It has been about a year since I called for adaptation (growth) and not decline in our industry. And it seems like that growth message was well received. This industry wants to grow now, and that is fundamentally exciting. How do we make it happen faster? Why should we make it happen faster? What can we do right now to attract that business? Is there actually a serious business case for doing so? And most important, can we justify the investment into the rail networks to convert this desire into contracts?
Let’s get our mindsets aligned first. Let’s clean our intellectual rail palates. PSR was not a growth mindset. The sentiment was right, in my opinion: Precision scheduling is the path toward on-time performance. But its execution and situational awareness were not. What started as a novel rail operating strategy morphed into a basic cost-cutting strategy. Its costs became clear over time. It was closer to a playbook that a private equity company would deploy for a business that had no hope for growing. If you can’t grow the top line, cut the bottom. Maximize profits using cost reductions, return cash to shareholders via increased dividends and big buyback programs to inflate EPS, and meet next quarter’s financial targets. Long-term value creation wasn’t the priority. It was essentially a short-term-focused value extraction strategy justified by the belief that the pursuit of rail growth was not the way to maximize a railroad’s financial performance. Therefore, it was not an era of investment into the railroad industry’s growth future. It succeeded in boosting share prices, but that’s about it.
To grow, railroads need to flip the fiscal strategy switch and make the investments now that were delayed and deprioritized during the PSR era, and do so in a big way: Bet on yourselves and bet on the rail industry’s market position and opportunity. It is a smart and lucrative bet to make. But it needs to be made right now, not next quarter or next year.
Why? Because the market opportunity right now justifies it. Even if it may not feel like it, given how quick most are to tie what is happening in rail to the broader economy, I believe the current state of the rail market offers a uniquely real opportunity to capitalize on if the industry thinks a bit differently than it has historically. What exactly is this market opportunity? It is a societal, commercial and financial one.
According to the American Transportation Research Institute, “Traffic congestion on U.S. highways added $108.8 billion in costs to the trucking industry in 2022 … This level of delay is equivalent to more than 430,000 commercial truck drivers sitting idle for one work year and an average cost of $7,588 for every registered combination truck.” America’s traffic problem is real and costly. It is also not improving. According to Dutch mapping and location tech company TomTom’s 14th Annual Traffic Index, not only did traffic congestion in the U.S. tick up by 9% year-over-year in 2024, but more than three-quarters of the cities included in the index had lower average speeds compared to 2023. American society has a need for rail growth to combat traffic, which keeps getting worse. Trucks are part of the problem.
Rail customers made the commercial market opportunity clear last year at the STB hearings on innovation and growth in rail. Multiple shipper trade groups quite literally told railroads exactly what they must do and what the service experience needs to be like to win more of their freight spend. Mike Seyfert, CEO of the National Grain and Feed Association (NGFA), testified that unreliable rail service makes it challenging for shippers to depend on railroads, leading them to choose trucking despite its higher costs. He highlighted that shippers need consistent and dependable rail service to consider it a viable option. The Private Railcar Food and Beverage Association (PRFBA) emphasized that to win back market share, railroads must provide good service, user-friendly alternatives and competitive pricing. The American Chemistry Council (ACC) even stated: “Thanks to new capital investments, by 2032, U.S. chemical and polymer production is expected to grow by more than 25 million metric tons. ACC estimates that this new production will lead to more than 120,000 additional railcar shipments.”
The commercial market opportunity is real, and it is here. Even if sometimes hard to project or quantify, most businesses would celebrate their customers saying, “We want to grow with you, and this is exactly what you have to do for us to give you more of our business.” That is an unmistakable demand signal that must not be ignored: If railroads give customers what they want, the railroads will grow. If the greenest and most fuel efficient form of long-haul land transportation also became the most reliable and easiest to use, a rail demand tsunami will follow.
The biggest winners from growing railroads, though, will be shareholders. They should be the most excited and supportive of the rail industry’s shift to growth. Most important, they should want railroad executive teams to make the necessary upgrades and investments within their railroads to secure this growth future, even if those moves don’t improve the OR in the next three to six months. Quantifying this opportunity with a success scenario shows why.
Redirecting just 1% of the U.S. trucking market, which according to the American Trucking Associations generated $987 billion in revenue in 2023, to rail could create between $6 billion and $9.87 billion in new annual revenue for railroads, depending on the average rates realized. Given the Class I rail industry’s estimated 30% to 40% operating margin (based on OR conversion and GAAP filings), this shift would generate between $1.8 and $3.9 billion in additional annual operating income. Handling this growth might require up to 1.64 million additional railcars per year potentially representing a 13.7% increase in total rail traffic depending on the commodity mix and whether that shift is bulk freight or intermodal. The implication is clear: To actually handle this volume increase, investment in infrastructure, service reliability and technology is needed now. But what makes this growth investment, and strategic direction, so lucrative?
