Railroads need to raise capital spending for expansion of capacity

Railroads need to expand capacity through higher capital spending, not buy back their own stock

For railroads, the past year was one of the most profitable ever.  Yet, this was done with rail traffic volume that was less than in 2006.  With these profits, what are the Class 1 railroads doing?  Investing in improved capacity and speed?  Not so much!  While the conditions and performance of U.S. railroads require higher capital spending, they are using their profits to buy back their own stock.

As pointed out by Fred Frailey in his article in “Trains” recently, railroads are using these profits to buy back their own stock,  thus passing up the opportunity to invest more in improvement of capacity.  He notes that, in 2015, Norfolk Southern will spend 22% of its capital budget of $750 million on capacity improvement.  Morgan Stanley estimates that Norfolk Southern will spend $1 Billion to buy back its stock.  The total the Class 1 railroads will spend in 2015 buying back stock is $10 Billion.

When railroads are proving they are not very dependable as an alternative to expansion of the highway system to meet future freight and passenger needs, it is difficult to understand how buying their own stock contributes to their future capacity.

Railroads need to adopt a new vision of their mission.  Their mission should be to become a dependable alternative to highways for freight and passengers.  That requires a modern system of multi-tracked rail designed for speed and high volume.  We at Rail Solution have advocated for a long time that the country and the railroads adopt the Steel Interstate concept as its objective for the 21^st century.   Railroads can start by investing their profits in infrastructure, not buying back their own stock.  Railroads can advocate private-public partnerships to accelerate the process of modernizing the North American rail system.

All of this can be done with intelligent marshalling of the resources of the country and the railroads, and in the future, be even more profitable for railroads than the present policy of extreme conservatism to expanding capability and capacity.

More at these links to Fred Frailey’s blog on “Trains”:

$10 billion flies out the door

More on railroad capital spending