Buffett’s Big Bet

Railroads May Rebound, but They Still Face Fundamental Challenges

Announcing his deal to buy the 77% of the Burlington Northern Santa Fe railroad that his company does not already own, Berkshire Hathaway chairman Warren Buffett described it as "a huge bet and one that I'm very happy to make, but it's not a bet on next month or next year. We're going to own it forever."

But forever is how long he may have to wait if he's betting that Burlington Northern and other freight rail companies will take significant market share from the trucking industry, according to W. Bruce Allen, a Wharton professor of business and public policy and director of the Wharton Transportation Program. Railroads have inherent benefits over trucks in such areas as fuel efficiency and manpower requirements, he notes, adding that those advantages are not likely to diminish in the foreseeable future. But, he adds, "people have been saying for 50 years" that those advantages should help railroads take market share from the trucking industry. As measured by the value of goods shipped, trucks carry about 80% of the freight shipped in the United States. Railroads carry less than 10%. The rest is handled by boats, barges and pipelines.

One reason railroads have not cut into the trucks' market share is reliability, according to Allen. "In his just-in-time world, companies can't tolerate delays, and railroads are far less reliable than trucks."

One new advantage may come from a demographic shift. "The good old boys who drive the trucks are reaching an age where they would rather be driving Winnebagos," notes Allen. But as the older drivers retire, trucking companies have been having a hard time finding replacements who are willing to tolerate the demands of long-haul trucking, including more rigorous drug testing than is required for other lines of work. Railroads face the same problems, but they require much less manpower than trucks. A 100-car freight train — on which each car can carry more than any truck — requires a crew of just two people, Allen explains. "You would need more than 100 truck drivers to move the same amount of freight."

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