After recovering from the devastating effects of the pandemic, the railway industry is now embarking on a new phase of growth and profitability
Investors frequently think of the railway sector as a slumbering one where little gets done. Other customers and long-suffering commuters might hold an even more critical opinion. However, there is a significant shift taking place in the industry. The industry is embarking on a new phase of expansion and profitability rather than being derailed by the pandemic or the popularity of electric vehicles.
The rise of a new generation that has forgotten the British Rail sandwich explains "nostalgia bias," the tendency for people to remember the past more fondly than the present, remembering that things were better than they actually were. Andy Jones, managing principal of Listed Infrastructure Equity at HSBC Asset Management, notes that one must look beyond this tendency. In actuality, trains are "generally more frequent, efficient, reliable, faster, and cleaner than ever." This rebound, which defies earlier forecasts of a decline, is visible throughout the industry, from freight operators to suppliers.
There will be a delay in your replacement robotaxi.
Passenger rail has strong social and environmental benefits over air and road travel, which is a major tailwind. Because of their passenger capacity and regenerative braking systemswhich use a moving vehicle's kinetic energy to turn it into electrical energytrains already perform better than electric cars in terms of energy consumption and emissions, according to personal finance expert Dat Ngo. According to UK data, a Eurostar trip produces less than a tenth of the emissions of similar electric-car trips, while a train trip uses roughly 25% less energy per passenger than an electric vehicle trip.
Apart from lowering carbon emissions, trains continue to play a vital role in reducing traffic. According to Jones, "if a significant portion of travelers chose to travel by car, the road network would quickly become overwhelmed, as cars typically carry two or fewer people, rather than rail, which can carry hundreds per journey." Naturally, even with the introduction of self-driving cars, this advantage will remain. A mass shift would result in longer, more costly trips for everyone, even though an individual might prefer a robotaxi to a delayed train.
According to Jones, autonomous vehicles will undoubtedly be used in places where mass transit is lacking. However, the technology is developing more slowly than expected, and even the most optimistic projections place the "price per mile" of a robotaxi at prices that are still higher than those of commuter rail.
Resuming power after lockdown.
There were initially concerns that commuter rail travel would permanently collapse as a result of the pandemic, the government-imposed lockdowns that followed, and the ensuing decline in commuter traffic. The head of Listed Infrastructure at Principal Asset Management, Emily Foshag, claims that commuter rail volumes have mostly recovered to between 85 and 95 percent of their pre-Covid levels. Commuter traffic has increased even more in some areas since COVID-19. The more notable change has been a change in travel habits, with more people commuting outside of regular rush hours and fewer trips during peak hours. Foshag thinks this change could increase railway operators' profits if they modify their operations and pricing appropriately. Lower maintenance and capital-investment costs may result from less wear and tear on infrastructure caused by reduced peak traffic.
Transport specialist and railway historian Christian Wolmar concurs. Anyone who has recently taken a train ride, or even attempted to purchase a ticket over the weekend, will have noticed that demand for rail travel is increasing. Additionally, Wolmar notes that there is a growing understanding that working remotely all the time is unsustainable, particularly for younger employees who need to return to the office to learn from senior staff, which is easier when they are nearby. This implies that the number of commuters will continue to rise. For instance, London's office occupancy currently trails that of continental Europe.
The rising of the fast train.
Arriving at the Tokyo Station is a Shinkansen Bullet Train.
Beyond commuter rail's comeback, high-speed rail is booming globally, especially in Asia. Wolmar just returned from a trip to China, where in less than 20 years, they have constructed roughly 30,000 miles of high-speed rail lines, which carry over eight million passengers daily. The Tokaido Shinkansen in Japan runs 372 services every day, connecting Tokyo, Nagoya, and Osaka. Wolmar anticipates that Asia's vast high-speed network will continue to expand.
The expansion extends beyond Asia. Several Middle Eastern nations are also planning high-speed networks, according to Gianluca Favaloro, partner and head of transport at EY-Parthenon's corporate finance team. Canada recently unveiled the design and development plan for Alto, a high-speed rail line that will be run by a private consortium and connect Quebec City to Toronto (as well as other cities like Montreal and Ottawa). Poland wants to connect its four main cities in Europe with a 480-kilometer high-speed rail line by 2035.
Favaloro also draws attention to how liberalization has changed the already-developed high-speed rail market in Europe. Better, more frequent trains and cheaper fares have resulted from increased competition, efficiency, and improved services brought about by allowing private operators to compete with state-owned incumbents. Along with increasing service options beyond Eurostar's current offerings, this competitive environment has created opportunities for new direct high-speed services between European cities and London via the Channel Tunnel.
And a boost for freight.
Although they are less obvious, freight trains are just as important to international logistics. "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, even though trucks continue to dominate for small, flexible deliveries over short distances. Manufacturing firms are therefore actively looking for locations with strong freight rail connections when reshoring their operations to the US.
With the growth of precision scheduled railroading (PSR), freight rail has become much more profitable. Hunter Harrison, a railway executive who previously served as CEO of CSX Corporation, Canadian Pacific Railway, and Illinois Central Railroad, created PSR in the 1990s. In PSR, freight trains are run on regular timetables, goods are delivered directly (as opposed to via a hub-and-spoke system), and fewer, longer trains are run in order to save labor costs. Although there has been some debate, Ristov claims that PSR has been widely implemented in the freight-rail sector over the past ten years, increasing operating margins and the proportion of freight that arrives at its destination on time from 70% to about 80% (and over 90% for "intermodal freight," or loads that move between different modes of transportation).
