(The following story by Robert Wright appeared on the Financial Times website on March 16, 2009.)
LONDON — North America’s railways appear finally to be experiencing the full force of the economic downturn after freight volumes fell 14.5 per cent in February against the previous year and some of the biggest operators reported still worse figures.
The falls come amid growing fears that regulators are growing tougher with operators, following a record fine for Burlington, Northern and Santa Fe, the market number two, over the treatment of a customer.
The largest US and Canadian railways – known as the Class I – had previously proved more resilient than other segments of the economy to the economic slowdown.
Anthony Hatch, an independent rail analyst, said he still believed the industry would survive the downturn better than many others. But traffic falls of the kind currently being experienced had last been seen in 1982.
He said: “In the fourth quarter, the railroads were able to avoid being part of the real world. In the first quarter of 2009, this isn’t true.”
Some of the most dramatic falls overall in February, according to the Association of American Railroads, were in motor vehicles carried – which were down 51.5 per cent compared with February 2008 – metal products (down 52.2 per cent) and grain (down 18.7 per cent).
The falls reflected falling demand for cars and other manufactured goods, as well as waning demand for ethanol, which had been a big driver of grain traffic.
Since the end of February, Union Pacific, the largest railway by revenues, has announced that traffic was down still further – 19 per cent – for the first week of March, against the equivalent week of 2008.
Announcing the gloomy February figures, John Gray, senior vice-president of the AAR, made a plea for the industry to be granted some of the economic stimulus funds being spent by the new US administration.
As private businesses, railways have traditionally had only fairly modest state funding.
“Obviously, it’s still a very difficult economic environment out there for railroads and their customers,” he said.
The railways’ gloom has been deepened by a judgment in February against BNSF by the Surface Transportation Board, the industry regulator, over complaints brought by Western Fuels, a utility that used the company to ship coal from the Powder River Basin coalfield.
Having once ruled in 2007 that the railway’s charge for the service was reasonable, the board announced last month it would require BNSF to pay Western Fuels $100m reparations and would cap its rates on the service for 16 years, losing the company future revenues of $245m at present values.
The judgment – which BNSF fiercely criticised – will add to concerns that have been growing in recent years that regulators could get tougher with railways over competition issues after recent years’ strong demand and rising prices on competing modes allowed them to raise rates.
Railways argue that, since returns for most only just exceed their cost of capital, prices cannot be excessive.