The new round of bargaining is getting underway during the most challenging economic environment the railroad industry has faced in decades. Just as it has with all American business, the economy has cut deeply into the revenue and profits of all the nation’s major freight railroads. In the last year alone, there has been a 16% drop in the number of carloads hauled by the railroads, bringing the total to the lowest level recorded since the railroads started tracking carloads in 1988. This has translated into a more than 20 percent plunge in railroad revenues. Unfortunately, most experts are predicting a slow and unsteady recovery for the U.S. economy, meaning that it will be a long time before the railroads rebound fully.
Infrastructure Investments & Technology Upgrades
America’s freight railroads operate almost exclusively over infrastructure that they build and maintain. From 1980 to 2007, America’s freight railroads invested approximately $440 billion (more than 40 cents out of every rail revenue dollar) to maintain and improve their infrastructure and equipment.
In addition to these expenditures, railroads will have to spend approximately $5 billion just to install positive train control (PTC) systems, according to the Federal Railroad Administration (FRA). To put this in perspective, $5 billion is roughly what Class I freight railroads spend in a typical year on all infrastructure-related capital spending and roughly what they’ve spent in the past four years combined for capital spending related to infrastructure expansion.
After installation, railroads will also have to spend hundreds of millions of dollars each year thereafter to maintain their PTC systems. Over 20 years, it will cost railroads between $9.5 billion and $13.2 billion to install and maintain PTC systems, according to the FRA. However, the FRA also estimates that PTC-related benefits over the same period will be between $440 million and $674 million. In other words, railroads will incur approximately $20 in PTC costs for each $1 in PTC benefits.
Efficiency & Productivity
To obtain and retain business, the railroads focus on delivering value to customers. To do this, they must be able to deploy employees and assets as flexibly and efficiently as possible. Some of the current work rules and practices hinder the railroads’ ability to do so, making it difficult to deliver high quality, cost-effective service.
Industry Regulations
Congress is also considering imposing new economic regulations on the industry that could have a significant financial impact on the railroads’ business.