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25 Table 6. Top five commodities moved by Table 7. Scale of rail operations. truck in 2008 (52). Class Number Route-Miles Employees Revenue (Billion $) Rank In Terms of Tonnage In Terms of Value Class I 7 94,801 167,581 50.3 1 Gravel Machinery Regional 33 16,713 7,742 1.7 2 Nonmetal mineral products Mixed freight Local 519 28,415 11,634 2.0 3 Cereal grains Motorized vehicles Total (USA) 559 139,929 186,957 54.0 4 Waste/scrap Electronics Canadian 2 561 - - 5 Gasoline Textiles/leather Total 561 140,490 186,957 54.0 From 1999 to 2004, annual truck VMT for all classes of trucks tion (FRA), Class I railroads represent only 1 percent of the grew at an average rate of 3 percent year to year. However, in railroad companies, own 72 percent of the network of rail- 2005 truck VMT declined 8.1 percent to 287.2 billion miles (1). roads in the country, and generate more than 90 percent of The cause of declining truck VMT may be related to increases the rail revenue (47). The Class I railroads also own 36 percent in congestion, changes in operating schema, 1000-mile trip of all freight cars. A recent study conducted by the Associ- conversions to intermodalism, or some combination of these ation of American Railroads (AAR) (60) concludes that the factors. As VMT growth and increases in commercial motor railroads' current network is reaching its capacity and that vehicle registrations likely will continue to outpace infrastruc- rail congestion will occur if the system is not expanded. ture investment increases, the need for low-cost and quickly Railroad capacity is determined by many factors including implementable solutions will also grow. Improvements in the amount of railroad track and rolling stock, the number and freight flows likely improve all vehicle flows; reducing opera- power of locomotives, maintenance, staffing levels, and a wide tional impediments can lower business costs, in turn reducing variety of operating strategies (4). There is currently a great deal both unit prices for the consumer and inflationary pressures of interest in railroad capacity now and in the future. Several for the economy. factors explain the interest: Traffic growth, both observed and forecast, raises the ques- 3.5 Railroads tion of whether railroads will have adequate capacity to Railroad Industry Ownership Profile: Ownership of rail- enable continued handling of the growing business. roads is almost exclusively private, and the existing industry Tightening of capacity in 20072008 has made it possible is the result of hundreds of company mergers over the last for railroads to increase freight rates. (When there is excess century and a half. The most important exception to private capacity, railroads historically have lowered rates in the ownership is the Alaska Railroad, a state-owned operation attempt to attract business; when there is a shortage of since it was purchased for $22.3 million and transferred from capacity, rates rise to balance supply and demand.) the Federal government in 1985. Other states and municipal- Given that rail is 2 to 2.5 times more fuel efficient than ities own segments of railroads leased to private operators or trucks (61), and because highways are increasingly con- joint terminal companies. Amtrak is not a freight railroad, gested, many policymakers want to encourage the shift of but operates its passenger service on tracks owned by freight some truck traffic onto railroads--which is more likely railroads (except in the Northeast Corridor and a track seg- if railroads have adequate capacity and can meet needed ment in Michigan it owns outright). service levels. Physical Infrastructure: Rail infrastructure consists of track Advocates of increased rail passenger service understand and structures, yards, locomotives, cars, and signals. The rail that availability of rail track capacity is a critical issue for network has shrunk considerably, from 254,000 miles of expansion of passenger services. Class I railroads in 1916 to 140,810 miles in 2006. Classifi- Rail freight is often assumed to have other benefits, includ- cation of railroads is historically by size and Table 7 shows ing environmental (lower emissions per ton-mile), an the breakdown by ownership of the rail network, number of excellent safety record, low-cost rate levels for bulk goods, employees, and revenue. Currently there are 559 railroads and movement of hazardous materials on private right- operating in the United States consisting of 7 Class I railroads, of-way (i.e., not mixed in with cars and trucks on the high- 33 regional carriers, and 519 local railroads. In addition, two way system). Canadian Railroads have U.S. operations large enough to qual- ify as Class I if they were separate entities under U.S. corpo- Investment: As private enterprises operating both owned rate status. According to the Federal Railway Administra- equipment and infrastructure, American railroads must raise

