America’s Silent Giant: Freight Rail’s Profitable Past and Uncertain Future
While the U.S. struggles to modernize its passenger rail system, the country’s freight rail network is thriving, operating over 140,000 miles of track and moving a staggering amount of goods. This vast, privately owned network is the largest and most profitable in the world, earning billions in profits annually.
"If you see it on a shelf, we likely had a hand in moving it," says one industry expert, highlighting the freight rail’s critical role in American commerce. The industry’s success can be attributed to several factors, including a vast geographically advantageous network, consolidation through mergers and acquisitions, and the 1980 Staggers Act, which loosened decades of strict federal regulation. This deregulation allowed railroads to set rates and choose routes, leading to increased efficiency and profitability.
However, the freight rail industry isn’t without its critics. With consolidation leading to a highly concentrated market, critics argue that the industry operates as a near-monopoly, wielding significant pricing power and potentially compromising competitive shipping options for businesses.
"They tend to be very oligopoly and have an enormous amount of power and pricing, and there isn’t a lot of competition," states one expert, highlighting concerns about market dominance.
The Biden administration has taken note, issuing an executive order last July targeting the practice of "reciprocal switching." This regulation seeks to force freight companies to open up their tracks to competitors, providing shippers with more choices and fostering a more competitive market. The Surface Transportation Board, the agency tasked with overseeing the industry, will hold a public hearing in March to further discuss this matter.
While freight railroads have invested heavily in infrastructure, the story for passenger rail is vastly different. Amtrak, the only major for-profit passenger rail company in the U.S., continues to struggle financially. Unlike the freight rail industry, Amtrak receives minimal federal funding compared to other countries, hindering its ability to compete with other modes of transportation, like air travel and trucking.
The future of freight rail faces a complex set of challenges. While demand for freight transportation is expected to climb significantly in the coming decades, the industry needs to navigate competition from rising automation in the trucking industry, particularly with the advent of self-driving trucks.
"If you think about on a per mile basis, there are estimates that an autonomous truck would actually reduce the cost of running a truck by as much as 70 percent," says one expert, "If that plays out, that’s going to put significant pressure on the railroads."
Freight railroads are already pushing back, investing in autonomous train technology and lobbying for stricter regulation on autonomous trucks. The industry also faces ongoing labor challenges, including potential disruptions from unions resisting efficiency-driven changes like "precision scheduled railroading."
Despite the uncertainties, the freight railroad industry remains a crucial pillar of the American economy, moving goods across vast distances and contributing significantly to national GDP. As the industry evolves to meet the demands of a changing landscape, balancing the need for efficiency, competition, and sustainable operations will be key to ensuring its continued success.
America’s Freight Rail: A Quiet Giant in the U.S. Economy
While the United States struggles to modernize its passenger rail system, its freight rail network stands as a titan, quietly powering the American economy. Spanning over 140,000 miles of privately owned track, this network moves one-third of all U.S. exports and nearly 40% of long-distance freight volume. The North American freight rail network is recognized globally as the largest, most efficient, and highly profitable freight rail system. This article delves into the workings of this vital industry, exploring its remarkable profitability, the challenges it faces, and its future prospects.
Key Takeaways:
- Freight rail in the U.S. is a powerhouse: It’s the largest, most efficient, and most profitable freight rail network in the world, contributing significantly to the U.S. economy.
- Deregulation sparked a freight rail renaissance: The Staggers Act in 1980 unleashed a wave of mergers and innovation, leading to the industry’s current profitability.
- A different story for passenger rail: Amtrak, the national passenger rail service, struggles financially, receiving significantly less government funding than its counterparts in other countries.
- The future of freight rail is bright but faces challenges: Automation and the rise of self-driving trucks pose significant competition, and concerns remain about the industry’s monopolistic practices.
- Freight rail is crucial for the supply chain: With the rise of e-commerce, the industry is moving more consumer goods, operating 24/7 to ensure an efficient flow of goods.
A History of Growth and Consolidation
The U.S. railroad’s roots stretch back to 1830, predating the emergence of airplanes and automobiles. Passenger and freight rail were essential to connecting a rapidly expanding nation. By 1917, over 1,900 railroads operated on a sprawling 254,000 miles of track.
The rise of cars, air travel, and trucking in the 1940s and 1950s shifted the landscape. However, the rail industry remained subject to stringent federal regulations that dictated rates and profits. The post-World War II era saw the federal government heavily invest in the interstate highway system, further boosting the trucking industry.
A pivotal moment arrived in 1980 with the enactment of the Staggers Act. This landmark legislation loosened regulations, granting railroads more autonomy in setting routes, prices, and services. The result was a surge in profitability.
Since then, the industry has witnessed numerous mergers, streamlining operations and eliminating redundant routes. For example, Union Pacific has grown to manage 32,000 miles of mainline track, a product of several key mergers. This consolidation ultimately boosted rail’s role in the U.S. freight network.
Freight Rail’s Profitability vs. Passenger Rail’s Struggles
The U.S. boasts some of the most profitable freight railroad companies in the world, generating billions in profits. This stands in stark contrast to the fate of passenger rail, which hasn’t experienced a similar resurgence.
While freight railroads have consistently invested billions in their networks, Amtrak, the national passenger rail provider, has faced more limited support. The federal government is Amtrak’s primary funder, but the level of financial support falls short of the funding levels allocated to passenger rail systems in other countries.
Experts point to the privatization of the freight rail industry and the unique geography of the U.S. as key factors contributing to its efficiency. In many other countries, rail networks are nationalized, with a single entity managing operations.
