The United States lags behind the rest of the world when it comes to passenger trains, but when it comes to the freight railroad, the U.S.
is dominating. The freight rail network in the U.S.
operates over 140,000 miles of privately owned track in every state except for Hawaii.
It moves one-third of all U.S.
exports and roughly 40 percent of long distance freight volume.
The North American freight rail network is considered the most efficient, the largest and the most profitable freight rail
network in the world.
It competes directly with the trucking industry to move goods around the country, shipping everything from coal to cars to chemicals.
And with the rise of e-commerce companies like Amazon, trains are increasingly moving consumer goods as well.
If you see it on a shelf, we likely had a hand in moving it.
There are seven major freight railroads that connect North America.
Union Pacific and BNSF dominate the West.
CSX and Norfolk Southern are the primary East Coast operators, while Kansas City Southern, along with Canadian Pacific and Canadian National run
routes north and south.
Amtrak, which is the United States passenger service, owns only three percent of the country's rail.
In 2019, the top five railroads in the U.S.
had a total operating revenue of over $71 billion.
BNSF, a subsidiary of Warren Buffett's Berkshire Hathaway, is not publicly traded, but the remaining four U.S.
companies have seen their stock on a steady climb over the last several years.
The railroads are incredibly profitable and actually are achieving profits that they've never seen in their entire history.
That, unfortunately, is not true for passenger railroad.
Amtrak continues to lose money.
It's the only major for profit railroad in the United States that hauls passengers, and yet it has never made a profit.
The future of freight demand in this country is strong.
Estimates of 30 to 40 percent increases in freight demand between now and the next few decades are prevalent.
But the freight rail industry success has not come without its challenges.
The industry has dealt with bankruptcies, the lack of demand for coal and the more recent supply chain bottlenecks and rise in thefts.
The seven top railroads, which owned the majority of the tracks in North America, have also been criticized for monopolistic power over the rail
industry.
They tend to be very oligopoly and have an enormous amount of power and pricing, and there isn't a lot of competition.
CNBC explores how freight railroads became so profitable and how the industry plans to evolve to stay on top.
The U.S. railroad dates back to the year 1830 before airplanes or automobiles were even invented.
Passenger rail and freight were in high demand to move people and things around the expanding country.
It's been an economic backbone of the United States in many ways, plays a core and central theme in American history and particularly the
state of the economy.
The railroad has seen many high and low points.
By 1917, 1,900 railroads operated on 254,000 miles of track.
The forties and fifties brought the rise of cars, air travel and trucking.
Up until that point, there was basically no competition for passenger or freight rail.
Besides, other railroad companies and the industry was subject to federal regulation that set rates and profit levels.
After World War Two, the federal government built this incredible interstate highway network and really lit trucking on fire, but didn't
relax the regulatory standards on the rail industry, even though the competition increased dramatically.
It wasn't until 1980 when the Staggers Act was enacted that these regulations were loosened.
It allowed railroads to choose routes, prices and services and brought profits back to the railroads.
Since then, many redundant routes and railroad mergers have consolidated the industry.
There is a series of about five or six different mergers that allow the Union Pacific to be the 32,000 miles of mainline track that we see here
today. Without M&A, chances are that rail as a percent of overall freight would be a much less important part
of our domestic freight network.
Kansas City Southern just recently agreed to merge with Canadian Pacific, and if the Surface Transportation Board approves, it will create the only
railroad linking Canada, the U.S.
and Mexico. Today, the U.S.
has some of the most profitable freight railroad businesses in the world, achieving billions in profits.
Passenger rail, however, has not seen a similar comeback.
While freight railroads have invested at least $25 billion dollars a year year over year into their networks over the past several decades, passenger
rail has not had the same level of benefit when it comes to Amtrak.
The federal government has traditionally been the primary funder of Amtrak, and the amount of funding pales in comparison to funding levels
that have occurred in other countries.
