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Chapter 6 RAILROADS Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Appreciate the contributions of the railroad industry to the development of the U.S. economy 2. Gain an understanding of the size and types of firms in the railroad industry 3. Discuss the relevance of intermodal and intramodal competition in the railroad industry 4. Know the major types of commodities hauled by the railroads 5. Recognize the different types of equipment used in the railroad industry 6. Discuss the nature of costs in the railroad industry and how they impact pricing decisions 7. Understand the importance of intermodal carloadings on the growth of the railroad industry 8. Be aware of the current issues facing the railroad industry today Chapter Overview Brief History of the Rail Industry The offering of scheduled common carrier freight and passenger service to the public began in the United States in 1830, with the start of operations on 13 miles of road between Baltimore and Ellicott’s Mills, Maryland. At the start of the U.S. Civil War in 1860, 30,626 miles of road were in service. By then, rail transportation had proven overwhelmingly superior in both price and service quality to animal-powered road transportation, and superior in service quality to water transportation on lakes, rivers, and canals, and on the ocean between different ports within the United States. During the first 30 years of its existence, the railroad industry evolved from a population of unconnected carriers focused on short-haul traffic to the completion of longer-distance lines located largely between the Atlantic seaboard on the east, the Mississippi River on the west, the St. Lawrence River and Great Lakes on the north, and the Potomac and Ohio Rivers on the south. The Civil War slowed but did not stop rail construction during the 1960s. Most notable was the completion in 1869 of the first rail link between the Midwest and the Pacific Coast. Total road mileage reached 52,922 in 1870. That year marked the beginning of the greatest boom in growth of railroad mileage. By 1900, total mileage stood at 196,345, accessing all parts of the country and providing shippers and travelers with a national network of carriers that connected with one another. Rail transportation remained the dominant, largely unchallenged, mode of intercity freight and passenger movement through the first two decades of the 20th century. However, erosion of its dominance began during the 1920s with the beginning of large-scale government-funded construction of hard-surface roads and superior service and/or cost characteristics of motor carriers and automobiles. Additional competition came from a revival of inland water transportation, which was aided by government-financed navigation improvements on rivers and by privately financed construction of oil pipelines. Air transportation emerged as a serious contender for rail passenger and mail traffic during the 1930s. Overall, the railroad industry suffered significant decline in relative importance after 1920. However, its role in freight transportation remains important in the 21st century. The railroad industry has stabilized in relative importance during the first part of the 21st century. This trend has been well documented and can be attributed in part to the following factors: alternate transport modes with superior services and/or cost characteristics (primarily motor carriers and pipelines); a resurgence in water transportation; and the changing needs of the U.S. economy. In 2006, railroads transported only 43 percent of the total intercity ton-miles transported by all modes. It is important to note that, on an actual basis, rail ton-miles have continued to increase and railroads are still the largest carrier in terms of intercity ton-miles, but not in terms of tonnage or revenues. The railroads are still vital to our transportation system and play an important role in our economy. For example, in 2003 rail revenues accounted for approximately 12.7 percent of the nation’s freight expenditures. Railroads in 2007 employed 186,112 people. Investment is another indication of importance. In 2007, rail investment in new plant and equipment was over $117 billion. In 2007, for example, rail locomotive and freight car acquisition increased sharply over 2006 (increasing more than 50 percent). As mentioned earlier, in 2006 the railroads shipped about 43 percent of all ton-miles moved by all transport modes in the United States. This percentage of ton-miles has been declining since its peak of 75 percent in 1929. However, actual ton-miles have, for the most part, been steadily increasing. In 1980 a total of 932 billion ton-miles of domestic intercity freight was moved. The figure dropped to 810 billion ton-miles in 1982 due mostly to the recession of 1982 to 1983. In 2006 the ton-miles were 1,853 billion, representing 43 percent of transportation’s total 4,309 billion. These figures highlight the fact that, even though railroads continue to move record amounts of goods, they are capturing less of the total transportation market because other modes have been growing even faster. However, there are indications that railroads may experience a resurgence on a relative basis because of more aggressive marketing and growth in intermodal traffic. Between 2000 and 2007, intermodal traffic increased from a little over 9 million loadings to just over 12 million, an increase of 31 percent. Intermodal shipments have become more attractive as fuel prices escalate and highway congestion increases. INDUSTRY OVERVIEW Number of Carriers Although there were 565 railroads listed in 2007, only 7 were Class I companies (see Table 6.1). This meant that they each did more than $359.6 million (2007) annually in revenue, or a total of $52.9 billion. The balance of the railroads is classified as “regional” or “local” and they accounted for about $4 billion of revenue. Offsetting the decline in the number of Class I lines, significant growth occurred in short-line railroads known as locals and larger lines known as regionals. These new operators took over unwanted trackage of the Class I lines and sought to recover lost business. As of 2007, there were 33 regional railroads. There were also 523 local lines, broken up by line-haul and switching. Some of the roads are as small as two or three miles but still contribute to the overall freight network. In addition, a number of holding companies were formed to control a number of short lines scattered around the country. One of the largest is RailAmerica , which operates more than 42 separate railroads in the United States and Canada with more than 8,000 miles of track. These holding companies have economies of scale in purchasing and can share other corporate assets, which reduces the cost of operation. Road mileage expanded rapidly during the initial construction period of 1830 to 1910 reaching a peak of 254,251 miles in 1916. However this has been reduced to about 229,530 road miles by 1929. By 2007, the number of road miles was reduced to 94,440. This reduction was due to abandonment of duplicate lines that was no longer needed because of improvements in technology, market shifts, the rail merger movement, and intermodal competition. Competition The competitive position of the railroad industry has changed dramatically after the first two decades of the 20th century and today the industry is faced with intense intermodal competition and selective intramodal competition. The railroads must compete with the other modes of transportation that have either evolved or matured since the 1920s. The industry’s economic structure has developed into a fine example of differenti¬ated oligopoly. Their major source of competition is intermodal in nature. INTRAMODAL As only a few railroads serve a particular geographic region there is now an oligopolistic market structure because there are a small number of interde¬pendent large sellers. Barriers to entry exist because of the large capital outlays and fixed costs required and, consequently, pricing can be controlled by the existing firms. With the merger trend, the intramodal competition has been reduced and many cities now have only one railroad serving them. Shippers are concerned that there will not be enough effective intramodal competition to preserve railroad-to-railroad competition. Some shippers are called “captive” as they have only one rail carrier serving them. INTERMODAL As noted earlier, the relative market share of railroad intercity ton-miles has been steadily declining because of increased intermodal competition. Inroads into the lucra¬tive commodity markets have been facilitated by governmental expenditures on infra¬structure that have benefited competing modes. For example, the government has provided an extensive local and national highway system, especially the interstate net¬work, for motor carrier use. Customers look for consistent on-time performance. Railroads need to provide this level of service to stay competitive. Railroad companies usually cannot deliver freight early because the customer then has to find a place to store it. In addition, through improvements and maintenance of the inland waterway system by the U.S. Army Corps of Engineers, the government has also provided the right-of-way for water carriers. Because of the governmental programs and the response of the rail¬road industry to change, railroads now account for 15.2 percent of total tonnage and 39.4 percent of total ton-miles shipped (see Table 6.3).
Overall, the railroads have been rate-competitive. Government influence, either in the form of economic regulation or expenditure programs aimed at promoting other modes, together with intermodal competition, forced the railways into making a deter¬mined effort to forestall industry decline by becoming more competitive. The Staggers Rail Act, which removed significant economic regulation, has allowed railroads to be much more price-competitive through contract rates and a more tailored response to customer’s service requirements. MERGERS Many mergers have taken place in the railroad industry and the size of the remaining carriers has correspondingly increased. The most recent trend has seen both side-by-side combinations as well as end-to-end mergers. Customer service and reliability can be improved by these mergers, because the many types of operating costs, such as car switching, and clerical costs, such as record keeping, can be reduced; but, such improvements have been slow to develop. A total of 28 mergers have taken place during the past 30 years, and 50 unifications overall so that there were only four major rail lines: Norfolk Southern, CSX Transportation, Union Pacific, and the Burlington Northern Santa Fe. ABANDONMENTS Many factors led to the abandonment of track around the country starting with the elimination of parallel and overlapping routes. The opening of the Interstate Highway System allowed motor carrier service to decrease transit time shifting freight from rail to motor. To effectively com¬pete with motor carriers for time-sensitive traffic, railroads had to focus on effi¬cient routes. Deregulation, which occurred in 1980, gave com¬panies freedom to buy, sell, or abandon unprofitable track without federal interference. The land used for rights-of-way could also be used unless the original deed required the return when the property was no longer being utilized for railroad purposes.
The abandonments were either rural branches or duplicate lines left over from mergers. The STB regulates abandonments, but changes in the law made it much easier for the railroad industry to close unprofitable lines. Regional and short-line operators took over some of this property.
