Changes and challenges for the rail industry

David Page | Intern

Published October 1, 1997  | October 1997 issue

While times are mostly good for the rail industry, there are rumblings from within the silver linings, and they're coming to the dark clouds of possible re-regulation, according to Jerry Fruin, a University of Minnesota applied economist.

Some shippers in captive markets, those served by only one line, are worried the railroads might charge more than the market can bear. Others predict there soon might be just four Class 1 railroads in the United States, down from 11 in 1995. To ensure that competition remains keen, calls are being made for increased competition through open access, meaning that all railroads will be guaranteed the right to compete for customers on any other railroads' lines.

There is a "certain superficial appeal" in the arguments for a return to some regulation, says Tom White of the American Association of Railroads, but he says that indicators of a drop in competition are misleading. For example, the number of Class 1 railroads would increase if subsidiaries were taken into account. Wisconsin Central, which pieced together castoff lines from the late Chicago Northwestern, now has three subsidiaries, which—if added together—might push the road into the Class 1 category. According to White, the reason the railroad balks at being included in the larger class is that it would have to follow certain reporting regulations.

Washington Enterprises, which owns Montana Rail Link, just picked up 1,143 miles of track from Soo Line for its I&M Rail Link. Its plan to create another Chicago/West Coast line has not quite succeeded, but it is poised to be a major player. Besides, if the goal of competition is lower prices, that criteria is already being met, according to the Association of American Railroads: Freight rates have fallen sharply since 1980, over 50 percent in constant dollars.

Another threat to competition may arise due to the capital-intensive nature of the business: $300,000 for a mile of track; $2 million for a new locomotive. Larger railroads have been able to reinvest their savings from personnel cuts and the sale of unproductive lines in order to upgrade tracks and equipment.

Smaller branch lines may not be prepared to survive future infrastructure demands, particularly those caused by natural disasters. When tracks or bridges are washed out by a flood, for example, they cannot be gradually replaced. Nonetheless, White thinks the threat to short lines is overstated. To begin with, they typically run at slower speeds and with smaller volumes. This means roadbeds should last longer. And when they do replace track, they can use cheaper, lighter secondhand rail. Some states are also willing to help smaller lines, and the federal government has a loan guarantee program to aid the lines.

Bricks, mortar and labor

One of the biggest changes in the railroad industry has been in the area of plant and personnel. In 1980, over a half million people worked in the industry, 86 percent of those in Class 1 railroads. Going from five-person to two-person trains, streamlining operations and centralizing functions cut that figure to 264,000 by 1995, with 71 percent in Class 1. During the same time, however, the average yearly wage nearly doubled to $48,000, according to the Association of American Railroads.

Cutbacks continue in specific locations. Three railroads serving the Superior, Wis., port area, for example, have eliminated jobs in the first half of 1997 in an attempt to provide Iron Range taconite mines in Minnesota with the lowest possible long-term contracts. The Duluth, Missabe & Iron Range Railway Co., part of Transtar, reassigned 16 clerical jobs. Burlington Northern Santa Fe followed suit by cutting up to 50 jobs in Superior.

Canadian Pacific's 1996 annual report discusses "traditional labour agreements that are not aligned with the cost/revenue structure of a regional railroad" and is making plans to downsize 1,000 administrative positions. Even so, railroads continue to be an important source of jobs in many states. BNSF, for example, is the third largest private employer in North Dakota and Montana.

Officials representing railroad clerical workers argue that centralization can hurt customer service. "When your territory is the entire United States," one union officer who asked not to be identified quipped, "you can't get to know your customers very well." Smaller lines hope to capture market share by emphasizing the kind of customer service the larger railroads cannot or will not provide.

"In order for some of the country elevators to get contracts with the larger Class 1 lines they may have to upgrade their facilities in order to fill 100-car trains," says Dave Long, vice president of marketing and sales for the Twin Cities & Western. "Some just cannot do that."