Railroads economics

I was just looking at my financial portfolio. I have a few shares of CN. It got me thinking.

With the scream climbing of the cost of fuel, I have seen on tv that companies that would normally tractor trailer there goods across the country are now putting them on trains. My questions is, is the increase in freight haulage generating enough revenue to exceed the cost of the fuel used by the railroads to get these loads delivered? Are the railroads making a profit with the increase in traffic? Is there an increase in traffic?

Of course it's more fuel-efficient, by a factor of five. Consider that trains generally don't have to stop (pace passing sidings) all day long. Also consider that train tracks are always nearly practically level. A huge amount of fuel is expanded in speeding up and slowing down, and in climbing hills. Relative to trucks, railroads are massively under-powered. That lack of power translates into great gas mileage. Well, diesel, but you know what I mean.

It would stand to reason that the higher fuel prices go, the more the railroad's inherent fuel efficiency advantage would allow them to be more competitive with trucks, on shorter and shorter hauls. Railroads can more easily add capacity without creating additional costs (you don't need a larger train crew to move a longer train), so all things being equal, that should lead to more profitability. Railroads are now looked uppon as a favorable investment by Wall Street, which underscores the expected increase in profitability. As for traffic, yes, it most certainly is increasing. All of the class 1's are spending furiously to add capacity and otherwise improve the physical plant to keep up with the demand.

There is a great future in the American transportation system and in American railroads in particular...I would think it should be a growth stock and worth hanging onto. Higher fuel prices are only part of the future story, so is traffic congestion and air quality. There will be more railrading in the future.

CSX is posting that they can move 1 ton 463 miles on a gallon of fuel.

10more years wrote:CSX is posting that they can move 1 ton 463 miles on a gallon of fuel.

That is probably conservative. On my run, we fueled (at Cleveland) trains that had originated in Selkirk, Boston or Jersey. Don't know if they would fuel in Selkirk; but there were no other fuel stops before Collinwood.

A typical CSX freight is between 8000 and 10,000 tons. Typical fuel taken on would be between 2000 and 3500 gallons per unit...most trains with to locomotives. And Selkirk's roughly 400 miles away from Cleveland.

To paraphrase, the original question was "is the increase in freight volume offsetting the increase in fuel costs?" The railroads would publically answer "no," but feel free to take that with a HUGE grain of salt. All class 1s have historically had fuel surcharge programs that are based on the average WTI crude price for a month as posted in the Wall Street Journal. Surcharges are triggered when crude exceeds $23/bbl ( at least for CSX). Right now, the surcharge is 41%, going to 44% in August.

Railroads got a lot of heat for this system as the surcharge was based on the shippers freight rate... and railroad rates can be as convoluted as airline pricing. As an example, use a 10% surcharge: a 100-ton carload of scrap paper moving from A to B at a rate of $1,400 would be assessed a surcharge of $140, meanwhile, a 100-ton carload of muriatic acid from A to B at a rate of $2,800 would be assessed a surcharge of $280. Considering each move used the same amount of fuel, you can imagine the acid shipper feeling he was getting ripped off. He was, in effect, subsidizing the move of scrap paper.

There was sufficient shipper opposition to the system that all the class 1s adopted a more equitable mileage-based system (started by BNSF) last year. That is related to highway diesel fuel prices, with a base of $2/gallon. (The surcharge is now 61 cents/mile on CSX.)

In addition to the fuel surcharges, the railroads' pricing power has increase enormously since 2003. The resurgence of export coal, increased imports, and the greater competitive position of railroads in a high fuel cost environment has really served the railroads well. Traffic growth has largely leveled off with the economy, but financial performance is still solid.

That is probably conservative. On my run, we fueled (at Cleveland) trains that had originated in Selkirk, Boston or Jersey. Don't know if they would fuel in Selkirk; but there were no other fuel stops before Collinwood.

A typical CSX freight is between 8000 and 10,000 tons. Typical fuel taken on would be between 2000 and 3500 gallons per unit...most trains with to locomotives. And Selkirk's roughly 400 miles away from Cleveland.

The CSX add speaks to Net Ton Miles. You are talking about gross ton miles. Net tons don't include the tare weight of the car. Gross ton miles include the weight of the car, and in your case the weight of any empties in the consist as well. I think CSXT averages about 800 GTM/gallon which is close to your example. A good deal of railroad fuel efficiencies are lost due to switching, out of route miles (rail haul is 15% longer than highway between the same two points), the high percentage of empty miles (for carload usually 50%) and the heavy weight of railroad equipment vs truck.

The rising fuel costs are mainly passed on to customers in the current fuel surcharges -- the higher prices would drive customers away, but truckers are suffering even *worse* fuel costs and so railroads remain cheaper than the main alternative. So long as the railroads have capacity to absorb the added business, they're winning much more money than they're losing. The difficulty comes when they hit capacity, start to have severe on-time problems, and to fix the problems, have to double-track, grade-separate, build new lines, or install CTC or PTS or whatever -- that costs. The recession is taking care of this problem temporarily, so that the 'already programmed' investments will be enough for a year or two at least.