OPERATING AND SERVICE CHARACTERISTICS General Service Characteristics
COMMODITIES HAULED The rail¬road system has evolved into a system that primarily transports large quantities of heavyweight, low-value commodities (or bulk products). Although railroads still handle a wide variety of commodities, more than 83 percent of total rail car loadings in 2007 involved the movement of bulk materials. Coal. Railroads are the primary haulers of coal, accounting for 43.8 percent of the total tonnage transported in 2007. Farm products. Farm and food products constitute the third largest commodity group hauled by railroads. Chemicals. Chemicals and allied products, a great number of which are classified as “hazardous” by the U.S. Department of Transportation (DOT), are transported in spe¬cially designed tank cars. Transportation equipment. Transportation equipment carloadings have increased to more than 5 percent of total carloadings, but decreased by over 75,000 carloads from 2006 to 2007. Although the commodities shipped by the railroad industry have changed over the years, with the emphasis placed on the movement of low-value, high-volume bulk materials, the railroads are still a possible mode of transport for many different types of goods, including both high-value merchandise and raw materials alike. TRAFFIC SHIFTS The demand for freight transportation is a derived demand and economic conditions have an impact upon the demand for transportation service. This is especially true for railroads because they primarily move basic raw materials and supplies. Intermodal movements by rail increased by 6.9 percent during the economic downturn of 2003. This trend toward intermodal moves could prove to be very beneficial to the railroad industry and allow them to be more competitive with the motor carriers. Constraints Railroads are constrained by fixed rights-of-way and therefore provide differing degrees of service completeness. If both the shipper and receiver pos¬sess rail sidings, door-to-door service can be provided but if either or both do not have sidings, the movement of goods must be completed by some other mode. Although on-time delivery performance and the frequency of service had deteriorated in the past, improvements have been made in recent years. The current position of the industry has been restored to competitive levels on selected. However, reliability and transit time will have to improve as well as equipment availability. Strengths A large carrying capacity enables the railroads to handle large-volume movements of low-value commodities over long distances. Motor carriers, on the other hand, are con¬strained by volume and weight to the smaller truckload (TL) and less-than-truckload (LTL) markets. Railroads are able to use a variety of car types to provide a flexible service because the rolling stock consists of boxcars, tankers, gondo¬las, hoppers, covered hoppers, flatcars, and other special types of cars. Another important service is that the liability for loss and damage is usually assumed by the railroads. Such dam¬age occurs because rail freight often goes through a rough trip due to vibrations and shocks (steel wheel on steel rail). In an attempt to regain traffic lost to other modes and gain new traffic share, the rail¬roads have been placing an increasing amount of attention on equipment and tech¬nology. Multilevel suspension systems and end-of-car cushioning devices protect the goods in transit. One area that has received much attention has been the intermodal era, namely, trailer-on-flatcar (TOFC) and container-on-flatcar (COFC) service. The railroads realized the neces¬sity of improving the TOFC and COFC service to compete effectively with motor carriers. The railroads have invested a significant amount of money recently in improving right-of-way and structures to help improve service by preventing delays.
Microprocessors have found their niche in the railroad industry, particularly in com¬munications and signaling. The rail industry has to realize that technology alone cannot mitigate their problems. Process change also has to occur. Equipment The carload is the basic unit of measurement of freight handling and a carload can vary in size and capacity depending on the type of car being used. The increases in average carrying capacity of railroad freight cars over the past 50 years have been dramatic. In 2007, the average carrying capacity per car stood at almost 99.5 tons, compared to 46.3 tons in 1929. The railroads own and maintain their own rolling stock. Today’s car fleet is highly specialized and is designed to meet the needs of the individual shipper. The boxcar has been surpassed in use by the covered hopper car, which is followed closely in number by the tank car. In 2007, more than 85 percent of the total fleet was designed for the transport of bulk and raw materials. Class I railroads own almost 42 percent of the freight cars while private companies own the remainder To remain competitive with the other modes of transportation, the railroads have increased their capacity. Service Innovations The railroad cost structure makes it necessary to attract large and regular volumes of traffic to take advantage of scale economies and to operate efficiently. TOFC service transports highway trailers on railroad flatcars while COFC transports containers without the chassis on specially designed cars. In 2007, more than 12 million trailers and containers in TOFC and COFC service were loaded. TOFC/COFC combines the line-haul efficiencies of the railroads with the flexibility of local motor pickup and delivery serv¬ice. This growth was stimulated by the advent of double-stack contain¬ers used in international trade. In recent years, the railroads have largely segregated their intermodal traffic from regular freight, with most of the intermodal trains operating on a priority schedule. United Parcel Service (UPS) has been a supporter of rail intermodal service for some time and is still the railroads largest single customer. The LTL motor carriers began using intermodal service during the 1980s to handle their surges of traffic, and as rail service has become more reliable, they are using the rail service on a continuing basis. The biggest change came recently when two of the largest truckload carriers, Schneider National and J. B. Hunt, purchased equipment to use rail intermodal service on an extensive basis. Economies are realized because putting finished goods in containers means not only lower packaging and warehousing costs but also faster transit times because time and effort are saved in the loading, unloading, and delivery of goods. The double stacking of the containers on traffic to and from ocean ports has improved the productivity of the rail COFC service dramatically. The unit train specializes in the transport of only one commodity, usually coal or grain, from origin to destination. The movement could be directly from a coal mine to an electric power-generating station with no stops in transit, and loading and unloading would be accomplished while the train was moving. Rail management is increasing the use of computers and communications to help improve discipline and maintain control over rail operations. COST STRUCTURE
Fixed Costs The railroad industry’s cost structure in the short run (a period when both plant and capacity remain constant) consists of a large proportion of indirect fixed costs, rather than variable costs as they own and maintain their own network and terminals. In addition, they operate their own rolling stock and locomotives. The major cost element borne by the railroad industry is the operation, maintenance, and owner¬ship of rights-of-way. Another major component of the railroad industry’s high fixed costs is the exten¬sive investment in private terminal facilities. Because of the large amount of fixed assets, the railroads as a group are not as responsive as other modes to the volume of traffic carried. The investment for equipment in rail transport, principally for locomotives and various types of rolling stock, has been enormous. In 2007, more than $8.6 billion was spent on plant and equipment. It is apparent that the railroads have a high proportion of expenses that are fixed and constant in the short run. However, they also have costs that vary substantially with volume. Semivariable Costs Semivariable costs, which include maintenance of rights-of-way, structures, and equipment, have accounted for more than 40 percent of railroad outlays in recent years. These figures, how¬ever, are deceptive because some railroads that were in poor financial health and their management found it necessary to forego maintenance to pay other expenses. Variable Costs Variable costs are a large proportion of every revenue dollar with labor being the largest single element of variable costs for railroads. Fuel and power costs are the next largest group of variable costs. LABOR In 2007, the cost of labor was $14.4 billion or $0.264 cents of every revenue dollar. Train, maintenance, and engine employees accounted for 78 percent of all the wages paid by the railroads. Railroad labor is represented by many different with three major classifications of labor unions: operating, non-operating craft, and non-operating industrial.
