Railroad revival
It's the modern version of the race to build the transcontinental railroad. But instead of creating a gateway to the riches of the West, the nation's two largest railroads, Union Pacific and BNSF Railway, are battling it out for the biggest share of the new gold rush from the Far East. Both lines are feverishly laying track, building terminals, and hiring workers to move nearly 48,000 containers of goods per week, many arriving in ships from China, to consumers across the United States. "There's more demand for rail than at any time probably since World War II," says Roger Nober, chairman of the Surface Transportation Board, the federal agency that handles rail rate and service disputes.
Most businesses would be delighted to see the demand growth that the railroads are facing. But for an industry that has spent more than 50 years scaling back, the surge isn't easy to absorb. The railroads now are being called upon to make billions of dollars in long-term investment and revamp operations that were more suited to chugging down the track with commodities like coal, chemicals, and grain rather than speeding consumer goods like jeans, dresses, and DVD players to the nation's superstores.
So far, the No. 2 carrier, known as Burlington Northern Santa Fe until shortening its moniker earlier this year, has taken the lead. While its larger rival has been beset by congestion, deteriorating financial results, and even bad weather, BNSF of Fort Worth had the best quarter in its history at the end of 2004 and a nearly 80 percent boost in its stock price over the past year. It is winning a larger slice of the new business in transporting consumer goods. But the contest is far from over. Omaha-based Union Pacific, which saw its profits plunge 76 percent in the last quarter of 2004, is working hard to catch up. And for all the potential the global economy has to offer, both railroads face big hurdles, both economic and political.
It's a reversal of fortune for the railroads, which were pushed into a slow decline when the rise of the interstate highway system in the 1950s made trucking the primary means of shipping goods. Many went bankrupt, and after Congress largely deregulated the industry in 1980, the railroads abandoned thousands of miles of track, and bigger companies gobbled up smaller ones. In fact, more than 75 percent of freight revenue today is generated by the four remaining big railroads (UP and BNSF in the West and Norfolk Southern and CSX in the East).
But a funny thing happened after all that consolidation. More shippers began seeing advantages in sending goods by rail than by road. For one, trucking costs are high thanks to a chronic shortage of long-haul drivers and skyrocketing insurance premiums. Traffic jams in urban areas have made truck transport less reliable. High oil costs have hit truckers far harder than they have the railroads, which are three times as fuel efficient. So in the past two years, with Chinese imports flooding ports at the same time that farming, mining, and manufacturing facilities were rebounding from the recession, the choice for shippers was clear. "As Asian imports and economic activity have increased, rail was the most efficient way to take these goods long distances," says Nober.
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