Thursday, April 17, 2008

Record Profits but Reduced Capital Budgets


It doesn't add up! Class Ones are pulling down big bucks. Trains are pounding heavily used tracks into the ground. Must be that the railroads are spending big bucks this year for maintenance, right? Wrong!

Last Autumn, the big Class Ones announced to their track material suppliers that orders would be way down for '08 in anticipation of much lower carloadings, hence much lower profits. So, are carloadings down? Not really. At least according to this and this from Railway Age.

But profits are up! At least judging by the initial 1st quarter report from CSX. No one disagrees that this is great news! Question is, are these same Class One Railroads so inflexible that they cannot revise their Capital Programs? They seem to be able to revise them downward quickly. The smarter of them will revise upward, too, and revise them now! Why?

-Track Material Suppliers are not that busy right now. Favorable pricing can happen. Not only that, but steel prices have gone significantly higher just in the past few weeks!And, higher petroleum prices will make an impact on pricing, too. '08 will be cheaper than '09. As the auto mechanic said, "You can pay me now, or pay me later!"

-Due to some accounting hocus-pocus, Capital Costs are suddenly cheaper!

-Many lines, such as the Wyoming Coal Lines, are busier than ever. Track is getting worn down, and strong track costs less and lasts longer than worn down track.

-Class Ones can become good neighbors by hiring and rehiring, and all of their suppliers will look good, too, as they do the same. This is a new paradigm for railroads, I know, but I hold out hope that somebody, somewhere, will take advantage.

So, why won't what is an obviously good idea happen? Why did these somewhat speculative decisions happen, too? I am guessing that hedge funds and other bankers are behind it somehow. During the past thirty to forty years, it was only the railroaders themselves who had to be educated every five years or so about how capital intensive the business is. Now, maybe, hedge fund managers and bankers outside the railroad's own headquarter buildings have to be told, too.

Whatever. It needs to be done. Now. Class Ones: Review the Capital Budget, and spend some of that money now, when it will buy so much more.

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