(The following article by Desiree J. Hanford was circulated by Dow Jones Newswires on September 13.)
ST. LOUIS — Any regulation of the railroad industry will lead to less capital investments by railroad companies, Norfolk Southern Corp. (NSC) Chief Executive Charles W. Moorman said Wednesday.
Speaking at the 2006 North American Railroads Customer Forum here, Moorman said that he and other railroad chief executives will cut their capital investments at any sign of regulation.
“If Norfolk Southern can’t make adequate returns and can’t justify the money it’s spending, investors won’t put up with that as long as they have in the past,” said Moorman, who is also chairman of the Association of American Railroads. “We’ll take that money and do other things with it that our shareholders will like, instead of investing it in the rails.”
The railroad industry is expected to have capital expenditures of $8.3 billion this year, compared with $6.4 billion last year, Moorman said. This has led to an improvement in service and quality, he added.
Railroad companies are committed to spending money assuming that they’re generating “economic returns,” Moorman said. But the “drumbeat” for regulation is becoming louder because of service problems and because railroad companies are making money, he said.
“There are concerns that there will be attempts made to change the (railroad industry’s) economic model through legislation,” Moorman told Dow Jones Newswires following his presentation. One concern in that regard is access to tracks owned and maintained by a rail company by another company that doesn’t make those financial investments on that track.
If companies have to lower their rates, that will lead to lower earnings and reduced investment, Moorman warned during his speech. Less investment by railroad companies wouldn’t be good across the board, Moorman said. With the amount of freight being moved across the U.S. by all forms of transportation, the industry has an opportunity to be a “huge part of the solution” when it comes to efficiently moving those goods, he said.
The 1920s and 1930s were the “dark ages” for the industry, stemming from a decline in passenger and freight business, Moorman said. That decline continued into the 1950s and 1960s, made worse by building of the federal highway system, he said.
By the 1970s, the railroad industry was highly regulated and “was in absolutely abysmal condition,” led by inadequate maintenance and poor service, Moorman said. It was difficult for railroad companies to make money, and the situation was so bad that there was talk of nationalizing the industry, he noted.
Moves to deregulate the industry during the 1980s helped spark a partial recovery, with railroad companies responding to customers’ needs and better pricing their services, Moorman said. Rail rates in real terms, however, didn’t increase between the 1980 and 2000 period, he said.
The 1980s were also marked by the continued consolidation of the rail industry, which improved productivity and eliminated duplicate sales, general and administrative expenses, Moorman said. Still, profitability didn’t increase proportionately to productivity and rail companies continued to struggle with their cost of capital and return on equity, he said.
The railroad industry entered a period of stability starting in about 2003, as the benefits of mergers became apparent, including the elimination of excess capacity, Moorman said. The increase in demand – sparked by an improving economy, the driver shortage in the trucking industry, higher fuel prices and other factors – has continued, he said.
This environment has led to increased volumes and pricing power for railroad companies, Moorman said. Profits have increased but return on equity for the industry in 2005 lagged all other industries, he said.
No one expected the increase in demand and so that has strained the rail system, leading to some service and capacity issues, Moorman said. Companies have responded by spending money to expand capacity, such as laying more track, purchasing more equipment and hiring more workers, he said.
Earlier in the day Surface Transportation Board Chairman Charles D. Nottingham said the increased freight volumes on railroads is a challenge that requires “constant attention” by both the rail industry and the customers. Freight valued at an estimated $30 trillion will be moved by railroad companies in 2020 up from $9 trillion in 1998, he said.