Wednesday, February 12, 2003

Throwing Their Freight Around

WASHINGTON, D.C. - Despite a punk economy, things don't look so bad for the railroads these days. Though down for the past 12 months, rail stocks in the S&P 500 have beaten the broader index's performance by 16%. Look back two years, and that spread widens to 59%.

So what's to like? For one, industrywide financials seem fairly steady. Value Line estimates that revenue will increase 3% by the end of 2003, while net margins, or net income as a percentage of sales, will increase to 9.5%. That's up an impressive two and a half points since 1998.

Another plus is this: Big rail has an unusually powerful position in Washington. Vice President Dick Cheney sat on the board of directors at Union Pacific until he took office. New Treasury Secretary John W. Snow was the chief executive at CSX. Nor does the industry simply rely on the Administration's railroad men. In November, for example, the Association of American Railroads (AAR) tapped Republican Bud Shuster, the former chairman of the House Transportation and Infrastructure Committee and a 28-year congressman from Pennsylvania, to lobby for it on transportation and tax issues.

Big rail has shown little hesitation to open its wallet, mostly to Republicans. By the Center for Responsive Politics' tally, rail companies ponied up $4.3 million during the 2002 election cycle. Union Pacific topped the list of contributors with $1.7 million, 84% of which went to Republicans.

The big carriers' lobbying machine exists, among other reasons, to protect the regulatory status quo. Visit Union Pacific's Web site, for example, and you'll find a position paper from the company on the Staggers Rail Act and the deregulation it brought to the railroads in 1981. After trotting out a raft of statistics on improving safety and productivity, the paper then warns that "these gains are threatened by legislation sought by some special interest groups that would impose new regulatory burdens on railroads."

So who are these special interests? Primarily disgruntled customers in the energy, commodities and chemical industries. Banded together in groups such as Alliance for Rail Competition (ARC) and Consumers United for Rail Equity, they pull out their own statistics to argue that freight carriers have effectively acquired monopoly control, leaving many customers "captive" to a single railroad. By their figuring, $11 billion worth of freight each year is shipped by such captive customers.

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