GE’s rail unit at full throttle
Railroads demand clean, fuel- efficient locos
In old westerns, roughlooking bandits on fast horses were the troublemakers for railroads. The bandits may have gone, but railroads face new threats such as inefficiency and environmental curbs.
General Electric Co.’ s rail business is looking to cash in by helping railroads overcome those modern-day bandits with cleaner locomotives to meet tightening emissions regulations, and better signaling systems and wireless tracking to move trains faster.
GE rail had US$3-billion in 2004 revenue including locomotives, signaling technology and service work, and expects 2005 revenue to increase by a doubledigit percentage.
The cleaner locomotives are also part of GE’s efforts to increase revenue from more environmentally friendly products. The company expects to double its revenue from such products, which also include wind turbines and water purification systems, to US$20-billion by 2010.
The efforts could bolster GE’s stock price, which despite solid operational performance has stumbled. In late May, GE (GE/NYSE) traded at about US$37, but has since been in retreat, trading recently at about US$33.
Railroads are profitable businesses these days. Burlington Northern Santa Fe Corp. had record earnings in the second quarter, while Union Pacific Corp. saw net income rise 47% from the previous year. However, Union Pacific said it hasn’t been able to keep up with record demand for moving freight.
That’s where GE wants to step in. The conglomerate — which makes products ranging from power turbines to movies — wants to use software to get more trains on the tracks closer together and therefore move more freight.
“Railroads are running out of bandwidth,” GE rail spokesman Patrick Jarvis said. GE says customers can boost capacity by nearly 50% with software and technology, a “digital railroad,” instead of more track.
“ After 90 years, the railroads have run out of excess capacity,” Morgan Stanley analyst James Valentine wrote in a recent research note.
The face of GE rail isn’t a rack of computer components that make the digital railroad, it is the massive squared-off front end of the company’s new Evolution series locomotive. The Evolution is one of the stars of an advertising campaign GE is using to highlight the greener products it is looking to for a revenue boost.
The 400,000 pound Evolution began production in January and so far is getting a good reception. GE has a backlog of about 2,000 orders. The company’s Erie, Pa., manufacturing plant can make only about 800 locomotives a year. They sell for around US$2million a piece.
Canadian National Railway Co. will begin taking delivery in the fourth quarter of 50 Evolution locomotives it ordered from GE. It is also buying 25 locomotives from GE rail’s main competitor, Electro- Motive Diesel Inc.
The 75 newer, more fuel-efficient locomotives will be able to replace 100 older ones on the railroad’s system, a Canadian National spokesman said.
GE spent several years and about US$250-million to develop the Evolution in preparation for new U.S. Environmental Protection Agency regulations requiring less nitrogen oxide and particulate pollution. These socalled Tier 2 regulations took effect this year and Electro-Motive’s SD70 locomotives also meet the standard.
The Evolution is separated from its predecessor, the AC4400, by new cooling and control systems and an engine that puts out the same 4,400 horsepower with 12 cylinders instead of 16, cutting emissions by 40%.
Pollution regulation is forcing some changes in the industry and more are on the way. Railroads expect the EPA to tighten emission standards further in the next few years, said Tom White, spokesman for the Association of American Railroads.
Agency documents indicate further regulations could go into effect as early as 2011. “Locomotives are a priority for us,” an EPA spokesman said of the regulator’s plans.
GE rail is preparing for that next step with plans for what GE executives have described as a Toyota Prius for the railroader set. GE rail is designing a hybrid locomotive that would capture the energy used in braking — a substantial amount of power on a freight train — and put it into batteries. The train crew could draw on those batteries to get up to 2,000 extra horsepower and, GE predicts, cut fuel consumption by 15% compared with the Evolution. (Hybrid locomotives made by RailPower Technologies Corp. (P/TSX) are already used to move cars around rail yards.)
GE expects to have the hybrid on the rails in 2008 and, as with the Evolution, will put some prototypes out for testing beforehand, Mr. Jarvis said. The hybrid won’t make the Evolution obsolete, but will be well-suited for certain applications, such as in mountainous areas where it will have to do a lot of braking and climbing.