A Pivotal Junction for Railroads

Article excerpt

The term "making the grade" perhaps originated from a freight train's efforts to reach the crest of a slope. And, like The Little Engine That Could, the American railroad industry is struggling to get back on track to financial strength after decades of stifling regulation, competition from truckers, and the recent recession.

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Class I railroads, those carrying freight long distances between major metropolitan areas, "account for approximately 68 percent of U.S. freight rail mileage, 89 percent of employees, and 93 percent of revenue," according to the Association of American Railroads (AAR). (1) More than 560 freight railroads navigate a 140,000-mile system nationwide with some 175,000 employees. (2) They annually move 1.5 million carloads of food products, 2 million carloads of plastics, fertilizers and other chemicals, and 7.3 million carloads of coal, among other items. (3)

Stifling regulation

"By the late 1970s, counterproductive and unbalanced regulation had brought America's rail industry to the brink of ruin," AAR explains. (4) "Rail bankruptcies were common, and tracks and equipment were falling apart because railroads could not afford the cost of upkeep."

Things began to improve in the early 1980s when looser regulation enabled marketplace demand to determine routes, services, and prices. As a result, average U.S. freight rates, adjusted for inflation, dropped 51 percent from 1981 to 2010 (based on revenue per ton-mile). "That means the average rail customer today can ship twice as much freight for about the same price it paid nearly 30 years ago." (5) Meanwhile, the industry consolidated from 14 Class I railroads to seven, a process that bolsters the bottom line in any number of ways.

Competition from truckers

For years, freight railroads in America faced falling revenues and declining profits partly because of rising fuel costs and competition from the trucking industry. But through innovations and adaptations, rail carriers have recovered and become the most cost-efficient way to ship goods.

Intermodal transportation, for instance, transfers sealed boxes from ships to trains for long-distance hauling and then to trucks for local delivery. Intermodal and container traffic grew 6.4 percent and 8.9 percent, respectively, last spring from the year before, even as total freight carloads slid 3. …