What’s Ward’s next move? Like any savvy railroader these days who knows one’s railroad must prepared for the future, he is increasing capital spending—in CSX’s case, to $1.7 billion.
How long will it take CSX to get back to pre-recession traffic levels? “Well, that’s an easy question!” says the ever-equable Ward. “Everybody’s crystal ball is cloudy, but at the peak of the recession we were down 21% in the second quarter, and have grown sequentially since then. But if [economic] forecasters are predicting 3% growth this year, that doesn’t do a whole lot. We were down 15% for the year , so obviously it’s going to take at least a couple of years, and it depends on how quickly it accelerates after this year. It’s really an issue of consumer confidence. When people get more comfortable, when things have stabilized and they’re out buying again, that’s really going to be the accelerant. As a company, we’ve done a great job at responding to this downturn, and we’re going to be ready when the economy comes back. We’ve got the resources, and we can deploy them relatively rapidly.”
Cloudy crystal ball or not, there are some indicators of where traffic is headed. “The coal market is going to be challenged on the domestic utility side, because stockpiles are quite high,” says Ward. “China is coming into the market for metallurgical coal, so we’re feeling more bullish on the export side. It will help mitigate some of the weakness on the utility side. For other commodities, we anticipate slow, gradual growth in the economy—no really outstanding market. Automotive is probably going to have great year-over-year growth because it was down so much in 2009. But we have to be careful of what the total volume is vs. the year-to-year growth. Getting back to coal, most experts at this point predict that there won’t be any climate change legislation coming out of the Senate. There’s great concern over jobs and what that legislation might do to jobs. It probably doesn’t impact our coal business in the intermediate term (10 to 15 years) because coal generates 50% of the electricity in this country.”
Freight car and component suppliers can take heart that CSX will be ordering some new equipment this year to replace aging rolling stock. Plans call for about 1,000 hybrid coal cars, 200 jumbo covered hoppers, and 200 aggregate cars. “This is a good time to replace coal cars,” says Ward. “The [carbuilding] capacity is available to do that. Even if there is climate change legislation, there’s still going to be a good portion of coal usage in electricity generation.”
Locomotives are a different story. There are no plans to purchase any new units this year, though a switcher rebuilding program is under way.
CSX’s largest capital expansion initiative is the $842 million National Gateway freight rail/intermodal corridor, which incorporates lines in the states of Maryland, Ohio, Pennsylvania, Virginia, West Virginia, and North Carolina. The project includes the I-70/I-76 Corridor between Washington, D.C. and northwest Ohio via Pittsburgh, and the I-95 Corridor between North Carolina and Baltimore via Washington, D.C. Launched in 2008 and scheduled for completion in 2012, the National Gateway involves 61 individual doublestack clearance projects and construction of six new terminals. The state share is 20% of the project cost, up to $189 million. Federal funds of $258 million (30% of project cost) are being sought; a sizable chunk—$98 million—has just been received through a TIGER (Transportation Investment Generating Economic Recovery) discretionary grant. CSX is investing the remaining 50%. A Cambridge Systematics study of the project found that every $1 of public money invested in rail infrastructure improvements will lead to $8 in public benefits. The study noted that “by improving the flow of freight and shifting freight transportation from the highway to the railway, the initiative will improve safety, relieve congestion, benefit the environment and reduce highway maintenance costs.” (For more information, visit www.nationalgateway.org.)
Capital spending for other expansion programs could be constrained by the amount of funds CSX will have to commit to Positive Train Control—$750 million or more. “We don’t have an endless source of money,” says Ward. “Clearly, PTC is going to be displacing other worthy projects. We can do less in other areas, but not for a sustained period of time. Some of our expansion capital is going to be cramped by this. It’s crowding out other worthy projects, and has a very poor cost-benefit ratio. Original FRA estimates were 15:1; it’s now a 22:1 negative return. I would rather use that money to buy new locomotives and new cars, upgrade track, and put in siding extensions, rather than in technology with a very poor return.”
