(The following story by y Mitchell Schnurman appeared on the Fort worth Star-Telegram website on June 11.)
FORT WORTH, Texas — You’d think that railroad companies would be huffing and puffing and hurting right now.
The economy is in a slump, maybe a recession, with housing and automobiles hit hard. Asian imports are down because consumers cut back on spending. Historically, those two factors alone drag down railroads.
Add in the soaring price of diesel, now the largest expense at BNSF Railway. The Fort Worth company spent $1 billion on fuel in the first quarter, up from $392 million in 2005.
Such trends can wreck an industry and force companies into bankruptcy and consolidation. (Think commercial airlines.) But rail’s big players are racking up record profits, strong revenue gains and stunning stock market returns.
What’s the cause?
Credit the commodities boom first. Huge shipments of grain and coal are offsetting deep cuts in lumber and autos, with much of the grain being exported to developing countries. Railroads often talk about their diversified business mix, and they’re seeing that pay off.
The industry has also improved its fuel efficiency. It says that it can ship three to four times more than a truck on the same amount of diesel. So as gas prices climb, the rails’ comparative advantage grows, and it’s picking up market share.
Finally, the giant rail companies enjoy a rare kind of pricing power: Their fuel surcharges stick, and the industry says it recouped 97 percent of the higher cost of fuel from 2003 to early 2007.
The results
Their pricing success has provoked a backlash, including antitrust lawsuits and talk of re-regulating the industry. (Railways were deregulated in 1980, two years after commercial airlines.) Big rail customers, including Archer Daniels Midland, say that railroads colluded in setting fuel surcharges, and the companies dispute the allegations.
There’s no disputing their standing on Wall Street. The total returns for the four biggest rail companies — Union Pacific, BNSF, CSX and Norfolk Southern — range from 26 percent to 52 percent this year. By comparison, the S&P 500 is down almost 7 percent, and Exxon Mobil is off more than 5 percent.
Investor Warren Buffett made headlines last summer, when his Berkshire Hathaway took a huge stake in BNSF and said it might buy up to a quarter of the outstanding shares. He paid about $80 per share, and the stock was still selling for $83 at the end of 2007.
On Tuesday, BNSF (ticker: BNI) traded at $111.56, and it’s gained 35 percent this year, including dividends.
In late April, the company reported a record profit of $455 million for the first quarter, with freight revenue up 17 percent. The big gainers were agricultural products (up 38 percent) and coal (up 26 percent).
“The export markets just continue to look very good, and then you add to that the ethanol and the domestic,” Chief Executive Matt Rose told analysts in the April conference call. “It’s just a phenomenal ag market. Really, it can best be summed up — anything to do with a commodity right now is really hot.”
Rail Renaissance
Analyst Anthony Hatch, who runs AHB Consulting in New York, calls this the Railroad Renaissance. And he says that Wall Street, which had viewed rail companies as slow growers that mirrored the economy, recognizes that this mature business can grow strongly, too.
Railroads are even getting a boost because they’re seen as a good “green” alternative. They can haul 1 ton of freight more than 400 miles on a gallon of diesel, and they produce fewer emissions than trucks and don’t add to highway congestion.
Hundreds of small truckers have gone out of business because diesel prices have been so crippling, Hatch said. And the more sophisticated truckers are turning to rail to transport more of their trailers long distance.
That segment of the intermodal business showed a small increase in May rail traffic, which means that railroads are benefiting in two ways from the oil price squeeze: They’re taking freight away from truckers and they’re doing more hauling for them.
That’s a business model for all seasons.
On the move
Rail shipments for wood and autos are down sharply in the first five months of 2008, evidence of a slumping economy. But commodities are in high demand.