Trains vs. Trucks
The Saga Continues
Presentation to the Sandhouse Gang
Evanston, IL
September 12, 2007
Dedicated in memory of the
Sandhouse Gang founder, host,
and our friend,
Doug Hagestad
More “Firsts” From the Fifties
• First major post-depression era
government financial support for freight
railroading contained in Transportation Act
of 1958.
• Program of Federally guaranteed loans
with total authorization of $500 million.
• Original program lasted from 1958 until
March 1961, but was subsequently
extended until December 1963.
Loan Guarantee Program
• Of the total authorization of $500 million, only
$85.8 million, or about 17% of the total was
actually used under first phase.
• By end of second phase a total of $244 million or
about 48% of authorization actually used under
program ($256 million left on the table).
• 19 of 25 applications came from eastern
railroads, 4 from the south and only 2 from
western carriers.
Impacts
• Mixed bag in terms of impact.
• Largest single loan amount, $40 million,
went to NYC to fund Elkhart Yard
improvements still in use today.
• But loans could not forestall the collapse
of the New Haven and Jersey Central.
• They did prolong the corporate lives of
C&EI, MKT and the Monon.
Perspective
• And ironically, one of the railroads that would
benefit the most from the next Federal financial
assistance program 20 years hence, the C&NW,
did not see fit to apply this time even though they
qualified, with its Chairman Ben Heineman
actually voicing opposition to the program.
• Rail industry ambivalence about these kinds of
programs remains to this day.
Compare and
• (railroad management) most closely resembles
attitudes observed in some utility companies and
government agencies. This attitude has led to
behavior that holds tradition in high esteem and
acceptance of conventional wisdom well past its
usefulness. Herein lies one of the primary causes
of the stagnation of railroad management, the
inflexibility of thinking and rationalization of
failure in a fatalistic acceptance of the situation.
Railroad Management, D. Daryl Wyckoff, 1976
(associate professor Harvard University).
Contrast
• Both the quality of service and the unit costs of
highway operations, and thus the competitive
status of highway carriage vis-à-vis (rail)….are
as much affected by trucker management
philosophies and practices as by the physical
environment of highway construction and
highway equipment. National Intermodal
Network Feasibility Study, Federal Railroad
Administration, 1976.
Motor Carrier Regulation
• In response to near ruinous competition
brought on by the Great Depression,
Congress extended price and route
regulation by ICC to trucking industry.
• Motor Carrier Act of 1935
• Two major exemptions in the form of
private carriage and raw agricultural
commodities (totals about 55% of t-m).
The Private Truck Phobia
• One feature of the postwar period was the
railroad industry’s obsession with
unregulated trucking, especially the impact
of private fleets.
• While rail revenues from 1946 to 1960
increased 37%, revenues for private and
exempt trucking increased by over 450%.
• The result of regulatory discrimination or
just the proverbial “better mousetrap”?
1962 Northwestern Conference
• Conference on Private and Unregulated
Transportation, October 1962, sponsored by
NWU Transportation Research Center.
• Research confirmed that existing private carriage
was concentrated in the 25 to 200 mile range.
• 83% of survey respondents said a 10% reduction
in common carrier rates would have no impact;
50% said a 20% rate reduction have no impact.
Private Trucking
• 1963 Census of Transportation showed
that private trucks handled 38% of total
truck tonnage for manufactured/processed
commodities.
• 1963 Census compared rail vs. truck, and
showed that while private trucks handled
20% of manufacturers’ intercity tonnage,
they generated only 7% of intercity tonmiles.
Private Truck vs. Rail
• In 1963 Census average length of haul (for
manufactured/processed products) for
private truck was 138 miles vs. 477 miles
for rail.
• In 1967 Census average length of haul for
private truck was 152 miles vs. 490 miles
for rail.
• Private trucking was (and still is) clearly a
short-haul phenomenon.
Commodities
• Top 5 commodity
groups handled by
private truckers, by
tons shipped, from
1963 Census of
Transportation.
• Candy, beverages &
tobacco products.
• Meat & dairy
products.
• Furniture & fixtures.
• Fabricated metal
products.
• Lumber & wood
products.
Private Trucking Today
• Today, private trucking handles about 33%
of total domestic freight tonnage, or about
48% of all truck tonnage (ATA).
• Average length of haul is 343 miles based
on recent NPTC Survey (best number).
