Railroads booming again (long article)

This item appeared March 27, 2006, in the Chicago Tribune:
As a 1 1/2-mile-long freight train rumbled past a towering stack of
green containers marked "China Shipping" last week, Neil Doyle, aboard his CenterPoint Properties helicopter, swooped in for a closer look, the Chicago Tribune reports.
"That line right there is L.A. to Chicago," he told a pair of Wal-Mart executives riding with him just above one of the world's busier train yards in far southwest suburban Elwood.
After generations of job cuts, consolidation and retrenchment, an old industry is growing anew. Railroads have become hot properties, hauling not only the familiar cargo of coal, grain and domestic products but also the mountain of goods pouring into California ports from Asian factories.
Huge investments in tracks, locomotives, electronic switches and sprawling facilities such as the Elwood hub at the former Joliet Arsenal suddenly make good sense as demand surges and railroad stocks soar.
Chicago stands to reap benefits. Railroads practically created the city in its early days, and it remains the point where East meets West and all six major freight lines come together before heading off again.
An estimated one-third of U.S rail cargo, from corn to clothing, flows through the tangle of track that covers the map of Chicago and its collar counties like spaghetti--creating notorious traffic jams along the way.
Trains that take two days to arrive from California might take another two to go a few miles through the Chicago bottleneck. The industry's boom underscores the need for better infrastructure, but it also raises questions about how much taxpayers should chip in. An ambitious public-private plan that targets the worst of Chicago's train-track entanglements got only a fraction of the federal funding its boosters expected in last year's pork-laden transportation bill.
While the project would help the public by shortening commuting times, improving safety at intersections and reducing exhaust emissions, the $1.5 billion cost presents a big barrier.
"Railroads are the primary economic beneficiaries," said John Gates, retired co-chairman of CenterPoint, which is developing the Joliet Arsenal site. "It's a difficult project for the public sector."
For years, the railroads have threatened to divert traffic from the area to avoid its congestion, but those threats ring hollow in the face of recent investments confirming Chicago's status as the centerpiece of the nation's rail system.
In a matter of months, CSX Corp. is expected to announce plans for another big hub in southern Cook County, industry sources say. That's on top of Union Pacific's giant new hub in Rochelle, Ill., and less-conspicuous local projects undertaken by other lines as well. At the Joliet Arsenal site run by BNSF Railway Co., which includes the old Burlington Northern and Santa Fe lines, expansion continues on a vast scale.
Last week, Commerce Secretary Carlos Gutierrez toured the facility, telling a hometown crowd, "You've got a great advantage." He also voiced confidence in the economy despite the loss of manufacturing jobs in the face of overseas competition.
"This is the future," said Gutierrez, former chief executive of cereal-maker Kellogg Co. "It's all about trading with the rest of the world. This is the best example I can think of."
Outside the warehouse where he spoke, construction hummed at a 3.4 million-square-foot Wal-Mart distribution center slated to open this summer. At the rail yard surrounding it, BNSF expects to handle 800,000 containers this year, up from 275,000 in 2004. It might do a million next year, said John Clement Jr., the railroad's senior manager of hub operations.
"We are ahead of the growth," he said. "We know what's coming. We're going to spend the money so we can be there for ourselves and our customers."
The Association of American Railroads expects that this year the major freight lines will invest a record $8.2 billion in new track, buying equipment and improving infrastructure, up more than 20 percent from a strong 2005.
It's a historic shift after many decades when railroads couldn't make enough money to cover their cost of borrowing it, which discouraged capital spending in one of the more capital-intensive businesses.
"My railroad for the first time in maybe half a century will earn its cost of capital," noted Chicagoan Robert Krebs, retired chief executive of BNSF. "It's a vibrant company now."
Though some believe the current railroad boom represents the peak of an economic cycle, others see a longer-term change. After 90 years, the railroads finally have run out of excess capacity. That in turn has restored their ability to raise rates, according to James Valentine, a research analyst for Wall Street giant Morgan Stanley.
"These positive trends in pricing and better returns are likely to continue for years, maybe decades," Valentine said. Because "all roads lead to Chicago," he added, the region will get a generous slice. "It should receive a disproportionate benefit from the railroads' resurgence."
To a degree, the industry owes today's recovery to a drastic deregulation plan implemented a quarter-century ago. The 1980 Staggers Rail Act came in the midst of severe financial troubles for the industry.
The government had prevented railroads from setting their rates, closing unprofitable tracks and consolidating networks. Service was terrible, and long-haul truckers gained market share.
Deregulation went hand-in-hand with additional consolidation. Major freight lines once numbering in the dozens combined into the mere half-dozen left today. Employment plunged from 458,000 when Congress approved Staggers to 165,000 as of 2005.
That difficult period left scars, including strained relations with workers and ultracautious management.
Over time, the railroads have increased efficiency by adopting so-called intermodal systems, which enable freight to move from point of origin to distribution destination without being removed from a trailer or giant container. It is more reliable and cheaper than transport over long stretches of highway.
Demand for the coal used to fuel power plants grew as well, and grain shipments remained a steady and important source of railroad profits.
The promise of continued growth makes straightening out Chicago's rail network all the more urgent. But the region's $1.5 billion public-private plan lost its political champion with the retirement in January 2005 of Rep. William Lipinski, a Chicago Democrat known for his transit clout. Just recently the plan suffered another blow when Canadian National Railway Co. withdrew from it.
Because none of the plan's initial construction projects would benefit its line, CN could not justify putting up money for it, a spokesman said. It might rejoin later, he added.
Indeed, the plan is far from dead. The $100 million in federal funding it managed to obtain, coupled with support from the other five railroads, has paid for mapping, surveying and engineering work in anticipation of eventual funding.
Yet it could be stuck in neutral for some time.
"The state has higher priorities, the city has higher priorities, the railroads individually have higher priorities, and it's still needed," said Jim LaBelle, deputy director at Metropolis 2020, a civic group backing the measure.
Meantime, out at the Joliet Arsenal site, BNSF's Clement is doing what he can to keep up with demand. He is adopting electronic systems for speeding the flow of some 2,500 trucks that visit the facility each day, using a software program designed specifically for rail-yard management.
Also on the way: global positioning system technology for tracking the thousands of containers piled high on the sweeping expanse of blacktop Clement calls "the parking lot."
The other railroads are on the move too. CSX expects to add 3,500 to its 30,000-plus workforce this year, said spokeswoman Kim Freely. It is increasing capacity by adding 10,000-foot sidings every 15 miles or so on its Chicago-to-Florida run, which will enable slower trains to pull over as needed.
Freely confirmed that CSX is looking for a new intermodal site south of the city but declined to elaborate or comment on timing. It has two such sites in the Chicago area.
One emerging threat: Re-regulation. Some coal and chemical shippers, feeling burned as the railroads flex their newfound power to raise freight rates, have started complaining to Congress. It's a struggle that has flared on and off for more than 150 years, and it could flare anew as these old companies continue shifting into a higher gear.
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------------------------------------------------------------ Interesting article. Thanks for sharing, Brad.
Bill Bill's Railroad Empire http://www.billsrailroad.net
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