(Forbes.com posted the following article by Andrew Gillies on its website on February 12.)
WASHINGTON, D.C. — Despite a punk economy, things don’t look so bad for the railroads these days. Though down for the past 12 months, rail stocks in the S&P 500 have beaten the broader index’s performance by 16%. Look back two years, and that spread widens to 59%.
So what’s to like? For one, industry-wide financials seem fairly steady. Value Line estimates that revenue will increase 3% by the end of 2003, while net margins, or net income as a percentage of sales, will increase to 9.5%. That’s up an impressive two and a half points since 1998.
Another plus is this: Big rail has an unusually powerful position in Washington. Vice President Dick Cheney sat on the board of directors at Union Pacific until he took office. New Treasury Secretary John W. Snow was the chief executive at CSX. Nor does the industry simply rely on the Administration’s railroad men. In November, for example, the Association of American Railroads (AAR) tapped Republican Bud Shuster, the former chairman of the House Transportation and Infrastructure Committee and a 28-year congressman from Pennsylvania, to lobby for it on transportation and tax issues.
Big rail has shown little hesitation to open its wallet, mostly to Republicans. By the Center for Responsive Politics’ tally, rail companies ponied up $4.3 million during the 2002 election cycle. Union Pacific topped the list of contributors with $1.7 million, 84% of which went to Republicans.
The big carriers’ lobbying machine exists, among other reasons, to protect the regulatory status quo. Visit Union Pacific’s Web site, for example, and you’ll find a position paper from the company on the Staggers Rail Act and the deregulation it brought to the railroads in 1981. After trotting out a raft of statistics on improving safety and productivity, the paper then warns that “these gains are threatened by legislation sought by some special interest groups that would impose new regulatory burdens on railroads.”
So who are these special interests? Primarily disgruntled customers in the energy, commodities and chemical industries. Banded together in groups such as Alliance for Rail Competition (ARC) and Consumers United for Rail Equity, they pull out their own statistics to argue that freight carriers have effectively acquired monopoly control, leaving many customers “captive” to a single railroad. By their figuring, $11 billion worth of freight each year is shipped by such captive customers.
Groups such as ARC–whose leadership includes executives from such companies as Dow Chemical, E.I. Du Pont De, Otter Tail Power and the Idaho Grain Producers Association–want to change the system so that any shipper that has access to only one rail service can request service from a second carrier.
The railroads, naturally, counter with their own statistics and economic rationales. “Claiming that every market can sustain two railroads just because some markets can is like saying that every city can support two major league baseball teams just because New York can,” argued a recent policy paper from the AAR.
Whatever the merits of the arguments on either side, the consolidation of the business is undeniable. At the time of deregulation in 1980, there were 42 Class I railroads (meaning those with revenue greater than $262 million). Now there are only seven. The so-called “major” Class I carriers–Burlington Northern Santa Fe, CSX, Norfolk Southern and Union Pacific–generate 94% of the industry’s revenue, according to the ARC.
Troublesome? Perhaps, but the fact is that the competitive landscape is unlikely to get pried open by the feds or anyone else anytime soon. Beyond the strength of the rail industry lobby, the proponents of greater rail competition are a fractured bunch. Not all shippers have their service. And complaints with some that do are hesitant to complain too loudly. “They’re a little reluctant to be too critical of those they depend on,” says Harvey A. Levine, an economist and transportation consultant.
“When I worked for it, the railroad industry did not want to take money from the federal government,” Levine says, sighing. “Now, they’re up on the Hill, asking for grade crossing money, for tax breaks, for special legislation if they go bankrupt. There’s all kinds of things going on.”
Given the effort the railroads have put into building their lobbying engine, those kinds of things are likely go in the railroads’ favor.