• In 2006, 7 of top 10 fleets were involved in
food-processing or food service industries
(Transport Topics).
Reality Check
• Second largest private fleet today, by
number of power units, is Wal-Mart.
• This is a company that still uses a large
amount of common and contract carriage
including rail intermodal and even moves
apples by refrigerated railcar.
• But at the end of the day this was a market
segment that simply passed railroads by.
Agricultural Exemption
• Movement of fresh fruits and vegetables by truck
was never regulated (exempt).
• 100% of movement of same commodities by rail
was always regulated.
• In December 1978, in response to SP’s
application, ICC used existing authority to totally
exempt all rail produce shipments, both carload
and intermodal, from price regulation.
20+ Years After Deregulation
• According to UP, in 2000 98.5% of
California-grown produce moved by truck.
• According to BNSF, in 2000 the market
share for perishables moved by rail was
roughly 7% of total perishable movement
in the U.S.
• Of that percentage, less than 5% moved in
carload lots.
Some Good News
• Almost 40% of frozen French fries move
by rail; transit time of 8 days works for
frozen product while fresh requires 3 day.
• Fresh oranges don’t travel well but the
juice does; Tropicana Orange Juice Unit
Train another one of few success stories
for rails.
• Ironically both commodities considered
“regulated”.
Contracts
• MC Act of 1935 created separate category for
truckers to perform transportation under
continuing contracts with a limited number (not
to exceed 10) of customers.
• In 1939 contract carriers accounted for 24% of
intercity ton-miles by regulated motor carriers;
dropped to 4.5% by 1972 (approx 2% of total).
• Revenues dropped from 16% to 4.8% of total for
same period.
Contracts
• By 1972 only 2,800 contract motor carriers vs.
11,800 motor common carriers of property; to
some degree contract carriage replaced by private
fleets.
• Contracts still had to be filed with ICC, and were
subject to minimum rate regulation.
• But railroads contended that their lack of
contract authority somehow conveyed an unfair
advantage to the truckers.
An Insider’s View - 1956
• “While regulatory restrictions are a major
deterrent to railroad progress, a principal
cause of traffic diversion in many instances
is the reduced transit time and greater
punctuality of highway delivery. Too
small a proportion of the total volume of
railroad freight movement is delivered in
accordance with advertised schedules.”
John W. Barriger III, 1956 (Super RR’s).
An Insider’s View - 1970
• First piece of pro-rail legislation was the
Transportation Act of 1958, sponsored by Sen.
George Smathers, of Florida.
• In late sixties the AAR helped form a group
called America’s Sound Transportation Review
Organization (ASTRO), with former Sen.
Smathers as its General Counsel.
• June 1970 ASTRO issued its final report which
included calls for modest regulatory reforms.
• Former Senator George Smathers passed
away in early 2007.
• Current AAR President and CEO Ed
Hamberger called Smathers a
“transportation visionary”, whose “views
hold true today as they did nearly 50 years
ago”.
About Those Views
• In particular, the railroads have suffered greatly
from their inability to agree on basic matters.
• They have forfeited initiative in such elemental
areas as car ownership, rates and divisions.
• They have constantly bemoaned a surfeit of
regulation while scurrying again and again to the
Commission for protection against their own
errors or resolution of their many internal
differences.
• Although reforms in regulation will assist
the railroad in meeting competition, ICC
approval has never been required to
improved the basic level of service.
• Reliability and speed of service are
competitive tools just as important as price
in the movement of many products.
ASTRO Final Report, Part VI, pages 4445.
Basic Causes For Share Loss
• The greater growth of traffic possessing
characteristics for which other modes have a
comparative advantage;
• The loss of traffic to new modes having inherent
cost and service advantages for the traffic;
• The diversion from railroads of traffic for which
the rails have an inherent or latent comparative
advantage that is thwarted by regulation or other
impediments. Task Force on Railroad
Productivity, 1973.
Impact of Regulation
• ICC allowed railroads to meet their competitors’
rates but not to lower them sufficiently to divert
anything but a modest share of the traffic, even
when fully allocated rail costs were lower.
• However, it was estimated that by the mid-60’s
some 90% of all rail traffic was moving on some
form of reduced rates, also known as commodity
rates (Southern grain rate case).
• How much traffic was actually in play between
modes here remains an open question.
