul moves. Not good policy.

Infrastructure in the rail world takes a long time to build. By the time a carrier works through local government objections, citizen objections, EPA issues, environmental impact issues, obtains permits, and actually builds a facility, it can be years. Global 3 at Rochelle, ILL took about 7 yrs from inception to opening. That's one example of many that have take greater than 5 yrs to build.

Additionally, since our Federal Govt has given away hundreds of thousands of great paying US manufacturing jobs to China, the supply chain has gotten a lot longer. Products that used to be manufactured close to your home is now made in Bejing. The product is shipped by water, then has to be hauled from the coast to your neighborhood. More goods moving more miles.

With the lags that Wall Street is driving, the delay in building infrastructure and the growing length of the supply chain, the RR's (all 4 US majors) are getting stretched thin.

So when does it stretch so far that it breaks?

Does the gov't end up stepping in at some point and start prioritizing the freight that will move (ie. essentials (coal for energy, food, clothing, housing materials.))?? Do the loads of DVD's, TV's, and other non-essential widgets end up getting a lower priority and get left on the dock for a while so that a load of processed food gets on the train?

Its not there yet, but if the economy gets much stronger, well.........

[M636C]

While I don't agree with all of dblstack's comments, it does seem to be true that the pressure for return on capital to the exclusion of most other things has probably resulted in the recent delays on UP, with the road being reluctant to put more money into human resources (loco crews) until the last minute, or in that case after it.

Globalisation is the inevitable result of the improvement in communications, and the ability to get things done reliably in other parts of the world. This will continue to increase, and eventually the people with Indian accents who answer your American Express queries won't have to pretend not to be in Delhi, because that's where you'll expect them to be. After all they can read your details from the data base as easily as someone in New York or Paris or Beijing, and they do speak English quite well even if the accent is strange.

Part of the problem is that the railroads own their right of way, while their competitors, the trucking companies and the air freight operators have their infrastructure provided by the taxpayer via the Federal government.

Suppose the big railroads were happy to sell their right of way to the Federal Government, in exchange for some sort of rights to operate over that track. The government would have to charge access charges, which could be as low as gasoline taxes, which is about all that trucks pay, or as high as the higher charges levied on airlines to use major airports.

Either way, competition would be allowed, so if BNSF upset you with late deliveries, you could ask UP or NS or CSX whether they wanted to take your loads. There would be practical limitations, so depending where you were, it may or may not be viable for a competitor, depending on getting qualified crews, being able to fuel and service locos and so on.

The open access regime in Europe is something like this, although there the governments have traditionally owned the infrastructure, and until recently, the monopoly operator.

Some of the Bush administration comments about Amtrak have indicated a view something like this, although it is possible to get the impression that they would really like Amtrak to fade quietly away with the minimum of financial input.

If the Eisenhower administration had decided to put say 10% of the money spent on the Interstate Highways into a progressively government owned rail infrastructure, the USA would be running passenger trains that would equal anything in Europe or Japan, with private enterprise happy to provide and run the trains the same way Greyhound are happy to run buses on the Interstates. The track required for such trains would allow faster and heavier freight trains, with avoiding lines, tunnels and grade separations to avoid congestion or interference between different types of train.

The railroads have lost their economic "competitive advantage" because they have to fund infrastructure that their competitors do not, and only by minimising this expense can their returns match those of competitors witout this burden. A popular phrase locally is "a level playing field" for competition, but for railroads, it is all uphill.

UP recently decided to send UPS shipments by truck because it was quicker and more reliable in the short term. What if they did that with everything except coal and grain and dangerous goods. Would the average person notice that there were no more Intermodal trains? They'd notice more trucks, but they wouldn't blame UP, at least not at first!

Railroads will only stay around while they can make money and pay their shareholders. That situation might change, and bit by bit, they might go away, like the canals in England.

There is no easy answer, but if the railroads do transfer more and more to road, the Federal Government will have to pay to fix the roads. Maybe the government could achieve more by providing some specific infrastructure (like the Metrolink flyover over the Santa Fe at San Bernadino) where more than one operator will benefit, and charge it to the budget for the surrounding roads, which wil get the benefit through reduced truck traffic.

It's all too complicated for me, sorry!

