FEW INDUSTRIES are more vulnerable to events that reduce income and increase expenses than U.S. railways. The basic business model is to haul a lot to offset the high fixed costs of owning fleets of locomotives and maintaining thousands of miles of track. This has been difficult as the US supply chain has taken off, first because of covid-19 and then as it has weakened. Ports are blocked, warehouses overcrowded and labor unavailable. It has undoubtedly been a difficult time for a railway company and, it turns out, a remarkably good time to be so.
The volumes and profits of listed companies that operate American railways and trains were previously tied as closely as a locomotive to its cargo. Not anymore. Traffic has yet to recover from pre-pandemic peaks, according to the Association of American Railroads, a trade group. But the financial equivalent of a train crash that such a slump would once have predicted has not happened. On the contrary, the major US freight carriers are on track to record annual profits. Their stock prices over the past few weeks have helped stock markets reach new highs.
Train regulators have earned their crust in recent months: The vital rails that underpin many transcontinental supply chains are not immune to their own disruption. At Union Pacific (UP), one of the two largest rail operators in the United States, fuel costs have increased 74% in the past year and locomotive productivity has fallen 8%. The “speed” of the freight cars, the number of kilometers driven in a day, is 5% lower than the company standard, in part because of the “terminal timeout” – the rail-expression to be blocked .
Wildfires in 13 western states over the summer caused widespread delays, diversions and damage. The global microchip snafu has cut back on car shipments, a lucrative cargo. Railways face their own shortages, from rolling frames used for unloading containers to large warehouses. Employees, whom railroad bosses once cut back in repeated efforts to cut costs, are now also in short supply. Many of those who were put on leave early are unwilling to return to work, says James Foote, chief executive of CSX, the third largest railway company.
Normally all of these factors would be toxic, but these are no ordinary times. The ability to obtain goods from A To B has become extremely valuable. Jennifer Hamann, UPThe chief financial officer of, explains that the strong demand “supports the pricing actions which return dollars exceeding inflation”. Price increases mean UPoperating profit for the past two years is up 9% even though volumes have fallen 4%.
Other railroads have made the exact same point (the networks overlap in places, although they largely cover their own corner of America). All of them have limited capacity and similar obstacles. Better yet, for railroad shareholders, the labor shortage has been even more acute in the trucking industry, easing outside competition.
Inevitably, the environment will change as bottlenecks are resolved and workers return. Arrogant business customers will not have forgotten how to negotiate. The railways themselves do not stand still. UP, for example, extends its seemingly endless trains from 9,500 to 10,000 feet. CSX introduced autonomous locomotives. Norfolk Southern is shifting more and more traffic from stranded West Coast ports to smoother East Coast operations. This unusual moment, in short, will pass. But for now, the industry remains on a roll.■
This article appeared in the Business section of the print edition under the headline “Hanging out”