The railroad industry has been reducing the size of the standard train crew wherever possible and the dual basis for pay for a full day’s work is inefficient in today’s operating environment. The railroad industry has been addressing work rules and staffing requirements in a very aggressive manner in the past several years. Two-person crews are now the stan¬dard, with both riding on the locomotive. Railroad managers feel that continuing changes in modifying or eliminating work rules for rail employees must be implemented in the near future if the industry is to survive in its present form. FUEL Fuel costs make up the second largest percentage of the revenue dollar and productivity and fuel efficiency have increased. The railroad’s efficiency in the use of fuel is an important factor making intermodal movements with the motor carrier more attractive. Economies of Scale As previously indicated, railroads have a high level of fixed costs as contrasted with variable costs. Fixed costs, such as property taxes, are incurred regardless of traffic volume. Variable costs, on the other hand, vary or change with the volume of traffic moved; that is, they rise with increases and fall with decreases in traffic levels. It is obvious from the above example that, if average revenue stays the same, the economies of scale not only lower costs per unit but also increase profit. FINANCIAL PLIGHT The railroad industry once enjoyed a virtual monopoly on the efficient and dependable transportation of passengers and freight. Over the decades, competition from other modes of transportation increased dra¬matically and the rail industry’s share of the intercity freight mar¬ket also declined to less than 50 percent. Government funds were used to provide rail competitors with their rights-of-way without fully charging them the cost of constructing or maintaining them as with the rail industry. The financial position of the railroads grew increasingly worse after World War II and it became obvious that the railroad industry could not continue to survive under these conditions. Legislation Reform The Rail Passenger Act of 1970 created the government-sponsored National Railroad Passenger Corporation (Amtrak), which relieved the railroads of their requirement to provide necessary passenger operations that were not profitable. The Regional Rail Reorganization Act of 1973 (3R Act) attempted to maintain rail freight service in the Northeast by creating the Consolidated Rail Corporation (Conrail), which was formed from six bankrupt northeastern railroads. CSX and the Norfolk Southern Railroad agreed to split Conrail between them and paid collec¬tively over $10 billion for the property. The Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) was the first attempt to deregulate the industry since the railroads came under regulation in 1887 The Staggers Rail Act of 1980 deregulated the railroad industry to a significant extent, replacing the regulatory structure that existed since the Interstate Commerce Act of 1887 created the Interstate Commerce Commission (ICC). Railroads were permitted to determine how much to charge and gained other freedoms from government economic regulation. The Staggers Rail Act did a great deal to enable the railroads to help themselves and avoid further deterioration of the industry, although they still face financial challenges. The ICC Termination Act of 1995 eliminated the ICC and transferred economic rail regulation to the Surface Transportation Board (STB). The STB has taken a relaxed posture on rail regulation so the railroads are now subject to market pressures more than economic regulations. Improved Service to Customers Since the Staggers Rail Act, the performance of the railroads has been improving in the eyes of some of its customers. Intermodal traffic has expanded by almost 484 percent dur-ing the period of 1980 to 2007, while productivity measures also have shown an increase. CURRENT ISSUES Alcohol and Drug Abuse The problem of substance abuse can be brought on by the very nature of railroad work. Long hours, low supervision, and nights away from home can lead to loneliness and boredom, which can then lead to substance abuse. The industry has established employee assistance programs (EAPs) that enable those troubled employees to be rehabilitated. Employees can voluntarily refer themselves to EAPs before a supervisor detects the problem and disciplinary actions become necessary. However, substance abuse while on the job usually necessitates removal of the employee from the workplace to ensure his or her safety and the safety of co-workers. Energy The energy shortages of the 1970s made the United States increasingly aware of the need to conserve natural resources. The railroads today are in a favorable position, especially when compared to motor carriers, because they are efficient energy consumers. Another study by the U.S. DOT concluded that railroads are more energy-efficient than motor carriers, even when measured in terms of consumption per ton-mile. The railroads economically shipped 905.6 million tons of energy-yielding products in 2007; 94 percent of these loadings were coal movements. Hence, the railroads can be an important factor in the development of the nation’s energy policy. Technology To become more efficient and consequently more competitive, the railroad industry is becoming a high-tech industry. A line of “smart” locomotives is being equipped with onboard computers that can identify mechanical problems, and the legendary “red caboose” was phased out by a device attaches to the last car of the train and device transmits important infor¬mation to engineers and dispatchers. Other applications of computer technology are as follows: • Advanced Train Control Systems (ATCS): A joint venture between the United States and Canada that will use computers to efficiently track the flow of trains through the entire rail system • Rail yard control: Computer control of freight yards that is used to sort and classify as many as 2,500 railcars a day • Communications and signaling: Provides quick and efficient communica¬tions between dispatchers, yard workers, field workers, and train crews • Customer service: By calling a toll-free number, customers can receive infor¬mation on the