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Railroads Back on Track?

They're posting record profits and expanding their operations, but rising rates and delays irritate some customers.

February 21, 2006|Ronald D. White | Times Staff Writer

After years of retrenchment, railroads across North America are reporting record profits and rolling forward with massive expansion projects of the kind that haven't been seen in decades.

The growth has been fueled by a flood of cargo containers filled with Asian products, which ended the coal industry's 102-year streak as rail's biggest revenue generator in 2003 and has surged further ahead since then.

Railroads are gaining ground on the rival trucking industry, which has been suffering from sharply higher diesel costs and a shortage of long-haul drivers. But companies that move their goods by train are complaining about increasing rates and delays.

"It's a new day a-dawning for the railroads," said Don Hodges, whose Hodges mutual fund lists railroads as some of its largest investments. "The railroads have been underperformers for so many years that people stopped paying attention to them. I think there is a lot ahead of them even yet."

The change is most evident along the route from the ports of Los Angeles and Long Beach to Chicago, the nation's busiest freight corridor for intermodal shipping traffic -- the large steel cargo containers and truck trailers that can move by ship, rail or truck.

Southern California's biggest movers of intermodal traffic, Union Pacific Railroad and BNSF Railway Co., posted strong earnings for 2005. That performance contrasted with the railroads' struggle in 2004 to keep pace with crushing congestion that began at the ports and crept inland to the tracks. They had to turn away cargo or leave it sitting for as long as two weeks before moving it east.

Omaha-based Union Pacific Corp., the nation's largest railroad, reported 70% growth in 2005 net income to $1.03 billion while revenue jumped 11% to $13.6 billion. Fort Worth-based Burlington Northern Santa Fe Corp., which owns the second- largest railroad, earned a record $1.5 billion, up 93%, on revenue of $13 billion, up 19%, for 2005.

No. 3 CSX Corp. reported that 2005 net income rose 237% to $1.2 billion and 2005 revenue increased 7% to $8.6 billion. No. 4 Norfolk Southern Corp. saw its net income rise 39% to a record $1.3 billion in 2005, while revenue rose 17% to $8.5 billion.

"I am particularly pleased that we converted strong revenue growth into a significant increase in operating income," Union Pacific Chief Executive James Young said about his company's 2005 performance during a conference call with investors and analysts. BNSF Chief Executive Matthew K. Rose, in a similar call, described "a systemic change in the demand for rail transportation ... and this new environment creates tremendous opportunities for us to grow business."

Despite its turnaround, Union Pacific received relatively little praise on Wall Street.

A.G. Edwards & Sons analyst Don Broughton, for instance, took Union Pacific to task for its "anemic" 5% growth in intermodal cargo volume, which would have seemed strong in almost any other year. BNSF managed nearly 10% intermodal growth. Industrywide, intermodal rail freight rose nearly 7% to 11.7 million containers and trailers in 2005; total volume, which includes freight moved in rail cars, rose 2.4% to $1.69 trillion ton-miles.

"The industry for many years was cursed with overcapacity. Now, we aren't. It's a sea change for us. We have gone from having to chase freight business to having freight customers chase us," said Tom White, spokesman for the Assn. of American Railroads.

Railroads move more than 40% of the nation's freight tonnage compared with nearly 30% moved by truck, but railroads reap about 10% of freight revenue while trucking companies take in about 80%, according to the rail trade group. Railroads are gaining more of that revenue because the goods moved in cargo containers tend to be more expensive than the coal, grain and other commodities that ride in rail cars.

In addition, the greater fuel efficiency of trains in an era of volatile prices and a dearth of truck drivers is having an effect on long hauls, transportation analysts said. The American Trucking Assn. said the nation was 20,000 short of the drivers it needs, a figure it expected to rise to 80,000 by 2010.

Business has been so brisk that railroads are having trouble maintaining their targeted average speeds and delivering goods on time. Meanwhile, they've been able to pass along fuel-price increases and raise rates for the first time in years, by an average of 15% from November 2004 to November 2005 for intermodal cargo, according to Logistics Management, a trade magazine for supply chain professionals.

Neither trend sits well with customers.

YRC Worldwide Inc., the Overland Park, Kan., company that until recently was known as Yellow Roadway, moves intermodal freight with its trucks and by rail. YRC Chief Executive William D. Zollars last month blamed railroad rate increases, new charges for trailers that formerly were free and service problems for reducing company earnings.

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