Experts say geography and privatization of the rail freight industry is why some consider it to be the most efficient in the world.
The rest of the world does things quite a bit differently.
In most of the rest of the world, the rail network is nationalized.
It isn't owned by a particular company.
United States geography is the primary reason that freight, railroad and the freight network in the United States is far superior to what you see
in other countries. A lot of what railroads depend upon are bulk commodities, agriculture, commodities and mining that we get out of the
ground, and a lot of those materials come from the center part of the country.
And because these are going to non populated areas.
Rail is really well positioned and is a far superior mode of traffic than you see with trucks.
These companies compete with each other, but also must work together and coordinate shipments since there's not one central owner of the railroad.
In order for us to provide service for a customer, say from the West Coast all the way to the East Coast, we have to hand off those products.
Those boxes, those car loads to a different carrier on the east side of the network.
Freight railroads are what I like to call the middle miles.
And so when you're looking at international traffic, for example, on the West Coast, you have ships bringing in goods and those are translated
either directly into train or into truck.
Train takes the long miles, the middle miles of those trips and then hands those off to truck, often at the end of the trip.
So we all work together is one overall network.
Through the reduction of companies and consolidation, railroad market power has increased.
It are occasionally brought up in front of the regulators for not servicing, but also not charging fair market rates.
They're constantly under the lens and constantly accused of exercising more monopolistic practices in their
pricing. Not so much on the intermodal traffic, which has to sort of stay naturally competitive with truck traffic, but more so on the bulk
goods that there isn't really an equivalent truck competition.
The Biden administration issued an executive order last July that calls for regulation on the freight industry, targeting a practice known as
reciprocal switching.
Reciprocal switching is intended to foster more competitive environments for shippers because the freight companies own certain stretches of track.
The regulation would force them to open up the tracks to other freight companies, giving shippers more options of who to work with and therefore
creating a more competitive market.
The practice is already common in Canada, and some freight railroads have switching agreements, which came as a result of previous mergers.
When Amtrak was created, part of the deal was its passenger trains would still have access to tracks owned by the freight companies.
Amtrak pays host railroads $142 million a year to use their tracks.
It comes at a time when we're trying to move as much freight as we can throughout the supply chain, and to do anything that would knowingly
undermine the fluidity of the freight network is frankly wrongheaded and at odds with the overarching goal of maximizing freight movement.
The system works.
The Surface Transportation Board is in place to adjudicate rate disputes and
determine whether or not a particular rate might be reasonable or not.
The Surface Transportation Board, the agency who oversees economic regulation in the industry, is holding a public hearing to discuss the
matter in March. The railroad companies rely on the trucking industry, but also compete with them for customers.
Truck is the biggest form of competition for railroads in North America.
Trucks have an advantage on the smaller shipments that are associated more commonly with consumer products rails.
We have a big advantage on what I would call bulk commodities that are heavy and move in larger quantities.
Historically, a big portion of rail volumes came from moving coal throughout the country.
In 2019, coal shipments were down 45 percent from their peak in 2006.
Today, the rise of e-commerce and companies like Amazon have made intermodal containers its biggest shipment.
Intermodal containers can move seamlessly from a ship to a train to a truck without having to be unpacked.
We've become a more intermodal intensive industry, and so things that we hadn't done in the past as much as move smaller packages.
We're doing a lot more of that.
It gives you more breadth and more reach in terms of the customers that you can serve.
The freight rail is the most environmentally friendly way to move goods over land.
We emit about twenty five percent of carbon emissions that are trucking partners do.
One intermodal freight train carries upwards of two hundred containers, and so that's two hundred trucks worth of goods on one train.
And for the railroads themselves, it's far more profitable.
They can charge a much higher rate on a per mile basis by hauling intermodal traffic than just hauling general
commodities.
Los Angeles and Chicago are the two top areas in the U.S.
for intermodal trains.
