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 Across the continent's seven largest operators, trains ran almost 8
percent slower on average and sat idle at key terminals for nearly
three hours longer in the second quarter than a year earlier, data
from the main railroads, known as Class 1, show.
While Canada’s rail operators have nearly recovered, many U.S.
operators lag far behind.
The concerns are sharpest in the U.S. Farm Belt, with lawmakers
fearful that the biggest crops on record may be slow to reach
markets or could even rot.
Rail logjams contributed to the economic slowdown early in the year,
rippling across corporate America and affecting everything from car
makers to ethanol producers.
Many experts blame an incomplete recovery from last winter's freight
backlogs, coupled with record crops and rising competition with
crude oil tankers for track space amid an economic recovery.
"It's like a sinking ship - you're bailing out at one end, but it's
coming in the other end just as fast, if not faster," said Citigroup
Global Markets transportation analyst Christian Wetherbee.
Performance fell behind as loads grew: between April and June, U.S.
rail carload volumes grew 5.4 percent and intermodal traffic, which
include shipments partly by rail, rose 8 percent, Association of
American Railroads (AAR) data shows.
At the same time, the industry is producing "tremendous" margins,
profit and cash flow, with some companies setting records, said rail
analyst Tony Hatch.
The largest operators plan to spend about 18 to 20 percent of annual
revenue this year on new terminals, track, sidings and equipment to
help boost capacity and efficiency, according to Thomson Reuters
data. That is slightly higher than recent average annual spending.
Some shippers complain that spending hasn't been sufficient to meet
demand, especially in bad weather. Still, many investment projects
are multi-year improvements that can't quickly fix traffic jams.
"We're criticized ... because we haven't put infrastructure in to
handle the growth. But then when you try to put infrastructure in,
the not-in-my-backyard lobby kicks in and says: We don't want you
here," Canadian Pacific Railway Ltd <CP.TO> <CP.N> Chief Executive
Hunter Harrison said on a recent earnings conference call.
Over the four decades to 2000, the nation's major track system
shrank by about half, in terms of miles of rails, according to the
U.S. Federal Highway Administration.
Although Berkshire Hathaway's <BRKa.N> <BRKb.N> BNSF Railway Co is
spending a record $5 billion this year, its performance lagged those
of competitors last quarter. BNSF trains traveled 11 percent slower
than year-ago speeds, and stayed at terminals for 18 percent longer.
Fadi Chamoun, an analyst at BMO Capital Markets, said BNSF is
unlikely to recover until mid- to late-2015 due to the amount of
work it must do.
In recent years, BNSF accounted for some 50 percent of the entire
rail industry's volume growth, analysts said. The company says it
handles up to 15 percent of U.S. intercity freight.
BNSF declined to respond to Reuters' questions about its performance
metrics. The Fort Worth, Texas-based railway has said it is working
closely with shippers to clear backlogs and adding track,
locomotives and crews.
The other four U.S. Class 1 railroads are CSX Corp<CSX.N>, Kansas
City Southern <KSU.N>, Norfolk Southern Corp<NSC.N> and Union
Pacific Corp<UNP.N>.
Kansas City Southern and Norfolk Southern did not respond to
requests for comment. CSX said it was investing in strategic
capacity additions and was adding train crews and locomotives to
restore performance and support growth. Union Pacific CEO Jack
Koraleski told Reuters that the railroad’s performance has been
improving even as volumes have been increasing, adding that it has
worked hard to address disruptions and customer issues.
Cowen & Co analyst Jason Seidl said winter exacerbated problems for
the industry. "As they were trying to dig out, the volumes took
off," he said.
ECONOMIC FALLOUT
In the United States, more than 40 percent of goods, valued at more
than $550 billion, are shipped by railroad each year on some 140,000
miles of track. Canada's 30,100 miles of track carry half of the
country's export goods.
