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Railroad Industry Overview Series - Trends - October 2007

LMSB Control Number: LMSB-04-1007-072
Affected IRM: X.XX.X

This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited or relied upon as such.

III. Trends

The following information was obtained primarily from internet sites maintained by the U.S. Department of Transportation’s Bureau of Transportation Statistics, and the American Association of Railroads (AAR)

In 1975, the nation's railroads—once the cornerstone of the transportation system—were foundering under ICC regulations that dated back to the 19th century. They did not have enough capital to invest in new track and equipment and operated with unsafe and deteriorating equipment. In 1976, more than 47,000 route-miles—about 25 percent of the nation's total—were operated at reduced speeds because of dangerous conditions [AAR 2000a].

The Railroad Revitalization and Regulatory Reform Act of 1976 partially deregulated rail rates and expedited merger processing. That year, government-sponsored Conrail replaced seven bankrupt northeastern rail lines. In 1980, the Staggers Act gave railroads the freedom to set rates, subject to maximum rate regulation, and allowed railroads to abandon service on unprofitable rail lines.

The Staggers Act was the springboard for the U.S. railroad industry. From 1980 to 1998, rail freight rates per ton adjusted for inflation declined an average of 38 percent and Class I (major) freight railroads averaged a 7.5 percent return on their net investment, up from 2 percent in the 1970s.

Over the past 20 years, the railroad industry experienced many changes:

  1. The industry consolidated, and today, there are seven Class I (major) railroads in the United States. Class I railroads now own approximately 100,000 miles of road (route-miles), down from 192,000 in 1975.
  2. Ninety-one thousand miles of rail line were abandoned or sold by major railroads. Many of the lines were sold to new, aggressive regional and short-line railroads. Regional and short-line railroads operated 50,000 miles of road in 1998 [AAR 2000a].
  3. The railroads have undergone productivity growth that far outpaces the American economy as a whole [AAR 2000b].
  4. Railroads established connections with trucking and ocean-shipping companies so that today, intermodal traffic has grown from 3.1 million trailers and containers in 1980 to 8.8 million in 1998 [AAR 2000b].

Between 1981 and 1995, the federal government increased funding to the states for rail freight planning and acquisition, rail facility construction, and rehabilitation. The Railroad Rehabilitation and Improvement Financing (RRIF) Program provides loans and loan guarantees for railroad capital improvements to state and local governments, corporations, railroads, and joint ventures that include at least one railroad for the first time ever in the rail industry.

The resurgence of the freight railroads proved so successful that Conrail was privatized in 1987. At that time, this was the largest initial public offering ever made in the nation's history. In 1999, Conrail was absorbed by CSX and Norfolk Southern in a historic consolidation tying East Coast and Midwest freight traffic to the South through two different systems.

Today, the overall challenges facing the railroad industry is to address issues of safety, congestion, productivity, and cost in an environment of ongoing mergers and consolidation. As the industry moves increasingly to consolidation, it is critical to maintain the competitiveness of the rail industry.

The Federal Railroad Administration expects rail ton-miles to increase from an estimated 1.46 trillion in 2000 to 2.40 trillion in 2025 and the rail freight industry to grow an average of 2 percent per year between now and 2025. This growth reflects the adoption of technological advances in communications, command, and control; more fuel-efficient locomotives; high-capacity, lightweight freight cars; and moderate traffic growth, led by intermodal traffic.

In this decade, the industry's movement toward mergers is expected to continue, and the number of major railroad systems may be reduced from today's seven to as few as two transcontinental railroads. There is uncertainty over the structure the railroad industry will take, however, in large part due to uncertainty over what rules will ultimately be applied to future railroad merger applications. Currently, there is a proceeding underway, initiated by the Surface Transportation Board (STB) proposing a rewrite of the merger rules. These proposed changes would require applicants to explore the consequences of possible merger activities of other railroads, provide service assurances to shippers, and enhance competition for the first time ever. The final rule will influence the speed and extent of future railroad mergers.

In the future, there is the possibility that non-railroads could acquire railroad systems and operate them very differently than they are operated today. Innovative transportation companies, such as the United Parcel Service, could acquire railroads to strengthen their multimodal operations and control the railroad's operation rather than be a customer of that railroad as we have historically seen.

The issue of access to rail lines of competing railroads will continue to be contentious. If, to increase competition, access is mandated by either the STB or Congress, the owning railroads could be faced with reduced financial ability due to more complex operations, and worsened service. Alternatively, such access could provide improved service if the additional carrier can provide innovative, low-cost service. The pricing of access is critical in order not to discourage the owning railroad from investing in roadway.

With increased financial pressures on the major railroads to provide improved service and reduce cost, one solution is to expand capacity. This is possible through adoption of technological improvements, such as Positive Train Control. Positive Train Control (PTC) systems are integrated command, control, communications, and information systems for controlling train movements with safety, security, precision, and efficiency. PTC systems will improve railroad safety by significantly reducing the probability of collisions between trains, casualties to roadway workers and damage to their equipment, and over speed accidents. In addition, out of financial necessity, these railroads may be more amenable to an increased federal government role in funding projects that provide both public and private benefits.

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