Betting on Rail

The topic of a recent article was a price war between two Chinese airlines and Chinese high-speed trains. The notion that high-speed trains could compete with air service is in many regards foreign to the typical notion of modal competition we have in the United States. In other parts of the world however, such competition is getting close scrutiny and will, in all likelihood, increase as nations construct infrastructure systems to meet the needs and demands of a global economy in the 21st century.

Warren Buffett’s recent investment in railroads with the purchase of the 131-year-old Burlington Northern Santa Fe Corp., have caused many to begin to assess the potential significance of rail in America's transportation future. Buffett's railroad carries freight and raw materials collected at ports and moved across the country. He is betting that growth in emerging markets will require shipping even more commodities by rail and it is no coincidence that he purchased a railroad that is located in the Texas megaregion. The Burlington Northern Santa Fe runs along the NAFTA superhighway where goods are shipped from Mexico through the United States and north to Canada. The increasing focus on trade agreements that facilitate ease of movement and exchange through open-door border policies are of increasing importance in global competitiveness. Buffett readily acknowledges that he,” bet on the country” and the continuance of spiraling congestion and gridlock.

Buffett’s acquisition will contribute to recent efforts to “go green” producing far less pollution than trucks would operating in the corridor, particularly when carrying tonnage in excess of 1,000 miles. Commodity movement and travel by rail is not as vulnerable to fossil fuel price fluctuations. The competition between rail companies is somewhat structured and limited by the high capital costs required to build and operate a new railroad.

A number of recent developments suggest an increasing demand for rail transportation and increasing pressures to respond to a number of challenges including climate change, carbon reduction, sustainability, clean energy and green jobs creation, and improved management of natural resources. In addition, the Obama Administration has awarded $8 billion in high-speed rail grants to more than two dozen states and has proposed an additional $13 billion to launch a "new era" of high-speed passenger rail transportation. The construction of high-speed rail systems within the United States moves the country in the direction taken by many other nations including Britain, Japan, China, France and Germany and many others that have made the decision to invest in rail. In 1989 Spain decided that by 2012 it wanted to have the longest high-speed rail system in Europe. If it continues to implement its high-speed rail plan by 2020, more than 90 percent of the country's total population will be within 31 miles of a high-speed train station. Economic development and extensive rider enthusiasm have silenced many critics.

The Obama Administration's newly announced rail program includes upgrading existing rail corridors to accommodate high-speed travel and establishing new corridors to enhance and expand rail service. While all agree that the amount of resources are but a down payment on what will ultimately be required, it does in fact signal a new era in infrastructure planning for the United States. The Acela, Amtrak's high-speed rail service, operates along the Northeast Corridor (NEC) running between Boston and Washington, D.C., and is the only high-speed train service in the United States. While the Acela is designed to attain a high speed of 150 mph (240 km/h), it usually operates at 50 percent of design speed. U.S. spending on passenger rail could benefit U.S. companies and create millions of jobs while saving 125 million barrels of oil, eliminating 20 million pounds of CO2 per mile per year, reinvigorating the U.S. manufacturing sector and generating $23 billion in economic benefits in the Midwest alone — all alongside a long list of intangible side benefits FourBillion.com. In addition, it has spurred U.S. industry to begin to develop and manufacture railcars and other system components. A number of U.S. and foreign companies have announced plans to build new factories to produce equipment. Siemens AG has purchased land to construct a facility for manufacturing high-speed rail passenger trains.