Tight capacity is one of the preconditions for railroad pricing power, so why worry about it?

Implications: For almost 100 years, or since 1921 to be precise, the railroad industry has been shedding excess capacity and abandoning lines and terminals. For most of that time, unfortunately, it was also losing traffic to other modes of transportation, primarily to the trucking industry. It was only recently that the railroads finally realized that they had abandoned too many lines and that excess capacity was no longer an issue. BNSF had to buy back a line they had sold that went from Seattle across the Cascade Range, and UP has been busy relaying some of the double track the SP had removed from the Sunset Route in the early 1990s. (The SP president was named the Railroad Man of the Year for that and similar feats.) With capacity tight, the railroads learned that they could charge more for their services and be somewhat indifferent to traffic losses as long as they were operating at or near capacity. Why would a company in such a situation be in any hurry to build more capacity?

Analysis:  Much of the congestion currently found on the railroad network is there by design. Rail lines were abandoned or relegated to local service in order to put more traffic onto designated corridors where operational efficiencies could be achieved. The Union Pacific’s yard at North Platte NE is so busy because traffic that used to move through Utah and Colorado was rerouted to the South Pass of the Rockies and across Nebraska where grades were lower and trains could run faster and with fewer locomotives and crews.   Much of the traffic growth in the West is due to the surge in coal traffic out of the Powder River Basin. The two main carriers in the West added track only after the traffic clearly warranted more capacity, but even those investments were gambles that the Green Lobby in the US would not be successful at curtailing the use of more coal in the future. Coal exports have partially offset some of the setbacks in recent months on the domestic scene, and rising natural gas prices have kept prices for coal at elevated levels. With high prices for coal and tight line haul capacities, the railroads have been able to raise freight rates almost 50% during the past few years.