Frozen transportation links contributed to a nearly 3 percent
contraction in the U.S. economy during the first quarter, the New
York Federal Reserve said last week.
Lawmakers and the $395 billion agricultural industry fear that
trains may fail to clear last year's record-breaking crops in the
Midwestern U.S. Farm Belt, which could strand part of this summer's
grain harvest.
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"We’re sounding the alarms right now," North Dakota Senator Heidi
Heitkamp told Reuters. "We believe the 2014 crop could be taken off
the fields and there won’t be any place to store it, because of the
lack of ability to move product by rail."
BNSF and Canada's CP Rail operate the main rail networks in North
Dakota, where farmers vie for space with some 700,000 barrels per
day of crude oil shipped by rail from the state's Bakken Shale.
"You can't see these massive increases in crude-by-rail and not
appreciate that they are creating problems for moving agricultural
products," Heitkamp said.
Members of Congress, utility companies, the United States Department
of Agriculture and others are asking the U.S. rail regulator, the
Surface Transportation Board, for help.
“With remaining grain in storage due to the backlog, grain elevators
in some locations, such as South Dakota and Minnesota, could run out
of storage capacity during the upcoming harvest, requiring grain be
stored on the ground and running the risk of spoiling. The projected
size of the upcoming harvest creates a high potential for loss,”
USDA Under Secretary Edward Avalos wrote to the regulator this
month.
Utility Xcel Energy said coal deliveries to a key Midwest facility
were behind schedule.
“When we run out of coal, the plant can't produce electricity. We
are right in the middle of summer when air-conditioning load creates
our highest levels of electric demand,” Xcel Chief Executive Ben
Fowke wrote in a letter to the STB at the end of July.
Since an April 10 hearing on rail service, the STB has issued
several orders, primarily involving CP and BNSF. The most recent
directive, issued in June, required the two railways to publicly
file their plans to resolve their backlog on grain orders and
provide a weekly update on grain car service. It declined to comment
on complaints or its plans.
Earlier this month, the Canadian government ordered Canadian
National Railway Co and CP to further boost regulated grain
shipments, in an effort to prevent a repeat of last season's
backlog.
Recent University of Minnesota data showed that transportation
bottlenecks cost the state’s soybean, corn and spring wheat farmers
nearly $100 million between March and May.
United Parcel Service Inc <UPS.N>, the world's largest courier
company, said that "very poor" railroad performance last quarter
raised its costs. Even passenger service Amtrak has been affected,
with some of the trains it runs on Class 1 tracks falling far behind
schedule.
Canada's biggest rails, CN and CP, operated their trains at speeds
4.7 percent and 3 percent slower in the second quarter than year-ago
levels respectively, better than most U.S. rivals.
CN said its ability to avoid Chicago, a hub notorious for
bottlenecks, helped its sector-leading recovery. In 2009, CN bought
a rail network that encircles Chicago, the Elgin, Joliet and Eastern
Railway Co.
CHICAGO BLUES
Chicago's third-snowiest winter on record severely tangled traffic
at a hub that handles one quarter of the nation's freight-by-rail
and has recently become a major conduit for Bakken crude.
Data from Union Pacific shows its trains idled in Chicago for an
average 65 hours in February, around double the typical time for
much of 2013.
Following a severe 1999 blizzard that paralyzed trains for days,
government and railroads launched a $3.8 billion plan to improve the
Chicago system.
That's not a quick solution for the industry's woes.
“It takes a long time for new lines and new terminals to get built,
and additional locomotives to be delivered and additional crews to
be trained,” said Steve Ditmeyer, an adjunct professor at Michigan
State University’s Railway Management Program.
“There’s a time lag that the railroads cannot snap their finger and,
all of a sudden, get out of the current problem.”
(With additional reporting by Joshua Schneyer and Jonathan Leff in
New York, and Sagarika Jaisinghani in Bangalore; editing by Joshua
Schneyer and Peter Henderson)
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