Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The WSJ has a nice look at some of the macro trends helping American railroads, who are taking market share from other forms of long haul transportation. While it was apparent there has been a huge help from shipments to the West Coast to feed Asia – namely China, along with the central plains oil boom, the story is even broader than that. One interesting note was the heavy use of the trains by FedEx and UPS who you generally think of as using trucks or planes. Until late, the transports as a whole – with the railroads and airlines in particular – have been clear market leaders during this rally.
- “Hot Trains” dedicated to high-priority customers like United Parcel Service roar across the country to deliver everything from microwaves to tennis shoes andAmazon.com packages. FedEx Corp., known for its huge fleet of aircraft, is using more trains, too.
- Welcome to the revival of the Railroad Age. North America’s major freight railroads are in the midst of a building boom unlike anything since the industry’s Gilded Age heyday in the 19th century—this year pouring $14 billion into rail yards, refueling stations, additional track. With enhanced speed and efficiency, rail is fast becoming a dominant player in the nation’s commercial transport system and a vital cog in its economic recovery.
- This time around, though, the expansion isn’t so much geographic—it is about a race to make existing rail lines more efficient and able to haul more and different types of freight. Some of the railroads are building massive new terminals that resemble inland ports. They are turning their networks into double-lane steel freeways to capture as much as they can get of U.S. freight demand that is projected to grow by half, to $27.5 billion by 2040, according to the U.S. Department of Transportation. All told, 2013 stands to be the industry’s third year in a row of record capital spending—more than double the yearly outlays of $5.9 billion a decade ago.
- And in a turnabout few could have imagined decades ago, rail is stealing share from other types of commercial transport—most notably the trucking business, which is waylaid by high fuel prices, overloaded highways, driver shortages and regulations that are pushing up costs.
- Transport by rail is also relatively cheap. Though rising, U.S. freight rail rates are nearly half what they were three decades ago, according to the Association of American Railroads. A confluence of other factors is advancing the trend. The energy boom, for instance, is reviving industries like steel and chemicals. Higher labor and transportation costs in parts of Asia are triggering a surge in sourcing from nearby.
- Trains may seem like relics of a bygone era. Not so. Steeled by a near-death experience in the 1970s—when many railroads filed for bankruptcy and braced for the threat of a government takeover—the railroads instead were largely deregulated. The survivors fought hard. They squeezed capacity, resolved labor issues, swallowed up weaker players and rebuilt. By the time rail’s prospects began to brighten a decade ago, the executives were “a much younger, more IT, more metric-minded group,” says William Galligan, vice president of investor relations at Kansas City Southern. “They had a whole new view toward how you run a railroad.”
- On long distances, trains have been cheaper than trucks for decades. They can move one ton about 500 miles on one gallon of fuel, which makes them three to four times more fuel efficient. Yet they were notoriously unreliable. In logistics, trucks and planes typically arrived on time. Trains, conversely, were known as “the black hole of rail,” says Prof. Sheffi.
- Railroads used technology and strategy to tackle such problems. They used sensors to detect mechanical issues before they caused delays. They developed their own version of the airline “hub and spoke system” and organized shipments in trains all bound for the same destination. The latter move eliminated the time- and labor-wasting stops to break trains apart and reset them. It also paved the way for longer and speedier itineraries.
- In the U.S. oil boom, rail’s new attitude has made it both a preferred mode of transport—and also an instrument of arbitrage. Oil nearly always travels below ground—by pipeline. Unlike pipelines, which travel between two fixed points, trains can transport the oil in many more directions. They also let producers go where the demand is—taking advantage of spreads of as much as $25 a barrel in markets pipelines can’t reach. Until recently, “crude by rail” was just an experiment. But by November, big oil players had carved out a plan here, dooming a new pipeline project in favor of a dozen rail-loading sheds. By year’s end, more oil was moving out of North Dakota by rail than by pipeline.
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