Freight rail is the backbone of the U.S. economy. It is an extremely safe, energy- and cost-efficient means of shipping that moves about 40 percent of the nation’s intercity freight. But despite recent industry profitability, evolving challenges require adaptation and innovation to ensure railroads remain positioned to provide customers and the American public with vital, high-quality service at a price that is competitive with other modes of transportation.
U.S. FREIGHT RAILROADS FACE A FUTURE OF CHALLENGES AND UNCERTAINTY
The American railroad industry has survived for nearly two centuries because of its ability to adapt and innovate in the face of unrelenting challenges. In the last 50 years alone, railroads have overcome crushing regulation, economic downturns, fierce competition, and the decline of the U.S. manufacturing industry.
These and other significant challenges led the industry to the brink of collapse in the 1970s. They compelled dozens of mergers for railroads to remain viable and achieve necessary scale. They brought on technological and other operational advancements that reduced industry employment by hundreds of thousands while, at the same time, sharply increased industry productivity and rail safety. The industry would not be the vibrant transportation system that it has become were it not for the extensive changes railroads made in response to challenges faced throughout this period.
Today, new and evolving challenges – including intense competition, economic uncertainty, a shifting traffic mix, global supply chain issues, and threats of increased regulation, to name just a few – require further adaptation and innovation to ensure railroads will remain well positioned to fuel the U.S. economy in a safe, cost-effective, and environmentally-friendly manner.
No Guarantee of Growth or Increased Market Share
Over the long-term, demand for freight transportation – at least for commodities other than coal – is expected to grow as the population and economy expand. The U.S. Department of Transportation estimates total freight demand growth of 30 percent by 2040. Railroads are positioned to be the most efficient and environmentally friendly way to meet much of this increased demand, particularly for longer-haul freight traffic, but they have no guarantee of growth or increased market share. Instead, they must continue to adapt their networks and offerings to better align with shifting customer needs and prevailing economic norms.
Put another way, the fact that the overall freight transportation “pie” might grow in the years ahead does not mean railroads are guaranteed a larger slice of that pie. Railroads will have to earn it by making significant additional investments in infrastructure, equipment, and new technologies and by providing freight transportation services more safely, reliably and cost effectively than competitors.
Intense Competition Demands Cost Control
Railroads compete intensely among themselves and with other modes of freight transport, particularly trucking. This competition is evidenced by the dramatic decline in rates charged to shippers. Since the industry was deregulated in 1980, inflation-adjusted revenue per ton-mile – a common proxy for rates – has fallen by about 44 percent, meaning that the average rail shipper can move much more freight for the same or less than it paid 40 years ago.
Most rail customers operate in highly competitive environments in which decisions about which mode of transport and specific carrier to use are often driven by price. This dynamic keeps railroads under constant pressure from customers to keep prices as low as possible while maintaining reliable service levels. It also ensures that railroad cost increases cannot simply be passed on directly to railroad customers, thereby requiring constant and careful attention to cost control and efficiency improvement in all areas of railroad operations.
Supply Chain Demands Consistent Development Post-Pandemic
The pandemic and the economic recovery from it have sparked global supply chain disruptions. The global supply chain is complex, and freight railroads have limited ability to influence non-railroad entities within it. Nevertheless, freight railroads are working with customers and other transportation modes to find solutions, expanding network capacity and hiring employees to meet demand.
Helping the nation get back on its feet and smoothing out supply chain issues requires that the railroads make consistent investments in infrastructure and personnel, equipment, technology and operational enhancements.
The Decline of Coal
Coal remains the top single commodity carried by rail. However, rail coal volumes have fallen sharply over the last decade due to ongoing economic and environmental forces. The railroads anticipate that coal will continue to decline as environmental objectives shift energy production towards lower carbon-emitting forms and renewables.
Coal will not disappear as a major source for electricity generation in the immediate future, but its market share in terms of U.S. utility-scale electricity generation has already been cut almost in half in recent years — from 50 percent in 2005 to 21.9 percent in 2021 per the latest EIA data — and will continue to decline. For railroads, the continued decline means billions more dollars in lost top-line revenue in the years ahead.
GOODS-RELATED SECTORS FACE ECONOMIC CHALLENGES
For decades, the U.S. economy has become increasingly services-oriented and less centered on manufacturing. Railroads, though, are primarily dependent on the “tangible” (goods-using or goods-producing) sectors of the economy, which are directly responsible for far more rail traffic than service-related sectors. The goods side of the economy has been severely impacted by the pandemic, supply chain challenges, record setting inflation, and other factors – all of which have contributed to a nearly 5% reduction in intermodal traffic in 2022 over 2021.
Goods-related sectors also are more likely to be exposed to trade disputes and challenging global competition. For example, U.S. agricultural exports, which comprise a large share of rail grain movements, must now overcome more competition from foreign producers for global sales. As a result, with increasing global competition, strong economic forces will continue to relentlessly pressure the sectors on which the railroad industry relies for a great deal of its traffic.
Advancements in Trucking Threaten Railroads
Railroads are currently at a competitive disadvantage because they fully fund their infrastructure, while taxpayers subsidize the trucking industry with support for the nation’s roads and highways. Large trucks underpay their federal cost responsibility by around 27 cents per gallon of fuel and therefore offer artificially deflated costs.
Freight railroads, on the other hand, are almost entirely privately funded and, to that end, invest much of their revenue back into their networks to the benefit of customers and taxpayers alike. Since 1980, railroads have invested nearly $760 billion of their own funds – or more than 39 cents out of each revenue dollar between 1980 and 2021 – in their operations to create the best freight rail network in the world, and they are continuing to innovate for an even safer and more efficient future. More than $250 billion of this investment has come in the last ten years alone.
Although railroads on average have been able to maintain a cost advantage over trucks for many long-distance movements even in the face of these massive investment levels and extensive taxpayer subsidies of the trucking industry – approximately $275 billion since 2008 alone — technological advancements related to autonomous truck operations (including platooning), electrification and other areas could dramatically lower motor carrier labor and fuel costs, which together comprise well over half of total costs for a typical long-distance truck. This will make trucks even tougher competitors in many markets than they already are and could especially impact intermodal, a market segment railroads are counting on for growth to counteract declines in coal.
Threats of Increasing Regulation
Increasingly, railroads face threats of new or re-imposed regulatory burdens that could imperil the industry’s ability to compete effectively and fairly. These threats come in the form of demands from some rail customers and their supporters in Congress and elsewhere for the Surface Transportation Board to make major changes in the scope and intensity of railroad rate and service regulation ranging from forced switching rules to Final Offer Rate Review. Many of these changes would, in one way or another, force the railroads to lower rates to certain customers at the expense of others, ultimately hindering commerce and increasing the cost of consumer goods.
Market indicators are not driving the push for re-regulatory action. Rather, it is an effort by some stakeholders to gain a competitive advantage through rates lower than the transportation market naturally supports. If successful, proposed regulatory changes would harm the U.S. economy and make it much more difficult for railroads to make the investments needed to maintain and upgrade their networks and to provide the safe, efficient and reliable service their customers need to prosper.