(The following column by Robert Malone appeared at Forbes.com on June 30.)
There are eight big, long-haul Class 1 railroads, and each is beginning to enter the electronic era, having weathered a long bout with the effects of deregulation.
Some of the great railroads that built America, though combined in some cases by mergers through the years, include the Burlington Northern Santa Fe, Norfolk Southern, CSX, Grand Trunk Western Railroad, Kansas City Southern, Soo Line, Union Pacific and the Illinois Central–and all are ferociously updating.
Once many more in number, they are gradually consolidating or being bought out. Grand Trunk Western and the Illinois Central are owned by Canadian National Railway, for instance, while the Soo Line is owned by Canadian Pacific.
Yet all these survivors have successfully made the transition from steam power to diesel power, and from large railroad crews to primarily two-man trains. They have been able to grow from small cars to larger and longer cars–from 40-foot box cars to 60-foot flat cars that are now able to hold two 53-foot containers. The challenges ahead are complex but worth the fight.
Forbes.com talked with railroad expert Brooks Bentz, a partner and industry consultant with Accenture and a former railroad man with a great deal of experience in intermodal freight and passenger handling. He believes deeply in their future of the American railroads.
Forbes.com: Brooks put people in the picture. Are the U.S. railroads moving ahead?
Bentz: Most assuredly, yes. The railroads, for the first time since deregulation, are able to earn the cost of capital. And it is interesting to observe that as soon as they did that, the government and the shipping public acknowledged that you need to earn your cost of capital to be a sustainable business. The next thing is people wanting to go to Congress to lobby for reregulation because the railroads are charging too much.
What makes railroads different than the trucks on highways and aircraft in air lanes?
Very simply, railroads are the only mode of transportation that owns its own right of way. The airlines don’t. The steamship lines don’t. And the trucks don’t. This is capital-intensive business. There are not a lot of alternative uses for the rails, as someone once said, other than long and narrow motels for railroad right of way.
Give us some measure of the productivity issues in railroading?
I have been struck by the productivity gains in the industry. I am recalling from data released by the Association of American Railroads. The statement was, I believe, that the railroads experienced the greatest productivity gains in history when they went from the 100-mile day for crews, five-man crews, low-horsepower locomotives and small cars [compared with] what we have today to largely two-man crews and high-horsepower locomotives.
When I got into the business in 1970, there were about 1 million people in it. But today, the railroads are handling more gross ton-miles annually than they ever did before, and with about 125,000 to 135,000 people. That is a good thing.
What is the challenge now?
The challenge is that having had a huge gain through engine enhancement, large-to-small crews, increased car size, stack cars (as against the old days of circus ramping up to the cars), what do you do next? You can go from a two-man crew to a one-man crew or a no-man crew, and that will be a gain in productivity. But it can’t be 100%, and it is not the big gain of the recent past. The gains will be more incremental.
Where do capital needs lie?
The need for capital will rise. Just renewing stuff that is in place today is continuing to raise cost. Steel is going up, so rail and track components for cars and locomotives are going up. Everything is going up. The revenue per employee was 300,000 ton-miles in 1929. In 2000, it went to 8.7 million ton-miles per employee.
It is hard to see how we are going to get that sort of productivity today. The challenge is going to be to sustain earning the cost of capital in the face of a growing demand for the service. Rates are rising, and this is new to the generation of managers who have come into the business since deregulation (they are used to rates going down).
It is hard to go to the CFO and say, “Look boss, I am doing a great job, but our rates are going up 10% this year.” This is not a story that is easy to tell.