Old wine in a new bottle: Policy issues for the U.S. railroad system

Logistics Spectrum, Jan-Mar 2001 by White, Charles H Jr

America's railroads today stand in an ironic position. Envied throughout the industrialized world for their efficiency and private sector status, America's freight railroads, nonetheless, appear to have temporarily lost their confidence. After the industry botched two major realignments (Union Pacific, Southern Pacific in the West; the Conrail split up in the East) the railroads' regulatory body, the Surface Transportation Board (STB), called "time out" from further mergers so the industry could settle down. This extraordinary intrusion into the market scuttled a pending transcontinental (and international) combination between Canadian National and Burlington Northern Sante Fe. It also comes at a time when significant public policy issues are pressing on the industry. Does our private sector industry have the financial wherewithal to meet the capacity challenges raised by the new global economy? Are technical solutions to capacity constraints adequate? Does the industry have the will to pursue them? Is it realistic to preserve a major intermodal link in our national transportation system - the railroads - as a purely private sector infrastructure? Do the times call for a new public/private partnership in U.S. railroading?

U.S. Railroads

U.S. railroads move more freight, in domestic or international trade, than any other railroad system in the world. U.S. rail traffic (measured in ton-km) is roughly 75 percent greater than that of the China Railways (the second largest system in the world). It is double that of the next two largest systems, Russia and 35 European countries combined. There are three categories of freight railroads in the US. Eight "Class I", or major, railroads have annual operating revenues of at least $259 million apiece. Thirty-five regional railroads have annual operating revenue levels of $40 million or more. There are also 515 local railroads. All major and regional railroads, as well as the vast majority of local carriers, are privately owned. The most recent available statistics show that in 1998, U.S. railroads earned total revenues in excess of $35 billion.

The industry has undergone major changes since 1980, the year the U.S. Congress implemented significant economic deregulation. Increased traffic growth, coupled with the shedding of redundant right-of-way, has led to significant increases in capacity utilization. Ton-miles per mile of road has more than doubled, from 5.6 million to 13.7 million in 1998. Intermodal container and trailer traffic gains (from 3.1 million units in 1980, to 8.8 million in 1998) have been a major part of this increase. Labor productivity has increased 271 percent since 1980 - a direct result of increased traffic and reductions in the labor force.

Railroad transportation is particularly important to U.S. international trade almost 50 percent of all export traffic moves by rail.1 The speed and efficiency of the U.S. rail industry has helped reduce the costs of intermodal traffic and stimulated the movement of imported and exported goods between the US. and its trading partners. Future world-wide growth in international trade will increase the demand for rail service, because the potential for substantial growth of truck traffic is limited. The U.S. and many of the world's urbanized areas are already experiencing significant highway congestion. WEFA, a major consulting firm, is forecasting that US. rail container traffic will grow substantially at an average of 6 percent a year for the next 10 years.

Unfortunately, however, this increased traffic is a mixed blessing. The US. rail system is already approaching capacity constraints in a number of corridors because traffic has increased while rail network and rail workforce have been reduced over the last 20 years. The forecasted intermodal increases and those anticipated in the coming decades must be matched by increases in rail capacity and efficiency, simply to keep costs down and traffic moving smoothly.

This is the core of the critical public policy issue now facing the American railroads. After decades of planned plant rationalization, the nation's rail infrastructure is approaching operational capacity. The industry's attempts to balance post-Conrail split traffic flows with a strained infrastructure underscore just how fragile the system has become in the East. Moreover, this new phenomenon coincides with a period of Wall Street coolness toward railroads arising out of their experience implementing the recent mergers, and a financial community mentality which rewards quarterly performance over long-run capital infrastructure investment.

How the railroads and the government respond to pressing rail infrastructure capacity needs will have a profound impact on our nation's overall transport system. Indeed, it holds the potential of shifting the railroad's position within the American political economy.

Technological Solutions through Positive Train Control (PTC)

One potential answer is on the horizon - smarter operations rather than expanded plant. New breakthroughs in operations and communications technology can effectively expand the capacity of the rail system, allowing railroads to pack trains more densely on the existing rightof-way. Both the private and public sectors are currently working in this arena. Advanced train control systems, by having more trains use the same track, expand the capacity of existing rail lines without building more lines. The U.S. Department of Transportation and the railroad industry are working to develop Intelligent Railroad Systems. These systems incorporate the newest digital communications technologies into Positive Train Control (PTC), braking systems, grade crossings and defect detection.