Sometimes, a fresh perspective from an external, non-stakeholder source provides us key insights into ongoing events and strategic implications. Too often, logistics and transportation as well as procurement professionals lend more attention to industry sources of information than to more independent, less biased business focused sources. Such was a perspective from a recent article published in The Economist regarding what strategies to expect from the U.S. and North America railroad sector.
The article, Doing the locomotion (Paid digital subscription required) is important reading in that it predicts that the second golden age of American railroads is drawing to a close and consolidation may follow.
“Now that cash is no longer raining down it will be harder to satisfy investors, customers and the long-term national interest all at once.”
The article observes that U.S. railroads have been a rare example of capitalism working well, with robust services demand driven by a previous boom cycle in commodities, particularly U.S. crude exploration and rail transport needs. Perhaps that was the insight that motivated Warren Buffet’s Berkshire Hathaway to acquire the BNSF in 2009, in the midst of the global financial crisis.
A virtuous cycle of demand, large profits and vast investment in rolling stock and infrastructure has ensued. Cited is a statistic that fixed assets among North America’s six largest freight rail firms rose by 58 percent from 2004 to 2014. In that same period, pre-tax return on capital rose from 10 percent to 19 percent. For every dollar of gross cash flow in 2014, 67 cents was reinvested. The article author observes that where most U.S. publically-held firms invest profits on share buy-backs to boost their stock price, U.S. railroad executives had more belief in investing in infrastructure and operating stock.
The commentary observes that an age of austerity now beckons and capital investment could drop as much as 20 percent this year. Thus, there was little surprise that CP Rail attempted its now abandoned takeover effort directed at Norfolk Southern.
This new period, according to the author, will test a clunky antitrust apparatus, and industry consolidation may be a result. A direct concluding statement was:
“Perhaps a rationalized (U.S.) rail system will ultimately be seen as the best solution for congestion. It may, however, take someone with Mr. Buffet’s legendary patience to witness it”
Another irony of the U.S. rail industry was the mandate to invest in Positive Train Control (PTC) technology by the end of 2015, which was extended to 2018 because of industry push-back. Three large freight railroads, Canadian National, CSX and Norfolk Southern have already indicated that they will not be ready until 2020, while four others indicate that they will meet the 2018 goal. Whether full PTC implementation will be another casualty of this new age of austerity or consolidation remains another open question.
Within our Supply Chain Matters 2016 Predictions for Industry and Global Supply Chains is a prediction that industry turbulence and continued change will surround the transportation and logistics industry. Now, an internationally recognized source foresees a similar trend for the North America rail industry. Industry supply chain teams need to cognizant of such strategic changes in their long-term supply chain supply network planning, especially in the light for more aggressive efforts in sustainability and green supply chain goal performance.