Rising fuel costs may mean comeback for freight trains

Spiking diesel fuel prices have deflated trucking stocks and made road kill out of many a small motor carrier.

It's sweet irony for anyone who's worn a pinstriped cotton cap to work. The rising price of diesel is poised to invigorate
a mode of transportation that trucks nearly annihilated–the 40 freight railroads crisscrossing the state.

The diesel-fueled locomotives that run on them have one giant advantage over the ordinary Freightliner or Kenworth: They're
commercial transportation's version of the Toyota Prius hybrid.

By coupling diesel engines to electric generators that power steel wheels, your run-of-the-mill diesel-electric locomotive
is at least three times more fuel-efficient than a semi. One gallon of diesel can move a ton of freight an average of 436
miles, the Association of American Railroads is fond of touting.

The president of Louisville & Indiana Railroad expects more new customers knocking on the door of his Jeffersonville
headquarters.

"We haven't seen them flocking in yet," said John K. Secor, whose line runs everything from cement to grain
to food products on 100 miles of former Pennsylvania Railroad track between Union Station and the Ohio River. But knock they
will, "at some point," Secor predicts.

The trend clearly favors railroads if diesel prices remain high; they recently averaged $4.70 a gallon. That's nearly
$2 more per gallon than this time last year, or $570 more to fill a semi's twin 150-gallon tanks. Trucking firms inevitably
pass on all or part of that to their customers.

"I definitely think the higher fuel prices will help railroads win some business from trucks. This, along with increasing
traffic congestion and a truck driver shortage, are all positive factors for rail," said Curt Grimm, a professor of supply
chain and strategy at the University of Maryland, College Park.

"There is somewhat of a rail renaissance," said Indiana Secretary of Commerce Nate Feltman, who increasingly hears
the need for rail access as a prerequisite for companies to locate new plants in Indiana.

Among them, he said, was Hawthorne, Calif.-based CerePlast Inc., which will receive starch by rail car to make plastics at
its new plant in Seymour.

And more recently, U.S. Cold Storage cited rail access as the key to economically shipping frozen foods bound for a massive
food storage warehouse that will be constructed at Lebanon Business Park.

"I could name a dozen more where, absolutely, the rail piece of it is a huge [consideration]," Feltman said.

Steel meets the road

Tom Hoback, president and CEO of Indianapolis-based Indiana Rail Road Co., said he's seen a marked shift in interest
in rail. It's not just rising fuel costs, he said, but also the chronic shortage of truck drivers and improved rail reliability
resulting from massive capital investments in recent years.

Indiana Rail Road has seen some coal business convert from truck to rail. It has been working with CSX and Indiana Eastern
Railroad to deliver coal to Richmond Power & Light over a rail spur that had been dormant for 30 years.

"The investment was motivated by increased trucking costs and improved rail service," Hoback said. "RP&L
projected a first-year transportation cost savings of more than $200,000."

If you need any more proof, Feltman said, behold how many railroads are having record profit years while trucking stocks
flounder. For example, Florida-based rail giant CSX posted record first-quarter profit of $351 million.

One trucking company that has suffered as the economy has slowed, Indianapolis-based Celadon Group, has seen shares over
the last year fall to as little as $6.50 compared with a high around $18; today, it's around $12.

Are customers flocking to rail?

"One would think so, but that really isn't the case," said Celadon founder and CEO Steve Russell, whose company
moves cargo through parts of Mexico, the United States and Canada.

Russell noted that trains have captured considerable long-haul businesses, such as between Long Beach, Calif., and Chicago,
"but it has been that way for the last 10 years," he said.

Railroads tend to be more economical with heavy loads hauled longer distances. But part of those shipments ultimately must
be carried by truck, and the percentage of cargo moved by truck has remained the same at roughly 83 percent, Russell added.

Even railroad advocates admit the trend isn't easy to spot.

"It's hard to say because of the fact the economy is weak right now," said Association of American Railroads
spokesman Tom White.

"I do think it's fair to say that rail is probably benefiting at the expense of trucks," said Scott Williams,
chief counsel for Florida-based RailAmerica Inc., which operates 41 short lines, including Central Railroad of Indianapolis
and Petersburg-based Indiana Southern Railroad.

Williams said rail shipments of lumber are down, coinciding with reduced home building, although RailAmerica's shipments
of coal and agriculture products have been up. "It's not a simple analysis."

More opportunities

What is clear is that some local lines have grown in recent years. Among them is the Indiana Rail Road Co., which has more
than 245 miles of its own track and 335 miles of track rights. It has connections to Chicago and Louisville, along with Ohio
River ports.

A few years ago, it acquired 93 miles of Canadian Pacific Railway track from roughly Bedford to Terre Haute. It's been
trying to lasso business from truck trailers, including those that haul raw materials to auto plants in Indiana.

One perennial challenge for short lines is upgrading tracks to accommodate demand. In fiscal year 2008, the Indiana Department
of Transportation awarded $1.3 million in rail improvement grants, the largest of which was $350,000 to Louisville & Indiana
for a project in Johnson County.

The L&I is owned by Chicago-based Anacostia & Pacific, an investment firm that owns a half dozen small railroads.

Better infrastructure reduces the likelihood of derailments and delays in shipments and is needed to help railroads carry
newer, heavier rail cars, said Mike Riley, INDOT's rail chief. Since 2006, INDOT has issued 22 industrial rail service
grants to railroads in the state totaling almost $5 million.

Improving rail connections to business is also key because "it's kind of getting that last mile and first mile that's
always the problem," said L&I's Secor.

Because not all firms can locate in areas where they can receive direct rail delivery, companies such as Indiana Rail Road
have tried to bridge the gap with "reload" facilities. Indiana Rail Road's is south of downtown. The center
unloads rail cars and either stores goods for future distribution or loads them onto trucks for final delivery–or visa versa.

"Customers can still realize the benefits of rail for the long-haul portion of their shipments," Hoback said.

Feltman and other state leaders see big potential in Indiana for larger, intermodal yards that transfer cargo between train,
truck and even ship.

Feltman noted the congestion of rail facilities in Chicago, where cargo can get stuck an extra day or more due to logjams.
He's had talks with a number of railroads about creating alternative intermodal facilities, particularly in northern Indiana.

"We've been working for the better part of 2-1/2 to three years with a lot of railroads to figure out how to develop
at least one site," he said.

"The biggest gain for the rail industry overall in the near term is likely in the intermodal segment," Hoback said.
"That's the most expeditious way to convert truck shipments to rail."