"The rest of the world does things quite a bit differently," says an industry expert. "In most of the rest of the world, the rail network is nationalized. It isn’t owned by a particular company."
A Freight Rail Network Optimized for Bulk Commodities
The U.S. freight network thrives on moving bulk commodities, especially agricultural products, minerals, and other resources mined from the heartland. These goods often travel to sparsely populated areas, making rail a highly efficient mode of transportation compared to trucking.
"A lot of what railroads depend upon are bulk commodities, agriculture, commodities, and mining that we get out of the ground, and a lot of those materials come from the center part of the country, and because these are going to non-populated areas…Rail is really well positioned and is a far superior mode of traffic than you see with trucks."
A Collaborative Network with a Touch of Monopoly
Despite competition between major freight railroads like Union Pacific, BNSF, CSX, Norfolk Southern, and Kansas City Southern, these companies must also cooperate to ensure seamless shipments. Since no single entity owns the entire network, goods often must transition between carriers to reach their destination.
"In order for us to provide service for a customer, say from the West Coast all the way to the East Coast, we have to hand off those products…to a different carrier on the east side of the network."
However, the consolidation of the freight rail industry has raised concerns about monopolistic power. The limited number of major players has led to accusations of unfair pricing practices, particularly on bulk goods where competition from trucking is limited.
"They’re constantly under the lens and constantly accused of exercising more monopolistic practices in their pricing. Not so much on the intermodal traffic, which has to sort of stay naturally competitive with truck traffic, but more so on the bulk goods that there isn’t really an equivalent truck competition."
Regulation and the Future of Freight Rail
The Biden administration’s executive order last July targeted the practice of reciprocal switching. Reciprocal switching mandates freight companies to allow other carriers access to their tracks, potentially creating a more competitive market for shippers. This practice is common in Canada and has been implemented through some existing agreements between railroads.
However, the freight industry is pushing back, arguing that this regulatory intervention would disrupt the smooth flow of goods and potentially undermine supply chain efficiency.
"It comes at a time when we’re trying to move as much freight as we can throughout the supply chain, and to do anything that would knowingly undermine the fluidity of the freight network is frankly wrongheaded and at odds with the overarching goal of maximizing freight movement."
The Surface Transportation Board (STB), the agency that oversees the freight rail industry, is holding a public hearing to discuss the matter in March. The STB is tasked with adjudicating rate disputes and ensuring that pricing practices are fair.
The Intermodal Shift: From Coal to Consumer Goods
While coal was historically a major commodity moved by rail, its shipments have declined significantly, down 45% from their peak in 2006. The rise of e-commerce has fueled a surge in intermodal container shipments, which can be seamlessly transferred between ships, trains, and trucks. This shift is transforming the freight rail industry,
"We’ve become a more intermodal intensive industry, and so things that we hadn’t done in the past as much as move smaller packages, we’re doing a lot more of that. It gives you more breadth and more reach in terms of the customers that you can serve."
Los Angeles and Chicago are major hubs for intermodal rail traffic. However, this increased reliance on containers has also brought challenges. Thefts from containers carrying goods for major companies like UPS, FedEx, and Amazon have become more common, especially in the Los Angeles area,
"A handful of years ago, theft out of an intermodal box was a nuisance. Happened every once in a while wasn’t organized. Today, over the course of about the last year and a half, that theft has become very well organized."
Navigating Supply Chain Challenges and the Era of Automation
The pandemic exposed vulnerabilities in the global supply chain, leading to significant backlogs at major U.S. ports like Los Angeles and Long Beach, which handle 40% of all goods entering the country by water. This congestion has put pressure on the freight rail industry to maintain efficient movement of goods.
"When the supply chain is facing challenges…we’ve been working hard to do our part to help alleviate supply chain challenges facing this country, and that’s through operating twenty-four seven. It’s through working with our maritime and our trucking partners to keep goods moving, to stand up additional capacity and really try to keep the economy going."
However, the industry is also facing another significant challenge: automation. The rise of self-driving truck companies like Embark and Plus could disrupt the freight landscape, potentially cutting costs by as much as 70% per mile.
"If that plays out, that’s going to put significant pressure on the railroads because they simply cannot maintain high pricing and really participate in that intermodal traffic."
Freight railroads are actively responding to this threat, investing in automation technology and exploring the potential of self-driving trains.
"We see an awful lot of emphasis on autonomous trucks, and I’m pretty sure within our lifetime we’ll see driverless trucks on the road. But we also then need to be able to automate the railroads to keep up with that."
"Ultimately, our answer to autonomous trucks is autonomous trains."
Labor Concerns and the Importance of Freight Rail
While automation poses a threat to the future of trucking jobs, the rail industry has its own set of labor concerns. The industry’s reliance on skilled labor, coupled with automation initiatives and union pushback on operational changes, have led to shrinking workforce numbers.
"There’s pressure to protect jobs. The regulators have to be very, very careful that we don’t end up back in the 1970s in 10 or 20 more years when the trucking industry has evolved, being highly innovative and automated, and rails are back holding the two-man crews because the federal government has said you will have a two-man crew rule."
Despite these challenges, the future of the freight rail industry remains bright. The projected growth in freight volume is expected to soar 50% by 2050, highlighting the critical role this network will continue to play in transporting goods both domestically and internationally.
"And it’s important that people realize that we’re out there working out on the network outside twenty-four seven. We’ve done that throughout the pandemic. We’ve done that throughout the supply chain challenges we’ve seen, and we’ll continue to do that into the future."