status of their shipments, correct billing errors, and plan new service schedules • Radio Frequency Identification (RFID) tags to track equipment and shipments and improve visibility. The role of high technology and computers will continue to expand and increase the ability of the railroads to provide progressively higher levels of customer service. Radio Controlled Switch Engines uses remote control technology to allow a person to operate and control a locomotive from outside the locomotive cab. In most railroad applications, control is from a remote control unit (belt-pack) attached to a harness that places the belt-pack waist high within easy reach of the operator. The operator can perform duties such as coupling, uncoupling of cars and moving about to be in good visual distance of the operation, and remain in control of locomotive movement at all times. Future Role of Smaller Railroads The consolidation among Class I railroads has led to an increase in the number of regional and small rail carriers. These small and regional rail carriers typically took over part of the infrastruc¬ture abandoned by the large railroads that spun off parts of their system that had low traffic levels and/or were deemed not to be needed for market success. The small and regional carriers often have to operate at a cost disadvantage but have some advantages given that they are more flexible and adaptable in meeting the needs of their customers (shippers). It should also be noted that local and state governments have assisted in financing the establishment of the new lines that have come into being since 1984. The large Class I railroads have been frequent targets for criticism about the service they provide to their customers. The smaller lines are usually viewed in a more favor¬able light because of their responsiveness at the local level. However, the small and regional rail carriers are usually more vulnerable if a large shipper along their line decides to close their operations. The future role of some of those carriers is somewhat uncertain because of these factors. Customer Service Class I railroads are perceived by some shippers as not being customer focused. This criticism has grown in intercity transport during the 1990s as mergers continued to occur. The new, larger companies appeared insensi¬tive to shipper needs and concerns about equipment and service To the extent that those equipment and service problems have persisted during the last several years, is indicative of the legitimacy of shipper complaints. This is a major issue for railroads, and improvements need to be made to increase rail market shares of freight traffic. Drayage for Intermodal Service One of the constraints on rail service is the fixed nature of the rail routes and the high cost to add rail segments to provide direct service. The pickup and delivery of trailers and containers in conjunc¬tion with a line-haul rail movement is usually referred to as local drayage. Study Questions 1. Railroads no longer dominate the freight transportation market but they still lead the market in terms of freight ton-miles. What factors contribute to their leadership in this area? Why is their share of the total expenditures for freight movement so small if they lead in freight ton-miles? The railroad industry has declined in relative importance during the last half of the 20th century. This decline has been well documented and can be attrib¬uted in part to the following events: the alternate transport modes with superior services and/or cost characteristics (primarily motor carriers and pipelines); a resur¬gence in water transportation; and changing needs of the U.S. economy. In 2006, railroads transported only 43 percent of the total intercity ton-miles transported by all modes. It is important to note that, on an actual basis, rail ton-miles have continued to increase and railroads are still the largest carrier in terms of intercity ton-miles, but not in terms of tonnage or revenues. The rail¬road system has evolved into a system that primarily transports large quantities of heavyweight, low-value commodities (or bulk products) on which freight rates are relatively low. Motor carriers concen-trate on the handling of small-volume, high-value finished goods on which much higher rates are charged. This is because of the relationship of the value of the commodities to the price charged to transport it. Freight rates that are too high would cause some low value products to stop moving as the freight cost would exceed the value of the product. 2. Since the passage of the Staggers Rail Act of 1980, there has been an increase in the number of small railroads (Class III). Why has this number increased while the number of Class I railroads has decreased? Offsetting the decline in the number of Class 1 lines, significant growth occurred in short-line railroads known as locals and larger lines known as regionals. These new operators took over unwanted trackage of the Class 1 lines and sought to recover lost business. As of 2007, 33 regional railroads existed and there are also 523 Local lines, broken up by line-haul and switching. Some of the roads are as small as two or three miles but still contribute to the overall freight network. The number of railroads and the number of miles of track have declined. One of the major reasons for this decline in both the number of companies and the miles of track has been the signifi¬cant number of mergers or unifications that have occurred in the railroad industry dur¬ing the past 30 years. A total of 28 mergers have taken place during the past 30 years, and 50 unifications overall. The latter included not only mergers but also consolida¬tions and outright purchases for control. The decade of the 1970s was very active, but the tempo of rail consolidations in the 1980s was hyperactive. 3. Explain the difference between intramodal and intermodal competition in the railroad industry. Which form of competition is most beneficial to shippers? Why? Intramodal competition is competition between members of one mode such as two railroads or two truck lines. Intermodal competition is competition between members of two different modes such as a railroad and a motor carrier. Intermodal is perceived to be healthy as it may hold down rates between competitors. For example, rail TOFC must compete with motor carriers and the prices of one cannot be too much higher than the other without freight shifting modes in response to prices. 