Impacts
• One view holds that the ICC tended to
protect motor and water carriers from
nondestructive as well as from truly
predatory or uneconomic rate competition.
• It was clear that the ICC forced railroads to
compete on basis of price and service
rather than just price; this turned out to be
a losing proposition.
Doomed by Complexity
• Trucking was growing with the postwar
economy; its route and service structure was
almost perfectly aligned with the marketplace.
• The railroad route and service structure had been
designed and built for a different time and place
in history; railroads had the dual problems of
getting rid of the old and growing the new.
• Problems like passenger trains, branch lines,
mergers, rate divisions, station agents, etc.,
simply did not exist for the truckers.
Impact of Regulation
• Already handicapped by complexity, the bigger
problem for railroads was ICC’s refusal to allow
corporate euthanasia, or the ability to discontinue
or kill off a whole range of obsolete, outdated or
irrelevant rules and services.
• Motor carriers were blessed with double good
fortune; faced problems of growth not decline,
with minimal regulatory interference.
Unintended Consequences
• One thing the railroad industry wanted
very much was the freedom for carriers to
lower or raise prices as they saw fit.
• Prior to 1970 lowering prices was more
important, but after 1970, inflationary
pressures made raising prices the higher
priority (for all modes).
Reality Check
• Part of the problem were the inherent flaws in
collective ratemaking which highlighted the
differences between eastern and western
railroads, and large and small carriers.
• Motor carrier rate bureaus averaged 10 weeks to
publish a rate while railroad rate bureaus
averaged 6 months to publish a rate.
• With the passage of Staggers in 1980 railroads
eagerly anticipated the ability to raise rates at
will.
An Insiders View
• “They have filed only a handful of innovative
rate increases. They haven’t used its (4R Act’s)
provisions in a way to establish new pricing,
marketing, and operating strategies that would
allow them to become more competitive. Indeed,
the railroad complaints are not so much that the
ICC has not allowed them to compete, but rather
that the ICC has not allowed them more freedom
where they need not compete---where they have
monopoly power.” ICC Chairman Daniel
O’Neal, January 1979.
The Really Big Surprise
• From 1978 to 1987 the number of ICCauthorized interstate motor carriers
increased from 16,000 to about 40,000, a
250% increase over 10 year period.
• The law of supply and demand took over
just as a major recession hit and the bottom
fell out of the rate structure; from 1980 to
1983 average truck rates drop 22%.
Railroad Income
• Very nasty rail industry price war,
facilitated by relaxed merger rules, that
almost put CNW out of business, and
drove SP to the wall as well.
• From 1980 to 1990 freight revenues stayed
flat at around $27 billion.
• Freight revenue per ton-mile dropped from
$2.867 to $2.657 (unadjusted for inflation).
Deregulation Examples
• Two of the more interesting examples
of deregulation at work.
• Intermodal/Piggyback/TOFC.
• Common ownership aka total
transportation companies.
Intermodal Deregulation
• In 1981 the ICC deregulated intermodal or
trailer-on-flatcar traffic by regulatory edict under
authority granted by 4R Act and Staggers, over
the strong objections of the trucking industry.
• While this was an important event, it addressed
only the price side of the equation for what was
still a service business.
• Railroads were now free to offer a combination
of low price and lousy service.
Self-Inflicted Wounds
• “Shippers have been burdened with multiple
rules and rates for inter-territorial shipments. A
prime example concerns the major flow of freight
across the Mississippi gateways to the West
Coast. Eastern railroads concentrate on Plan 2.5
and no longer offer Plan 4, while the western
railroads offer Plan 4 but not Plan 2.5. Some
TOFC/COFC personnel state that the lack of
through Plan 2 rates was the greatest deterrent to
attracting through traffic.” National Intermodal
Network Feasibility Study, 1976.
Reality Check
• We would submit that the far more
significant development occurred in 1981
when APL created the first domestic
intermodal network under a single
management.
• One operating and marketing entity now
controlled train and terminal operations as
well as equipment and pricing.
• APL had created what we now call the
“Intermodal Business Unit” but on a
nationwide scale; one of the key
recommendations of the FRA’s 1976
Intermodal Feasibility Analysis.
• The combination of a true intermodal
network with the unprecedented smooth,
damage-free ride of double stack gave
shippers something never before available.
• APL followed up with a brilliant marketing
and advertising campaign.
