Productivity, Pricing, and Profitability in the U.S. Rail Freight Industry, 1995-2004

Rail industry productivity grew by 7% per year from 1984 to 1995, but most of the benefits to the industry were offset by reductions in rail rates and the increasing need for capital expenditures. Rail rates declined by more than one-third during that period, while financial measures, such as return on shareholders equity and net railway operating income, showed only a modest improvement. From 1995 to 2004, productivity improved 5% per year, prices continued to fall, and financial performance was flat or declining. There is no doubt that productivity improvements helped railroads make very significant reductions in their costs during this 20-year period. However, by 2004, the long-term trends were coming to an end. The rate of productivity improvement was declining, rates were starting to rise, and capacity and service problems were becoming more serious. With higher rates, many of the Class I railroads were coming close to earning their cost of capital. The combination of increasing profitability, declining service, and inadequate capacity is unlikely to be sustainable. The lack of capacity and deteriorating service quality are seen as serious problems not only for rail customers, but for public agencies at the local, state, and federal levels. Railroads will need financial and planning assistance from these agencies as they seek to provide sufficient capacity to handle the potential growth in traffic that is expected over the next 20 years.