The railway industry is often perceived by investors as a sleepy sector where nothing much happens. Long-suffering commuters and other customers may have an even harsher view. But the industry is undergoing a profound transformation. Far from being derailed by the pandemic or the rise of electric vehicles, the sector is entering a new era of growth and profitability.
As Andy Jones, managing principal of Listed Infrastructure Equity at HSBC Asset Management, observes, one must look beyond “nostalgia bias” — the tendency for people to recall the past more fondly than the present, remembering that things were better than they really were, which can be explained by the rise of a new generation that has forgotten the British Rail sandwich. The truth is that trains are now “generally more frequent, efficient, reliable, faster and cleaner than ever”. This resurgence is evident across the industry, from suppliers to freight operators, defying earlier predictions of decline.
Your replacement robotaxi will be delayed
A significant tailwind for passenger rail is its compelling environmental and social advantages over air and road travel. Personal finance expert Dat Ngo highlights that trains already outperform electric cars in energy consumption and emissions, primarily due to their passenger capacity and regenerative braking capabilities (that is, systems that capture the kinetic energy of a moving vehicle and convert it into electrical energy). UK data indicates that a train journey uses about 25% less energy per traveller than electric vehicles do; a Eurostar trip generates less than a tenth of the emissions of comparable electric-car journeys.
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Beyond carbon reduction, trains also remain crucial in alleviating road congestion. As Jones points out, “the road network would quickly become overwhelmed if a meaningful share of travellers decided to [go] by car, [as cars] usually carry two or fewer people, rather than rail, which can carry hundreds per journey”. This benefit will of course endure, even with the advent of self-driving cars. An individual might prefer a robotaxi to a delayed train, but a mass shift would lead to longer, more expensive journeys for all.
Jones concedes that autonomous vehicles will surely find applications in areas underserved by mass transit, but the development of the technology is proving slower than anticipated, and even the most bullish estimates put the “price per mile” of a robotaxi at levels that remain uncompetitive with commuter rail.
Powering back from lockdown
The pandemic and associated government-imposed lockdowns, and the resulting slump in commuter traffic, initially triggered fears of a permanent collapse in commuter rail journeys. But commuter rail volumes have largely rebounded, to about 85-95% of pre-Covid levels, says Emily Foshag, head of Listed Infrastructure, Principal Asset Management. In some regions, commuter traffic is even higher than it was before Covid. The more significant change has been a shift in travel patterns, with fewer peak-hour journeys, but increased commuting outside traditional rush hours. Foshag believes this shift could enhance railway operators’ margins, provided they adapt pricing and operations accordingly. Reduced peak congestion translates to less wear and tear on infrastructure, potentially lowering maintenance and capital-investment costs.
Christian Wolmar, a transport expert and railway historian, agrees. Anyone who has recently travelled by train, or indeed tried to get a ticket at the weekend, will have seen that demand for travel by rail is coming back. There is also, says Wolmar, a growing recognition that continuous remote work is unsustainable, especially for younger staff who need to get back in the office to learn from senior staff, which is more easily done when they are in close proximity. This suggests that there will be further growth in the number of commuters — London’s office occupancy currently lags behind that of continental Europe, for example.
The ascent of the high-speed train
(Image credit: David Mareuil/Anadolu Agency via Getty Images)
Beyond the recovery in commuter rail, high-speed rail is experiencing a global boom, particularly in Asia. Wolmar recently returned from a visit to China, where they have built about 30,000 miles of high-speed rail lines in under two decades, a network that serves more than eight million passengers every day. Japan’s Tokaido Shinkansen, linking Tokyo, Nagoya, and Osaka, operates 372 services daily. Wolmar expects Asia’s extensive high-speed network to keep developing and growing.
The growth is not confined to Asia. Gianluca Favaloro, partner and head of transport at EY-Parthenon’s corporate finance team, notes that several Middle Eastern countries are planning high-speed networks too. Canada recently launched the design and development plan for Alto, a high-speed line connecting Quebec City to Toronto (as well as other cities, including Montreal and Ottawa), which will be operated by a private consortium. In Europe, Poland aims to complete a 480km high-speed line linking its four major cities by 2035.
Favaloro also highlights the transformative impact of liberalisation in Europe’s already developed high-speed rail market. Allowing private operators to compete with state-owned incumbents has fostered increased competition, efficiency and improved services, leading to better, more frequent trains and lower fares. This competitive environment has also opened avenues for new direct high-speed services between European cities and London via the Channel Tunnel, expanding service options beyond Eurostar’s current offerings.
A boost for freight, too
Freight trains play an equally crucial, albeit less visible, role in global logistics. Although lorries remain dominant for small, flexible deliveries over short distances, “when it comes to transporting large amounts there’s no real substitute for having rail as part of your supply-chain network”, says Todor Ristov, senior portfolio manager at the Global Listed Infrastructure fund at Van Lanschot Kempen. Consequently, manufacturing companies reshoring operations to the US are actively seeking out sites with robust freight rail links.
The profitability of freight rail has been significantly enhanced by the rise of precision scheduled railroading (PSR). PSR was developed in the 1990s by Hunter Harrison, a railway executive who was formerly CEO of Illinois Central Railroad, Canadian Pacific Railway, and CSX Corporation. PSR involves operating freight trains on regular schedules, delivering goods directly (rather than using a hub-and-spoke system), and running fewer, longer trains to reduce labour costs. Despite some controversy, PSR has been widely adopted across the freight-rail industry over the last ten years, according to Ristov, boosting the percentage of freight that arrives on time at the destination from 70% to around 80% (and more than 90% for “intermodal freight”, loads that transfer between different modes of transport) and substantially increasing operating margins.
