Freight Train Blues

The freight rail industry has long played a crucial role in supporting the US economy. But in today’s tight markets the importance of that relationship is hanging in the balance, as Union Pacific CEO, James R. Young, explains.

“Over the past 25 years, the American freight rail system has gone from moving three million trailers and containers a year to more than 12 million a year”
-James Young

It cannot be argued that the American freight rail system provides nothing short of the most efficient, cost-effective freight rail network in the world. Not only is it vital to the economic health of US industry, but it also keeps American companies competitive in the world market. America’s freight rail network is also the safest, most environmentally friendly and energy efficient mode of surface transportation. And freight railroads have long been considered the backbone of the US’s transportation network, moving more than 41 percent of the freight ton miles, which is more than any other mode of transportation.

But what does 41 percent of the freight ton miles mean? Looking behind the number reveals that US railroads actually move 70 percent of all automobiles produced in the US; 30 percent of the entire nation’s grain harvest – enough wheat to provide every man, woman and child with a fresh loaf of bread six days a week; and 70 percent of the coal in the US, which provides half the nation’s electricity needs.

In fact, everything that we touch in our daily lives – from orange juice, to the clothes we wear, to toys, bicycles, computers, DVDs – all have had some part of their journey on a train. Over the past 25 years, the American freight rail system has gone from moving three million trailers and containers a year to more than 12 million a year. It also carries steel, the wind turbines that create renewable electricity, and chemical products that are used to make the medicines we take, protect the water we drink, help grow the food we eat, and produce the products that make our lives more comfortable. In short, 41 percent of the freight ton miles means just about anything that touches our lives.

Freight railroads also directly employ approximately 187,000 people, and the vast majority of these are union jobs. These are good US jobs, where the average total compensation is roughly $95,000, marking freight railroads as one of America’s highest-paying industries. Employees also pay for, and are covered by, the Railroad Retirement System, which provides benefits considerably more generous than those associated with Social Security. In fact, roughly 550,000 retired railroad workers and family members currently receive more than $8 billion in retirement and survivor benefits each year.

In addition, all of the large, along with the vast majority of smaller freight railroads are privately owned, which means they must build and maintain their own tracks and rights-of-way. Not only do they own the tracks, but freight railroads also have to also purchase the equipment that operates on these tracks, and they do this with virtually no governmental assistance. In fact, in 2007, freight railroads paid almost $600 million in state and local property taxes on this same infrastructure and equipment, and between 1980 and 2007 freight railroads invested approximately $420 billion in both operating expense and capital investment – more than 40 cents out of every revenue dollar – to maintain, renew and expand track and equipment. This investment generates billions of dollars in economic activity to the rail supplier community and estimations show that for every billion dollars in increased rail investment, 20,000 jobs are created.

But while during normal economic conditions the freight railroad network moves enough lumber to build almost three houses every minute of every day, and enough cement to build 45 miles of new highway every day, these are not normal economic conditions and this is unquestionably affecting how our railroad companies are operating.

Downturn
In January 2009, Union Pacific reported earnings for both the fourth quarter and the full year of 2008. Frankly, it was a good year for the company, with the firm reporting record returns as well as record investments. However, Union Pacific did begin to see the impact of the weakening economy in the second half of the year as rail traffic dropped sharply in the fall. In fact, in the fourth quarter of 2008, Union Pacific car loadings dropped by 12 percent and have continued to drop further in 2009.

This year will clearly be a year that challenges the company, its customers, and its employees. During peak periods, Union Pacific has handled up to 205,000 car loads a week, and in 2006 and 2007 the company averaged over 190,000 car loads per week for the entire year. But in January 2009, car loads were below 150,000, and in prior weeks, the number was much lower. These are numbers that the company has not seen since the 1990s, and the reduction in car loadings cuts across every commodity group Union Pacific carries. 

As a result of such reductions, Union Pacific has also had to face the arduous task of having to reduce their number of active employees, and over the last five years, the company has hired over 27,000 people to accommodate growth and replace retired workers. 

