U.S. railroad capex expected to hit $12 billion in 2011, says AAR report

While heavy capital expenditures are nothing new for the freight railroad industry, a report released today by the Association of American Railroads (AAR) stated that United States-based freight railroads are planning to spend $12 billion in capital expenditures in 2011, following a $10.7 billion investment in 2010.

The 2011 tally would be a new record, with 2010 being the current record for railroad capital expenditures, according to the AAR.

The report, entitled “Great Expectations 2011, Railroads and Continued U.S. Economic Recovery,” points out that although capital expenditure investments are expected to grow, these investments could potentially be negatively impacted by various regulatory and legislative policies being bandied about by Congress, which could hinder the amount of dollars railroads invest into capital expenditure-related efforts.

These things include: legislation attempting to remove antitrust exemptions currently granted to the railroad industry; legislation calling to increase competition—or re-regulate—the railroad industry; a Congressional mandate to implement Positive Train Control (PTC) technology, which will cost more than $5 billion for the freight rail industry to install on more than 72,000 miles of tracks by the December 31, 2015 deadline, with total costs coming to $10-to-$13 billion when passenger trains are included; and an ongoing push to increase truck size and weight.

During a conference call earlier today with members of the media AAR President and CEO Ed Hamberger cited a recent speech President Obama gave to the United States Chamber of Commerce in which Obama called on the private sector to get off the sidelines and spend money to hire employees and get the economy moving again.

“I am pleased to say that [the railroad industry] is not on the sidelines,” said Hamberger. “This industry has been in the game. The $12 billion investment for 2011 follows three years where we averaged $10 billion per year, and up to this year they were the three highest years on record for capital expenditures, which occurred during the middle of the worst recession since the Great Depression. This industry is putting its money on the future, and we will be hiring about 10,000 people this year, and given the retirements over the next five-to-eight years it could be another 60,000-to-70,000 jobs filled.”

Hamberger also noted that these capital expenditure investments are funded by private capital and not taxpayer funding, adding that the railroad industry owns, maintains, improves and pays taxes on their rights-of-way.

Other costs included in capital expenditures include maintenance, with 20 cents of every revenue dollar going back into maintaining, expanding, and improving the U.S. rail network over the last ten years.

What’s more, railroad networks, said Hamberger, are key in the President’s goal to double U.S. exports by 2015, with one-third of all U.S. exports moving by freight rail to U.S. ports.

“If we are going to double exports, we need to make sure there is enough freight rail capacity to get those exports to market,” said Hamberger. “It is important that we be able to make the investments that we have been making and will be making this year.”

And with a plethora of railroad-related legislation kicking around that could negate the railroads’ ability to make these types of capital investments, Hamberger said these things can give pause and cause uncertainty in the railroad industry and send signals to AAR members, which cause them to ponder whether to continue making these investments.

While the railroads continue to plead their case for federal regulations to remain in their current form, railroad shippers and rail shipper groups continue to maintain that they are suffering from increased rates and decreased quality of service.

“For too long, the market has been blocked from setting fair prices for shipping products via rail, which has hurt shoppers, exporters, farmers and manufacturers,” said Glenn English, chairman of Consumers United for Rail Equity (CURE), a railroad shipper group.

But railroad executives continue to counter that theory, explaining that the existing regulatory railroad environment for has produced—for North American railroad shippers—a freight railroad system that is the best in the world. And if the railroad industry lost the ability to earn its cost of capital it could have a negative effect on capital investments to support traffic growth and reverse the strides made post-Staggers Act in the areas of rail safety and service reliability.

“The attitude in Washington towards the rail industry these days is verging on schizophrenia,” said Wick Moorman, chairman, president and CEO of Norfolk Southern, at the company’s May 2010 Annual Meeting of Stockholders. “On the negative side, we are still engaged in defending against the long-running initiative by a small, but well-funded, group of rail shippers who are attempting to alter the economic regulatory regime which governs us so as to lower their rates, and at the same time seriously damage our ability to earn adequate returns…and invest in the future. These shipper- representatives are cynical and short-sighted in trying to manipulate the system to their advantage, while at the same time complaining loudly about government interference in their own businesses.”

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