All Aboard: Why America's Second Rail Boom Has Plenty Of Room To Run

An excerpt from the story which appears in the February 10, 2014 issue of Forbes

On an overcast Tuesday morning in dusty North Platte, Nebr., Tony Orr stands at the center of the world’s largest freight rail yard, watching as billions of dollars’ worth of commodities and goods roll by. He’s the general superintendent of Union Pacific’s Bailey Yard–at 2,850 acres, it’s three times the size of New York’s Central Park and handles 10,000 train cars per day on 315 miles of track.

Orr’s view is a soot-caked cross-section of the American economy. To his left a 1.25-mile-long train trundles west toward Wyoming to refill after dropping off 30 million pounds of coal; to his right 140 double-stacked cars clack off to the East Coast with furniture, auto parts and electronics from China and Japan. Beyond, westbound grain trains shriek through the yard while refrigerated cars the color of dirty snow carry fresh produce from California to the Mid-Atlantic, and rusty blue boxcars bear lumber from the Pacific Northwest to points east. “We stay busy,” says Orr. “It’s like New York–this place doesn’t sleep.”

Rail is on a roll, and not just in North Platte. Thanks to leaps in technology, the rising price of diesel and improved delivery speeds, more and more freight traffic has moved from roads to rails, where trains can move one ton of goods about 500 miles on a single gallon of fuel. Since 2009 Union Pacific’s weekly carloadings have increased from 133,000 to 180,000, helping the company achieve record earnings every quarter since the beginning of 2010. Since 2009 its stock price has surged 350% while competitors like Kansas City Southern and Canadian Pacific have seen shares more than double, all of which makes Warren Buffett’s $34 billion purchase of the rival Burlington Northern four years ago look like the great train robbery: FORBES estimates BNSF is worth about $65 billion today.

The industry, so recently an aging also-ran in the age of superhighways, is now a fountain of superlative figures: Industrywide, revenues have surged 19% from $67.7 billion to $80.6 billion since 2009, creating 10,000 new jobs at railroad companies and countless thousands in related industries–and paying out $21 billion in wages last year alone, up nearly $1 billion. As the U.S. population swells, the Federal Railroad Administration projects that the tonnage of freight shipped by the U.S. rail system will increase 22% by 2035.

“This is the best they’ve been doing in half a century,” says rail consultant Carl Martland, a retired MIT lecturer. “It’s hard to imagine a scenario where there is not growth. People are going to continue to eat, heat our homes, buy cars. If everything else is outsourced, that means all the products are going to be coming into the United States at a port in containers. How are they going to get where they’re going? They’re going to Chicago, Memphis, everyplace else by rail.”

All of which is driving a multibillion-dollar revival in rail R&D and infrastructure, investment unseen in America since the transcontinental railroad. Thousands of new state-of-the-art locomotives–far more fuel efficient and less polluting than the ones they replace–are now operating on U.S. railroads.

The most impressive fact of all is that the boom has been underwritten by industry, with no cost to taxpayers. That’s annual infrastructure spending of $20 billion–including $3 billion so far on a massive, federally mandated safety upgrade known as Positive Train Control. Contrast that to America’s highways, which receive $40 billion a year in federal subsidies. “It’s paid for by private investors,” says Union Pacific Chief Jack Koraleski. “In today’s world, where the tax dilemmas are mounting and there are so many issues, the rail industry is one of the true success stories.”

It isn’t all good news, of course. Carloads were roughly flat last year, due to weakness in the coal industry and other commodities, and are still 16% below peak 2006 levels. And as rail has been rejuvenated, so have concerns about safety and the environment, highlighted by a string of deadly oil-train explosions. But rail’s new success is far from a fad. There’s plenty of indication that we’re just in the early stages of a surprising renaissance.

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