Peter

[daveklepper]

"Governments" have already stepped in. Does anyone know of a rail commuter operation that is not subsidized by a state or local government? Including investments that also on occasion benefit the frieght business? How about the railroad - State Government partnerships that are three-tracking part of the RF&P, the corridors to the LA Ports, all because of a desire to take truck traffic off highways. We can expect this kind of thing to gradually increase, and this will be the bandaid that will keep the whole shebang going. What is really necessary, of course, in the investment in billions, not millions, the Swiss approach scaled up to USA and Canadian dimensions. Dave Klepper

[mudchicken]

History has proven repeatedly that Uncle Sam can't run railroads effectively.

Now that the folks that tried to run the nations railroads are six feet under (remember USRA)? and the politicians line their pockets with trucking industry cash, they will probably try again.

[daveklepper]

The Government bailed out Conrail, and the loan was repaid by stock. If 2 Billion were invested under Gunn's management in Amtrak, it could then be privatized, with of course all commuter and rural diespensation service subsidized by state and local governments. If the right labor conditions and the sort of super railroads that exist in Japan and Europe existed in North America, corridor high speed and luxury intercity trains, could then make money. That is a big IF. The NE Corridor would then be from Portland, ME down to Richmond, with a Boston connecting tunnel. Springfield's branch would also be high-speed. Ditto Albany. There would be high speed corridors radiating from Chicago to the Twins, Omaha, St Louis-Kansas City, Cincinatti, Toledo-Cleveland, and Detroit. etc. First class service would be spit and polish like the best of the pre-Amtrak railroads, like the Super Chief. But there would be subsidized low cost service to keep communications open with snow-bound cities in winter, commuter service as now but run better . Amtrak would cooperate with railroads in moving freight too. Say several cars of important merchandize failed to meet a connection, and there would be a possibility of moving the cars on the rear of a high speed Amtrak run, assuming the freight cars have the necessary gear for the high speed operation. The frieght railroad would contract with Amtrak to move the cars enabling the freight railroad to meet its comitment to its shipper. Incidentally, this kind of thing was normal practice for many railroads in WWII. Government involvement doesn't mean the Government runs the railroad. Dave Klepper

[Modelcar]

...A lot of good suggestions in above posts....If we could only get there. As Peter indicates of UP shipping UPS by trucks recently....No the avg. person would not notice there are less intermodule trains..but....they sure would notice there being more trucks on interstates...which in my opinion we can't handle especially in summer peak traffic time...They are just about saturated as it is now and more would really raise the danger of travel. And as for the railroads [and Amtrak], performing to meet schedules of shipments now as in WWII...that should be even more possile with the modern equipment compared to what was running back then. All kinds of good possibilities if it just all could be put together somehow....

[jeaton]

The notion that "Wall Street" is running or ruining railroads is not new. I know that at least as early as the 1960's, Bill Johnson, then Chairman and CEO of IC Industries (Illinois Central Railroad) noted that in general, the markets were very focused on short term results. (I am sure such observations were made in earlier times). This never bodes well for cpaital intensive industries, including railroads, but it is a fact of life for any publicly held business.

The particular problem for railroads is that if you start with a plant in decent shape you can "cash cow" a railroad by putting off track and other infrastructure maintenance. Thus, you can come up with pretty good numbers almost until standing cars start falling off the rails. The trick for the CEO is to come up with the right balance the long term needs of the business and the short view of the markets.

Now. you can dump on the "Street" for taking this short term view, but you have to stop to think about just what Wall Street is. We know first that the term represents the markets for the buying and selling of shares of ownership in companies. In spite of incidences of manipulation, NYSE, Nasdaq, American and most other stock markets are a pretty honest excercise in free trade and capitalism. Willing buyers and willing sellers agree on a price.

"Wall Street" also includes the large group of people who buy and sell stocks on behalf of others. I am not speaking just of the broker given power by an individual to buy and sell stock for a personal account. This is a relatively small part of the trading activity. There is much more trading volumn generated by instutional buyers. These are the folks that buy and sell stocks that go into mutual funds, retirement funds and insurance company portfolios.

Often, it is these money managers who are accused of the short term mentality. But, what is the real drining force? Do you own mutual funds, have and IRA, or company sponsored retirement 401K or similar plan, or expect to receive a "public sector" pension?

LOOK IN THE MIRROR!

Jay

[Anonymous]

Although I agree whole heartedly with the idea of separation of infrastructure divisions from operating divisions for the good of the industry (see my previous posts!), I do not believe it would be necessary for the government to own the infrastructure in order for the benefits of open access to accrue. It is possible to run the infrastructure companies as privately held regulated utilities, with the feds giving a few tax breaks here and there to assure their viability (maybe the feds could guarantee a minimum annual dividend to infrastructure stockholders as a "safe harbor" caveat), and under-utilized lines held under public-private entities by involving the states.

