This year’s supply chain snags, clogged ports, labour shortages and other hitches have somehow put U.S. freight railways on track for record profits.

Boyden's perspectives on the news and trends that are transforming industries

It would be reasonable to expect that ongoing supply chain issues associated with the sudden attack and uncertain retreat of COVID-19 would have a negative impact on America’s railway companies, driving costs up and revenues down. Ports are backed up. Labour is hard to come by. Warehouses are full. These conditions have certainly been troublesome for the freight rail industry. And yet, major U.S. carriers are seeing what could be record annual profits.

American railways depend on moving high volumes of goods to compensate for the high costs of fleet ownership and track maintenance. The Association of American Railroads (AAR) reports that traffic has yet to return to pre-pandemic levels. In November, lower intermodal volume drove total traffic down 4.5% from the same period last year. The lucrative motor vehicles & parts category has been especially hard hit by the chip shortage, driving traffic down more than 14% last month, according to AAR data.

The experiences of Union Pacific Corp. (UPC), one of America’s two biggest rail operators, are typical of how the country’s major carriers have fared in 2021. UPC’s fuel costs have climbed 74%. Its locomotive productivity, a key metric which tracks miles per locomotive, has dropped 8%. Freight car velocity, referring to the number of miles travelled in a day, is 5% below the company’s standard. This is partly due to ‘dwell time’, the time locomotives spend sitting idle in terminals.

Further disruptions have beset the industry this year, such as delays, rerouting and damage from wildfires in the west over the summer. Years of slashing workforces as part of cost-cutting efforts are now cause for regret: James Foote, railroad industry veteran and CEO of CSX, the nation’s third-largest rail company, says that many employees furloughed during the pandemic are not returning.

The outcomes, in terms of financial results and share prices, are unexpected. “Ordinarily all these factors would be toxic, but these are not ordinary times,” The Economist points out. One key factor is that the value of railway transportation capacity has skyrocketed. Strong demand, says UP’s CFO Jennifer Hamann, “supports pricing actions that yield dollars exceeding inflation”. Raising prices has pushed the company’s operating income up by 9% over the past two years, despite lower volumes.

Another factor concerns competition from the trucking industry: While labour shortages are vexing for railroads, they are even worse in trucking, where they can have more negative impact on capacity. This works to the freight rail industry’s advantage. When shippers encounter issues with road transport, they will often switch to rail. Trucking still has the advantage in speed, but having fewer drivers amidst high demand spells trouble. As the Journal of Commerce describes, “Truck drivers are the basic unit of transportation capacity and the glue that holds supply chains together.”

Now the question is whether the rail freight industry will continue to prosper as the flow of transportation smooths and more employees return. UP is preparing for expansion, making hefty capital investments to increase capacity. Both UP and CSX are moving ahead with plans to add autonomous locomotives to their fleets. This year’s surprising results are seen as a signal to move full steam ahead.

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