An America-first agenda will require a renewed focus on U.S. rail

One of the winners of tomorrow’s US economy could be one of the icons of its past: its railroads.

Stretching coast to coast over 140,000 miles of track, the US rail network is set to play a critical part in meeting the growing domestic demand for efficient goods transport.

President Trump’s “America First” agenda is prioritising delivering America’s economic needs through American industry. Meanwhile, geopolitical and economic uncertainty is causing more companies to onshore their operations in the United States. A KPMG survey, published in 2024, found that 81% of U.S.-based executives say their companies are bringing back more of their supply chains due to global challenges¹. This research was conducted ahead of the introduction of tariffs which will further amplify this trend.

Together, these factors should increase demand on the country’s domestic rail networks. This is an opportunity of a scale that the sector hasn’t seen in decades, including for the smaller, but critical, components of the network: its short line railroads.

On track for growth

In a country as large and geographically diverse as the United States, using rail transport as part of a multi modal transport solution – where more than one form of transport is used – makes economic sense, particularly where long distances are involved.

Compared to sending loads solely by truck, rail solutions offer cost benefits at distances as short as 500 miles, with savings getting larger the longer the distance travelled. There are also carbon savings due to rail’s substantially higher fuel efficiency.

According to our own research, the rail freight market in the US has seen nearly continuous growth in volumes over the last 20 years when excluding coal volumes. In addition, it has outpaced the growth in trucking in the US by around 40%. There’s room for further expansion as for distances over 550 miles, where rail is typically the most cost-effective option, rail only accounts for about 50% of the freight transportation market.

This shift isn’t just about cost. It’s also a response to broader pressures on the logistics ecosystem. Labour shortages in trucking, rising fuel prices, and increasing carbon accountability are all encouraging shippers to re-evaluate their transport modes. Rail offers a solution to all of these challenges, aligning with cost efficiencies and ESG priorities. In fact, according to the Association of American Railroads, freight railroads produce up to 75% fewer greenhouse gas emissions per tonne-mile compared to trucking.

However, for rail to deliver its greatest value to shippers as part of a multi modal solution, it has to help them get as close to their end-customers as possible in order to minimise the use of more expensive ‘last-mile’ elements. Short line rail provides this critical infrastructure.

Short line, big role

Although they often comprise relatively small lengths of track, typically in the 10s or low 100s of miles, short line railroads provide essential access points to the largest Class I railroads. They serve as key bridges between the arteries of the rail system and other nodes in the logistics network, as well as being on-boarding points for locally produced goods.

Many independent short lines came into existence during the 1980s and 1990s following deregulation of the industry.  As Class 1s adapted, consolidated and evolved, they streamlined their systems by divesting their last mile lines to entrepreneurs who could run them more efficiently. They also had a greater focus and ability to drive local growth by attracting local businesses to use the railroad. Decades on, many short lines are reaching the limits of what can be achieved without new investment, technology, and management capability. Many aging family owners are lacking practical succession plans for the future. This presents a unique opportunity for institutional investors to step in, bring further investment, and enhance long-term performance.

The market remains highly fragmented.  While there are just six Class I railroads in the United States, according to the American Short Line and Regional Railroad Association, there are over 600 short line railroads operating nearly 50,000 miles of track. That’s roughly 30% of the total rail network. The short line railroads serve as first or last mile for as much as 40% of freight on the rail network. Over half of these are still owned by families or entrepreneurs.

Downside protection, upside potential

Short line rail is critical infrastructure with downside protection in the form of owning rail track in a strategic market position with a defined catchment area. It also offers significant upside in the form of opportunities for operational improvements and steady demand growth. This could be accelerated by the onshoring and ‘America first’ government policies.

We made our first investment into US short line rail in January of this year, creating short line rail specialist Phoenix Rail with the acquisition of Pennsylvania’s Lehigh Valley Rail Management (LVRM).

Phoenix Rail has been formed with a management team that has proven experience in improving US short line operations. LVRM stood out to us as a first step into the market: its assets are critical nodes in the US rail network and directly serve the densely populated Northeastern US. There’s a particular concentration of distribution centres around LVRM’s intermodal terminal that serve this population. These centres represent billions of dollars of logistics infrastructure and provide a diversified existing customer base.

We are focused on supporting Phoenix Rail’s management team in pursuing organic growth opportunities through collaborating with Class I railroads to explore growth and efficiency in their networks, and service improvements to their customers. Given how fragmented the market is, we’re also exploring similar investment opportunities to expand the Phoenix Rail platform.

Moving ahead

Short line railroads play a vital role in multi modal freight solutions. Their ability to efficiently connect first and last-mile to major railroads improves the competitiveness of rail, which offers the most cost-effective mode of freight transport in the US. There are currently discussions underway in Congress to increase tax credits available for the rehabilitation and maintenance of short line rail which should lead to additional attractive investment opportunities in the sector.

This all culminates into a real opportunity for infrastructure investors with the ambition to modernise, add value to and consolidate underinvested assets in the short line rail sector. With strong fundamentals, clear tailwinds, and growing national relevance, we see this as a pivotal moment to reshape a critical layer of America’s transport and logistics infrastructure.

Interested to find out more about Ancala’s approach to investing in infrastructure? Register your interest, here.

References

1. KPMG Study: https://kpmg.com/us/en/media/news/proximity-premium-2024.html

2. Manufacturing Today: https://manufacturing-today.com/news/us-manufacturing-growth-predicted-to-rebound-significantly-by-2025/