Theft of these boxes have been on the rise recently in L.A., Union Pacific containers carrying packages for companies like UPS, FedEx and Amazon were
found open and a trail of empty boxes lined the tracks.
A handful of years ago, theft out of an intermodal box was a nuisance.
Happened every once in a while wasn't organized.
Today, over the course of about the last year and a half, that theft has become very well organized.
We have a concentrated issue in the L.A.
basin.
Los Angeles ports are a crucial part of the global supply chain.
The Port of L.A. and the Port of Long Beach together taken 40 percent of all goods sent to the U.S.
by water. Millions of containers and billions of dollars worth of goods move through the port every year.
Supply chain issues during the pandemic have led to a backup at the ports, with lots of containers waiting to move into the country
When the supply chain is facing challenges.
Freight railroads are facing challenges, and we've been working hard to do our part to help alleviate supply chain challenges facing this country, and
that's through operating twenty four seven.
It's through working with our maritime and our trucking partners to keep goods moving, to stand up additional capacity and really try to keep the
economy going.
As the industry looks to the future automation and the rise of self-driving truck companies like Embark and Plus could take more of the freight
industry's market share,
If you think about on a per mile basis, there are estimates that an autonomous truck would actually reduce the cost of running a truck by as
much as 70 percent.
If that plays out, that's going to put significant pressure on the railroads because they simply cannot maintain high pricing and really
participate in that intermodal traffic.
We see an awful lot of emphasis on autonomous trucks, and I'm pretty sure within our lifetime we'll see driverless trucks on the road.
But we also then need to be able to automate the railroads to keep up with that.
Union Pacific has invested in TuSimple, a self-driving truck startup as a way to keep up with developments.
It also said at the company's investor day in 2021 that ultimately our answer to autonomous trucks is autonomous trains.
There are companies like parallel systems currently working on prototypes of self-driving trains.
Of course, we're looking to be as competitive as we can and in the future.
There's a lot of pieces that go into that, but certainly the technology and kind of the backbone of that technology we think we think exists and
we're pursuing those opportunities.
Despite being the dominant mover of freight in the U.S., the trucking industry is facing a labor shortage, an issue that only grew worse during
the pandemic.
Labor, as a percent of overall railroads, is far less than what you see with the trucking industry.
So autonomous is going to benefit the trucking industry far greater than it would benefit the railroad industry, and so it's a major threat to the
railroads. I would fully expect that the railroads will fight through their lobbying efforts to keep autonomous trucks really
boxed in and tightly regulated, and will be a big constituent that pushes back on full autonomous.
Trucking makes up 27 percent of jobs in the transportation industry compared to rail transportation, which makes up three percent.
The rail industry declined by 40,000 jobs from November 2018 to December 2020.
Railroads also have their own set of issues as it relates to labor.
The unions that are fighting them on things like precision railroading, which makes the railroads far more efficient and makes the railroads far
more dependable, but also mean that there's less labor and humans involved in the transportation network's.
Precision
scheduled railroading is an operational innovation that helped turn the industry around.
It adds, and mixes freight cars onto longer trains for fewer trips and reduces the number of stops and crew.
Unions have not particularly liked it, but shareholders of the railroads have loved it, and that's really driven the capital appreciation, the
proper appreciation and the efficiency of the railroads for the past couple of decades.
There's pressure to protect jobs.
The regulators have to be very, very careful that we don't end up back in the 1970s in 10 or 20 more years when the trucking
industry has evolved, being highly innovative and automated, and rails are back holding the two man crews because the federal
government has said you will have a two man crew rule.
Despite these criticisms and the number of employees in both trucking and freight rail declining, the need to transport goods around the world will
not stop. The projected growth for freight volume in the U.S.
is expected to grow 50 percent by 2050.
And it's important that people realize that we're out there working out on the network outside twenty four seven.
We've done that throughout the pandemic.
We've done that throughout the supply chain challenges we've seen, and we'll continue to do that into the future.