• Program was so successful that by the late
1980’s shipments of household goods were
returning to the railroads for the first time
in 70 years, with a partnership between
APL and Allied Van Lines.
• Deregulation did have an indirect impact in
an odd sort of way.
• One of the side effects, or unintended
consequences, of trucking deregulation
was the almost total demise of the
unionized carriers.
• As a result, a major institutional barrier to
increased use of intermodal was removed.
• Rail deregulation was a factor here but only at the
margins.
• It help to create a slightly more favorable set of
overall circumstances in the marketplace but did
not in and of itself produce major change.
• It took mostly outsiders or customers, rather than
the railroads, to unlock the true potential of
domestic intermodal, a familiar story.
Common Ownership
• One of the panaceas offered and promoted
was the concept of common ownership of
multiple modes, sometimes referred to as
total transportation companies.
• The concept was to allow railroads to
freely acquire control and/or ownership of
existing trucking companies and/or to start
up new companies.
Common Ownership
• This was expressly prohibited under
existing law before 1986.
• Only rail ownership allowed was for
trucking as part of through rail movement.
• The model most frequently cited as
justification was the Canadian Pacific,
which at the time owned a railroad, truck
line, steamship line and airline.
The Rules Change
• The regulatory regime had never prohibited
coordination between the modes, just common
ownership.
• With a combination of ICC action and Federal
legislation, by late 1986 all of the regulatory
barriers to unrestricted railroad ownership of
trucking companies were removed.
• Several railroads decided to take the plunge and
purchase existing motor carriers, with decidedly
mixed results.
• 1985: Burlington Northern, Inc., purchased
several truckload carriers, selling them off in
1988.
• 1985: Norfolk Southern purchased North
American Van Lines, which also had a large
commercial division, and dumped it in 1998 (but
kept Tom Finkbiner as the consolation prize).
• 1986: Union Pacific purchased Overnite
Transportation, which they finally sold to UPS,
Inc., 19 years later for almost exactly what they
originally paid for it.
• Canadian Pacific is now a stand alone
railroad, which we thinks speaks for itself.
• And one of the most successful intermodal
partnerships in the history of transportation
was based on a simple handshake between
two men of vision and courage, J.B. Hunt
and Mike Haverty.
Biggest Circus of All
• CSX under Hays Watkins purchased American
Commercial Lines (1983), Sea-Land (1986).
• Enormous culture clash; corporate infighting.
• Minimal support from the marketplace.
• Starved the railroad (under protégé John Snow)
for capital while NS was beefing up.
• Ultimately sold assets in 1990’s to raise cash for
Conrail acquisition.
Two Big Questions of the Age
• Were railroads still a monopoly ready to
exploit their monopoly status to the full
extent possible if not restrained; or
• Were railroads victims of an obsolete
regulatory regime that would not allow
them to compete in the marketplace ?
• Staggers answered both questions with a
resounding YES!
The Two Big Answers
• After Staggers railroads did respond more
aggressively to some competitive
situations with reduced pricing.
• They also ruthlessly exploited their
monopoly situation by aggressively raising
rates on captive shippers; 2004 GAO
Analysis found 31% of rail tonnage
moving on rates > 180% RVC.
Conclusion
• Rail deregulation was a non-event for
many existing or potential customers.
• For captive shippers, a large portion of the
base, deregulation proved to be a negative,
reflected in a 25 year struggle to reverse
key portions of process.
Conclusion
• Contracts have been widely used by both
railroads and motor carriers; who benefits
more from confidentiality, railroads or
shippers?
• The one direct customer benefit was a 75%
reduction in freight loss and damage
payments from 1975 to 1985.
Conclusion
• Railroads remained largely production-oriented
(see Doyle Report and Levitt book), while
truckers remained even more customer-oriented
(advance TL carrier phenomenon).
• The prevailing “bias for incrementalism” as
described by Bob Gallamore remained with one
or two significant exceptions.
• Did not prevent the railroad industry from
continuing its remarkable propensity for shooting
itself in the foot (witness the last 10 years).
Conclusion
• Kept the rail industry afloat but could not reverse
market share losses to trucks; ton-miles stay flat
and lose a point of market share on tonnage
(1980 to 1990).
• In the end deregulation in general, and the
Staggers Act in particular, made the dining room
look nicer with new china and fresh linen, but did
very little to actually put food on the table, or
freight back on the rails.
QUESTIONS