(Reuters circulated the following article by Nick Carey on January 29.)
CHICAGO — Rising imports and domestic demand have been mixed blessings for U.S. railroads and their customers.
As demand has grown, prices, revenue and profits have followed suit. But so have customer complaints that railroads are failing to deliver.
“Prices are going up while service goes down,” said Bill Zollars, chief executive of U.S. trucking company YRC Worldwide
Railroads are investing in capacity, but they say this takes a great deal of time and money.
The fourth-quarter earnings of the top four companies have shown how surging demand has boosted the bottom line. The net profit of the largest U.S. railroad, Union Pacific Corp.
Norfolk Southern Corp.
A large part of the earnings boost has come from large price hikes of up to 10 percent in 2005, the largest since the railroad industry was deregulated in 1980.
This has been welcome news on Wall Street and most analysts are bullish on the prospects for railroad stocks.
In a January 23 research note, Morgan Stanley transportation analyst James Valentine said the “six major North American railroads will see their stocks appreciate” 50 percent to 100 percent over the next four years. This also includes Canadian Pacific Railway
In a January 27 research note, Merrill Lynch analyst Ken Hoexter said “more upside appears to exist in the rails due to the stamina of the current pricing renaissance.”
THE NAYSAYERS
But the enthusiasm of analysts for the stocks is not matched by railroad users.
After reporting its fourth-quarter earnings on Thursday, United Parcel Service Inc.
On Thursday, coal mining company Peabody Energy
YRC Worldwide’s Zollars said railroad delays have been “messing up our network.”
The railroads acknowledge improving capacity and efficiency is their main challenge moving forward.
Union Pacific has been overhauling its network, but Chief Executive James Young said the company is “only at the bottom of the third inning at the moment.”
All the main railroads have announced capital expenditure increases for 2006 to boost capacity, while indicating that fresh price hikes will be necessary to justify these investments.
This has only added to complaints about prices.
Bob Szabo, executive director of Consumers United for Rail Equity (CURE) — a group representing a number of utilities and other shippers, said the top four railroad companies control 90 percent of all U.S. rail traffic and are not subject to antitrust laws.
Some of CURE’s members estimate that capacity issues coming out of the Powder River Basin have forced East Coast utilities to import coal from Central and South America, adding $15 a month to the average electric bill this winter.
CURE would like to see increased regulation of the railroads to boost capacity and address pricing issues. “Our members are paying monopoly prices,” Szabo said.
Tom White, a spokesman for the Association of American Railroads (AAR), said the railroads know of CURE’s requests, but added that there is only so much they can do to grant them.
“(CURE has) never explained to us how reregulation is going to increase investment and lower prices,” White said. “Like all public companies the railroads have to go to Wall Street to raise money and the returns have to justify the investment.”
White sees no solution soon to the capacity crunch. “It takes a long time to increase rail capacity. There is no quick fix for this problem,” he said.