(The following article was posted on the Financial Times website on May 10.)
NEW YORK — It is a standoff befitting of the town where Billy the Kid, the legendary Wild West outlaw, was laid to rest.
Two stationary freight trains face each other across a 1,500ft-long, single-track railway bridge spanning the Pecos River in Fort Sumner, New Mexico. Behind them, five more locomotives wait their turn to cross.
Among the freight caught in the bottleneck: a consignment of coal for an Arizona power station, hundreds of containers carrying imported goods from west coast ports and two trains full of UPS parcels.
The scene, observed one afternoon in March, is typical of the hold-ups occurring every day throughout the US as the country’s ageing rail network struggles to cope with the surging freight volumes generated by robust economic growth.
Union Pacific and BNSF, the two largest operators, this week sought to ease pressure on one of the busiest stretches of track when they agreed to jointly invest $100m in additional capacity around the Powder River Basin coal fields in Wyoming.
But angry rail customers, including most of America’s largest manufacturers, retailers and energy companies, believe the industry is not doing enough to tackle congestion and poor service.
Entergy, a large electricity generator, is suing Union Pacific for coal supply disruptions, and more than 200 other rail users descended on Capitol Hill recently to lobby Congress on the capacity crunch.
Everybody agrees action is needed to make US railways flow more smoothly but there is no consensus about the solution.
Rail operators want Congress to provide tax incentives for investment in capacity, arguing that shareholders will not accept more expenditure without greater rewards. Many rail users, however, believe there is only one sure way of making the industry more responsive to customer needs: increased competition.
The crisis on US railways has its roots in the industry’s deregulation in 1980, when operators were freed to cut capacity and forge mergers in search of efficiency. Over the following 26 years, the network has shrunk by more than a third and only four large operators remain: Union Pacific, BNSF, CSX and Norfolk Southern.
Nobody doubts that some consolidation was necessary but critics say the restructuring gave too much power to operators. With each of the big four enjoying near-monopoly control over entire regions, the industry has little incentive to improve service or increase capacity, says Bob Szabo, executive director of Consumers United for Rail Equity (Cure), a rail users’ group. “The railroads have tried to keep their relationship with customers out of the market place,” he says.
He points to the industry’s record profits over the past year as proof that capacity shortages are being used to inflate prices. Union Pacific last month announced a doubling in first quarter net profit and its shares have increased by nearly 70 per cent in the past two years.
“As long as Wall Street is rewarding them for having less capacity than demand, nothing much is going to change,” says Mr Szabo.
Cure wants the rail industry stripped of exemption from anti-trust laws, forcing operators to behave more competitively – a proposal adopted in legislation being pushed by several members of Congress.
But Matthew Rose, chief executive of BNSF, says increased regulation would act as a deterrent to investment. “The only way to expand capacity is to make sure the railroad companies are making enough money to invest,” he argues.
Investment has been held back in the past by the industry’s traditionally low return on capital but as prices increase, operators are spending more. BNSF has increased capital expenditure by 10 per cent to $2.4bn this year, including $400m on new capacity.
Much of the cash is earmarked for the company’s flagship line between Los Angeles and Chicago. About 4 per cent of the 2,200-mile route is single-tracked, causing delays of the kind seen at Fort Sumner. Mr Rose wants the entire line double-tracked by 2008, including a new $30m bridge over the Pecos River.
Other measures include financial incentives for employees to accelerate freight throughput. Every minute a train is left waiting to cross the Pecos River hits every employee – from top management to freight yard workers – in the pocket. The company is also investing in satellite tracking technology that will allow trains to travel closer together safely, increasing track utilization by up to 20 per cent.
Unclogging US railways will be a slow process. Mr. Rose says that, while service will improve eventually, customers must accept the days of unlimited rail capacity are gone. “This industry used to be like a light switch. If you needed more railroad cars you just flipped a switch and they were available,” he says. “That switch is no longer working.”