WASHINGTON – The U.S. Surface Transportation Board has determined that only one major railroad – Union Pacific – was “revenue adequate” in calendar year 2010.

A railroad is considered “revenue adequate” if it achieves a rate of return on net investment equal to at least the current cost of capital for the railroad industry.

Revenue adequacy determines long-term financial sustainability – the ability to pay investors competitive returns as well as covering the cost of efficient operation, which includes obtaining capital for new equipment; to maintain existing track, bridges, signal systems and other capital assets; and to fund capacity expansion.

For 2010, the STB concluded that the current cost of capital for the railroad industry was 11.03 percent, and only Union Pacific achieved a rate of return equal to or exceeding that percentage. No railroad was found to be “revenue adequate” for calendar year 2009.

For 2010, the STB determined that Union Pacific achieved a rate of return on net investment of 11.54 percent; Norfolk Southern, 10.96 percent; CSX, 10.85 percent; Kansas City Southern, 9.77 percent; BNSF, 9.22 percent; Canadian National U.S. affiliates, 9.21 percent; and Canadian Pacific U.S. affiliates, 8.01 percent.

WASHINGTON – Individuals choose bank savings accounts based on the interest rate offered, assuming the investment is secure because no depositor has ever lost their principal on a Federal Deposit Insurance Corp. (FDIC) backed account.

By contrast, corporate investors must consider risk of their principal along with an anticipated rate of return on their investment. Investors are more likely to invest in and/or lend to a firm displaying long-term financial sustainability.

For railroads, long-term financial sustainability is measured by revenue adequacy – earnings that cover the cost of paying investors competitive returns as well as covering the cost of efficient railroad operation.

Congress has instructed the U.S. Surface Transportation Board (STB) to make annual determinations of railroad revenue adequacy. For 2009 (the most recent STB determination of revenue adequacy), the STB determined that no major railroad was revenue adequate. A 2010 determination will be made soon.

To determine revenue adequacy, the STB annually measures a railroad’s profitability against its cost of holding and attracting investors.

The STB calculation estimates the average rate of return needed to persuade investors to provide a railroad with capital for new equipment; to maintain existing track, bridges, signal systems and other capital assets; and to fund capacity expansion. That profit must also allow the railroad to pay investors a competitive return.

Thus, only when the railroad’s rate of return on investment equals or exceeds its cost of capital is the railroad considered revenue adequate. The profits of large corporations may look immense in terms of total dollars, but investors and economists measure profit based upon return on investment. For example, a $5,000 interest payment by a bank on a savings account may seem huge, but if the $5,000 is paid on a $500,000 savings account, the return to the investor is but 1 percent and may cause the investor to shift banks in search of a better return.

This week, the STB determined that the 2010 cost of capital for railroads was 11.03 percent, up almost 6 percent (or sixth-tenths of one percentage point) from the 2009 cost-of-capital when no railroad was determined to be revenue adequate.

It will be November before the STB uses the higher cost-of-capital benchmark to determine if any railroad achieved revenue adequacy in 2010. To achieve revenue adequacy, a railroad’s profit for 2010 will have to have met or exceeded 11.03 percent. In 2009, for example, one of the most profitable railroads — Union Pacific — posted a return on investment almost two percentage points below the threshold for revenue adequacy.

Meanwhile, major railroad stocks are well off their 52-week highs, suggesting investor concern over the ability of railroads to sustain their recent levels of profitability.

The price of CSX common stock is down 30 percent from its 52-week high; Kansas City Southern is down 18 percent from its 52-week high; Norfolk Southern is down 21 percent from its 52-week high; and Union Pacific is down 23 percent from its 52-week high. BNSF is now held privately and its stock is not traded.


NEW YORK – Former UTU Associate General Counsel Dan Elliott, now chairman of the U.S. Surface Transportation Board — the federal agency regulating rail mergers, line sales, abandonments and labor protection — returned to his roots July 4, speaking to more than 500 UTU officers and members attending the union’s eastern regional meeting here.

Terming train and engine workers “the unsung heroes” of the freight railroad industry’s renaissance, Elliott said, “None [of the resurgence] would have been possible without the people in this room. Labor was a major contributor to the rebirth of the rail industry as productivity shot through the roof [since Congress partially deregulated railroads through the Staggers Rail Act of 1980]. This is all thanks to your working harder, smarter and better,” he said.

Elliott recalled that prior to partial deregulation afforded by the Staggers Act, railroad bankruptcies were increasing, track often was in such poor repair that there were standing derailments, service quality had deteriorated and job security was problematic.

The Staggers Act, said Elliott, set loose market forces, giving railroads “greater flexibility to make decisions, develop better ideas and operate more efficiently. There are fewer trucks on the highway and the United States has some of the lowest freight rates in the world. It has all been done with private investment.” He said his job and the job of the STB is to “make sure the industry stays healthy.”

As for his elevation to the STB – which required a nomination by President Obama and confirmation by the Senate — Elliott said, joking, it was something he had long sought. Reflecting on an early-career appearance before the STB’s predecessor agency, the Interstate Commerce Commission, Elliott recalled having to make a difficult argument seeking labor protection.

“I was told to say my piece and sit down. So I went to Washington to the ICC Building. There were scores of railroad attorneys, a press table and spectators. I said my piece. And the chairman asked me to explain why UTU members should have lifetime income protection when nobody else in the room had it. I knew right then and there that I wanted to be the one asking the questions and not answering them,” Elliott said.