How railroads came back from the brink and got ahead

McClatchy NewspapersOctober 31, 2011 

HARRISBURG, Pa. — It's a Sunday afternoon and there's a massive traffic jam on a bridge that crosses the wide Susquehanna River, with truck trailers and containers on both sides waiting to get to their final destinations in the densely populated Northeast.

However, this gridlock isn't occurring on a highway.

Rather, it's on the century-old, stone-arch bridge that now carries the trains of Norfolk Southern Railway to far-flung destinations such as Chicago, New York, New England, Baltimore and Atlanta. Half a century ago, most of those trains would have carried coal, ore and manufactured goods stuffed into old-fashioned boxcars. Many still do, actually.

But what's causing the traffic jam is something else: the "boxcars" belong to trucking and shipping companies, such as UPS, J.B. Hunt and Schneider International, filled with consumer products bound for the shelves of big-box stores such as Walmart, Target and Home Depot.

If you buy stuff at any of these stores — and most of us do — it got there by train.

More than three decades after the federal government deregulated freight railroads, the industry is enjoying "a new golden age," said Frank Wilner, the author of several books on railroad economics. After being left for dead in the 1970s, railroads reinvested nearly $10 billion in themselves last year alone, according to industry figures, and they haven't received taxpayer bailouts. Need a job? They're hiring, and if you're a veteran, they want you. They can't send jobs overseas because their business is literally bolted to the ground.

"They are more efficient than trucks are at moving quantities of freight," Wilner said.

The Interstate Highway System eroded railroads' freight business starting in the 1950s. Railroads tried to win back some of the business by putting truck trailers and containers on flatcars — intermodal service, it's called, because the merchandise can move by road, rail and water — but with a tradition of moving heavy freight at slow speeds, they weren't very good at it.

"When I started, railroads were the laughingstock of intermodal service," said Mark B. Solomon, senior editor at industry magazine DC Velocity and a transportation author and expert who's covered the industry for 30 years and formerly handled public relations for UPS.

Not only is trucking freight rail's biggest competitor, it's also its biggest customer. In 2003, intermodal service overtook coal as the leading source of revenue for the freight rail industry.

Solomon and other transportation experts said that truckers are losing their edge because of highway congestion, higher fuel costs, driver shortages and pending safety regulations. Meantime, railroads have made a huge bet on intermodal service, spending hundreds of millions of dollars on new facilities and upgraded tracks to handle the increasing traffic volume.

"The trucking industry has a problem," said Larry Kaufman, a former transportation journalist, industry analyst and communications chief, and author of "Leaders Count: The History of the Burlington Northern and Santa Fe Railway."

"Smarter truckers and smarter railroads are seeing this as a synergy," he said.

Now, Solomon said, the advantage goes to freight railroads. The low pay and difficult on-the-road lifestyle makes it hard for trucking to attract drivers.

"When the economy picks up, you're going to have the worst driver shortage in history," he said.

J.B. Hunt made its first rail shipment more than two decades ago, after its founder rode a Santa Fe Railway intermodal train from Chicago to Kansas City with Santa Fe's president. Recently, the Lowell, Ark., trucking company reported that intermodal operations generated 59 percent of this year's third-quarter revenues.

Railroads also are doing something else they used to be not very good at: marketing.

Viewers of the PBS "NewsHour" see a spot featuring the orange and black locomotives of BNSF Railway. CSX, which might not sound like a freight railroad at first blush, touts its blue and yellow shipping containers in national television ads as "how tomorrow moves."

Matt Rose, BNSF's chief executive, said this isn't your grandfather's railroad business.

"The railroad of today is not the railroad of yesterday," Rose told McClatchy. "We're a great kaleidoscope of the U.S. economy."

Rose isn't the only one who thinks so. In 2009, billionaire investor Warren Buffett spent $26 billion to buy BNSF in what he described as "an all-in wager" that the economy would come roaring back from recession.

While a robust recovery hasn't materialized, BNSF profit rose 14 percent in the second quarter of 2011.