The unmatched windfall impact on shareholder value is the real reason, reward and fundamental business case for rail growth: If railroads expand their growth trajectory and start to deliver carload growth results, their price-to-earnings (P/E) ratios could rise from historical averages of 16x to 18x to potentially 20x to 25x, pushing the total market capitalization of Class I railroads significantly higher. While this valuation multiple expansion is not guaranteed, it is the financial metric to target for improvement to deliver the highest returns for shareholders while also positioning rail as the backbone of North American freight growth. Even a modest shift in truck freight to rail (just 1%!) would deliver major long-term shareholder value while improving service competitiveness and reducing highway congestion. If railroads earn, with their traffic growth results, higher valuation multiples, which investors use to derive the share prices in their enterprise value calculations, shareholders would win, and win big. The objective to strive for in the era of railroad growth is a reclassification and repricing of railroads as growth companies, not stagnant and declining ones.
The market opportunity is real. It’s there. It’s worth it. And the railroads need to think much bigger and be bold. There is a market safety net right now that will catch the railroads if they have the courage to act, spend and think like growth businesses. If they do, I believe the industry can and will transform and command the respect it once had.
But what specifically must happen to make this exciting future reality faster? First, we must remember what the market wants and needs to experience prior to awarding the rails more of their business.
Today’s transportation providers—like it or not—are held to the experience standard set by Amazon and Uber. Users expect real-time visibility, simple access and payments and reliable performance. When a consumer buys a ride, meal or package delivery, they immediately see where their vehicle is, whether it’s on time and when it’s expected. This is the standard. Anything less is obsolete. Rail customers say they want this too, but it still doesn’t exist in the rail experience. Why is this standard so extreme to rail? Why is rail so slow to accept that this is now a basic expectation? In my opinion, the answer lies in financial priorities.
Last year, a large railroad put out a bid to have suppliers try to improve its internal ETA model accuracy. The contract value of doing so, and this is not a typo, was $0. The compensation to perform this work and build this bespoke, hyper-complex technical capability out was the “opportunity” to work with this large railroad. Why? There was “no budget available.” This Class I wanted a bespoke, hyper-complicated technical solution to be built for them and proven to be better than what they currently had internally prior to being willing to pay a single dollar for it. That is simply not how the world, technology or business work now. And this mindset is a key reason why railroads are not truly growing yet. I suspect what happened was they did not think the ROI on this upgrade would be high enough when compared to other uses of capital, despite the obvious value high-accuracy ETAs have for rail customers. These ROI horse blinders need to be switched to racing goggles that allow the railroads to see and act on the bigger picture. This needs to happen immediately. Why?
History has the lesson: tank cars. In the late 1800s, as the rail industry and the oil industry were taking off, new railcars had to be designed and built that could transport bulk liquids, because the original method of transporting oil, loading barrels of oil into boxcars or on flatcars, was a bad one (the barrels leaked a lot). Thus, the tank car was born, and oil companies originally were the first to build them because they wanted to control distribution of their oil. The railroads were fine with this, because they wanted to own more versatile rolling stock instead of the specialized tank cars the oil companies needed. As the oil industry began to boom, railroads grew with them and maintained this ownership preference. These tank cars were more specialized and more expensive to build, own and maintain. So, railroads maintained their preference for non-ownership and left it to the oil companies, and eventually to railcar manufacturers and lessors like UTLX and GATX, which got their starts making tank cars. To this day, the entire tank car fleet is privately, not railroad, owned.
This is the lesson: For that railroad revenue growth, someone else had the ability and the incentive to pay the initial cost to fix this liquid transport problem for the railroads. But as of today, there exists no such incentive for anyone to pay to fix the intricate and complex modernization challenges that the railroads are now faced with and must own. Railroads need to understand that if they choose not to invest their own capital at higher levels and faster rates into a serious and necessary modernization push, no one else will. That sounds expensive and daunting for the rail industry, but there is good news: The funds exist, and they can be deployed justifiably and immediately by the railroads if they choose to make this investment. Most important though, it is the fiduciary obligation that rail executive teams are chartered with by their own shareholders to do so: Maximize shareholder value.
Between 2015 and 2022, the seven (now six) North American Class I railroads spent about $165 billion on share repurchases, while total capex expenditures over that same period were roughly $119 billion, much of which was spent just to maintain operations. A buyback is traditionally executed when the business believes there is no alternative better use of cash for the business to invest in that would maximize shareholder value more than the company’s own stock. A successful buyback therefore is done when the company believes its share price is lower than the actual value of the business, and when over time, when the share price rises to match what the company believed it should have been, it succeeds in generating a high return. It is a speculative, but less risky, “investment,” for it also has the benefit of reducing the number of outstanding shares, which mechanically increases the stock price even without improving business fundamentals. It’s a lower-risk way to boost stock prices in the short term.
This is where the funding for modernization can and should come. Why? Because even for the flagship PSR railroad, CN, buybacks are not a guarantee: As of this writing CN’s 2024 buyback program authorized last year has a negative return. At the close of trading on Jan. 23, 2025, CN’s 2024 program had repurchased 13,940,250 common shares at a weighted-average price of C$168.00 per share for C$2.342 billion. CN’s stock price one year from the day it announced that program was C$152.71: On Jan 23, 2025, the 2024 buyback had a –9.1% return, on C$2.3 billion. That’s about C$231 million not spent on actual operational upgrades the railroad would still have functioning instead of its balance sheet.
