Productivity Improvements in the U.S. Rail Freight Industry 1980-2010

Between 1980 and 2008, extensive productivity improvements and changes in traffic mix allowed railroads to become more profitable despite declining prices and stronger competition from motor carriers. In 1980, freight operating costs were $26.3 billion for the Class I railroads. Between 1980 and 2008, revenue ton-miles increased by a factor of 1.94 and inflation (measured by the GDP price deflator) increased by a factor of 2.27. Had the rail traffic mix and rail productivity remained at 1980 levels, and if freight costs had increased with inflation, then freight operating expense would have increased by a factor of 4.4, from $26 billion in 1980 to approximately $110 billion in 2008. If real revenue per tonmile had kept pace with inflation, revenues would also have increased by the same factor, from $28 billion in 1980 to $116 billion in 2008. In fact, Class I revenues in 2008 were under $60 billion. The $56 billion difference resulted primarily from a large reduction in real rail rates caused by stronger intra- and intermodal competition, along with a shift in traffic mix toward lower-rated commodities, changes in the ownership of the freight car fleet, and a larger role for small railroads. Railroads not only survived this extended period of declining rates, they increased their profits and their return on investment. Extensive productivity improvements enabled the Class I railroads to halve their real costs per ton-mile, even though fuel and other resource costs rose faster than inflation. Productivity improvements were greatest in the areas most suitable to rail freight: bulk traffic moving in heavy haul unit trains, long-haul movement of containers in double-stack trains, and high-volume shipments moving long-distances in specialized equipment. While the rail industry indeed achieved tremendous improvements in productivity following passage of the Staggers Act in 1980, it is incorrect to point to deregulation as the primary reason for these gains. Productivity growth was achieved in part through network rationalization, a restructuring process than was perhaps assisted by Staggers, but a process that was actually begun in the 19th century. Other factors that were even more critical to productivity growth included technological advances, new labor agreements, improved management, and public policy responses to the Northeast Rail Crisis.