Railroads in a Renaissance? Transport expert says maybe

WASHINGTON — The railroad industry has passed through an inflection point and may now be in the early stages of a Renaissance, says John Larkin, managing director of Transportation Group-Equity Research, Stifel, Nicolaus & Co.

In a presentation to the Associations of American Railroads’ Treasury-Finance division, Larkin said the railroads have done a good job of downsizing over the years and have made massive improvements in productivity. Many have encountered financial difficulty and even now aren’t earning their cost of capital but “we think the railroads are right on the verge of changing this decade-old story,” he said.

Some freight experts in the US
think rail is on a comeback

Rail business should get a boost from three key shipping sources: imports, coal and grain, he predicted. Over the next 10 years, the number of imported containers coming into the US is expected to double and rails move much of that container freight.

Higher prices for natural gas and other energy sources likely will make coal the energy of choice for U.S. electric power generators — and railroads have captured an increasing percentage of coal shipments over the years. China and other developing countries are importing more grain and moving grain to North American Pacific ports is another railroad forte.

“The railroads aren’t going to be the relief valve for the capacity-constrained trucking industry,” he said. They don’t service every region truckload carriers serve and “the amount of incremental capital expenditures needed to spool up incremental capacity is so dramatic that it is unlikely to be spent, especially with Wall Street looking over the CEOs’ shoulders in this industry.”

However, there are ways railroads can improve capacity utilization and eliminate bottlenecks, like “scheduled” railroad operations, targeted capacity expenditures and upgrading existing infrastructure. Pricing leverage is at work across the entire transportation marketplace and “price increases are not as shocking to the system as they once were,” Larkin said. “Over time they could become an annual event, which would benefit all transportation companies, including the railroads.”

— from Heavy Duty Trucking magazine