Today, Union Pacific has roughly 3150 employees out on furlough or in a part-time work program. However, the majority of those furloughed are in a program called Alternative Work and Training Service (AWTS), which was started as a mechanism to keep otherwise furloughed, well-trained employees available to return to service when the company sees an uptick in demand.

Under the direction of AWTS, employees are guaranteed eight days of paid service every month, which can be in the form of work or training. Usually weekends are designated as the paid service days so that weekend vacancies are covered and so that those employees in the program are able to get another job during the week. Union Pacific also continues to provide healthcare coverage and pay railroad retirement taxes for the employees in this program.

Ensuring there is a readily available pool of trained employees – while expensive – is a deliberate strategy that Union Pacific has undertaken to ensure the long-term health and responsiveness of the company. We want to be ready to meet increased demand for rail transportation should the economy respond to the current stimulus.
 
While it isn’t clear what will happen throughout the remainder of 2009, one thing is certain – Union Pacific will be required to take the cost containment steps necessary to reflect economic reality. If the economy grows, the company will make the much-needed investments for the future; if not, it will contain spending, reduce costs and reduce capital to reflect the weaker economy.

Supply and demand
To capture all the benefits that rail can provide to our economy and society, the industry must continue to invest for the future. A recent Department of Transportation (DOT) study projects total freight transportation demand will increase by 92 percent from 2002 to 2035, with an 88 percent increase in demand for rail service during that same period. Other studies conclude much of the same. Moreover, a September 2007 study (The National Rail Freight Infrastructure Capacity and Investment Study) found that, by 2035, Class I railroads need $135 billion in investment to expand their network capacity if they are to keep pace with DOT’s forecasted demand.

This figure equates to over $4.5 billion annually for capacity expansion for the next 27 years, meaning that that amount will be needed several times to maintain and renew existing infrastructure. However, today, on an annual basis, the industry is spending less than 40 percent of this amount on new infrastructure capacity, and while studies that project growth this far into the future may not be 100 percent accurate, even if these studies are off by as much as 50 percent we will still not be able to invest in infrastructure to the level the nation needs us to.  

Another area that continues to bring huge costs to the rail industry is replacing existing assets that have either come to the end of their useful life and need because of damage caused by natural events such as fire, floods and earthquakes.

Union Pacific, for example, owns a bridge over the Mississippi River that is nearing the end of its useful life and this single bridge alone will cost hundreds of millions of dollars to replace, and last year construction was started to replace another bridge in Boone, Iowa, that will ultimately cost over $50 million.

While these are big numbers associated with big projects, equally staggering are the day-to-day numbers. Union Pacific currently wears out two miles of track every day, and at a cost of between $450,000 and $600,000 for replacement rail per mile, this adds up very quickly. While estimations show that it costs on average $2.5 million per mile to build new track, this figure does not include the additional cost of acquiring land or environmental issues that may need to be addressed before a new track can be built.

Challenges
These are the challenges we have before us. Our government must embrace policies that enhance the ability of the freight railroads to attract private investment dollars. Our ability to attract private investment in rail infrastructure literally frees up billions of dollars in public money that can be used to support other modes of transportation in this country. In fact, one could argue that the less we utilize rail in this country, the more the taxpayer must pay to subsidize other modes of transportation. We must be able to earn an adequate rate of return to attract private dollars. As returns improve to market levels, additional investment will follow.

Congress must enact an investment tax credit for new rail capacity. We have endorsed a proposal that has been introduced in this Congress that would provide for a 25 percent investment tax credit for new rail construction that expands freight capacity. This credit will allow us to increase our return and make additional investments in rail – investments that are critical if we are going to meet the future, projected demands for rail transportation. In today’s economic environment, where we must conserve our cash, this would enable us to spend more than we could otherwise. In fact, according to US Department of Commerce data, for every $1 of rail investment that would be stimulated by the tax incentive, $3 in total economic output would be generated. 

