Thursday, May 05, 2016

We don’t need more mergers

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We don’t need more mergers

Now that I have your attention, I’ll say it again: The last thing the North American railroad industry needs for the foreseeable future is the long-talked-about “final round of mergers,” resulting in two gargantuan transcontinental Class I carriers that will still have to deal with getting through Chicago.

The AAR will need to rename itself the Association of American Railroad. Atlas won’t shrug. He’ll have a convulsion. You think I’m joking?

The just-concluded Canadian Pacific-Norfolk Southern saga is proof-positive that almost no one has the stomach anymore for this kind of activity. Not the Class I’s, including CP. Not the Class II and III carriers. Not the Department of Justice. Not the Department of Defense. Not Congress. Not the Surface Transportation Board. Not rail labor. Most important, not our customers.

I’ve had the general impression that the railroads were saying, “Please don’t force us to combine,” because that’s exactly what would have begun to happen had William Ackman and Pershing Square Capital Management prevailed and swallowed up Norfolk Southern. Chances are, the STB would have said, “Hold on, let’s see what all these mergers will really do to competition.” As well, we’d probably be looking at a lot of onerous conditions, like open access. Most, if not all, railroads really don’t want that.

Since partial deregulation under the 1980 Staggers Act, we’ve done a remarkable job with productivity and cost savings:

• We’ve slimmed and consolidated into seven large railroads complemented by many entrepreneurial regionals and short lines.

• We’ve reduced headcount—going from five-person train crews to two-person crews, for example.

• We’ve invested nearly half a trillion dollars of private capital into our physical plant, locomotives and rolling stock to the extent where North America’s freight railroads are the envy of the world.

• We don’t require government assistance, and when we do combine private and public dollars for projects with well-defined public benefits, like intermodal terminals and corridors, much of the money is ours.

• We are technologically advanced.

• We operate safely.

• We are the most sustainable (“green”) form of transportation, land, sea or air. What is the number up to now, one ton of freight moves 500 or more miles in a train using only one gallon of diesel fuel?

All of this, especially the cost-control part, is what we needed to do. But we’ve gone about as far as we can with cost saving and efficiency extraction. We’ve been improving our bottom line and lowering our operating ratios through higher productivity, rate increases, fuel surcharges and other methods at our disposal. We continue to do this, even in the face of economics-driven double-digit traffic drops.

That’s the problem: Present-day business levels notwithstanding, growing the top line is getting tougher and tougher. Coal may rebound, but not to the level it once was. Powder River Basin coal may be gone in 10-20 years.* Crude oil and ethanol? Down to a trickle.

So from where will growth come? Many railroaders believe it will come from intermodal, and much of it domestic.

I’ll say it again: We don’t need more mergers. So let’s put a halt to all this hedge-fund-driven, short-term-gain-driven insanity, so-called “quarterly capitalism.” Let’s focus on the real challenge facing our industry: Growing the top line, for the longer term.

I’ll conclude with some words of wisdom from Conrail President and Chief Operating Officer Ron Batory: “No business can save itself into prosperity. Current actions will determine tomorrow’s future, in part. Time waits for none of us and a sense of urgency surrounds us.”

Like I said, we don’t need more mergers.

BNSF Coal Trains Passing* The Powder River Basin is the largest coal mining region in the U.S., but most of the coal is buried too deeply to be economically accessible. PRB coal beds are shaped like elongated bowls and as mines expand from east to west, they will be going “down the sides of the bowl.” This means that the overburden (rock lying over the coal) will increase as will the stripping ratio (the ratio of rock that needs to be moved to get to a ton of coal).

The United States Geological Survey (USGS) has conducted studies on the economic accessibility of coal in major coal producing regions of the country. The studies have typically found that only a small fraction of the coal will be economically accessible at the current price of $10.47/ton. In August 2008, the USGS issued an updated assessment of PRB coal. After considering stripping ratios and production costs, the USGS concluded that at the time of the economic evaluation, only 6% of the original resource, or 10.1 billion short tons of coal, was currently economically recoverable. At a price of $60/ton, roughly half (48%) of the coal is economical to produce.

Presently, the approximately 15 PRB mines are working in areas where the stripping ratio is between 1:1 (i.e. one ton of rock for one ton of coal) and 3:1. As the mines expand, the stripping ratio will increase. As more rock needs to be moved (using large electrically powered draglines and diesel and electric mining trucks), the production cost will also increase.

The U.S. uses about 1 billion tons of coal a year, with about 40% currently coming from the PRB. The amount of coal coming from the PRB has been increasing over the past 20 years. Increasing the price paid for coal can increase the amount of economically recoverable coal, but increasing the price of coal will also increase its production cost. In addition, because coal is a solid, not a liquid, it cannot be produced from many scattered wells as can oil and gas. Rather, coal has to be produced from mines that expand slowly by moving massive quantities of overburden.

The mines in the Powder River Basin typically have less than 20 years of life remaining. Almost all of the coal in the Powder River Basin is federally owned, and further mine expansions will require a series of federal and state approvals, as well as large investments in additional mine equipment to begin the excavations.

(Adapted from Wikipedia)

William C. Vantuono, Editor-in-Chief

With Railway Age since 1992, William C. Vantuono has broadened and deepened the magazine's coverage of the technological revolution that is so swiftly changing the industry. He has also strengthened Railway Age’s leadership position in industry affairs with the conferences he conducts, among them Next-Generation Train Control, Light Rail, and Rail Insights. He is the author or co-author or editor of several books, among them All About Railroading; John Armstrong’s The Railroad: What It Is, What It Does; Railway Age’s Comprehensive Railroad Dictionary; and Planning, Engineering, and Operating Light Rail, With Applications in New Jersey.

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