For decades, freight railroads have heavily reinvested profits to build the most efficient and cost-effective rail network in the world. Railroads are investing billions of dollars each year to maintain and modernize the 140,000-mile network, develop and install a Congressionally-mandated safety system (at a cost of $10 billion) and employ a skilled and highly compensated workforce. The current state of the U.S. economy doesn’t diminish the need for those investments. Even as rail traffic has fallen across numerous sectors in 2016, railroads must invest in the industry in order to provide competitive service, sustain the customer base, and facilitate prospects for future growth. This bargaining round must take into account the investment imperative amid difficult economic conditions.
Coal In Decline: The Impact on Railroads
This round’s labor negotiations are taking place against the backdrop of unprecedented change across the freight railroad industry and among its customers.
At issue is that the health of railroads is affected by the dramatic reduction in shipments of coal – their largest revenue source – and in other commodities as the nation’s economy faces major challenges.
The bottom line is that the economic outlook for the industry has significantly shifted from when the labor negotiations began in 2014 – a development that must be taken into consideration by negotiators and interested parties.
The decline in coal shipments parallels national efforts to generate power with alternative sources. In 2006, nearly half of the electricity generated in the country was from coal. Today, less than one-third of power is from coal. That matches the natural gas share, which has risen sharply in recent years due to favorable pricing and wide availability. Learn More.
Maintaining and Growing a Network
Unlike airlines, cargo ships and trucks, America’s railroads maintain the nation’s 140,000-mile rail network overwhelmingly with private funds. From 1980 through 2015, freight railroads reinvested $600 billion in the network. In 2015 alone, freight railroads spent well over $20 billion to purchase new equipment and improve rail lines and facilities. In recent years, railroads have invested about 19 percent of revenue on capital expenditures, far above the historical rate of three percent spent by the average U.S. manufacturer.
Positive Train Control
Since 2008, freight railroads have worked closely with the federal government and passenger railroads to meet the obligations of the Rail Safety Improvement Act of 2008 – an unfunded mandate to develop and install the most complex safety system in the history of the railroad industry.
The system, known as Positive Train Control (PTC), is costly. By the end of 2015, the freight railroads had spent $6 billion on PTC development and deployment. The estimated total cost for PTC development and deployment is $10 billion. Moreover, the freight railroads will spend hundreds of millions of additional dollars each year after that to maintain the system.
Investing in the Future
As evidenced above, freight railroads annually reinvest billions of dollars in revenue directly back into America’s rail network – an average of nearly $55 million per day in 2015. These investments allow railroads to meet customer demand, facilitate economic growth across the United States, and succeed in a competitive transportation landscape.
Moreover, America’s freight railroads must adapt to handle rapid shifts in traffic and prepare for projected volume increases in the years to come. Railroads must continue to contain costs in order to make necessary investments to grow and maintain the most efficient and cost-effective freight rail system in the world.