(The following story by Robert Wright appeared on the Financial Times website on September 29.)
LONDON — The huge yellow crane straddling the tracks at one of Norfolk Southern Railway’s container-handling yards works steadily along the train. It lifts each of the two containers stacked on each railcar and places them on to a waiting flatbed truck trailer, ready to be driven off.
Business at the yard in Harrisburg, Pennsylvania remains steady in spite of the downturn in demand for the consumer goods often carried in containers. Falling overall demand has been partially offset by the high fuel prices and driver shortages facing the US trucking industry.
Lines such as JB Hunt, the US’s largest trucking company, save money by bringing containers to rail facilities such as Harrisburg for their journeys’ long-haul legs rather than hauling them by truck. As a result, revenues in Norfolk Southern’s Intermodal arm – its container-hauling business – were up 11 per cent year on year to $532m in the three months to June 30.
There is even more robust activity at the Lamberts Point coal port that NS, the fourth largest US rail operator, operates in Virginia. Long lines of coal trucks wait at the port for loading on to ships. Demand for coal – including the 20m tonnes of Pennsyvlanian and West Virginian coal exported through Lamberts Point annually – gave NS coal revenues for the second quarter this year up 33 per cent on the same quarter of 2007.
The less-severe-than-expected impact of reduced US consumer spending and strong growth in bulk commodities have together helped the seven large US and Canadian railways to withstand the economic slowdown better than any previous such crisis for several decades.
For the second quarter this year, NS, one of two leading US operators east of the River Mississippi, reported net income up 15 per cent year on year to $453m on rail operating revenues up 16 per cent to $2.76bn. Union Pacific, the biggest operator west of the Mississippi, reported second-quarter net income up 19 per cent year on year to $531m on operating revenues up 13 per cent to $4.57bn.
Anthony Hatch, an independent, New York-based rail analyst, says most leading groups beat market expectations in results in the second quarter. They were among the few groups in industrial North America to have done so.
The sector’s strength has allowed it to raise prices. NS’s average revenue per carload of coal in the second quarter was up nearly 30 per cent year on year to $1,729; intermodal yields rose 9.6 per cent to $656.
James Squires, NS’s chief financial officer, gives several reasons for the improvement, including the industry’s improving service.
But a key factor has been rationalisation. The industry’s liberalisation in 1980 permitted operators to close lines and tear up unused tracks, saving millions of dollars in maintenance costs.
There has also been consolidation among operators, which has allowed elimination of underused routes. “Capacity is still, on a comparative basis historically, relatively constrained,” Mr Squires says. “That leads to better pricing and financial performance even through a downturn.”
Thanks to the price increases and volume growth, most large US rail groups for the first time in decades earn returns from investments higher than their cost of capital. As a result, railways are among the few US infrastructure owners investing heavily in increasing capacity. NS is still, for example, working on the $151m Heartland Corridor project to clear its route from the Hampton Roads ports in Virginia to Chicago to carry containers stacked two-high, as already happens on other parts of the network.
The work – which, because of its potential to remove trucks from roads, is being part-funded by state and federal governments – should hugely improve the competitiveness of the Heartland route for container shipments to the Midwest.
Mr Squires accepts that rail’s profitability and investment might not survive if the slowdown becomes very severe. “If there’s a long, deep recession, things are not going to go as well for us, even with the advantages and benefits we have,” he says.
But NS is in a very different position from the years following its 1997 acquisition of part of Conrail, another leading railway, when its priority was to cut its debt.
Now, says Mr Squires, NS is inclined to borrow so that its investments need not stop. “That gives you a lot more flexibility – including the ability to maintain growth-oriented investments which traditionally have been cut at the first sign of a downturn.”