ENGINEERING GANGS and contractors are hard at work across the USA, as the Class I railroads scramble to add capacity to cope with demand. With the coal, grain and intermodal sectors booming, capital investment budgets are running at record levels year after year.
BNSF is adding a third track on California's famed Cajon Pass and a fourth in Wyoming's Powder River basin, and Union Pacific is pushing ahead with a massive programme to double-track its entire Sunset Route between Los Angeles and El Paso. On November 14 Norfolk Southern announced that work had started on the Heartland Corridor project to clear its main line across West Virginia and Ohio for double-stack operation.
Market pricing has enabled the big railroads to generate record operating incomes and help fund investment. But clouds are gathering which could end this rosy scenario as the Class Is face a two-pronged attack.
As we reported in RG 6.06 (p303), freight shippers concerned by high rates and poor quality of service are backing four bills being debated in the US Congress, which would re-impose rate regulation and introduce competition to redress perceived monopoly abuses. However, the Association of American Railroads estimates that in real terms average freight rates are still only half those before deregulation in 1980.
A new threat comes from big commercial investors, who have bought into the rail sector and want to see spending trimmed to boost returns. In October investor group TCX issued an open letter criticising CSX for spending too much on capital works and not keeping costs under control. TCX is demanding improvements in corporate management, and is also reported to be in discussion with other railroads in which it now holds substantial stakes.
In November UP Chief Executive Jim Young warned that any attempt to re-regulate the rail industry would have serious implications for investment. Matt Rose of BNSF agreed that restricting earnings potential would force capital out of the industry. And Norfolk Southern told us on November 15 that 'we are very concerned about attempts at re-regulation. If we can't earn decent returns on our investments, we might be inclined not to invest as much.'
The irony is that shippers want regulation to ensure a better quality of service, but by cutting off investment, re-regulation could actually restrict the ability of the railways to add capacity where it is needed.
On November 2 the Surface Transportation Board announced that it planned to treat CPR's US$1·48bn acquisition of the Dakota, Minnesota & Eastern Railroad as a 'significant' transaction, requiring a five-month review which officially starts on December 5.