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26 Table 8. Freight car ownership. conducting business. The fundamental purpose of rail dereg- ulation in the 1970s was to enable the railroads to behave like Private Regional Types of Freight Cars Class I Cars and Local Totals other businesses in the American private enterprise system, Box Cars 76,066 15,008 41,034 132,108 that is, to earn revenues adequate to keep existing capital in Covered Hoppers 114,100 270,145 20,517 404,762 the industry and to attract new investment for expansion and Flat Cars 95,083 52,528 21,724 169,335 facilities rehabilitation. After the collapse of the Penn Central Refrigerated 19,017 - 2,414 21,431 and other bankrupt companies in the early 1970s, the Federal Gondolas 99,837 82,544 21,724 204,105 government took responsibility for reorganizing rail service in Hoppers 71,312 75,040 12,069 158,421 the Northeast. The planning process resulted in abandonment Tank Cars - 255,137 - 255,137 of thousands of rail route-miles and government expenditures Totals 475,415 750,402 119,482 1,345,299 of some $8 billion to acquire, rehabilitate, and cover operat- ing losses for its new creation, Conrail. Until the Staggers Act was passed in 1980, however, Conrail continued to lose about large amounts of capital and reinvest in operations and ca- $1 million/day. Since the Staggers Act, railroads have made pacity. In 2006, industry capital investments were close to a remarkable renaissance (see Figure 8). Conrail was sold to $8.5 billion--over 16 percent of operating revenues. Few the public in an initial public offering (IPO) in 1987, and in major industries reinvest at this rate. Included in capital ex- 19981999 was divided between Norfolk Southern ( 60 per- penditures are purchase and major overhaul of locomotives; cent) and CSX Corporation ( 40 percent). The large Class I railroads have nearly 24,000 locomotives in service. The indus- railroads are now earning close to their cost of capital and try has access to over 1.3 million freight cars; this figure includes are able to support their huge investment requirements from freight cars owned by railroads large and small, leasing compa- retained earnings. nies, and shippers. Table 8 shows the distribution of ownership Human Resources: Railroads have reduced employment dra- by type of freight car. matically, which is a key source of productivity improvement Reinvestment by the private enterprise railroads is a func- in the industry. One major factor in reducing employment tion of their ability to earn revenues in excess of their cost of was the Presidential Emergency Board 219 finding of 1991 3.00 Productivity = Revenue Ton-Miles per Constant $ of Operating Expense Volume = Revenue Ton-Miles Revenue = Constant $ Operating Revenue Price = Constant $ Operating Revenue per Revenue Ton-Mile* 2.50 * Includes the effect of changing commodity mix, average length of haul, and freight car ownership - among other factors. 2.5 to 3-fold Improve- ment in Productivity 2.00 Indexed: 1980 = 1.0 Doubling of Volume 1.50 Total Revenue Growth Initially 1.00 Constrained by Lower Prices 50% Lower Prices 0.50 ICC Regulation Impact of Rail De-Regulation 0.00 1966 1972 1978 1984 1990 1996 2002 2004 1964 1968 1970 1974 1976 1980 1982 1986 1988 1992 1994 1998 2000 2006 Productivity Volume Revenue Price Figure 8. Performance of the American railroad post-Staggers Act of 1980 (62).

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27 Table 9. Employment and wages (63). measuring a movement of a ton of goods 1 mile) railroads are the largest general freight mode in the United States. According Employees 1980 Benchmark 2005 2006 Employees--all RRs (000) 532 232 237 to the U.S. Congressional Budget Office (CBO) (64), railroads Class I (000) 458 162 168 moved 47 percent of intercity freight measured in ton-miles and Wages / Year Class I ($) $ 24,695 $ 66,975 $ 68,141 30 percent measured in terms of tons; this figure excludes air freight and pipelines. Motor carriers originate more tons of (after threatened strikes and lock-outs) that facilitated reduc- freight and earn more revenues than railroads by a consider- tion of standard train crews from four to two if only limited able margin, but railroads have long average hauls and carry switching would be needed en route. Railroads are heavily many heavy, bulky commodities of lower value per pound. unionized, and both wages and working conditions are usu- For reasons such as this, average fare levels (prices) are consid- ally defined in contracts between individual railroads and their erably lower than is the case for motor carriers. Table 10 char- employees' bargaining units. There has been a significant acterizes train lengths, average tonnage, and average lengths reduction in the number of bargaining units in recent years. of haul over the past 50 years. Today, the United Transportation Union and the Brother- FRA reports that in 2006, the railroads generated $54 bil- hood of Locomotive Engineers are the largest rail unions, but lion in revenue and set a new record for freight traffic with other industry workers are represented by a significant number 1.77 trillion revenue ton-miles, up 4 percent from 2005. How- of other labor unions. Table 9 summarizes wage and employ- ever, these accomplishments are relatively recent and are the ment data for the industry. result of decades of struggle, retrenchment, bankruptcies, These trends indicate that: deregulation, and slow rebirth of the American rail industry. In 1920, the American rail industry was the largest U.S. employer The Class I railroads are only 7 out of more than 500 U.S. with two million workers (65) compared to 187,000 in 2006. railroads but they handle 93 percent of rail freight in the Although the current American rail network is 44 percent United States (45). smaller in terms of miles, America's freight railroads gener- Major U.S. rail corridors will require additional rail capac- ated 93 percent more ton-miles of freight in 2006 than they ity and right-of-way. did in 1980, and they did so with 32 percent fewer route-miles, Railroads will be seeking to optimize their capacity through 63 percent fewer employees, 