'Railroad Renaissance': Proven True

'Railroad Renaissance': Proven True

By now, most railway stakeholders are likely as sick of that phrase as I am. Nonetheless, trite as it is, the phrase aptly describes an industry that, like classical culture re-emerging from the dark ages, reinvented and reinvigorated itself and emerged as a potent force in logistics.

I originally used the term "Railroad Renaissance" in the mid-1990s and it spread as a form of branding, like "Crescent Corridor." It was also was a form of wishful thinking for the rails that slowly, painfully came to fruition. After all, Mike Walsh, then CEO of the Union Pacific Railroad, told me the railroads were soon to be in a position to finally take (or retake) advantage of their natural competitive position on bulk, unit train and long-haul freight transportation. 

And so the new era seemed imminent when I wrote of the renaissance in 1994. The United States was spreading its capital and rail expertise around the world, leading and influencing privatizations globally. In North America, a single market was developing, and new products and new productivity were leading to growth. Intermodal, fueled by the development of doublestack and the new converts such as J.B. Hunt Transport Services and UPS, grew at what had been an unheard of pace until ? it didn't.

By 1998, the "Railroad Renaissance" looked like a pipe dream.

Economic and weather issues had slowed the fairy-tale recovery. That was followed by a railway bull market and then the self-inflicted consolidation crisis of the late 1990s, when growth and optimism came to a crashing halt like the end of the Thirty Years' War in Europe. The industry regressed to the point of becoming almost re-regulated. Those fellow believers who added capacity ("if we build it, they will come") were ridiculed as dreamers; investors looked toward the movement of electrons, not goods.

 

But the potential for a return to good times was always there, and the added capacity and improved networks and systems all came together in the early years of this century when the country came roaring out of its small recession and the mythical line between supply (capacity) and demand for rail transportation was crossed, likely sometime in 2003. Rates, which had only declined since deregulation in 1980, now actually increased, and there was more volume than the rails could, frankly, handle well. Suddenly the phrase "Railroad Renaissance" was back - and so was the comeback, this time, it seems, to stay.

Rail executives, investors, observers and reporters all succumbed to alliterative awe in their discussion of this remarkable industrial turnaround. Imagine buggy whips becoming useful again.

And don't think that didn't grate a bit, all of that uncredited use: Perhaps I should have trademarked the phrase years ago (but then I would have looked a bit foolish in 1998, or at least a bit early). After all, I was there for the House hearings, the bitter, margin-crushing fights over coal contracts, the years of operating ratios in the 90s. ?  
But whoever threw out the phrase in this second flowering of railroad growth, it was clear the 21st century renaissance was for real.

First came the great years of 2003-2007, a period so good that rails, heaven forefend, even approached adequate returns on invested capital. They were years so good virtually all commodities had growth stories of their own, not just intermodal; and intermodal began to actually contribute to the bottom as well as the top line. Customer anger also grew, never a good thing, as rates did as well as congestion. But rail service gradually recovered while the trucking industry looked to the rails more as partners to solve truckers' own problems rather than as purely competitors.

Clearly we can chart a modal shift, as more shippers want to take advantage of rail economics, accelerated by but not exclusively influenced by the fuel price spike.  

The world of North American freight shippers is turning to rail, in unit trains and in general manifest (traditional) trains, in intermodal and bulk commodities and general industrial goods.

And frankly, at least so far, this freight and now general recession, painful as it is, provides further proof of the power of rail economics. Rail volumes are holding up fairly well, relatively; rail prices much better indeed and so rail earnings stand out like a beacon on a dark night. The rails are accelerating their modal share gains, as Mike Walsh predicted to me almost 20 years ago they would.

I expect in the next cycle they will do even better, surpassing even the bullish expectations of the consensus optimism on the rails. After all, we will be in a period where trucking capacity will be short and productivity in that industry peaked; and where we will face a growing infrastructure deficit, making railways' private infrastructure all the more valuable to shippers and governments - and to investors. 

Although the phrase may be more apt than ever, having gone into the public domain and become as familiar as "new paradigm" or "housing bubble," its time to come up with something new. Having gone through the fire of the renaissance, and faced down those looking for reformation, are we about to enter the era of: Railway EnlightenmentTM

Hatch is president of ABH Consulting, a railroad industry research and consulting firm.