4. One of the significant factors in rail development has been the number of mergers that have occurred, but there have been different types of mergers that have occurred over time. Discuss the major types of mergers and explain why they occurred. Will mergers continue to occur in the rail industry? Why or why not? Historically, many mergers have taken place in the railroad industry, and the size of the remaining carriers has correspondingly increased. Early rail mergers grew out of efforts to expand capacity to benefit from large-volume traffic efficiencies and economies. Later, side-by-side combinations were made to strengthen the financial positions of many of the railroads and eliminate duplication. More recently though, end-to-end mergers were created to provide more effective intermodal and intramodal competition. Customer service and reliability can be improved by these mergers, because the many types of operating costs, such as car switching, and clerical costs, such as record keeping, can be reduced; but, such improvements have been slow to develop. Previously we noted that the number of railroads (refer to Table 6.1) and the number of miles of track (refer to Table 6.2) have declined. One of the major reasons for this decline in both the number of companies and the miles of track has been the signifi¬cant number of mergers or unifications that have occurred in the railroad industry dur¬ing the past 30 years. A total of 28 mergers have taken place during the past 30 years, and 50 unifications overall. The latter included not only mergers but also consolida¬tions and outright purchases for control. The decade of the 1970s was very active, but the tempo of rail consolidations in the 1980s was hyperactive. In 1920, there were 186 Class 1 railroads; by 2008, the number had declined to 7. One reason for this drop was the way in which railroads are classified by revenue, which, as it was adjusted for inflation, fewer roads qualified. The primary reason, however, was the accelerating trend of mergers. After the Staggers Act was passed in 1980, there was a significant increase in mergers and acquisitions so that as of 1999 there were only four major rail lines: Norfolk Southern, CSX Transportation, Union Pacific, and the Burlington Northern Santa Fe. There is speculation that there may be two more mergers which would create two transcontinental railroads but given the recent problems which past mergers have created, this seems unlikely in the near future. 5. What factors have contributed to the decline in the volume of higher-value freight by the railroads? What changes, if any, could the railroads make to attract back more higher-value freight from motor carriers? The rail¬road system has evolved into a system that primarily transports large quantities of heavyweight, low-value commodities (or bulk products). Motor carriers concen¬trate on the handling of small-volume, high-value finished goods, whereas water and pipelines carry the larger volumes of the lowest value types of bulk commodi¬ties. The railroads therefore find themselves engaged in intense competition with these other modes for the opportunity to ship many product categories. Although railroads still handle a wide variety of commodities, more than 83 percent of total rail carloadings in 2007 involved the movement of bulk materials. Table 6.4 lists the products with almost 31.5 million carloadings carried by the railroads in 2007. Of the six commodities shown in the table, only two, motor vehicles and equipment and miscellaneous and mixed shipments (intermodal), are not bulk commodities. In an attempt to regain traffic lost to other modes and gain new traffic share, the rail¬roads have been placing an increasing amount of attention on equipment and tech¬nology. For one, to decrease damage statistics, railroads focus on new technologies. They must ensure that the service they provide is price and time competitive with motor carriers which is their primary competitor. The railroad cost structure makes it necessary to attract large and regular volumes of traffic to take advantage of scale economies and to operate efficiently. In recent years, rail management has developed or re-emphasized a number of service inno¬vations to increase traffic volume. 6. Railroads have abandoned a significant number of miles of track (over 260,000 miles) since 1916. Why has this trend developed? Will it continue into the future? Why or why not? In 1916, at its peak, the railroad industry owned 254,037 miles of track. Today, more than half of that is gone as the early overexpansion left extensive amounts of excess trackage in many areas, and the railroads had to abandon significant portions of rail trackage to remain competitive. Parallel and overlapping routes, therefore, have been eliminated wherever possible. Many factors led to the abandonment of track around the country. In the late 1950s, the government opened the Interstate Highway System. This allowed motor carrier service to decrease transit time, which caused shippers to use motor carriers. To effectively com¬pete with motor carriers for time-sensitive traffic, railroads had to focus on effi¬cient routes. Deregulation gave com¬panies freedom to buy, sell, or abandon unprofitable track without federal interference. The land used for rights-of-way could also be used unless the original deed required the return when the property was no longer being utilized for railroad purposes. In some cases, all or part of the right-of-way was turned into hiking trails with some bridges left in place. Even though the railroad industry reduced its track mileage by more than half, the lines remaining still carried a major share of the freight. The abandonments were either rural branches or duplicate lines left over from mergers. The ICC, and later the STB, still regulate abandonments, but changes in the law made it much easier for the railroad industry to close unprofitable lines. Not all the lines were scrapped, as dis¬cussed above, and regional and short-line operators took over some of this property.