Ward takes issue with the FRA’s use of 2008 as the traffic-year base for equipping TIH (toxic inhalation hazard) routes with PTC. “Between 2008 and 2015, things are going to change,” he says. “The Transportation Security Administration requires us to provide the safest and securest routing, based on 27 different factors. That will change the routing on about 20% of TIH. Some of our biggest customers will be getting out of the business of manufacturing or using some of these products. Clearly, in our view, 2015—and where the traffic will be moving then—should be used to determine where PTC is installed, not an historical base that does not really match the intent of Congress as we interpret it.”
Then there’s the question of what technology would deliver the best safety benefit. “Everybody would like to have a risk-free world, but it does not exist,” says Ward. “Look at it how many people are killed on highways every year—44,000 roughly. I can change a lot of that very quickly: No car can go faster than 30 mph, which would eliminate most of those fatalities. We are not willing to pay that price to have that risk-free world. Everyone wants things to be safer, but there are trade-offs of what is the appropriate price you’re willing to pay to lessen the risk. Wouldn’t you rather spend money on growing the amount of traffic moving on rail, which reduces highway congestion, improves the environment, and improves our energy independence, vs. technology to prevent accidents that can be tragic but are very rare?”
Ward agrees with his fellow CEOs on the urgent need to settle a deep conflict in Washington: a pro-rail Administration that’s advancing a national rail plan vs. a Congress attempting reregulation and adopting unfunded mandates. “We really do hope that the policymakers will look at the entire picture and what role freight rail should be playing in our society, rather than these one-off things that are at odds,” says Ward. “We can’t provide the societal benefits if we are not allowed to make sufficient money to get the returns for shareholders and have the money to reinvest in the infrastructure. We need to think about a rail policy.”
Ward calls the Senate Commerce Committee’s draft STB reauthorization bill “very unbalanced. We can’t support it,” he says. “There is restriction on our revenues and our ability to earn money, which would restrict our abilities to invest. When earnings increase, so does investment. If earnings go down, our investments will go down. Most of our customers are enjoying better service and safer operations, and freight rates that are still half of what they were in 1980 on an adjusted basis. Railroad returns are still less than the average of U.S industries. Let’s not go back to that period where it wasn’t working. We don’t need the government getting involved in running railroads. The government seems to be getting involved in running a lot of businesses. They’d be better off to let us continue to run our railroads and not get involved in our day-to-day operations.”
What’s driving this push for re-regulation? “There is a select group of customers that have been pushing for this for 25 years—chemical customers, a rural electric co-op, grain shippers in the West,” Ward points out. “An analyst at UBS went back to 1990 and looked at our average price increases. We’ve been averaging a little more than 1% per year. If you look at the groups that are the biggest proponents of lowering our prices, they’re getting 2%-4%, even 7% per year. They are passing on tremendous increases to their customers, multiples of what we are doing, and they are saying our prices are unfair? They are taking money out of our pocket sand putting it into their pocket, looking at the short term and not thinking about the consequences of railroads making inadequate returns and not being able to invest. It doesn’t make sense.”
What does make sense is that public perception of railroads is changing for the better. “People are realizing the important role we play in the economy,” says Ward. “We’ve been doing some advertising here at CSX, and it’s resonated really well because people are starting to understand the role we play relieving highway congestion and moving freight, and our environmental friendliness. There is a lot of potential for passenger service in various corridors. We just need to make sure that there’s a sound public policy in place to allow us to capitalize on what we provide.” In terms of an increase in shared freight and passenger traffic, Ward says CSX “is more than glad” to work with passenger rail providers that can meet the railroad’s requirements for safety, preserving freight capacity, funding, and liability exposure. Investments in passenger capacity “normally do not create tremendous new capacity for us,” he says. “It allows the passenger trains to operate and for us to continue serving our customers. In most cases it is not a big enhancement to what we do. It’s really making sure that what we have is not diminished. Sophisticated computer modeling can be done to look at the capacity needs of freight and passenger. It’s expensive and complicated, but it’s worthwhile to do so that everything will work well for both freight and passenger.
”Running a freight railroad is very complicated. That’s why states like Virginia and North Carolina have sophisticated transportation departments that can help do the modeling for both parties.”