August 12, 2014
Of the different modes of transportation, only the railroads have the ownership of the right-of-way. The railroads own the ground, the ballast, the track and the signals that make up a modern railroad. We see the hardware of rolling stock and locomotives, a combination of private investment by both the carriers and the shippers. What we don’t see is the ongoing investment and operating cost of the mandated signals systems, like the Rail Safety Improvement Act of 2008 (RSIA).
The mandated systems employ positive train control (PTC), an advanced technology that automatically stops or slows a train when it detects the risk of train-to-train collisions, excessive speed derailments and unauthorized train movements in repair areas or misaligned track switches. RSIA requires Class I railroads to install PTC on tracks that carry passengers or toxic-by-inhalation (TIH) materials by the end of 2015.
The September 12, 2008 Chatsworth Train Collision, in which a distracted commuter train engineer pulled a passenger train past a red signal into the path of an oncoming freight train, triggered RSIA passage. The bill, including the requirements for PTC, quickly developed after the accident, passing a month later on October 16, 2008. The 315-page bill mandated PTC, a process that works better on paper than in the gemba.
All of the mandated railroads are working out land-use deals for the extra land needed to accommodate the fiber optic signals systems PTC requires. Railroads must gain approval from local governments, from the local town council to Indian Tribal Councils; prepare environmental impact statements; and work through a regulated traffic control at grade crossings. There is a cost, and an indeterminate delay while waiting for the gears of government to turn.
The PTC systems depend on data transmitted from a network of antennas that follow the rail network, to support wireless communications between ground systems and the train locomotives. The Federal Communications Commission (FCC) has ordered a stop to installing the necessary signaling antennas. There remain over 22,000 unbuilt and required antenna structures because of the halt work order the FCC issued in 2013, wanting more time to develop a historic preservation and tribal review process for the antennas' locations.
Industry officials said for a long time the mandated deadline was unrealistic. The FCC antenna issue ensured getting a PTC system up and running by 2015 was practically impossible. The railroad industry continues to make investments, but remains unable to proceed because of federal government regulation. "We are caught between a statutory requirement and an unworkable bureaucratic process and don't see a viable path forward to deploy PTC in a timely manner," Association of American Railroads (AAR) President and Chief Executive Officer Edward Hamberger testified to Congress on March 6, 2014.
The 2015 deadline is a farce, and it appears that all parties accept the farce.
PTC is not an inexpensive proposition. The railroads are making a billion-dollar investment in the electronic signals infrastructure that PTC requires. Union Pacific dedicated $450 million this year just to PTC. BNSF committed $200 million, Norfolk Southern over $230 million and CSX over $300 million, over $1.2 billion across those carriers. Because PTC is a wireless system depending on dedicated cellular and satellite signals, the antenna system is a clear requirement. However, the railroads have investment in the locomotives, some 22,000 locomotives, and in the spider web of networks along the tracks controlling remote track switching and train detection. The railroads collectively spent $40 million to buy the dedicated wireless spectrum for the data transmissions.
Yes, the railroads spent $40 million for electronic airspace.
At the front of every freight train is a network of high-power motive machines: locomotives. In the neighborhood of $5 million per unit, a railroad adding 200 locomotives in a single year needs to arrange $1 billion in financial support. Railroads stopped owning locomotives directly, turning to large equipment leasing firms for long-term leases. Leasing companies own a large portion of the general-purpose rolling stock, packaging fleet financing deals with the railroads and packaging the loans into bonds, much like the mortgage market.
Of the more than 1.4 million freight cars operated on U.S. railroads, the railroads own only 20 percent of the fleet (or operate under a lease to the railroad). Eighty percent of the freight cars are owned by large leasing companies, like GE Credit, or owned by the shippers.
The hottest car on the market today is the “Tank Car of the Future” or the “Tank Car of Tomorrow,” depending on the company making the car. Notice that in total, the railroads own a tiny fraction of the tank car fleet; the cars belong to the shippers. The numbers in this chart reflect the conditions as of January 2014, prior to the actions by the Canadian Transportation Safety Board (CTSB) and U.S. Federal Railroad Administration (FRA) in reaction to the aftermath of the Lac-Mégantic, Quebec CBR train wreck that incinerated the center of the town.
The wreck and resulting explosive fire highlighted the volatile chemical structure of Bakken Crude Oils. The CTSB analyzed samples of the crude remaining in the nine tank cars that did not derail in the crash. They found the samples were of a light, sweet crude oil whose flashpoint was consistent with a condensate or gasoline product. The testing showed no indication of contamination of the crude from the fracking process or the fracking fluids. In reaction to this wreck, and the results of other wrecks involving other DOT-111 tank cars, the shippers, leasers and railcar manufacturers started designing tougher cars, working hard ahead of any mandate.
The industry is not waiting. One of the larger American freight car builders, Greenbrier Industries, announced in May 2014 orders for over 3,500 new “Tank Cars of the Future,” the HM-251 for carrying hazardous liquids. Union Tank Car is still in accelerated testing of its “Tank Car of Tomorrow.” Canada’s CTSB already blessed Transport Canada’s new interim rule directives that phase out the use of DOT-111 tank cars for hazardous liquids service in the next three years.
This is more a rhetorical questions than a real effort to give investment advice. Railroads are capital-intensive businesses that pay a decent return on the investment, over the long term. The industry, which at one time had five times the track mileage and six times the labor force, moves five times the freight tonnage of the railroads of 50 years ago. In that time, many railroads went out of business, either swallowed by another railroad or abandoned in place. The number of companies in the industry had to consolidate while the volume of business recovered and the railroads could make a profit again.
If you really want to know if railroads are a good investment, talk to Warren Buffett. Buffett’s Berkshire Hathaway bought the BNSF in 2009. Watch Buffett and Charlie Rose talk about the deal, and then do some research on the performance of the Class I railroads. Based on the stock prices and the volume of trading, there are many investors who believe the railroads are a worthy investment.