Warren Buffet’s recent purchase of the BNSF railroad was great news for the US for a whole bunch of reasons. First off, it was a strong endorsement of the railroad industry and its place in the US transportation network. It was also good news for the nation’s railroad system as a whole. One of the great challenges for freight railroad operators in the US is balancing the enormous demand for capital expenditures with the demands from shareholders for dividends and share buybacks. There is only so much cash to go around and railroads are one of the most capital intensive businesses in the US for the simple reason that they own and maintain almost all of the their own infrastructure. So BNSF moving from public to private ownership means that there will be less of a demand to pay out dividends and more of a focus on making long term investments that will pay off down the road. Basically the focus shifts from the short term to the long term. Now it is unlikely that the other major US railroads will be privatized anytime soon, but with BNSF in private hands it will force the other major railroads to focus more on the long term to keep up with BNSF.
Another reason to cheer and laugh out loud is how the US media landscape tried to make sense out of the deal. Railroads are generally ignored unless there is a major accident or spill of some kind. And so, as articles have been written all over the country from newspapers to magazines, it is comical to watch as reporters try to make sense of why the ultimate savvy investor Warren Buffet bought the second largest railroad when most people think railroads are irrelevant and outdated. Articles, like the link to the ones below from the LATimes and the NYTimes, have been written explaining how railroads are suddenly a growth business again and how they are retaking market share from trucks because they are more fuel efficient, amongst other reasons. What’s amusing is that as far as these writers are concerned, this all just happened yesterday. But thats ok. Because the education of the public and the press about the importance of railroads in our national freight transportation system desperately needed to happen. And so, if all it took was Warren’s stamp of approval, its just too bad it took so long to happen. A point by the way, that was not lost on Buffet: Buffett has said he realized a few years late that railroads had become an appealing investment.
http://www.latimes.com/business/la-fi-rail3-2010jan03,0,27378.story
http://www.nytimes.com/2009/11/04/business/04deal.html
There has been much debate recently about the Obama’s administration’s high speed rail plan that was funded in the economic stimulus bill to the tune of $8 billion dollars, plus a billion a year for the next five years. Much of the debate has centered on whether high speed rail is worth building on a economic basis. I personally believe that many of the negative reports completely miss the point, which is that you cannot measure the economic potential correctly when you only look a travel time reductions, or what the total outlay of federal dollars is compared to an economic payback that fails to look at the many intangible benefits that will arise from high speed rail. But frankly it should come as no surprise that I think high speed rail is a good idea. I have actually failed to post or comment on these stories about if we should build high speed rail because I think they are flawed and anyway, finally, we are building it one way or the other since the money is coming from DC regardless of what people write now. Thank goodness.
So, moving on from the question of if we should build high speed rail to the question of where, today I want to highlight an excellent report from America 2050, an offshoot of the regional plan association here in NYC, called “Where High Speed Rail Works Best”. The report, see the link below, examined every possible city pair in the US that could potentially host high speed rail and ranked those city pairs on a host of factors (factors by the way which I think are much more all encompassing than the metrics used to judge if high speed rail makes sense). Unsurprisingly, the city pairs that lead the list are in the northeast corridor. The first four on the list are all northeast corridor, but number 5 is LA-SF, and 7 and 8 are also California related. It’s nice to know that all of the top 15 city pairs are on the lists of planners to build high speed rail with the notable exceptions of two: Los Angeles – Phoenix and Dallas – Houston. But maybe this program will finally spur traditionally red anti rail states like Arizona and Texas to plan for the obvious future that is passing them by.
http://www.america2050.org/pdf/Where-HSR-Works-Best.pdf
The efforts in the US and around the world to figure out what to do about carbon emissions from coal have heated up recently as global warming and climate change are being debated in the US Congress. President Obama is pushing hard to get Congress to act on climate change in time for the UN global climate change conference in Copenhagen this December. What to do about coal is a fascinating issue, because there is so much coal out there, and much of it just happens to be in two countries that are the largest producers of carbon emissions, the US and China. Although environmentalists have pushed hard to have coal heavily taxed in the new cap and trade scheme being debated in the US Congress, that is proving to be very challenging, given the political strength of regions in the US that produce and consume coal. On top of that, with 50% of base electrical load generated by coal, replacing it in the near future is pretty much out of the question, as the scale of any replacement would have to be massive.
Coal usually has three strong business supporters; the miners, the railroads that transport the coal, and the power producers. However, lately the issue of coal for the railroads is becoming a lot more complicated. The crux of the issue for the railroads is that although today they are major beneficiaries of coal traffic and depend a great deal on revenue derived by moving coal (for the big four railroads, between 15% and 20% of total revenue) they may benefit even more in the long run from higher costs that will be associated with carbon emitting industries, such as truckers.
Railroads claim they can haul a ton of freight four times as far as truckers with the same amount of fuel. And the growth industry for the railroads in the last twenty years has been intermodal, which is carrying truck loads on trains, mainly because of the vastly lower costs when you can move one hundreds trailers on one train with two drivers instead of one driver for one trailer. So the future of that business looks better than ever in a carbon constrained environment.
Railroads are extremely capital intensive businesses and therefore cant make mistakes when planning investments in their physical plant that will last twenty years or more. So right now coal investment is on ice, until the fog clears about what the future holds for carbon emissions. But longer term in a carbon constrained world the future of railroads looks bright.
http://www.nytimes.com/cwire/2009/09/16/16climatewire-big-coal-carriers-navigate-a-risky-climate-tr-5184.html
The Economist looks at the British rail system: With demand soaring and a national government with massive budget deficits, some way has to be found to pay for the needed expansion of the system to meet the future demand for rail services in the UK. But the system is already heavily subsidized, and no one wants to make citizens pay more in fares or increase the subsidy. What a surprise!
The British rail system today is a public/private mix. Public infrastructure, private operators. Today Network Rail owns and maintains the British railroad network and private train operating companies operate freight and passenger service along their tracks. Network rail debt is under written by the British government and its operating loss is subsidized by the British government, but the Government claims it is not a public sector company, mainly to keep the large debts network rail has off of the national balance sheet of the UK.
The future of the railways: Pay up, pay up, and board the train | The Economist
