Why are railroads still important in the current era?

Railroads are the most efficient transportation mode for moving goods on the earth’s surface. Railroads are of particular importance for the movement of commodities that heavy and moved in bulk over long distances where the transportation spend represents a large portion of the total delivered cost. Just a few examples of commodities moved by railroad are coal, grain, fertilizer, chemicals, forest products, finished motor vehicles and metals, among many others. The railroads are no longer in the business of moving passengers, but approximately 70% of the miles that Amtrak runs travel over track owned by the freight railroads for a fee. 

What advantages do railroads have as compared to other transportation modes? 

Compared to truck, railroads are less expensive but also typically represent a lower level of service. In the railroad revenue segment that is most competitive with trucking (i.e., intermodal), shipments via railroad are typically priced at a 10%-15% discount as compared to trucking. On shipment of goods that are less competitive with trucking, the difference in rates can be much higher, or the trucking industry may be unable to profitably compete for the freight entirely. 

Compared to transportation by barge on the inland waterway, railroads are a higher-cost, but a faster option. For many bulk railroad commodities that are less time-sensitive, such as grain, shipment via lower-cost barge would be preferable, but the constraint is the lack of a waterway in the needed location. 

What do railroads haul? 

Railroads haul a wide range of bulk commodities, chemicals, finished motor vehicles and intermodal containers, roughly approximated in the chart below. It is important to note that while intermodal units represent approximately half of railroad unit volume, intermodal represents roughly one-quarter of railroad revenue (shown below 20% in the chart below because some intermodal freight is captured in other categories). The railroads’ revenue per unit is lower for intermodal than carload traffic because one intermodal unit carries less tonnage than a carload and is also more competitive with the highway. 

*Some intermodal revenue included in other modes, such as food products
Source: Stifel Financial

How are railroads regulated? 

The railroads were economically deregulated by the Staggers Act of 1980. The Staggers Act enabled the railroads to set rates determined by market conditions rather than by any collective rate-making structure. The railroads became free to ask for rates that they believed reflected market conditions provided that no alternative in the marketplace existed. The Staggers Act also allowed the railroads to abandon unused or less used rail lines which were important because of the capital-intensive nature of keeping railroad track maintained to adequate safety standards. The railroads remain economically deregulated (meaning they have the right to set rates) but are under the regulatory purview of the Surface Transportation Board (STB) of the U.S. Department of Transportation, the current iteration of what was formerly called the Interstate Commerce Commission. In lieu of oversight by the Department of Justice, the STB must approve all mergers and acquisitions and is responsible for overseeing rate cases that shippers bring against railroads where there is an accusation of abuse of market power. 

Source: Shutterstock