Obama’s High-Speed Vision Gets Railroad Companies Back on Track

By Jason Simpkins
Managing Editor
Money Morning

Railroad companies have been some the best performers in the recent rally of U.S. equities.

Canadian National Railway (NYSE: CNI) CSX Corp. (NYSE: CSX), and Burlington Northern Santa Fe Corp. (NYSE: BNI) - a favorite of Warren Buffett - are all up a about 30% since early March.

And even though the current rally is beginning to lose some steam, there are still plenty of reasons to like railroads over the long haul. They're clean, efficient, and their development is a fixture of President Barack Obama's economic, political, and social agendas.

Obama Fast Tracks Railroad Investment

President Obama envisions high-speed rail as a big part of the United States economic recovery, as well as the country's societal progression.

Earlier this year, Obama outlined his plan to devote at least $13 billion to developing high-speed rail over the next five years.

"Railroads were always the pride of America, and stitched us together. Now Japan, China, all of Europe have high-speed rail systems that put ours to shame," Obama said.

While most passenger trains in the United States travel at the maximum allowable speed of 79mph, trains in Europe and Asia typically travel in excess of 125mph. In France, for example, the Train Ga Grande Vitesse (TGV) travels at an average speed of 133 mph. Another French train actually reached 357.2mph in 2007, setting a new world record, The Associated Press reported.

Japan, which opened its first high-speed rail in the 1960s, transports more passengers than any other rail system on earth, and its Shinkansen trains travel at an average speed of 180mph. And Germany, Spain and China all of have trains capable of traveling as fast as 140mph.

There are 10 "potential" 100-600 mile corridors in the United States that could be carrying similar high-speed trains sometime in the not-so-distant future, according to a fact sheet released by the Federal Railroad Administration (FRA).

Developing a high-speed rail system, "similar to how interstate highways and the U.S. aviation system were developed in the 20th century," would bring a host benefits including more manufacturing jobs, more choices for travelers, and less dependence on oil, the fact sheet said.

"The potential economic benefits of a high-speed rail link between Chicago and Milwaukee, so that people are avoiding I-94, or the link between Chicago and St. Louis, Detroit, all those Midwestern cities, I think is enormous and is a very real option," Obama, a Chicago native, said. "Although gas prices are low right now, it becomes a very meaningful option for people who don't want to take off their shoes (for screening), drive to an airport, pay for parking, and suffer delays."

High-speed passenger trains also figure in to the administration's "green" agenda. Developing all 10 high-speed corridors could eliminate 6 billion pounds, or about 3 million tons, of greenhouse gas emissions each year.

"My high-speed rail proposal will lead to innovations that change the way we travel in America," the President said. "We must start developing clean, energy-efficient transportation that will define our regions for centuries to come."

The American Recovery and Reinvestment Act (ARRA) set aside $8 billion as part of what the Obama administration called a "down payment" on a new, cleaner high-speed railroad system, with another $5 billion included in the president's budget to be dispersed over the next five years.

"To have the federal government now coming out even with $8 billion is great. It lets us look to the future and see what we could really do to develop high-speed," Washington state rail division deputy director Andrew Wood told the BBC. "When I was at school in England teachers always said whatever America does Europe will do in 15 years. This is the roles reversed - the Obama plan's the first step."

Profits Coming Down the Track

While many U.S. rail companies, such as Burlington Northern, are focused primarily on freight transportation, they still stand to benefit from the Obama administration's railroad revolution, because the first phase of development means upgrading existing track.

"It's very likely that all of the money will go to significant improvements of existing tracks," Ross Capon, head of the National Association of Railroad passengers, told The AP. "It's not going to build bullet trains."

That's good news for companies like BNSF, whose railway system alone adds up to more than 50,000 miles of operated track. These companies also have long histories of operations in the Pacific Northwest and Midwest.

Shortly after the announcement by the Obama administration, Oregon Governor Ted Kulongoski and Washington Governor Chris Gregoire sent the White House a letter applauding its "bold rail vision and supporting critical infrastructure investments that will improve mobility, create and preserve jobs, and benefit air quality across our country," the Northwest Progressive Institute Advocate reported.

"Our states, along with British Columbia, have a committed partnership with BNSF [Burlington Northern Santa Fe] and Amtrak," the letter said. "Together, we welcome federal ARRA funds - and the jobs that we'll create with those funds - to help advance our service and improve our infrastructure."

Burlington Northern's focus on clean energy further aligns its goals with that of the Obama administration and local politicians.

BNSF last year acquired 200 fuel-efficient locomotives from General Electric Co. (GE). The engines burn 20% less fuel than their predecessors, BusinessWeek reported. And this year, Burlington Northern will become the first company in the industry to deploy a hydrogen-powered locomotive.

For years now, Burlington has provided potential customers with data showing exactly how much more carbon-friendly their hauls would be if they used trains instead of trucks.

For instance, a train carrying 100 tons over 1,000 miles produces 45% less pollution than a long-haul truck does, according to BNSF.

And unlike trucks, trains don't get stuck in traffic.

"Congestion costs the industry $8 billion a year," said Ray Kuntz, president of the American Trucking Association. "And it's growing at 8% to 10% per year."

CSX has also developed a low-emissions locomotive with three clean diesel engines.

"We're already three to four times more fuel efficient than trucks and we want to take to the next level and really put a green product out there," Michael Ward, Chairman and CEO of CSX told Fox Business. "This locomotive will reduce the emissions of particulates and NOx (nitrogen oxide) by 80% and the emissions of CO2 by 50%."

Ward said his company is investing $1.6 billion in clean technology this year.

"We think long-term more and more people are going to turn to the railroads to relieve highway congestion and because of our small environmental footprint," he said. "So we're making investments in the future even in this tougher time."

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