Get your portfolio on track for the return of the railways

From freight trains to high-speed Maglev technology, the entire rail industry is experiencing a renaissance. Matthew Partridge explains how you can take advantage of the new glory days of rail.

Goods rail is starting to make something of a comeback © Getty

The protracted row over the ballooning costs and uncertain benefits of the HS2 high-speed rail project has obscured the bullish long-term growth outlook for the overall rail industry. Whether it’s a case of freight trains improving their efficiency to become a more competitive option for shippers than lorries, commuters ditching the car in favour of trains, or “flight shaming” causing people to embrace “slow travel”, railways seem to be recapturing some of the excitement of the “glory days” of the pre-WWI years and the late 19th century. This in turn has major implications for the companies involved in the sector.

Rail freight’s recovery

Goods trains are perhaps the least glamorous part of the rail industry. Slow, noisy and tied down to particular routes, they seemed at one point to be facing an existential threat from flexible, faster lorries, which now carry nearly three-quarters of freight by volume in the US and a similar proportion in other major economies. At the same time the decline of the coal industry in Britain and America hurt demand from what had been one of rail’s most reliable and lucrative customers.

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The good news is that freight rail is starting to make something of a comeback. Part of this is due to an increase in demand as trade has expanded. While coal may be declining, “increases in the amount of commodities, chemicals and crates of general goods mean that there has been a big growth in the volume of freight in recent years”, says Jim Wright, manager of the Premier Miton Investors Global Infrastructure Income Fund. Global trade growth has been so strong that there has been a rise in the number of ports, especially on the west coast of North America.

However, rail companies have also managed to dramatically improve the efficiency of their operations thanks to a “laser-like focus on taking out costs and reducing inefficiencies”, says Wright. Much of this is due to “precision railroading”: a management philosophy that focuses on making freight networks more efficient by operating on fixed schedules (like passenger trains) and combining container and general merchandise trains. Railways have also found that they can cut both costs and the speed of transport by running longer trains, which reduces the number of individual journeys that they have to make.

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The greener option

Cost isn’t the only area where rail freight has an advantage over road haulage. Rail has a much lower carbon footprint. As a result, there has been a big push within Europe to get firms to switch from road back to rail, leading to “significant freight growth”, says Wright. The road-haulage industry is also facing a recruitment crisis, with the sector unable to find people who are willing to replace the drivers who are retiring in droves. While some in the road-haulage industry are pinning their hopes on driverless lorries, these are “a long way away”.

Overall, the prospects for rail haulage appear rosy for the next two decades, with Wright expecting annual freight growth “in the high single-digits for up to the next two decades”. Of course, coronavirus-related disruption could lead to a temporary downturn in global trade, hitting rail freight volumes. However, any impact is likely to be limited to the “short term” and won’t be strong enough to halt the structural upswing.

The growth of metropolitan services

When it comes to transporting people rather than goods, commuter and metropolitan rail services within cities and suburbs have experienced a sustained increase in passenger numbers over the past 20 years. Railway historian and transport expert Christian Wolmar thinks that this has two main causes.

Firstly, there has been a big increase in population growth in urban areas. This has helped because rail works best in more densely populated areas; trains take up much less room per passenger than private cars.

Wolmar also believes that there is strong evidence that we are starting to see “peak car”, with overall car-ownership rates starting to fall, especially among the younger generations. Part of this shift away from cars stems from changes in lifestyle and concerns about cars’ role in contributing to global warming and reducing air quality. However, it’s also due to the simple fact that larger and more crowded cities have produced an increase in traffic congestion, which in turn makes urban car journeys longer and less pleasant.

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