(The following article by Katherine Yung was posted on the Dallas Morning News website on May 18.)
Trade with China isn’t just about cheaper clothes and computers. It’s also reshaping and reinvigorating one of the linchpins of the American economy, the Burlington Northern Santa Fe Corp.
The nation’s No. 2 freight railroad is thriving as it finds its fortunes increasingly linked to shipments from the world’s fastest-growing economy.
Revenue at the Fort Worth-based company has been hitting record highs. Demand is so strong that for the first time since the deregulation of railroads in 1980, BNSF has been able to raise its prices, instead of lowering them. And after several years of trimming its workforce, the railroad is hiring again.
So important is trade with China that BNSF, which operates a 32,000-mile network stretching across 28 states and two Canadian provinces, no longer sees its financial outlook completely tied to the ups and downs of the U.S. economy.
“Gross domestic product growth is not the most relevant issue for us,” Matthew Rose, BNSF’s chairman and chief executive, said in a wide-ranging interview discussing the future of BNSF and the rail business.
“How much more goods are going to be produced in China is really much more important than whether or not we have 3.1 percent GDP growth or 4 percent or 2.7.”
China impacts more than the bottom line. To transport the rapidly growing number of containers arriving daily at ports in Southern California and the Pacific Northwest, the railroad has had to alter the way it operates.
It’s been adding a parallel second track on key routes, such as its line between Los Angeles and Chicago. It’s been increasing the number of cars on each train. And a system that once existed to haul raw materials into manufacturing plants and finished goods out is now focusing on its main routes, rather than its branch lines.
The result: The railroad’s network is both simpler and denser.
“More and more U.S. manufacturers, more and more U.S. retailers will be buying more and more goods specifically from China,” Mr. Rose said. “We’ve had to change our railroad, our strategy of the entire railroad and the focus of how we handle distribution to accommodate that.”
Start of a comeback
Since 2000, U.S. imports from China have nearly doubled in value, reaching $197 billion last year alone.
Congested highways, a truck driver shortage and improvements in railroads’ efficiency and reliability have turned rail into a more attractive option for retailers, manufacturers and others.
As a result, railroads are prospering and scrambling to find ways to carry even more freight.
“We are in the very early innings of a comeback for a very traditional industry,” said Anthony Hatch, an independent analyst who has followed the railroads for two decades. “This is clearly the best time I’ve ever seen since deregulation. We are very clearly in a renaissance.”
With BNSF leading the pack, total industry revenue jumped 13.4 percent in this year’s first quarter from the year-ago period, the largest quarterly increase in more than a decade, according to James Valentine, an analyst at Morgan Stanley.
Even lofty fuel prices, the bane of airlines, isn’t proving as much of a headache as many had feared. BNSF is offsetting higher diesel costs through a combination of hedging and customer fuel surcharges.
Investors have taken notice. Over the past year, BNSF’s share price has shot up 52 percent, closing Tuesday at $49.61 per share.
The good times mark a profound shift from the past. Since railroads were deregulated a quarter-century ago, the industry has been cutting capacity and merging to cut costs as prices fell year after year.
To survive, many railroads like BNSF began utilizing technology to become more efficient. Toll-tag devices, rather than hundreds of employees, now record freight car numbers. And technology has enabled train crews to shrink from five people to two.
Looking ahead
But the arrival of flush times doesn’t mean BNSF is resting easy. Long term, Mr. Rose foresees the day when the railroad will either need to grow bigger through a merger or acquisition or move up the supply chain and provide other services such as trucking or supply chain management.
“We will have to provide a much broader set of capabilities to customers,” he said. “Otherwise, we run the risk of being marginalized.”
BNSF has already begun moving in this direction. In August 2002, the railroad launched BNSF Logistics, which is based in Springdale, Ark., and has been acquiring other logistics companies.
But a large railroad merger or acquisition seems unlikely in the near future. “Right now is not the time,” Mr. Rose said.
Five years ago, in the face of government opposition, BNSF and Canadian National Railway Co. called off their proposed merger, which would have created North America’s largest railroad stretching from Halifax, Nova Scotia, to Los Angeles.
At the time, massive and costly service disruptions and other shipping nightmares caused by previous rail mergers led the U.S. Surface Transportation Board to draft rules making it harder for large railroads to combine.
But Mr. Rose isn’t ruling out further industry consolidation, noting that the 36 large railroads that existed in 1980 have been whittled down to only seven today.
“It’s just kind of hard for me to imagine there won’t be another one [merger or acquisition] at some point in time,” he said. “Customers are going to want railroads to have broader capability across the supply chain. And merging has for these network businesses been a pretty good way to do that.”
For now, though, BNSF is focused on handling the rising volume of trade with China. It’s also transporting increasingly greater quantities of low-sulfur coal from the Powder River Basin in Wyoming and Montana to utilities.
This year, the railroad, which has about 38,000 employees, will hire 3,400 workers, half of whom will fill retirement vacancies. That comes on top of 3,600 new hires last year, of which 1,000 were added to handle the increase in business.
In addition to expanding its workforce, BNSF is adding additional tracks, terminals, locomotives and freight cars.
It’s planning to build a new intermodal container transfer facility five miles north of the Port of Los Angeles. And closer to home, it’s enlarging its operations at Alliance Texas, the logistics and transportation hub north of Fort Worth.
“You’ll see us just capitalize on what we think are some really great opportunities out there,” Mr. Rose said. “You’ll see us continue to really advance the clock through technology.”