Management of

Transportation
Seventh Edition
Coyle, Novack, Gibson & Bardi
© 2011 Cengage Learning

Chapter 6
The Railroad
Industry

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
• Rail: dominant mode from 1850s to WW II
– Superior in both price and service quality to
road transport for most of this period
– Superior in service quality to water transport
• Pivotal role in U.S. economic development
– Great expansion in track mileage, post-1870s
– Financed by private capital
– Too much track mileage relative to demand

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 Introduction
• Domination begins to wane after 1920
– 1929: rail carried 75% of freight ton-miles
– Today: carries about 43% of freight ton-miles
– Some reasons for relative decline
• Large-scale government construction programs for
roads and inland waterways
• Private financed construction for oil pipelines
• Government also helped develop air transport that
provided superior service for passengers and mail
• Economy and shipper service-related needs change

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 Introduction

• Railroads remain vital part of U.S. economy

– Industry revenues about .4% of GDP
– Industry revenues about 12.7% of total
expenditures for freight transport service in U.S.
– Railroads employ about 187,000 people
– Railroads invested over $117B in new plant and
equipment in 2007

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 Industry Overview
Number of Carriers
• Industry structure
– Concentrated: Small number (565) dominated
by a few large (Class I) carriers
• 7 Class I railroads
• Rest are regional or local (short line) carriers
• Total rail system mileage
– Reached peak in 1916 (254,251 miles of road)
– Today: about 94,440 miles of road

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or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or 6
duplicated, or posted to a publicly accessible website, in whole or in part.
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duplicated, or posted to a publicly accessible website, in whole or in part.
 Industry Overview
Competition
• Intramodal (between railroads) competition
– Current industry structure is a differentiated
oligopoly
• Small number of large carriers
• Few places served by multiple railroads
– Number of carriers is small in part due to
• Large financial barriers to entry
• Financial attractiveness of mergers and consolidations

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 Industry Overview
Competition

• Intermodal (between modes) competition

– Very intense for non-bulk traffic
– Some modes offer service advantages over
railroads
– Other modes offer price advantages over
railroads

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Industry Overview
Competition
• Mergers
• Large number over time, trend accelerated in 1980s
following Staggers Act
• Motivation
– Early mergers made to expand capacity, create EOS
– Side-by-side mergers done to strengthen financial position
and reduce duplication
– End-to-end mergers done to improve competitive position,
first vs. other RRs, then vs. other modes, and service levels
via fewer interchanges between railroads
• Consequence - small number of carriers own majority
of track and carry majority of rail freight
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duplicated, or posted to a publicly accessible website, in whole or in part.
 Industry Overview
Competition
• Abandonment of rail lines
– Context: early over expansion followed by
increased competition between modes
– Most abandonments involve duplicate track or
track serving small markets with little rail freight
– Some track taken over by smaller railroads
– Alternative uses for land
• Rails-to-Trails Conservancy
• Rail-banking program
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 Operating and Service Characteristics
General Service Characteristics
• Characteristics of principal commodities
– Railroads carry wide variety of products
• But, 83% of total 2007 rail carloadings concentrated in
low-value-to-weight (bulk) products
• Principal commodities hauled
– Bulk products: coal, farm products, chemicals, food
and kindred products, nonmetallic minerals
– Non-bulk: Transportation equipment, intermodal
mixed freight
• Traffic shifts: Growth of intermodal traffic
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duplicated, or posted to a publicly accessible website, in whole or in part.
 Operating and Service Characteristics
Constraints and Strengths
• Constraints on railroads
– Fixed rights-of-way impedes door-to-door service
– Other service level limitations
• Strengths of railroads
– Large carrying capacity (few size or weight
constraints) enable low average cost operations
– Capable of handling almost any type of cargo
– Railroads assume liability for loss and damage
• Railroads tend to have higher damage claims
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 Operating and Service Characteristics
Constraints and Strengths
• Strengths of railroads
– Recent emphasis on equipment, technology
innovations, and quality programs
• Improved suspension, end-of-car cushioning devices, and
in-car force instrumentation packages
• Quality certification program (M-1003)
– Intermodal services
• Double-stack services – greatly improve productivity
• Terminal improvements, equipment redesign, and right-of-
way improvements designed to reduce in-transit delays
– Microprocessors for communications and signaling
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 Operating and Service Characteristics
Equipment
• Composition of rail car fleet has changed over
time to meet changing shipper requirements
– Historically, standard box car was most numerous car
in fleet – used for hauling general mfg. goods
– Today, fleet contains many specialized rail car types
• Cars custom designed to accommodate different types of
bulk products or shipper need
• More than 85% of car fleet designed for transport of bulk
products and raw materials
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duplicated, or posted to a publicly accessible website, in whole or in part.
 Operating and Service Characteristics
Service Innovations
• Piggyback service: intermodal service directed
to non-bulk, manufactured products
– Includes both container-on-flatcar (COFC) and
trailer-on-flatcar (TOFC) services
• Definitions, basic differences between COFC and TOFC
– Accounts for increasingly large number of
carloadings
– Competes directly with truckload (TL) service

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Operating and Service Characteristics
Service Innovations

– Competitive advantage piggyback service

• Combines cost-efficiency of RR long haul with
flexibility of truck pick-up and delivery
– Principal disadvantage of piggyback service
• Transit time and on-time delivery performance
– To counter service disadvantage
• RRs create dedicated intermodal trains
• Trains run on regularly scheduled departures and
priority operating schedules
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Operating and Service Characteristics
Service Innovations
• Public benefits of piggyback vs. TL services
– Reduced fuel consumption
– Reduced road congestion and road damage
– Lower emissions
• COFC: component of international trade

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 Operating and Service Characteristics
Service Innovations
• Unit trains: specialized, one commodity trains
– Direct origin to destination movement
• Run on priority service schedules
• No stops in-transit
– Used frequently for coal and grain shipments
– Shippers often own rail cars
– Disadvantage: empty backhauls
• Computer and communication systems
– Management control and shipment monitoring
– Car tracing, ordering and billing simplified
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 Cost Structure
Fixed Costs
• Railroads have high % of indirect fixed costs
in short run
– Short run: means that capacity remains constant
– Estimated 30% of costs do not vary with volume
due to high % of long-lived (durable) assets
• RRs own and maintain networks (rights-of-way) and
terminals (freight yards)
– Geographically fixed, impedes responsiveness to changes in
demand
• Equipment: locomotives and rolling stock
• $ billions in annual capital expenditures
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 Cost Structure
Semi-Variable and Variable Costs
• Semi-variable costs: over 40% of total costs
– Includes maintenance of rights-of-way, structures
and equipment
– Often deferred during financially difficult periods
• Variable costs
– Labor: Largest component of variable costs
• 26.4% of each revenue dollar
• Unionized work force, 14 craft unions
• Work rules: productivity challenges and issues
– Fuel: 2nd largest component of variable costs
• Locomotives: increasingly productive and fuel efficient
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 Cost Structure
Economies of Scale (EOS)
• Means falling average costs ($/ton) as scale or
capacity increase, assuming capacity utilized
• Economies of density or utilization
– Falling average costs as volume carried increases,
assuming capacity remains constant
– Large among RRs due to high fixed costs
– Following example indicates impact of higher
utilization on average costs and profits

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 Current Issues
• Rail: more energy-efficient than truck
• Lower environmental impact
• Technology
– Train, yard control systems, “smart”
equipment

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