Boxcars hold a special place in my unlikely vision for freight railroads’ future. I say “unlikely” because I do not think many other railroad people share this vision, but Railway Age’s interest in boxcars compels me to respond.
I’d like to start with the fundamental problem of no growth for Class I’s. Adjusted for inflation, the seven (now six) Class I railroads had combined revenues of $105.7 billion in 2011 (in 2023 dollars) vs. $96.6 billion in 2023. That dismal statistic was of course behind the two days of hearings at the STB on the subject of railroad growth, or lack thereof. STB Vice Chairman Karen Hedlund’s comment about the testimony she heard was, “From our economists and consultants, we heard a pretty grim story. From our Class I railroads, ‘Hey! Look at all the investments we’re making! We’re just doing great!’ And somewhere in between we have to figure out what’s going on.”
I side with the economists and consultants. I’ve recalculated the capital expenditures claimed by Class I’s to subtract the expenditures on just replacing worn-out assets in kind, and I think for the years 2010 to 2023 the Class I’s actually spent only $40 billion on items meant to increase profitability (as opposed to the $209.6 billion claimed in their reports). Compared to the $258.2 billion distributed to stockholders from 2010 to 2023, that $40 billion amounts to an anemic effort to invest in themselves.
Where could rail growth come from? The latest version of CSCMP’s (Council of Supply Chain Management Professionals) annual State of Logistics Report says that 2023 U.S. rail revenue was $96.6 billion vs. motor carrier revenues (other than parcel traffic) of $931.7 billion. It is likely that at least two-thirds of that truck revenue was from merchandise in dry van truckloads, meaning more than $600 billion. If freight railroads want to grow meaningfully, it is not going to come from coal, chemicals, wheat or any other bulk commodity. It is going to come from merchandise traffic, which has markups per ton in the multiples of bulk rates. Those elevated markups are the result of the service quality required for merchandise, whose inventory carrying costs are high and form a significant percentage of their overall supply chain costs (one-third, according to the State of Logistics Report), because of the intrinsic value of most merchandise compared to that of bulk commodities.
Therefore, to compete for merchandise traffic in containers and trailers, rail intermodal has had to provide reliable and relatively speedy rail service. But intermodal cannot compete over short distances because of the high embedded drayage costs at each end of the haul, high terminal costs for handling and storing equipment, huge amortization costs of building modern intermodal terminals, and elimination of local ramps in favor of high-efficiency and high-volume centralized ramps that can justify dedicated trains. The average length of haul for a truckload is now less than 500 miles, so rail intermodal cannot compete for most truckload movements. What could? A boxcar!
But boxcars are stymied by at least three huge problems:
- Service: The cost of pickup and delivery by boxcar may be much less than the cost of local truck drayage, but service frequency for most customers has deteriorated from seven days per week when I started my railroad career in 1968 down to two or three times per week now. Trucks are scheduled for 15-minute windows at loading/unloading docks. How can boxcars compete with that? At least some short lines switch on demand.
- Solicitation: The Class I’s spend one-half of one percent (0.5%) of their annual budgets on commercial effort: marketing, sales, and industrial development. They don’t provide shippers with agents for any traffic except intermodal. There is literally no one proactively soliciting general merchandise traffic in boxcars for the Class I’s. Again, many short lines do solicit single-car lots, which most boxcar traffic would be, but their efforts are usually sabotaged by inflexible Class I pricing, unreliable Class I interchanges, irregular Class I linehaul service, and/or a shortage of serviceable Class I boxcars.
- Metrics: Department heads at the Class I’s are often judged according to their efforts to lower operating ratio, not their efforts to increase profitability. The two are anything but synonymous. Operating ratio is a false metric that often forestalls growth. The true metric is whether a movement contributes to overhead—if its revenue exceeds marginal cost—which is the concept behind differential pricing (the biggest benefit of the Staggers Rail Act of 1980). I just got back from an L&N Historical Society convention. Here’s how L&N General Superintendent Albert Fink described the problem in an 1874 letter to shareholders: “[T]he error which is often committed [is] using the percentage of the net to the gross earnings [i.e. the operating ratio] as a criterion of the economy with which a railroad is operated.” Following, he describes differential pricing.
Giving an example of the danger of making the operating ratio a key metric might help.
One of my bosses when I was at Conrail was Jim Newton, who went to Norfolk Southern and became President of Triple Crown. Its RoadRailer network of 13 terminals could get traffic that conventional intermodal could not. Triple Crown contributed positive cash flow above incremental costs, but its operating ratio was worse than that of conventional intermodal, which wasn’t all that good itself. At least that was what Jim was told. He was not allowed to see the company’s internal cost calculations for his own business group!
So in 2015, NS stopped repair of RoadRailers in order to eliminate Triple Crown and lower its operating ratio. The last RoadRailer left Detroit for Kansas City on Aug. 25, 2024. Almost all that traffic went back to over-the-road trucking. An avenue for revenue and profit growth is gone. Triple Crown is now a container service.
The following essay (download below) is one of the two from my 2011 book on railroad economics and management, A Railroad Manifesto. This essay, “In Praise of the Boxcar,” will be the basis for part of a follow-up book I’m working on now.