Lastly, Congress should enact and fund programs that allow states to partner with freight railroads to move forward with projects that benefit both the freight railroad and the public. The best example of this type of project is the CREATE project in Chicago.  This project will improve the fluidity of the freight railroads, enhance passenger rail service in the City, and reduce congestion on the highways.  The freight railroads are willing to put up money consistent with the benefits we would receive, while the local, state and federal governments put up the resources commensurate with the public benefits. These types of projects allow both sides – private and public – to develop and implement projects that would not otherwise move forward.

This article is based on testimony by James R. Young, Chairman, CEO and President of Union Pacific Corporation, given before the United States House of Representatives in January 2009.

Class I railroads
In the US, The Surface Transportation Board (STB) defines a Class I railroad as ‘having annual carrier operating revenues of $250 million or more’, after adjustments for inflation, which are calculated using the Railroad Freight Price Index developed by the Bureau of Labor Statistics (BLS). According to data from the Association of American Railroads (AAR), in 2006, Class I railroads had minimum carrier operating revenues of $346.8 million.

About CREATE: A project of national significance
CREATE will invest billions in critically needed capital improvements to increase the efficiency of the region's rail infrastructure. CREATE will reduce train delays and congestion throughout the Chicago area by focusing rail traffic on five rail corridors. The work includes:
• 25 new roadway overpasses or underpasses at locations where auto and pedestrian traffic currently crosses railroad tracks at grade level
• Six new rail overpasses or underpasses to separate passenger and freight train tracks
• Viaduct improvements
• Grade crossing safety enhancements
• Extensive upgrades of tracks, switches and signal systems

For area residents, CREATE means reduced traffic congestion, shorter commuting times, better air quality and increased public safety. For workers and businesses, it means more jobs and economic opportunity.

Feeling the benefit
A closer look at some of the other ways freight railroads impact the infrastructure industry as a whole

All freight is moved safely. Nothing is more important to railroads than the safety of its employees, its customers, and the communities it serves, and its safety record is unmatched. Between 1980 and 2007, the last full year for which data is available, railroads have reduced the overall train accident rate by 71 percent and employee casualties are down by 80 percent. Today, railroads have lower employee injury rates than other mode of transportation and most other major industry groups – including agriculture, construction, manufacturing and even some types of retail activity.  

The two largest railroads in the US each spent more to operate, maintain and expand their infrastructure than the State of New York did on its entire highway system. As the nation’s only privately funded transportation system operating a 140,000-mile network, railroads require vast amounts of private investment to meet the large capital demands necessary to support their infrastructure. While other modes of transportation rely on government funding to support their infrastructure, the railroads ability to facilitate this private investment is a tremendous asset and benefit to the country.

If just 10 percent of the freight that moves by highway moved by rail instead, the US’s annual fuel savings would exceed one billion gallons. Freight that moves by rail instead of truck reduces greenhouse gas emissions by two-thirds per ton mile. The EPA estimates that for every ton-mile, the typical truck emits roughly three times more nitrogen oxides and particulates than a locomotive.

Freight reduces highway gridlock. A typical train takes the equivalent of several hundred trucks off the highways. Overcrowded highways act as an inefficiency tax that seriously constrain economic growth and costs commuters days in lost time every year. Freight railroads help relieve this tax by reducing congestion, enhancing personal mobility, reducing the cost of maintaining existing roads and reducing the pressure to build costly new ones.

Virtually all passenger rail operations outside the Northeast Corridor (including
Amtrak) run on track owned by the freight railroads. There is currently a very healthy and robust relationship between passenger rail operators and freight railroads, and both often partner together to take thousands of commuters out of their cars and onto the trains. However, to take rail capacity from freight to provide rail capacity for passengers is not the answer to America’s urban congestion problems, as it will only shift thousands of trucks onto the highways. The real answer is to grow capacity for both freight and passenger and this concept was recognized in the recently passed Amtrak Reauthorization legislation, which provides additional funds for new capacity.