BNSF's 32,000-mile railroad network, based in Fort Worth, Texas, blankets the western two-thirds of the United States, often within a stone's throw of its archrival Union Pacific — "a great competitor," Rose said of the slightly larger Omaha, Neb., company.

Railroads haul more than 40 percent of the freight in the U.S., and they're a pretty good indicator of the health of various sectors of the economy. Rose said it's a mixed picture.

Although the housing bust means that BNSF is hauling less lumber and other construction materials, Rose said the energy sector is a bright spot in the railroad's portfolio. That not only includes an oil- and gas-drilling boom, but also "green" energy such as wind — the railroad transports turbines to sites where they're assembled to generate electricity. BNSF also remains one of the country's top coal haulers; the railroad says it moves enough to power one out of every 10 homes in America.

As a member of President Barack Obama's Council on Jobs and Competitiveness, Rose sits alongside several U.S. business leaders, including Facebook's Sheryl Sandberg.

"We're not an Internet-age company, but very much an industry that helps to allow large segments of the economy to grow," Rose said.

While other businesses are reluctant to hire, the freight rail industry is on track to recruit 15,000 new workers this year, many of them veterans of the wars in Iraq and Afghanistan.

"We've been quite successful and pleased with hiring veterans," Rose said.

The relationship between the military and railroads goes back to the post-Civil War period, when officers returning from battle went into the business of building and running America's railroads. In 1860, the country had 30,000 miles of track. By 1910, the number increased to 240,000. The 140,000 miles that remain today are more productive than ever.

While many businesses complain that they're overregulated, Holly Arthur, a spokeswoman for the Association of American Railroads, the industry's lobbying arm, said all freight railroads want is to leave things just the way they are.

"A lot of industries talk about regulation," she said. "The current regulatory scheme works for us."

To some shippers, however, that's the problem.

Bob Szabo, a Washington lobbyist, has been pushing lawmakers to introduce more competition in rail service for the so-called "captive" shippers who have no alternatives to rail service, and sometimes no other railroad. He also wants to see Congress repeal the antitrust exemptions that apply to railroads.

"Monopolies work," said Szabo, who's executive director of Consumers United for Rail Equity in Washington, a coalition of freight rail customers working on the legislation. "We don't call competition re-regulation, but they seem to."

Szabo said that railroads charge his clients exorbitant rates just because they can. Szabo has found a sympathetic ear among some Senate Democrats, but proposals to crack down on the railroad industry haven't gotten much traction.

"They feel like they have the political power to stop any changes from being made," Szabo said of rail companies. "Don't cry any tears for them. They're doing quite well."

Arthur said the shippers Szabo represents just want lower rates.

"They are using the legislative and regulatory process to exact a better deal than the one they may currently have," she said.

Kaufman said it's little wonder that railroads and shippers are occasional adversaries: They're both in business to make money.

"Is rail service perfect? Of course not," he said. "Only a fool would argue it's perfect."

Kaufman, the former transportation journalist who worked for railroads in the years before and after their deregulation in 1980, said price-sensitive shippers such as chemical companies were bound to be unhappy when railroads became more service sensitive. That benefited companies that needed better service, such as automakers, who were prepared to pay more for it.

"The shippers were split," he said. "To some degree, the same split exists today."

But if Congress hadn't passed and President Jimmy Carter hadn't signed the Staggers Rail Act in 1980 to deregulate the industry, the nation's railroads wouldn't have become the success story they are, Kaufman said.

"They were not masters of their own fate," he said. "They would have been nationalized."

As a financial journalist in 1970, Kaufman broke the story of the Penn Central bankruptcy, at the time the biggest business failure in American history. It nearly brought down the entire industry and resulted in a government-orchestrated rescue that folded Penn Central and several other bankrupt railroads into what became known as Conrail.

"It was a hairy time," Kaufman said. "The industry was on the verge of disaster not that long ago."

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McClatchy Newspapers 2011

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