A study of long term economic impact of rail line abandonment.

Author:Ozment, John

    Railroads are critical to the success of many businesses in the U.S., especially those involved in largescale production requiring large volumes of bulk raw materials. Railroads are the link between ocean carriers and trucks for shippers moving containers internationally, and intermodal freight is the fastest growing segment of the railroad industry.

    Although railroads are an essential part of our nation's transportation system and remain regulated by the federal government, the number of rail carriers has decreased dramatically and operations have evolved radically. Furthermore, the miles of rail line in the network has continually declined so that barely half of the 254,000 miles it had at its peak in 1916 now remains (AAR 2007a). This decline in rail mileage and potential loss of rail service is a major concern of shippers and communities throughout the U.S. (Stewart et al. 1996; Office of Public Services 1997; AHTD 2002; Babcock et al. 2003a; Babcock et al. 2003b). In response to this concern, government policy makers have attempted to balance the needs of shippers and communities with the financial burden on railroads that are forced to continue operations over unprofitable branch lines.

    It is not clear; however, that government intervention to prevent rail abandonment is warranted in today's evolving economy. When railroads were the only reasonable form of transportation, they often had monopoly power and sometimes it was abused (Farris 1969). Under those conditions, there may have been a need for protective regulations, but abandonment of unprofitable branch lines can hardly be classified as monopolistic exploitation. In many instances, rail lines are abandoned because of declining traffic levels resulting from more creative shippers selecting other forms of transportation, especially trucks. Protests are made typically on behalf of firms that are thought to have no alternative means of transport. Unfortunately, their traffic volumes frequently are not sufficient to permit profitable operations of the line. Protective policies of this nature may be simply enabling less creative shippers to continue inefficient and archaic business practices.

    Shippers who lose rail service because they are "the last to leave" will find either a new, perhaps more efficient way of meeting their customers' needs, or failing a successful transition, they may become victims of abandonment and cease operations. While the failure of a business should not be taken lightly and may be initially a serious problem for owners and employees, it is difficult to imagine that they could not rebound, since others found preferable means of transport prior to the abandonment (Gittings and Thomchick 1987; Office of Public Services 1997). If firms cannot survive without rail service, and the impact of the abandonment is truly serious, the entire local economy would be affected, not just a single company, and those effects should be apparent over a long period of time. In fact, federal abandonment policy requires that the Surface Transportation Board (STB) find "serious, adverse impact on rural and community development" before rejecting an abandonment application (Office of Public Services 1997, p. 10).

    The purpose of this study was to examine the long-term economic impact of rail line abandonment. To assess these long-term effects, counties in Arkansas that had no rail service prior to 1980 or had experienced rail abandonments prior to 1996 were compared to counties that had not lost rail service during that period. Conditions relating to population, employment, income, banking, manufacturing, wholesaling, and retailing and changes in those measures between 1980 and 2000 were analyzed, using data from the County and City Data Book (U.S. Census Bureau 2007).

    1.1 Pervasiveness of Railroads

    Railroads are a vital part of our nation's transportation system and provide essential services to corporate America. As of 2005, there were 560 common carrier freight railroads operating in the U.S. and they earned nearly 50 billion dollars in annual revenue. Railroads employ over 180,000 people and operate over a system of nearly 141,000 miles of rail line. Approximately 40 percent of all domestic ton-miles move by rail and railroads move virtually all types of freight (AAR 2007a). Currently, there are 7 Class I railroads (those that earned approximately $320 million or more in revenue in 2005) in the U.S., and while they represent just 1 percent of the carriers, they own 68 percent of the rail infrastructure in terms of route mileage, employ 89 percent of the industry's workers, and earn 93 percent of its revenue (AAR 2007a). There were 30 Regional Railroads operating in 2005. These carriers employed about 7,000 people and earned about 1.5 billion in revenue. There were 320 local line haul (short-line Railroads) in operation in 2005, and they employed about 5,700 workers and earned about 1.2 billion in revenue. Switching and terminal (S & T) carriers do not offer line haul, intercity services, focusing instead on local pick up and delivery services or shuttling traffic between line haul carriers within a specified area. In 2005, there were 203 S & T carriers that employed about 6,000 and earned about 800 million dollars in annual revenue (AAR 2007a).

    As shown in Table 1, coal is the most important individual commodity moved by railroads. It accounts for approximately 40 percentage of railroads' tonnage and 20 percent of their revenues. Chemicals make up about 9 percent of the tonnage, but account for nearly 12 percent of revenues. Grain and other agricultural products represent about 8 percent of the tonnage and 8 percent of revenue. Non-metallic minerals such as sand, gravel, and crushed stone are also important commodities moved by rail. Other important sources of revenue include food products, steel, forest products such as lumber and paper, motor vehicles and parts, petroleum, and scrap materials. Miscellaneous mixed shipments represent only about 6 percent of the tonnage but nearly 15 percent of revenues. These mixed shipments are primarily intermodal freight movements; the movement of trailers and containers by rail, and is the fastest growing segment of rail traffic (AAR 2007b). In 1980, 3 million trailers and containers moved by rail, more than two-thirds of which were trailers. By 2006, however, the railroads participated in nearly 12 million intermodal movements, 9.5 million (80 percent) of which were containers (IANA 2007).

    1.2 The Era of Transition

    The rail system has evolved over the years in response to changes in government policy, changes in the economy, and changes in the competitive environment. In response to these changes the railroad industry adopted a strategy of "downsizing" that has increased the productivity of labor, fuel, and asset utilization while decreasing the number employees, miles of track, and the number of freight cars (Larkin et al. 2005). With the help of the federal government, this downsizing strategy allowed rail carriers to focus on the needs of their most potentially profitable markets. During the 1970s, the rail industry faced such serious financial problems that the federal government radically changed it philosophy of regulation in an attempt to ensure the rail industry's survival. This is especially pertinent since some of the problems the rail industry faced were due to excessive regulation in the face of promotion of other modes that often put railroads at a competitive disadvantage (Harper 1982; Wood and Johnson 1983).

    The services sector of the U.S. economy accounts for over 78 percent of GDP (CIA 2006). With the evolution toward this service orientation, there have been major declines in rail-oriented freight accompanied by the growth of freight that was more suitable for trucks (Harper 1982). Technological improvement in vehicles together with the development of state and federal highways, especially the interstate system, made trucks especially more competitive.

    The realization that trucks were better suited for many shipments, as well as, pickup and delivery activities led railroads to focus on large customers with high traffic volumes. Intermodal container movements, coal and grain were identified as the three major sources of traffic that were critical to the rail industry's downsizing strategy and continued survival (Larkin et al. 2004). As noted earlier, coal is one of the most important commodities moved by rail. An individual power plant will use a sufficient volume of coal to make it economical to load unit trains of 100 cars and move them directly to the power plant and return the empty cars for reloading. Many members of the agricultural community would prefer that rail carriers pickup grain shipments right from their facilities, but railroads would rather let the trucking industry move individual shipments to collection points known as unit train loading facilities. From those facilities, rail carriers can load full unit trains and move them directly to their destination.

    The development of intermodal traffic, especially Trailer on Flat Car (TOFC) and Container on Flat Car (COFC) was also a product of this response to the evolving environment, but the rail industry believed it should be done on a large scale, not for small, individual shippers. It became part of their overall strategy of downsizing. During the 1990s, the rail industry closed over 100 intermodal rail yards across the U.S. and began to focus on high volume unit train movements between major cities...

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