Once that is done, the whole collective problem of captive shippers, paper barriers to short lines, inequities in rail car availability, etc. will fade into the annuls of history.

[PNWRMNM]

You are making it all more complicated than you need to. The Govt, state or federal can simply choose to put money into infrastructure. The problem is that rate regulation has bled the industry white since 1906 and govt hiways and barge channels have given competitiors a free ride on their infrastructure.

Direct infrastructre grants are the least harmful intervention available.

Mac

[Anonymous]

Big Gummint is our savior. Big Gummint will eventually step into everything; I'm so glad, because they're so good at all they do. I'm grateful to be controlled by such a friendly, helpful Big Gummint. (It is the NATURE of government to "step in"; that's how a Constitutionally based government becomes Big Gummint! The Founding Fathers built safeguards into our Constitution to prevent or at least, delay the inevitable onset of an all-powerful central government. They'd likely be amazed their system survived as long as it did. [notice I used past tense...it's deliberate...])

[CSSHEGEWISCH]

I'm not sure that the separation of infrastructure and operation into distinct corporate units is all it's cracked up to be. We should hear from our European and Australian counterparts to see how well this actually works.

[jeaton]

Maybe about two years or so ago, Ed Ellis wrote a column in trains on the idea of breaking railroads into separate, but private infrastructure and operating companies. He based his arguements on how the investment community would perceive the financial nature of these two very different entities. From that point of view, the arguements had merit. Right-of-way, track and signals are obviously capital intensive, long run by nature, where operating company costs would be primarily made of immediate, mostly direct expense. It would be easier for the Street to judge the companies, forecast the future, and make the buy or sell decisions.

I think the fundamental flaw is the inevitable conficts that would occur between the two companies. Basicly the infrastructure company, needing to achieve financial goals, may not be as responsive to the operating companies as would be appropriate. "Your'e going to have to make due with that bad track for now." "We don't have the funds to add the sidings to get the capacity you need to handle your growing business." Operating companies might also make demands for maintenance or improvements that aren't really needed. It just leads to a risk avoidance that could ultimately lead to financial disaster.

Bad enough, but if you go to government ownership of infrastructure, you now add the political element to the investment decision. For that reason alone, I would oppose government ownership. I have no doubt that some billions have been spent on projects on The Interstate Highway System that would not have made the cut or at least would have been given a lower priority in the face of a totally rational economic study.

I will agree that somehow changes will have to be made, but there are no easy solutions and you better be careful what you wish for.

[RudyRockvilleMD]

The idea of breaking railroads into infrastructure and operating companies is certainly not working in Great Britain. Consider the high speed derailment north of London in October, 2000. The cause was defective rails. The infrastructure operator, Railtrack, was warned about several stretches of track having defective rails, including the one where the derailment took place, but Railtrack did little if anything about them. This led to a chaotic situation where emergency track maintenance was necessary, and trains were cancelled at the last minute.

The point here is that the operator and the infrastructure owner should be the same just for the sake of responsibility, accountibility, and a smooth operation. The minute you split the responsibility and the accountibility for the infrastructure operation suffers, as it has in Great Britain.

[Wdlgln005]

Of course, the govmt will eventually step in. Most people thing govmt has all the money & they let us have just enough to eat & sleep & pay more taxes.

THe railroads need a fair shake at the tax free bond market, the same as any other mode of transit. Who pays for the airports? Who do you think pays for the highway? I'm sur all the contractors get paid plenty & vote Demopiblican so they can get the next deal. Most states borrow to the hilt to do all these projects, then need big sales/gas tax to pay for it all.

THere's not a railroad that didn't go bankrupt at one time or another & didn't need govmt to get them started or bail them out of trouble. THe limit to the freeway system is how many more lanes can be added to I whatever. Spending on rails will be needed by the states & locals to keep their connection to the national system alive.

[AntonioFP45]

At times it seems that Class 1 railroads make rather bizarre decisions that help shoot themselves in the foot. I never thought I'd see the day when Class 1s are actually turning away industrial customers if their shipments only require a few freight cars.

However, we've seen the bueracracies at work in government run agencies and they're far from efficient.

.