Lazard Asset Management's portfolio manager for global listed infrastructure and global franchise strategies, Matthew Landy, says this has been particularly true for the US freight sector, which has profited from deregulation and a wave of consolidation in recent decades. As a result, what have essentially turned into local monopolies have better economies of scale and pricing power. For example, since 2000, Union Pacific Railroad has produced more than 30-fold returns for investors due to its impressive operational improvements.
With increases in grain and chemicals offsetting decreases in coal transportation, Landy predicts steady rather than sharply rising North American freight volumes. However, he applauds the industry's accomplishments in increasing locomotive fuel efficiency, which have helped to lower operating costs and provide investors with steady, respectable returns.
Efficiency gains are a result of digitalization.
Beyond PSR, technological developments have the potential to further transform railway operations. Founder and CEO Robert Garbett of Drone Major Limited, a drone consultancy, highlights tests his company is conducting with Network Rail, which uses drones to identify trespassers on the tracks. Because drones can detect trespassers well in advance of trains approaching, they can determine whether it makes sense to close a section of track or contact law enforcement.
Drones will also be used, according to Garbett, for track inspections and equipment delivery to maintenance personnel, which will cut down on time-consuming trips to depots. Furthermore, autonomous drone flights with operators serving as observers may be made possible by developments in navigation technology. In the UK and abroad, the railway sector is adopting drone technology to reduce expenses, boost productivity, and enhance operations and safety.
The development of artificial intelligence.
Beyond lowering the expense of information gathering, digital technology promises to bring about other advancements. Artificial intelligence is also being used by railroads to better analyze the data they collect. According to Tom Bartley of Mind Foundry, a machine learning startup that was spun out of Oxford University, a lot of railway infrastructure needs to be inspected on a regular basis, especially older systems like those in the UK.
Due to their inherent subjectivity, these checks are incongruous. In order to make "more consistent and speedy decisions that can plan interventions in a way that reduces the disruption to railway operations and optimizes costs across the life of the asset," artificial intelligence models can now analyze asset photos taken by staff and drones thanks to recent developments in computer vision and machine learning. According to early trials, there may be a 40 percent reduction in inspection costs and a more effective way to prioritize the most crucial maintenance tasks.
Railways, according to Blake Richmond of Resonate, a company that focuses on enhancing railway traffic-management systems, are undergoing a revolution in digitalization. This will entail making sure that data is efficiently stored and shared in addition to gathering a significant amount more data about all operations and assets. Richmond notes that a major obstacle to efficiently and promptly exchanging information is the growth of fragmented systems and bottlenecks. In the end, he says, "systems that identify possible issues on the line are useless if they should have been resolved a week ago by the time they are gathered, disseminated, and examined."
However, there is a growing commitment to centralizing information in easily accessible databases, which is good news. In order to enable faster, occasionally real-time decision-making, this data can then be analyzed by faster, more potent computer systems. This enhanced operational performance should guarantee that the industry "continues to move in the right direction" when paired with more government funding.
Consider investing in railways right now.
Managing 11,800 trains across more than 7,400km of track, including many of Japan's bullet trains, the East Japan Railway Company (Tokyo: 9020) is one of the biggest passenger rail operators globally. The goal is to have it completely automated in ten years. In addition, the company operates railways in India, Indonesia, and Thailand and owns shopping malls and hotels with over 10,000 rooms. Revenue is expected to increase by roughly 5% per year, and shares are trading at about 15 times 2026 earnings. Two percent is the dividend yield.
The largest listed freight railroad in America and the second largest overall, Union Pacific (NYSE: UNP) runs 32,200 miles of track throughout the central and western United States. Its strong operational performance results in significant operating margins of about 40% and a 15% return on capital employed. Since 2020, earnings have increased by nearly 40% as a result of this. Union Pacific's stock offers a dividend yield of 2 to 48 percent and is currently trading at just over 17 times 2026 earnings.
Although he respects Union Pacific, Lazards Matthew Landy believes that the best course of action for investors is to purchase a railroad like Norfolk Southern (NYSE: NSC), which has "relatively more room to improve its operational performance" and, consequently, greater potential to increase its earnings, which have already increased by almost half since 2020. Mostly in the eastern part of the US, the company runs 28,400 miles of freight rail track. Its shares offer a dividend yield of 2.2 percent and are trading at 17.3 times 2026 earnings.
Alstom (Paris: ALO) is a leading manufacturer of rolling stock and signaling equipment with operations in four regions. It offers a range of rail-related services, including maintenance for the Elizabeth line in London. Following its 2021 acquisition of Bombardier Transportation, which increased its market share, the company is now focusing on digital services in order to take advantage of the digitization of railroads. Alstoms' shares trade at a competitive 11:4 times 2026 earnings, with strong sales growth of roughly 6% per year.
Constructcciones y Auxiliar de Ferrocarriles (Madrid: CAF) has had considerable success producing both buses and trains. Rolling stock and associated rail services account for about 78% of the company's revenue. It manufactures a variety of trains, including commuter trains and the 200 mph Oaris high-speed models. The company has recently successfully tested semi-autonomous trains in the Netherlands and remotely operated trains in Oslo, demonstrating its investment in cutting-edge signaling technology. Between 2019 and 2024, revenue increased by two-thirds, and during that time, earnings quadrupled. Despite this impressive performance, CAFs shares only trade at 10 times 2026 earnings, with a 3 percent dividend yield.
As a result of the present issues with the UK rail ticketing system, the ticketing website Trainline (LSE: TRN) has profited. However, updated plans for a competing state-backed app have hurt its stock. Although there is worry about possible government competition and new competitors like Uber, Trainline has negotiated a deal that forbids any rival from having preferential access to offers. This, along with its entry into the European rail market, should maintain revenue growth, which has almost doubled since 2020. The share price is 13.6 times 2026 earnings. It's a dangerous wager.
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