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U.S. Railroads Invest in Future as Freight Volume Surges

While industry observers predict rail freight activity could double by the middle of the century the United States is building an innovative rail network that can compete globally

Dean Barber, President / CEO, Barber Business Advisors (July 2011)
Freight can be a good barometer of economic activity. Simply stated, the movement of goods indicates commerce. Here are some stats:

U.S. rail volumes excluding grain and coal shipments rose 7.9 percent to 4.6 million carloads in the quarter ended March 31, according to data compiled by the Association of American Railroads (AAR) in Washington. It was the second-highest increase in a first quarter, after last year's 9.3 percent advance.

On the trucking side, where a majority of America's freight is moved, the American Trucking Association (ATA), predicts that freight tonnage will grown 24 percent by 2022 with revenue ticking up even more - 66 percent. "The trucking industry continues to dominate the freight transportation industry in terms of both tonnage and revenue, comprising 67 percent of tonnage and 81 percent of revenue in 2010," ATA Chief Economist Bob Costello wrote in his forecast.

Reasons Why
Whether it is by rail or truck, there are reasons for the pickup in freight movement, including:

  • Increasing worldwide demand for coal in power generation - coal comprised approximately 37 percent of total U.S. railway carloads in 2010.

  • Growth in U.S. industrial production (projected at more than 3 percent for 2011) and intermodal traffic (first quarter 2011 intermodal shipment volume rose 8 percent year over year)

  • Measures by the U.S. government to boost American manufacturing exports (March 2011 export orders rose to their highest level in more than 20 years)

Rail Improvements

From the customers' point of view, rail transport is cheaper and more fuel-efficient than truck and ship transport. As a result, railroads are gaining market share. And some industry observers predict rail activity could double by the middle of the century, when the U.S. population is expected to grow by more than 100 million. North American rail-freight rates are predicted to continue to be the lowest - or one of the lowest - in the world, and the industry is expected to finance most or all of its capital requirements without public support.

The fact of the matter is that shipping by rail is for the most part less convenient than by truck. But in an era of scarcity and pressure on costs, there has been a growing focus on efficiency. The best thing railroads have going for them is their inherent efficiency, be it in land usage or energy consumption or cost of moving a ton mile of whatever needs to be moved. That plays into railroads' strength.

In the past, railroads have not been known to put a lot of emphasis on customer service. As a result, there was little emphasis on improved transit times and providing consistent reliability. Some shippers, who felt they were captive to a single railroad, even have feared that complaining would somehow put them at risk of having to pay higher rates. Today, however, the industry is far more responsive to customer needs.

In fact, investment by railroad operators for product and service improvement is surging. Fiscal 2010 witnessed a record-breaking $10.7 billion capital investment, and AAR has reported that the freight railroads will spend a record high of $12 billion in 2011 for manpower recruitment, installation of new rail tracks, and other capital projects. The railroad industry is also expected to hire 10,000 new employees in 2011. The U.S. is building an innovative rail network than can compete globally.

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