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Transportation And Making Money

Let’s start this blog post with a definition or two, beginning with “transportation.” In the railroad context—hope you didn’t think I’d be discussing air transport—transportation is the movement of people and property from one place to another. “Making money” is just what it sounds like: Earning a reasonable return on the time and money invested in providing transportation.

We’ve heard a lot about privatizing passenger rail transportation of late. All Aboard Florida, a subsidiary of Fortress Investment Group is building a passenger railroad in Florida. Detractors (not the NIMBY whiners) do not think this project is going to make a profit for Fortress. I’ve written many times in this blog and its predecessor Passenger Rail that a passenger railroad, be it intercity or commuter, will never turn a profit. That’s why I’ve used the term “making money” in this post instead of “profit.”

Consider how a railroad enterprise makes its money. Historically, in the United States, investors (either private or governmental) provided funds (or land) for capital expenditures (today called Capex) and operating costs to get a railroad off to a start. In the beginning, railroads were built and financed to carry passengers! Mines, mills, farmers and manufacturers had no markets, no buyers, outside of their very small geographic areas, and they were used to transporting their goods short distances by wagons. But people wanted to go places. They wanted to travel beyond their small geographic areas and they wanted railroads to take them there, because railroads moved an order of magnitude faster than wagons. These people, these pioneers, also needed railroads for communications; not electronic communications, but messages on paper or carried by emissaries in person. The wise among the entrepreneurs of the day saw that they could, in fact, hope for a nationwide market for their products if they could send salesmen or sales literature to far flung places. The wise railroad management also saw this and encouraged businesses to settle in those far flung places and farmers to farm remote lands.

And even then, most railroads that existed in the late 1940s, before the late 20th century consolidations and mergers, had already gone through multiple bankruptcies. Even when the markets for most goods and commodities became national, railroads had a hard time turning a profit for investors. In part, this was due to public perceptions heightened by shippers and their representatives in government who could not see the railroads’ slim margins. The argument went something like this: The railroad should not be able to make money moving freight if the rate it charged didn’t allow the shipper to make money, especially if the railroad was the only railroad on which the shipper could move his goods from point A to point B. The shippers early forgot what it would have cost to move the same quantity of freight by wagon, and how much longer it would take. The government regulations that resulted hamstrung the railroads into the 1980s before being lifted, and still the drumbeat for re-regulation goes on today.

My point is that railroads have historically been only marginally profitable even on the freight side of the goods v. passenger coin. But they made money. They made money to put into capital improvements and maintenance. They made money to invest in research and engineering and improve the way the whole, massive transportation machine works. They made money for their customers. They made money for cities and towns across the vastness of the American continent by encouraging what we now call TOD (Transportation or Transit Oriented Development). When commuter rail sprang up around cities, it may never have made money for the railroads if not offset by heavy patronage of freight customers in those same cities, but it made money for the cities themselves, capitol you could bank almost as easily as cash. The cities grew, and the people in them had jobs and earned a living and in many cases bettered themselves financially because they were in a city that had railroads.

Today, the freight railroads deregulated—I won’t say unregulated, because they’re not—make money for their investors. They have billion-dollar Capex budgets and pay an enormous amount of taxes in all states. The government subsidized Amtrak makes money a different way. It’s bottom line is negative if you remove subsidies, but it still produces TOD wherever new trains are brought on line. The irony there is that most of the dollar subsidies are dumped into the Northeast Corridor, where the restrictions of a booming populations limit TOD to urban renewal style wreck-and-build projects that tend to destroy the historic character of older urban business districts. Nonetheless, find a way clear to stop a passenger train in such a district, and it’s almost guaranteed that intelligent and industrious Americans will find a way to make some money because of it. So the capitol of government subsidy turns a profit for the citizen. Not so bad, or so far off what happened with the original transcontinental railroads.

Summarizing my thesis for which I have argued above, the transportation we call railroad makes money in all cases, across the board. It is a form of transportation to be honored, and grown, and improved, not scorned as if it were a relic of bygone eras. Freight rail is the most energy efficient way to move heavy and large quantities of goods and commodities from one place to another over land. It’s hard to imagine an alternative. Without passenger rail, the nation would have to invent it. It is also the most energy-efficient way to move people. Without more passenger rail, in the form of new ventures, expanded or privatized Amtrak, and/or higher or high-speed rail, America may find that it has to invent that, too. I am not a proponent of or believer in man-made climate change as it is popularly sold to the public. But should climate change occur by whatever means, should the weather become unmanageable for airlines, America may find that it needs a grown-up, weather hardened, and growing passenger rail network for the same reasons it needed it in the first half of the 19th century. Thank God we have a starting point, Amtrak, that is making money, not showing a profit. Thank God ship yards are still making ships, too. I hope All Aboard Florida makes a lot of money for Fortress. It may be a harbinger of things to come.

©2016 – C. A. Turek – mistertrains@gmail.com

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