Disruptive thinking about railway capital requirements

It has been a bit more than a decade and a half since the rail industry, assisted by well-qualified consultants, alerted the public and industry watchers that economic growth would clearly require some form of a new partnership if the rail freight industry was to assemble the capital resources necessary to meet freight demand by about 2035.

The 2002 Freight Rail Bottom Line Report (downloadable at the link below) was a landmark public policy testament about how to integrate public and private capital to meet ongoing economic traffic growth across the U.S. It was authored by AASHTO (American Association of State and Highway Transportation Officials), and picked up by state DOTs. It clearly changed the way railroads were perceived by public planners. Railroads became part of the fabric of integrated freight and passenger planning through this introduction. Without USDOT authorship, it helped share option planning.

That, however, was before the unexpected global recession of 2007 to 2009, which still plagues U.S. economic recovery in 2016. I believe that it is now time to reflect and challenge the initial projections—update their relevance with new evidence.

A 20- to 25-year horizon isn’t the normal way of railroad thinking. U.S. freight railroads classically have thought in terms of a series of 18-month to perhaps three-year plan horizons. By the time of the Rail Bottom Line Report, there was a broader acknowledgment building inside corporate boardrooms for longer-range planning. Longer-range themes have been reflected increasingly in periodic corporate reports to shareholders. That’s a strong positive about benchmarking for the future.

Rail freight was to have an impressive growth role in America. However, many critical economic assumptions are outdated. In fact, they’re almost a generation old now. That should be our focus here and now.

The first SWOT (Strengths, Weaknesses, Opportunities, Threats) challenge is to ask, “Is the aggressive traffic growth and supporting capital investment still valid? Or are changes in energy and resource commodities suggesting a reassessment?” State and federal rail planners have recently been recertifying their state rail plans to the Federal Railroad Administration. Are the data and plans/projections reflective of the global shifts? There is a possibility of a widening disconnect. How and who will address this economic change theme? Is it true or false?

Why? The old assumption was that the percentage of freight tonnage in 2020 to be carried by rail would increase to 17%. This shift would move about 600 million tons of freight and 25 billion truck VMTs (vehicle miles traveled) off the highway system. Lower rail prices per ton-mile would thereby save shippers close to $240 billion, and perhaps reduce public highway trucker use by about $17 billion—maybe double that.

It’s time to audit these assumptions, just to find out the facts. Are these targets still achievable in the next five years?

To achieve an aggressive rail modal share increase and public/private benefits, the capital expense dollars for investment and maintenance a decade and a half ago needed to total between $205 billion and $225 billion over the 20 years. The expectation was that as much as $83 billion would be needed from sources other than railroad revenue “earnings” and railroad borrowing. Is this still valid?

It’s not all bad news, though. The general expectation was that railroads were with difficulty investing into their business at a difficult-to-sustain rate of about 17% to 18% of rail revenues—thus the need for more public investment. In contrast, during the past half-decade, profits and cash generation, even in a largely recessionary period, have seen some North American railroads investing at an incredible 23% to 25% range. Few predicted this private investment pace back in 2000.

So what is the revised outlook toward 2020? Or further out toward 2035? In the face of lost bulk cargo like coal—a market that has historically been one of the highest profit margins for rail freight carriers—who is rechecking the total demand/capacity rail freight forecast?

The bottom line: Clearly, the 2002 report was an important document, because for the first time since perhaps the 1975 USRA Final System Plan, a national assessment of the health and future of the railroads was issued for inspection and debate. With much-richer databases today, it’s probably a good time to recalculate where the industry is with five years to go on the 2020 target date and what the new public/private issues are.

It’s clear, for example, that recent dividends and stock buybacks and cash flows were never anticipated back in the 2000 to 2006 timeline. Nor were the recent huge revenue pricing margins.

Long-time delays in executing PPP projects for public/railroad joint investments from Houston to I-95 and Chicago CREATE now present both the public and industry planners with a long wish list of freight improvement projects. Many are not fully funded. Are they still necessary, with railway traffic changes, and while rail freight shifts toward intermodal trains? What is practical to consider in the remaining 2016-2020 period? Which projects are still affordable? Who’s going to lead that analysis and report back with the new status? DOT? FRA? STB? One or two key state DOTs?

Who champions a series of revisions, looking out out toward 2030? A new SWOT appraisal? Is this necessary? What’s your opinion?