This has especially been the case for the US freight industry, which has benefited from deregulation and a wave of consolidation over recent decades, says Matthew Landy, portfolio manager for global listed infrastructure and global franchise strategies with Lazard Asset Management. This has led to improved economies of scale and pricing power from what have effectively become local monopolies. Union Pacific Railroad, for instance, has shown strong operational improvements, delivering more than 30-fold returns for investors since 2000.
Landy anticipates stable rather than dramatically increasing North American freight volumes, with declines from coal transport being offset by growth in grain and chemicals. But he commends the industry’s success in improving locomotive fuel efficiency, which has contributed to falling operational costs and sustained and decent returns for investors.
Digitalisation drives efficiency gains
Beyond PSR, technological advancements are poised to revolutionise railway operations further. Robert Garbett, founder and chief executive of Drone Major Limited, a drone consultancy, highlights trials his company is running with Network Rail, which is using drones to detect when people are trespassing on the tracks. Drones can spot trespassers long before trains approach, and hence assess whether or not it makes sense to shut a section of track down or call the police.
Garbett thinks that drones will also be used for track inspections and delivering equipment to maintenance staff, eliminating time-consuming journeys to depots. Moreover, advances in navigation technology could enable autonomous drone flights, with operators acting as observers. The railway industry, both in the UK and internationally, is embracing drone technology to cut costs, enhance efficiency, and improve safety and operations.
The rise of artificial intelligence
Digital technology holds out the promise of improvements beyond cutting the cost of gathering information. Railway companies are also turning to artificial intelligence in order to analyse more effectively what data is collected. Tom Bartley of Mind Foundry, a machine-learning company spun out of Oxford University, notes that much railway infrastructure, particularly older systems such as those in the UK, requires regular inspection.
Such checks are inevitably subjective and hence inconsistent. Recent advances in computer vision and machine learning enable artificial-intelligence models to analyse photographs of assets taken by staff and drones, leading to “more consistent and speedy decisions that can plan interventions in a way that reduces the disruption to railway operations and optimises costs across the life of the asset”. Early trials suggest potential reductions in inspection costs of around 40% and more efficient prioritisation of the most important maintenance work.
Blake Richmond of Resonate, a company focused on improving railway traffic-management systems, believes railways are in the midst of a digitisation revolution. This will involve not only collecting vastly more data across all operations and assets, but also ensuring its efficient storage and sharing. Richmond identifies a key challenge in the proliferation of disparate systems and bottlenecks when it comes to sharing information in an effective and timely manner. After all, “there’s no point in systems that spot potential problems on the line if by the time it is collected, distributed and analysed, things should have been fixed a week ago”, he states.
But the good news is that there is a growing commitment to centralising information in accessible databases. Faster, more powerful computer systems can then analyse this data to facilitate quicker, sometimes real-time, decision-making. Combined with increased government investment, this improved operational performance should ensure that the sector “continues to move in the right direction”.
Railway investments to consider buying now
East Japan Railway Company (Tokyo: 9020) is one of the world’s largest passenger rail operators, managing 11,800 trains over more than 7,400km of track, including many of Japan’s bullet trains. It aims to become fully automated within a decade. The company also owns hotels (offering more than 10,000 rooms) and shopping centres, and provides operational services for railways in India, Indonesia and Thailand. Revenue is projected to grow by about 5% annually, and the shares trade at around 15 times 2026 earnings. The dividend yield is 2%.
Union Pacific (NYSE: UNP) is the largest listed freight railroad in America and the second largest overall, operating 32,200 miles of track across the central and western United States. Its robust operational performance contributes to substantial operating margins of around 40% and a return on capital employed of about 15%. This has fuelled a nearly 40% increase in earnings since 2020. Union Pacific’s shares trades at just more than 17 times 2026 earnings, and offer a dividend yield of 2.48%.
Lazard’s Matthew Landy admires Union Pacific, but thinks that the best strategy for investors is to buy a railroad such as Norfolk Southern (NYSE: NSC), which has “relatively more room to improve its operational performance” and therefore greater potential to boost its earnings, which have already gone up by nearly half since 2020. The company operates 28,400 miles of freight rail track, predominantly in the eastern United States. Its shares trade at 17.3 times 2026 earnings and offer a 2.2% dividend yield.
Alstom (Paris: ALO) is a global leader in rolling stock and signalling-equipment manufacturing, and operates across four regions, providing various rail-related services, including maintenance for London’s Elizabeth line. Its 2021 acquisition of Bombardier Transportation expanded its market share and the company is now prioritising digital services to capitalise on railway digitisation. With solid sales growth of about 6% annually, Alstom’s shares trade on an attractive 11.4 times 2026 earnings.
Construcciones y Auxiliar de Ferrocarriles (Madrid: CAF) has enjoyed great success manufacturing trains and also makes buses. The firm derives around 78% of its revenue from rolling stock and related rail services, manufacturing a range of trains from the 200mph Oaris high-speed models to commuter trains. The company is investing in advanced signalling technology, with successful recent tests of semi-autonomous trains in the Netherlands and remotely operated trains in Oslo. Revenue grew by two-thirds between 2019 and 2024, with earnings quadrupling in the same period. Despite this strong performance, CAF’s shares trade at only 10.3 times 2026 earnings and offer a dividend yield of 3.2%.
Ticketing website Trainline (LSE: TRN) has benefited from the current shortcomings of the UK’s rail ticketing system. However, its shares have been affected by renewed plans for a rival state-backed app. Potential competition from the government and new entrants such as Uber are a concern, but Trainline has secured an agreement preventing preferential access to deals for any rival. Coupled with its expansion into the European rail market, this is expected to sustain revenue growth, which has nearly doubled since 2020. The shares trade at 13.6 times 2026 earnings. It’s a risky punt.
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