28.11.16

THE CASE FOR INTERNAL IMPROVEMENTS.

It's the unsexy infrastructure, notes Alex Tabarrok.  Locks and dams on the Ohio River.  Hand-thrown switches on the Chicago railroads.  And a reminder that downsizing is a false economy.
On routes where they still have adequate infrastructure, railroads have won back fantastic amounts of business from trucks, especially on long hauls such as Los Angeles to New York, where railroads now have a 72 percent market share in container traffic and could have more. Railroads have gone from having too much track to having not enough. Today, the nation’s rail network is just 94,942 miles, less than half of what it was in 1970, yet it is hauling 137 percent more freight, making for extreme congestion and longer shipping times.

The half-conscious decision by Washington, Wall Street, and the last generation of rail management to abandon much of the rail system thus prevents railroads from getting more trucks off the road. For example, UPS desperately wants to use fast trains like the ones Erie Lackawanna once had to reduce the cost of moving parcels coast to coast in less than four days, a feat currently requiring a tag team of truck drivers at enormous cost in fuel and labor. For a brief time in 2004, UPS did persuade two railroads to run a train fast enough to handle this business. But due to insufficient track to allow slower trains to get out of its way, the UPS bullet train caused massive congestion, freezing up the Union Pacific system for months until the railroad at last canceled the service.
The overbuilt railroad network of the 1920 - 1970 period was phenomenally productive, and improvements in train and signalling technologies have made possible the greater volumes, even at the risk of a lot of Delayed Freight.

But, because the freight railroads are private businesses, and public money goes for such things as highways and streetcars, getting some of the freight railroads to work with government agencies, even on projects such as improving the rail lines between the Official Region and the Southeast (widening Interstates 84-81 for more trucks being a fools errand) takes new thinking.
Known as the Crescent Corridor, these lines have seen a resurgence of trains carrying containers, just like most of the trucks on I-81 do. The problem is that the track needs upgrading and there are various choke points, so the Norfolk Southern cannot run trains fast enough to be time competitive with most of the trucks hurtling down I-81. Even before the recent financial meltdown, the railroad couldn’t generate enough interest from Wall Street investors to improve the line.

The railroad has long been reluctant to accept government investment in its infrastructure out of fear of public meddling, such as being compelled to run money-losing passenger trains. But now, like most of the industry, it has changed its mind, and it happily accepted Virginia’s offer last year to fund a small portion -- $40 million -- of the investment needed to get more freight traffic off I-81 and onto the Crescent Corridor. The railroad estimates that with an additional $2 billion in infrastructure investment, it could divert a million trucks off the road, which is currently carrying just under five million. State officials are thinking even bigger: a study sponsored by the Virginia DOT finds that a cumulative investment over ten to twelve years of less than $8 billion would divert 30 percent of the growing truck traffic on I-81 to rail.
In the Chicago area, Union Pacific have been working with Amtrak and Metra on capacity improvements.  They get an additional track, West Chicago to Elburn, to handle freight for and from Chicago, and the Free Rein to 110 campaign on the Alton Route to St. Louis provides passage for expedited intermodal and automotive trains.  Norfolk Southern and CSX aren't thinking that way, yet.

The difficulties raising money?  Perhaps that's an unintended consequence of the "shareholder value" fad.
America’s major railroad companies are publicly traded companies answerable to often mindless, or predatory, financial Goliaths. While Wall Street was pouring the world’s savings into underwriting credit cards and sub-prime mortgages on overvalued tract houses, America’s railroads were pleading for the financing they needed to increase their capacity. And for the most part, the answer that came back from Wall Street was no, or worse. CSX, one of the nation’s largest railroads, spent much of last year trying to fight off two hedge funds intent on gaining enough control of the company to cut its spending on new track and equipment in order to maximize short-term profits.

So the industry, though gaining in market share and profitability after decades of decline, is starved for capital. While its return on investment improved to a respectable 8 percent by the beginning of this decade, its cost of capital outpaced it at around 10 percent -- and that was before the credit crunch arrived.
There has to be an arbitrage opportunity here. But the forward-looking investors have not yet appeared.  "Nor does the long-term potential for increased earnings that improved rail infrastructure would bring, except in the eyes of Warren Buffett -- who is bullish on railroads -- and a few other smart, patient investors."  What's interesting is that the trucking companies may not be viewing the railroads as deadly competitors when some capacity improvements are concerned.  "The American Association of State Highway and Transportation Officials (hardly a shill for the rail industry) estimates that without public investment in rail capacity 450 million tons of freight will shift to highways, costing shippers $162 billion and highway users $238 billion (in travel time, operating, and accident costs), and adding $10 billion to highway costs over the next twenty years. 'Inclusion of costs for bridges, interchanges, etc., could double this estimate,' their report adds."  Yes, and those ever-heavier trailers, tandems, and triples, are engineered to beat the bridges and interchanges to pieces.

We'll see what sort of internal improvements come from Mr Trump and the new Congress.

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