Each time a railroad interchanged a car to another line, there was the chance for delay. As mergers reduced the number of railroads, fewer inter¬changes were needed. For example, until 1993, at least three railroads were needed to go from Chicago to San Francisco, but now one company owns all the track, allowing more efficient service. 7. The railroad industry has developed a number of new types of equipment to replace the stan¬dard box car. What is the rationale supporting the diversification of equipment? The railroads own and maintain their own rolling stock. The characteristics of these cars have changed considerably to suit customer requirements; for example, the conventional boxcar has been de-emphasized but has seen resurgence in the past few years. Today’s car fleet is highly specialized and is designed to meet the needs of the individual shipper. Following is a list of eight generalized car types: • Boxcar (plain): Standardized roofed freight car with sliding doors on the side used for general commodities • Boxcar (equipped): Specially modified boxcar used for specialized mer¬chandise, such as automobile parts • Hopper car: A freight car with the floor sloping to one or more hinged doors used for discharging bulk materials • Covered hopper: A hopper car with a roof designed to transport bulk commodities that need protection from the elements • Flatcar: A freight car with no top or sides used primarily for TOFC serv¬ice machinery and building materials • Refrigerator car: A freight car to which refrigeration equipment has been added for controlled temperature • Gondola: A freight car with no top, a flat bottom, and fixed sides used primarily for hauling bulk commodities • Tank car: Specialized car used for the transport of liquids and gases These various types of equipment allow the railroads to serve a wide range of customers and transport a wide range of commodities. 8. The railroad industry’s cost structure is different than that of the motor carrier industry. What factors contribute to this difference? What impact do these differences have for the railroads in terms of pricing, competiveness, and investment? Because the railroads have a large amount of fixed assets, the railroads as a group are not as responsive as other modes to the volume of traffic carried. Motor and water carriers, as well as the air¬line industry, are able to shift resources faster in response to changes in customer demand because of their use of “free” rights-of-way. Motor carriers, for instance, pay for their costs through user charges, tolls, and various taxes (such as fuel taxes). These charges are related and vary directly with the volume handled, thereby creating a variable rather than a fixed cost for the user. Circumstances place the railroads at a disadvantage. Motor carriers and water carriers are characterized by having a big percentage of variable costs while railroads have a high percentage of fixed costs. Because of this, the railroads do not have the same freedom in pricing adjustments as do other modes. In addition, the railroads have a much higher level of investment than to the other modes as they must by for their own right of ways and much larger terminal facilities. 9. Discuss the major current issues facing the railroad industry. Select one of these major issues and present appropriate recommendations for resolving the issue. Many industries, including the rail industry, are taking a close look at the problem
and at possible methods for dealing with it. The problem of substance abuse can be brought on by the very nature of railroad work. Long hours, low supervision, and nights away from home can lead to loneliness and boredom, which can then lead to substance abuse. Because of this situation, the railroads have been dealing with the problem of substance abuse for a century. Rule G, which was established in 1897, prohibits the use of narcotics and alcohol on com¬pany property. Rail employees violating this rule could be subject to dismissal; how¬ever, the severity of this punishment led to the silence of many rail workers who did not want to jeopardize the jobs of their coworkers.
To deal with this problem, the railroad industry has attempted to identify and help employees with substance abuse problems. The industry has established employee assistance programs (EAPs) that enable these troubled employees to be rehabilitated. Employees can voluntarily refer themselves to EAPs before a supervisor detects the problem and disciplinary actions become necessary. However, a Rule G violation— substance abuse while on the job—usually necessitates removal of the employee from the workplace to ensure his or her safety and the safety of coworkers. Employees who are removed can still use EAPs for rehabilitation and can apply for reinstatement after they have overcome their problem. Railroad EAPs have proven to be very effective. A recent Federal Railroad Administration report found that the rate of successful rehabilitation has risen by 70 percent. The success of these programs depends largely on support from rail workers as well as all levels of management. (Medium) 10. What factors have contributed to the success of intermodal rail service? What barriers exist to future expansion? One area that has received much attention has been the intermodal era, namely, trailer-on-flatcar (TOFC) and container-on-flatcar (COFC) service. The railroads realized the neces¬sity of improving the TOFC and COFC service to compete effectively with motor carriers. The developments include terminal facilities for loading and unloading, as well as changes in the railcars and trailers and containers. However, the changes have not stopped here. The railroads have invested a significant amount of money recently in improving right-of-way and structures to help improve service by preventing delays. The concept of piggyback service was designed by railroad management to increase service levels to intermodal customers. Piggyback traffic, which includes both TOFC and COFC services, accounted for 15.2 percent of total loadings in 1986, occupying a little less than three million cars and ranking second behind coal in total rail car-loadings. In 2007, more than 12 million trailers and containers were loaded. As can be seen in Table 6.6, intermodal carloadings increased until 2000, when there was a modest decline of 2.7 percent. When discussing piggyback service, considera¬tion must be given to the individual concepts of TOFC and COFC movements. TOFC service transports highway trailers on railroad flatcars. It combines the line-haul efficiencies of the railroads with