The party's over

Posted by Fred Frailey
on Friday, January 1, 2016

Jack and I left Grand Island at 6:30, fully an hour before the sun appeared behind us over the Platte River valley of Nebraska. West we went on U.S. 30, past Alda, Wood River, and Gibbon. Through Kearney, Odessa, and Elm Creek. Then Overton and Lexington. These are towns along the busiest freight train corridor in North America, maybe the world, triple-tracked for the 100 miles from Gibbon to North Platte. We saw snow-covered farm fields, herds of cattle, occasional cars and trucks. What we did not see until Cozad, almost 100 miles into our day’s drive, was a moving Union Pacific train. “Jack,” I said to my companion, “it’s worse than I thought.”

Jack said nothing, because Jack cannot speak. But even a dog would sense the change that has come over the railroad business. The latest traffic numbers show business in a freefall. U.S. rail traffic for the week ending December 26 was down 18 percent from a year ago. Coal loadings fell a staggering 32 percent, petroleum products and metallic ores both 26 percent. Over all, carload traffic was down 18 percent, intermodal up 1 percent, for the week, versus the same week in 2014.

Maybe those numbers are misleading because of the Christmas holidays. So look at the four-week trends, in descending order of calamity: Kansas City Southern, down 1 percent; CSX Transportation, down 6 percent; BNSF Railway and Canadian Pacific, both down 7 percent; Norfolk Southern, down 9 percent, and Canadian National and Union Pacific, both down 10 percent. For all of 2015 except its last week, only BNSF has held its own versus those 51 weeks of 2014, its loadings flat. At the opposite end, UP is down 6 percent year to date and the seven Class I railroads as a group down 2.3 percent.

This bespeaks a railroad recession. It appears to be worsening, not receding, amid a U.S. economy whose growth remains positive, though anemic. The railroads’ great hope, to build their intermodal franchises, is stalling, and small wonder. The cost of diesel fuel is at rock bottom, which benefits truckers more than railroads. And trucking companies have excess capacity these days. So competition between rail and highway is fierce, particularly east of Chicago, with its shorter hauls. Amid these pressures, CSX has done a phenomenal job, increasing its intermodal business 5 percent the past four weeks, versus those same weeks in 2014.

The railroad recession is having strange effects. I suspect it lies behind Canadian Pacific’s pursuit of Norfolk Southern. Having taken CP about as far as they can, Hunter Harrison and Keith Creel seem focused on buying business growth by merging with NS. At CSX, operations chief Cindy Sanborn is running 150-car-plus manifest trains on 28-hour (rather than 24-hour) headways. She appears to have reduced costs significantly in the face of falling traffic, but if this is her long-term plan, then heaven help the railroad business. Most puzzling of all is the divergent fortunes of BNSF and UP. How can it be that BNSF is treading water while Union Pacific is sinking? Coal: BNSF up 1 percent year to date, UP down 18 percent. Grain: BNSF up 13 percent YTD, UP down 10 percent. All carload traffic: BNSF down 0.3 percent, UP down 8 percent. Are these numbers the result of pricing, of service quality, of pure dumb luck? I wish I knew.

And where does this leave the Railroad Renaissance, what independent analyst Anthony Hatch has termed the industry’s financial and traffic revival of the past decade? Tony suspects it is alive but on hold. Myself, I believe the party is over. I say this because railroads as a group are not behaving in a manner that suggests business growth is a big priority. As I’ve said before, the focus is on the price of their stocks.

What we need to begin a new renaissance is a different business model for railroads, a new way of coping with highway competition, shipper unhappiness, increased government regulation, and unrelenting pressure from Wall Street for short-term results. If a new business model is emerging anywhere today, it is in Fort Worth, at the corporate offices of BNSF. Just look at the numbers. Something seems to be happening there. Those of us looking in from the outside just don’t know what.

As Jack and I drove west though Nebraska, I had a crazy thought. Why, I wondered, does UP continue to maintain, at great cost, those three main tracks? The business that justified this infrastructure is long gone for now. Why not mothball one of those tracks until the justification for using it returns? The same could probably be said of the 270-mile double track line from near North Platte to the Power River Basin coalfield in Wyoming. With coal traffic on this route dissolving, couldn't one of the tracks between every other set of crossovers could be taken out of service for the time being? No doubt people are asking these very questions in Omaha. Goodness, these are strange times.—Fred W. Frailey

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