[Anonymous]

QUOTE: Originally posted by Wdlgln005

Of course, the govmt will eventually step in. Most people thing govmt has all the money & they let us have just enough to eat & sleep & pay more taxes.

THe railroads need a fair shake at the tax free bond market, the same as any other mode of transit. Who pays for the airports? Who do you think pays for the highway? I'm sur all the contractors get paid plenty & vote Demopiblican so they can get the next deal. Most states borrow to the hilt to do all these projects, then need big sales/gas tax to pay for it all.

THere's not a railroad that didn't go bankrupt at one time or another & didn't need govmt to get them started or bail them out of trouble. THe limit to the freeway system is how many more lanes can be added to I whatever. Spending on rails will be needed by the states & locals to keep their connection to the national system alive.

You know, you just might be on to something there.

[jeffhergert]

QUOTE: Originally posted by AntonioFP45

At times it seems that Class 1 railroads make rather bizarre decisions that help shoot themselves in the foot. I never thought I'd see the day when Class 1s are actually turning away industrial customers if their shipments only require a few freight cars.

However, we've seen the bueracracies at work in government run agencies and they're far from efficient.

.

Class 1s turn away single carload business? They've been doing that for the last 20 or 30 years. Some more than others.
Jeff

[kevarc]

The FERC is pushing this for the electrical business. They want the utilities to seperate the transmission from the generating/retail business. So far, it has been a giant joke. The companies that are being set up as "independant" transmission entities, get the management people from the utilites that owned them. How independant do you think they really will be?

This is all fine and dandy, but jeaton and Dave Klepper pretty well hit the nail on the head. Until we, as Americans and stockholders - one way or the other, quit having a short term outlook and look at the long term, bigger picture, it will remain this way.

[spbed]

This is very simple stock goes up stockholders are happy. Stock goes down stockholder get upset & the guys in the ivory tower get evicted. [:)]

QUOTE: Originally posted by dblstack

There's a lot of evidence to support the theory that Wall Street is running the Class 1 railroads. A lot of decisions are made in an effort to dress-up the financials for the current quarter and less is being done to improve the RR for the longer run. Wall Street wants railroads to provide returns like companies that are in entirely different industries (retailers, technology co's, dot-coms, etc.) Those companies may have higher returns, but they have more risk. How many of those companies have a history nearing 150 years? How many will be around 150 years from now?

That Wall Street mentality is forcing RR management to act short term. It rewards them for doing so. It is also causing them to lag demand in purchasing equipment and in building infrastructure (track, terminals, etc.) They want to run existing capital at "110%" to show superior returns. However, the dangerous downside is that you can't meet demand. Simple minds would say that the simple answer is to raise prices and the market will sort itself out. That will drive some traffic away from the rails to trucks, but then you're forcing freight to a less efficient mode (ie. fuel, labor efficiency) for longer haul moves. Not good policy.

Infrastructure in the rail world takes a long time to build. By the time a carrier works through local government objections, citizen objections, EPA issues, environmental impact issues, obtains permits, and actually builds a facility, it can be years. Global 3 at Rochelle, ILL took about 7 yrs from inception to opening. That's one example of many that have take greater than 5 yrs to build.

Additionally, since our Federal Govt has given away hundreds of thousands of great paying US manufacturing jobs to China, the supply chain has gotten a lot longer. Products that used to be manufactured close to your home is now made in Bejing. The product is shipped by water, then has to be hauled from the coast to your neighborhood. More goods moving more miles.

With the lags that Wall Street is driving, the delay in building infrastructure and the growing length of the supply chain, the RR's (all 4 US majors) are getting stretched thin.

So when does it stretch so far that it breaks?

Does the gov't end up stepping in at some point and start prioritizing the freight that will move (ie. essentials (coal for energy, food, clothing, housing materials.))?? Do the loads of DVD's, TV's, and other non-essential widgets end up getting a lower priority and get left on the dock for a while so that a load of processed food gets on the train?

Its not there yet, but if the economy gets much stronger, well.........

[Anonymous]

GENTLEMEN THE ENTIRE BASIS FOR OUR POLITICAL AND ECONOMIC SYSTEM IS GREED.THE BIG BOYS IN THE IVORY TOWERS WANT IT AND IF THEY GET IT THE WORKERS WANT IT ALSO . NO ONE THINKS ABOUT THE FUTURE , IF THEY DID WE WOULD NOT SEE SITUATIONS LIKE ENRON ET AL