the flexibility of local motor pickup and delivery serv¬ice. On-time deliveries, regularly scheduled departures, and fuel efficiency are the major reasons for the present growth and future potential of TOFC service. For exam¬ple, a 100-car train (which places two trailers on each flatcar) is more economical to run than 200 trucks over the road. Fuel is saved and railroad economies of scale are realized. Traffic congestion, road damage, and maintenance and repair costs are all reduced because of the reduction of number of trucks out on the highways. The intermodal movement of trailers and containers grew rapidly during the 1980 and this growth was stimulated by the advent of double-stack contain¬ers used in international trade. Also, the railroads have placed new emphasis on their intermodal business after a number of years of doubting its profitability The ability to provide long term consistent service is one of the major challenges that could limit growth in this area. Terminals are becoming more and more congested causing delays and allocation of available equipment. Case Questions Case 6.1: CBN Railway Company 1. What are the potential advantages and disadvantages of entering into these “power-by-the-mile” arrangements? The advantages of leasing are usually the cost savings, the capital flexibility, and hopefully, in this case, better equipment service. The disadvantages are diminished control, the potential for higher costs over time, and in this case, perhaps employee morale. 2. What should be done if the problem with the locomotives continues even with the agreements? If the problem persists even with the leasing, they need to analyze the situation in much more depth to get at the root cause(s) or to determine if the projected repair rate is unrealistic. 3. Do you think that the decision to lease the locomotives was the best decision for CBN? Explain your answer. Given the information in the case, the leasing approach seems to be an attractive solution. Equipment repair does not seem to be a core competency of CBN Railroad. The lesser is probably more experienced and should be to improve the repair shop productivity. Case 6.2: Railroad Reregulation 1. If you were asked to prepare an argument representing the interests of the railroad industry against reregulation, what would your main points be? The main argument to be made on behalf of the railroads is the sustained level of profitability that industry has enjoyed since its deregulation in 1980. The Staggers Act of 1980 gave railroads more freedom to abandon unprofitable lines and set prices according to market forces. These freedoms allowed railroads to behave as firms in a pure market economy, taking advantage of value-of-service pricing, where necessary, and being more selective on the markets they serve. The profitable operations of the railroads have also allowed them to make necessary investments/improvements in infrastructure. 2. If you were a representative of CURE, what would your arguments be to reregulate the industry? The rationale for economically regulating an industry is to prevent monopolistic abuses in the market. By the very nature of its cost structure, the railroad industry is a natural monopoly. As such, some shippers will be “captive” to only one railroad. These shippers, then, have little or no power to allow the market to set competitive prices. As such, the railroads may charge these captive shippers whatever price will bring an acceptable level of profit. Also, the line serving that captive shipper might be abandoned by the railroad, eliminating all rail service from that shipper. The commodities hauled by the railroads tend to be bulky and low-value in nature in general. Charging excessively high transportation prices (in a monopolistic situation) to move these commodities has a significant effect on the prices of these commodities in the market and on the profit that needs to be made by the shipper. This could put these shippers at a competitive disadvantage in the market. 3. If you were a representative of the motor carrier industry, would you be for or against railroad reregulation? What would your arguments be? There can be two answers to this question. First is the position that the motor carrier industry is for reregulating the railroads. In this position, an argument can be made that the railroads are a direct competitor of the motor carrier industry for selected commodities in selected markets. For these commodities/markets, the railroads have a distinct pricing advantage in the short run since only variable costs need to be recovered. As such, railroads (which have a significantly lower variable cost than do motor carriers) can price well below what motor carriers can offer. Reregulating the railroads would place artificial controls over these pricing practices. Second is the position that the motor carrier industry is against reregulation. As indicated in this chapter, TOFC and COFC rail loadings have increased significantly over the past several years. This is an indication that the motor carrier industry has enjoyed profitable relationships with the railroad industry as far as pricing and service for intermodal movements. Reregulation might significantly harm this relationship by increasing prices on intermodal moves. 4. What would be your position if you represented a group of shippers whose freight moved primarily by TOFC or COFC? This answer is basically the same as the answer to Question 3. Shippers make the decision to go TOFC/COFC or over-the-road with motor carriers. So, the same two arguments can be made for and against reregulation by the shippers as was made for the motor carriers. Suggested Internet activities:
1. Have the student visit the web sites of four of the Class 1 railroads. Have them compare and contrast them as to ease of use and available information. Union Pacific http://www.up.com/ CSXT http://www.csxt.com/ Norfolk Southern http://www.nscorp.com/nscorp/index.jsp Burlington Northern Santa Fe http://www.bnsf.com/ 2. Have the student do a literature search TOFC/COFC and motor carriers and from the material, discuss the current situation. Note: TOFC/COFC is also called intermodal service. 3. Have the student visit the web site of the Surface Transportation Board. These are many cases/decisions made by the STB concerning railroads on this site. Have the student pick one decision and explain how it will impact a railroad and/or the industry and how it will impact shippers. Instructor Manual for Transportation: A Supply Chain Perspective John J. Coyle, Robert A. Novak, Brian Gibson, Edward J. Bardi 9780324789195