The highest likelihood optimized return on railroad capital and higher return on excess cash generated from business operations for railroads right now will come not only from buyback programs, but also from the acceleration of and down payment on this industry’s “modernization-for-growth” effort. Put differently, the bespoke internal ROI project calculation math that railroads use to justify capital spend and project upgrades is arbitrary and just an internal governance exercise if the business is simultaneously executing large buyback programs and allocating the bare minimum in the modernization domain, especially when the buyback underperforms. If the railroad already believes, by approving a buyback program or dividend boost, that making the balance sheet healthier is the most important fiscal priority when compared to any other use of capital that could make the actual service product the railroad is selling better, why at all even consider a necessary or discretionary project, upgrade, pay increase or anything that could be good for the business and make it better?
That would be sound logic if railroads were currently operationally perfect, but given the sheer quantity and frequency of newsworthy events even in the last six months, it is not possible that they are yet. It is paradoxical behavior given the situational context: Operating events are making the news, but every single upgrade project possible to help fix them is not approved, while buyback programs are, regardless of what happens. Any project to fix newsworthy operating events should take precedent over a buyback or a dividend, for clearly there is a problem that needs to get fixed to stop that operating failure from happening again. The frustrating part of the rail industry for me is the seemingly continuous and repetitive news headlines that seem to have almost been normalized in this industry, like derailments, without any guidance or clear direction about what is going to be done to prevent that kind of failure from happening ever again. Growth railroads cannot even be perceived to be apathetic operationally.
I called for growth because growth requires real, not claimed, operational excellence. To grow, railroads will have to solve the thorny, hard to solve and repetitive problems that are not excellence. It is a total mindset, strategy and priority shift from the past decade of railroading.
After a year of saying “we want to grow,” railroads I believe are slowly learning this: You cannot simply state “we now want for you to give us more of your freight spend” without building the infrastructure and service experience customers are asking for. It won’t work. Rail customers shouldn’t have to write Congress for a better rail service experience. That’s not how healthy industries grow. The responsibility to improve the rail shipping experience lies with the railroads and their suppliers, not their customers. If you don’t think, act and spend like a growth business, and operate with the sense of urgency that a growth business has, you will not be a growth business. And the financial markets will not award you a growth valuation multiple, for you are not a growth business: You just state you want to be one, and the desire is not fiscally material.
My argument, then, is simple: It is smart to bet on yourselves, but do it by making your railroads better, not just your balance sheets. It is not as fiscally risky as you might think to make the rail shipping experience elite. Relax the overly restrictive PSR “cost-cutting only” mindset that haunts this industry’s fiscal strategy like a hangover. Use a barbell strategy: Continue reasonable buybacks and dividends, but increase the modernization budget meaningfully. There is no better time than now.
A growing rail industry reduces traffic congestion on our highways, making maintenance less expensive. It accelerates U.S., Canadian and Mexican industrial manufacturing with its faster and more precise delivery performance, allowing rail customers to produce with a totally new type of production precision, efficiency and speed. It attracts more manufacturing, more plants, more investment, and more jobs into the U.S. industrial manufacturing base. It creates more jobs for more railroaders, and allows railroads to make rail careers even more attractive, exciting and lucrative. And it energizes and supports the U.S. economy in a way that it needs right now, especially given the new strategic push by the Administration to bring manufacturing back to the U.S. Attractive and reliable rail operational performance makes North American manufacturing more attractive.
We have no better alternative, strategic direction and choice other than pursuing growth. We railroaders must bet on ourselves, with confidence and conviction. Why? Because this industry can grow. Railroads can be truly elite. And they most certainly can deliver results for their customers, shareholders and employees while they do so. The reward for success will compound, reverberate and amplify for every single stakeholder in this industry, our society and the world. It is time for railroads to get serious and remind the world why the industry that built the economic backbone of the most powerful and lucrative industrial economy in human history is still capable of doing what people don’t think is possible. If it does, and the entire rail industry gets excited and gets to work, and the talk of growth, which is cheap, becomes resource-backed action and results, it will be time to sell trucking stocks and buy the rails.
Alex Luna is the Founder and CEO of AlphaRail, a 2020 Creative Destruction Lab Quantum Computing Stream graduate and the only rail-focused founding member of the United States Quantum Economic Development Consortium (QED-C). Alex started his rail career as an intern on Norfolk Southern’s Ag Marketing team. After modeling and renewing $1.6 billion in rail customer contracts as the Market Manager for Norfolk Southern’s sweeteners commodity franchise, the railroad’s’ most profitable agriculture franchise, Alex left to start AlphaRail to bring high performance algorithmic and computing technology into the rail industry to improve the quality of rail service that rail customers experience. Alex holds a BS in Supply Chain Management and Business Analytics from The University of Tennessee, Knoxville, an MBA from Vanderbilt University, and Venture Capital Executive Education from The University of California Berkeley. He also serves on the Use Case Technology Advisory Committee for the US QED-C.