16 percent fewer locomotives, and new technology. just 7 percent more gallons of diesel fuel (60). Increases in rail The railroads face a continuing capital shortage despite productivity in the two decades indicate increased utilization their growth. of railroad infrastructure through technological innovation Partnering with public agencies on major corridor projects and improved operations (4). will become more valuable to the railroad and the public. These trends have resulted in the railroads operating fewer tracks but having much higher train volumes. Train lengths Performance: Railroads have often been described as the have also increased, so that it is common to see trains up to nation's first big business. They are unique or remarkable in 2 miles in length. The AAR reports that between 1980 and other respects as well. If measured by ton-miles (the statistic 2006 freight volumes, profitability, and on-time performance Table 10. Trends in train and freight car productivity (4). Average Average Average Average Productivity per Year Cars per Tons per Tons per Length of Carload Train Train Carload Haul (miles) (ton-miles) 1955 65.5 1,359 42.4 447 19,035 1960 69.6 1,453 44.4 461 20,522 1965 69.6 1,685 48.9 503 24,621 1970 70 1,821 54.9 515 28,311 1975 68.6 1,938 60.8 541 32,894 1980 68.3 2,222 67.1 616 41,352 1985 71.8 2,574 67.7 665 44,971 1990 68.9 2,755 66.6 726 48,313 1995 66.3 2,870 65.3 843 55,032 2000 68.6 2,923 62.6 843 52,803 2005 68.9 3,115 61 894 54,473 % change 5.2 129.2 43.9 100.1 186.2

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28 have significantly increased, coinciding with deregulation noted to contribute to the decline in rates include changes under the Staggers Act of 1980. At the same time, rail em- in commodity (e.g., increasing percentage of bulk com- ployee productivity rose 427 percent, locomotive productiv- modities), increased length of haul, and increased private ity rose 128 percent, and productivity of each mile operated ownership of equipment. The productivity gains resulting rose 185 percent. Overall productivity measured in ton-miles from deregulation could be attributed to deployment of per dollar of inflation-adjusted operating expenses also rose technology and more efficient operations. Spychalski and 167 percent since deregulation (60). Swan (67) also observed that the dramatic change in the These successes have made railroads profitable, but they still structure of the U.S. rail freight industry since economic struggle to earn their cost of capital as railroads earn only about deregulation was accompanied by the concentration of the 7 percent on net capital, according to FRA (47). For decades, Class I rail industry and a subsequent, significant decline American railroads earned the lowest rates of return of any in rates. Boyer (68) also showed that modal shifts between major U.S. industry. Between 1960 and 1979, the average truck and rail were relatively minor because the relative annual return on shareholder equity was 2.3 percent (65). prices did not change. In other words, changes in traffic for U.S. railroads have estimated that up to 40 percent of their a given mode could be attributed to induced demand rather revenues are devoted to capital assets, a percentage which is than to modal shifts. significantly higher than most industries. The high cost of The USDOT's FAF2 estimated that domestic freight move- maintenance for track, rolling stock, and yards requires sub- ments by rail between 2002 and 2008 increased by about 5 per- stantial capital investments, which are not liquid or mobile. cent, whereas exports have increased by about 90 percent Investing in a line represents a significant long-term invest- and imports increased by only 8 percent (52). This increas- ment for a railroad. Railroads' reluctance to invest in or cost- ing demand is spurred by general growth in the economy share on projects has also been constrained by the intense and increasing foreign trade. This presents an increase in competitive pressures they face for rates. Because railroads total tonnage of freight moved by rail from 1.8 trillion tons compete with barges and trucks, they have not raised rates in 2002 to 2.0 trillion tons in 2008. This growth is forecast commensurate with inflation. to increase to 3.5 trillion tons by 2035. During the same period, Furthermore, deregulation and related changes (easier the value of exports increased by over 63 percent and the value abandonments, transfer of passenger services to Amtrak and of imports increased by 7 percent (52). commuter agencies, Northeast reorganization of bankrupt Figure 9a shows the 2007 train volumes compared to the railroads, etc.) enabled ending many inefficient operations. 2007 capacity and Figure 9b shows the 2035 estimated train Rate deregulation allowed "pricing away" (de-marketing) volumes compared to 2007 capacity. This assumes that capac- unprofitable traffic, closing junctions, and changing divi- ity of the rail freight remains unchanged. The figures show sions, among other actions. Dennis (66) examined the rel- locations with severe capacity problems. ative importance of the various factors that may underlie Railroads carry a broad range of commodities, with vastly the decline in railroad rates since the Staggers Act. Factors different shipping characteristics, intrinsic value, and geo- a b Note: Level of Service (LOS) A through F approximates the conditions described in Transportation Research Board, Highway Capacity Manual 2000. Figure 9. Performance of freight rail system (a) 2007 and (b) 2035 (26).