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The Troubled Outlook For Railroads
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FEW, IF ANY, RESPONSIBLEPEOPLE actually in (or otherwise affiliated with) the railroad industry can look toward the future with total equanimity. Yes, railroading — unlike some other participants in the econo- my — has weathered the rough economic times that have plagued us for nearly four years now. But significant problems must be overcome if that is to continue. That is a view on Wall Street, as outlined by analysts with NASDAQ.
A Wall Street List The report makes out what amounts to a de facto industry “To Do” list. The executive suites at the major railroads, of course, are already well aware of what lies ahead. But this Wall Street analysis offers a daunting agenda for potential investors to consider, along with more optimistic factors it also highlights: 1) The Positive Train Control (PTC) man-
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date was incorporated in the 2008 Rail Safe- ty Improvement Act (RSIA). The measure, which carries an estimated $5 billion price tag, requires expensive safety infrastruc- ture that must be in place by December 31, 2015. (As I write, lawmakers are wrangling with competing proposed extensions of that deadline in the House-Senate Conference Committee that is trying to formulate the long delayed omnibus transportation bill.) The mandate would apply to main lines that carry certain hazardous materials, and on lines that involve passenger operations. Against that huge $5 billion outlay, the fi- nancial benefits would be realized only after 20 years, with savings of up to $440-$674 million. (We should pause here to note the NAS-
DAQ report is not making political or moral judgments. That is not NASDAQ’s job. The question of balancing cost-effectiveness and human necessity is argued out in other venues, such as the Capitol Hill Conference Committee. NASDAQ exists in part to mea- sure the factors that investors need to take into account when deciding where to put their money. Also, NASDAQ says the opin- ions contained in the report are those of the analysts and “not necessarily” those “of NASDAQ OMX Group.”) 2) Price regulations are a focal point of constant friction between the railroads and the shipper customers, especially “captive shippers” who have no effective alternative to one railroad. The Surface Transportation Board (STB), which mediates that and other industry issues, has produced a study esti- mating that 35 per cent of freight rail is cap- tive to a single railroad. That is another debate being hashed out
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in the Surface Transportation Bill negotia- tions and elsewhere. Outgoing Senator Herb Kohl (D-Wis.) has introduced a measure to abolish freight rail industry exemptions from anti-trust laws. The senator argues the goal is “healthier competition” among the shippers, supposedly to stop “unfair” price policies. NASDAQ analysts, on the other hand, believe that any amendment on regu-
lating pricing policies “calls for a serious threat to railroads, especially when the un- certainty is hurting volume growth, and pricing has become a dominant factor for generating revenues.” 3) The U.S. Environmental Protection
Agency (EPA) has caused considerable con- cern over a sweeping regulation which af- fects coal-fired plants in 27 states. The new standard proposes to limit their carbon diox- ide emissions to an extent that —according to power plant operators — is unrealistic. As NASDAQ analysts remark: “Railroads, which transport nearly two-thirds of coal shipments, are most likely to be impacted by the implementation of the new [rule] that could [pose] a significant threat to utility coal tonnage.” Aside from the NASDAQ report, we would
note that while local communities around the nation are rallying behind the coal in- dustry, there are also local skeptics. The ex- pected increase in coal train traffic through Missoula, Mont., has prompted that city’s Councilman Dave Strohmaier to request that the U.S. Army corps of engineers do a study of the widespread impacts — includ- ing those in the Treasure State — of build- ing West Coast export facilities for the fuel. 4) The capital intensive nature of rail-
roads is an expensive fact of life. It requires continued infrastructure improvement and acquisition of capital assets. “Moreover,” ob- serves the report, “industry players access the credit markets for funds from time to time.” Fine, when the conditions in credit markets are agreeable. But if not? Again to quote: “Adverse conditions in credit markets could increase overhead costs associated with issuing debt and may limit the compa- nies’ ability to sell debt securities on favor- able terms.” 5) Unionized labor is a not insignificant
factor in railroading’s economic equation. Most rail operating employees are union members and thus covered by bargaining agreements. On one side of the table is the industry’s National Carriers’ Conference. On the other side are the Brotherhoods. These negotiations are generally arbitrated nationally and take place over a period of years. Says the NASDAQ-commissioned analysis: “Failure to negotiate amicably could result in strikes by workers, resulting in loss of business.” Probably not to worry: The last national
railroad strike in the U.S. that anyone no- ticed occurred in 1991, and lasted just a few short days. The federal rail labor law has set up a process involving the railroads, the unions, and the government — through spe- cial boards, the White House and, if neces- sary, congressional action —to focus on any threat of a rail strike which, if it gets out of hand, could negatively affect the everyday taken-for-granted necessities and conve- niences of virtually everyone in America. (At this writing, there is a very big labor dispute north of the border involving Canadian Pa- cific. Though that is mainly an issue for Canadian law, that carrier does havesignifi-
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