Berkshire Hathaway 2017 Annual Meeting Audience Question # 27

The future growth prospects of BNSF

Warren Buffett:

OK. Gregg?

Gregg Warren:

Warren.

Warren Buffett:

Yeah.

Gregg Warren:

Between 2010 and 2015, intermodal rail traffic enjoyed double-digit rates of revenue growth as shorter-haul freight converted from truck to rail.

During the past year or so, though, cheaper diesel prices and more readily available truckload capacity have made trucking more competitive, leading to a decline in intermodal rail traffic.

While carload growth is expected to be solid longer term, helping to offset weakness in other segments like coal, what impact do you expect the widening of the Panama Canal, which was completed last year, to have on the West Coast port shipments that BNSF has traditionally carried through to exchange points for the Eastern U.S. railroads, as shippers elect to have goods unloaded at ports in the Gulf of Mexico or up the Eastern seaboard?

And while loss of volumes is never a good thing, could there be a small trade-off here as the bottleneck in Chicago, where most East-West cargo is handed off, eases a bit over time, if some of the current traffic gets rerouted?

Warren Buffett:

Well, you know… I… Chicago has got lots of problems, and it’s going to continue for a while. I mean, that requires a good solution.

When you think of how the railroads developed, I mean, they… Chicago was the center and, you know, they laid the rails… and there were a whole bunch of different railroads… you know, a hundred years ago. And the city grows up around them and everything. So Chicago is a
…can be a huge problem.

But getting to intermodal, I think intermodal will do very well. But you are correct that car loadings actually hit a peak in 2006, so here we are 11 years later.

And the investment of the five big Class I railroads… four of the biggest… if you look at their investment beyond depreciation, it’s tens and tens of billions of dollars, and we’re carrying less freight before, in aggregate, than we were in 2006. And coal will continue to decrease.

It’s a good business, and it has big advantages over truck in many respects. Truck gets much more of a free ride in terms of the fact that their right of way, which is the highway system, is subsidized to a much greater degree beyond the gas tax… you know, we… than the railroad industry.

But it has not been a growth business, in physical volume, to any great degree. I think it’s unlikely to be. I think it’s likely to be a good business. I think we’ve got a great territory.

I like the West better than the East, and as you mention, you know, there will be some intermodal traffic that gets diverted to Eastern ports perhaps or so on.

Overall, I…we’ve got a terrific system in that respect. And we will do well.

It would be more fun if we had something where you could expect aggregate car loadings to increase two or three or four percent a year, but I don’t think that’s going to happen.

I do think our fundamental position is terrific, however. I think we’ll earn decent returns on capital. But that’s… I think that’s the limit of it.

Charlie?

Charlie Munger:

Nothing to add.

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