New Way To Run A Railroad

The nation's rail industry is slimming down to gain new customers.

Source: The Greenbrier Companies

With more efficient construction of next-generation railway cars, there is more room for larger customer loads and cutting rail operators' operational costs.

"There continues to be pressure on companies to reduce their cost structures," says R. Paul Herman, founder and CEO of sustainable investment firm HIP Investor.

Railway car improvements such as the use of lighter materials—like aluminum in some car types—and better wheel components have increased the freight capacity of a railway car.

These efforts go hand-in-hand with other rail industry initiatives to move more freight off the nation's highways and onto its rails.

New locomotive technologies from equipment makers, such asGE, are also cutting fuel costs, while railways infrastructure changes are putting more goods onto trains earlier in their journey to market. (GE is the parent company of CNBC.)

The push for more efficient cars is also being tailored to the various car type in the nation's rail fleet.

Take the now ubiquitous shipping container placed on double-stack railway cars that can easily move from ship, to rail, to road.

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The average car is now 17-percent more energy efficient thanks to a whittled down weight.

Greg Saxton, chief engineer at railway carmaker, The Greenbrier Companies, says his firm has cut 2,500 pounds from these 74-ton double-stack cars by rethinking every inch, including the use of less steel in the frame.

Automobile carriers—some 55,000 railway cars—use a well system, instead of the two-level design, to get more autos on one car, for a 21-percent increase in efficiency.

By using aluminum rather than steel, the 100,000-strong fleet of coal cars is 20-percent more fuel efficient.

About 60 percent of the US rail car fleet is owned by railway car leasing firms, such as Trinity Industries. Another 30 percent is owned by the railroads. Freight shippers own the rest.

Manufacturers are hoping fuel efficiency advancements will help wrestle more business from the trucking industry.

The average long-haul truck gets about six miles per gallon with a full load, while the rail industry says trains can move one ton of freight 457 miles on a single gallon of fuel. (Read Trucking Firms Try to Keep Up With Fuel-Efficiency Drive.)

Despite the potential cost savings, some freight customers are reluctant to switch over for fear they'll lose flexibility in their delivery options.

The railway car manufacturing industry—which includes six car manufacturers and 250-plus components makers—has seen vehicle deliveries drop from 75,000 units in 2006 to under 21,000 in 2009, with less than 10,000 forecast for 2010.

Source: The Greenbrier Companies

Jim Beall, who specializes in the rail sector for the law firm of Ball Janik LLP. estimates that basic fleet maintenance requires 10,000 to 20,000 additional cars per year, so without sufficient new investment there is likely to be lost carrying capacity, which could push up shipping prices once freight demand bounces back.

Beall is working with industry participants to lobby Congress for a tax credit to help stimulate some of that pent-up demand. Prompting customers to move up purchases by a year or two will save domestic companies and jobs.

"By 2014, it's possible all the little guys will be gone," says Beall, adding that the industry has lost 54,000 jobs in the last 18 months. "And we'll be buying components from Russia, China and India."

Beall and others hope the combination of smart technological improvements, timely government policy and the inevitable economic rebound will save and advance the industry.

"With corporations on the sidelines for most capital spending and virtually no lending from banks, innovative ideas on how to reduce cost and increase service are the main drivers of recurring cash flow and maintaining profits today," says Herman.