What made railroads profitable?

[Anonymous]

Well by 2020, *** Davidson, UP's chairman, and other brass, will be eating prison food

[Anonymous]

1954? Inter State Highway act? President Bush apparently being overridden by Congress to pour more dollars into Amtrak? Billions of tax dollars poured back into detirorating highway infrastructure to replace 50 year old bridges and highways. Darwin award belongs to the American people if they don't realize that the government shell game is not working in their favor!
Will

[nobullchitbids]

QUOTE: Originally posted by nanaimo73

Poor management waiting to merge with C&NW starting in 1954 and letting the railroad rot away beneath them.

I recall riding the City of Everywhere back in 1962 from Los Angeles to Cedar Rapids (Marion), Iowa; it did not have to be daylight for one to know he had crossed the Missouri River. U.P. throughout followed the wisdom of its modern founder, Harriman, and maintained its plant; Milwaukee by comparison made passengers think the road had been put together with a tack hammer. So much for the penny-wise approach.

I think much in the original thread needs to focus on WHICH roads were going belly-up: The Pennsy and the Central were saddled with hugh plants manifested often in four-track mains appropriate to a time when highways still had ruts; U.P. by comparison had a plant well maintained and more oriented toward modern traffic requirements. Smaller railroads like Nickel Plate fell not because they made no money but because economies of scale simply obliged their assimilation. Deregulation certainly helped with this process -- I recall how the ICC fought like devils to block Southern from using "Big John" hopper cars -- the regulators, themselves, were keeping the roads locked in iron underwear until Congress finally got wise and fired the pigs. Subsequently, roads poised to take advantage of the new atmosphere flowered, while those still saddled with megaplant died.

Computers helped a lot: With computers, at least with certain types of shipments, it is possible to schedule supply by train to within hours, and that makes a big difference to factories eager to limit their own physical plant. If your storage tanks can be a string of U.P. covered hoppers or privately owned tankers, and you also enjoy economy of scale, it becomes cheaper to use the railroad than it does to rely on trucks (which themselves can be pretty timely). The railroads in effect had to learn -- and be legally able to implement -- some of the business practices which others had used to eat into their business.

[Anonymous]

I would second mudchicken. The Staggers Act of 1980 cut the rail systems loose from the ICC. Congressman Harley Staggers D-WV was born in the B&O railroad town of Keyser WVa.

[JimValle]

Once the Interstate Highway System came on line, the railroads lost the vast bulk of their premium freight to the truckers. Nevertheless the size of the economy grew at a good clip from 1960 to the present so there was still plenty of work for the railroads to do. They carved out a niche for themselves long hauling bulk commodities, coal, grain, chemicals, and stone which trucks are not suitable for and that traffic is always increasing. Best of all it is completely safe. No other land carrier can do it profitably. With fuel prices on the rise and probably destined never to come down to traditional levels again, piggy-backs and double stack trains should be in line to reap a windfall of business. Of course, railroads are a "mature" industry which means profitability will never be dramatic and improvements will be incremental at best so there will always be some doubt as to their true earnings and potential.

[oldyardgoat]

Man, did this topic range far afield!
To answer the original question: the Staggers Transportation De-regulation Act of 1980. This Act of Congress changed all the rules of ground transportation in the USA. The failure of the famous Rock Island (1980) directly changed the outcome of this bill, which was "in committee" (and headed for oblivion) at the time. The death of the Rock Island, an "an American Institution" got the attention of congress, like very few things outside of a war could.
All the other thins, dieselization, loss of passenger service, previous mergers, coal, trucking,ad infinitum, were ingredients for the stew that boiled over with the demise of the Rock Island.
Speaking of passenger service, it was not until the famous 20th Century Limited made its last run on December 2, 1967, that things began to happen that led to the creation of AMTRAK (NARP Corp.).
The slow deterioration of passenger trains bgan during WWII when the railroads were denied production of passenger cars in 1945. That left a bad taste in the mouths of thousands of returning servicemen at war's end. The ICC gave the initial push with the its order in 1947 that limited speeds to 79 MPH unless the railroads installed expensive ATC/ATS equipment. Only the major western roads made the invetment. Without that edict the railroads would have continued their competative edge, and we could have seen the kinds of trains found in the rest of the world that go 100+MPH.
Dieselization was an economic move by the railroads, and all the other stuff was the evolving course of business and technology.
Ardenastationmaster.

[MichaelSol]

QUOTE: Originally posted by JimValle

Once the Interstate Highway System came on line, the railroads lost the vast bulk of their premium freight to the truckers. Nevertheless the size of the economy grew at a good clip from 1960 to the present so there was still plenty of work for the railroads to do.

The 1960s were pretty flat.

The following index numbers show the Gross National Product size, based on year 2000 as the 100 mark.

1950 16.23
1960 20.98
1968 24.48
]1969 25.7
1970 27.03
1980 52.17
1990 80.37
2000 100
2005 110.89

You can see inflation ratcheting up in 1968 and 69, and the 70's, but the real growth after the inflation clamp down under Reagan in the early 1980s has been very good. We've had nearly as much economic growth in the past five years alone, as we had during the two decades of the 50s and 60s combined.

You can see why there wasn't much for railroad growth in those two decades, between stagnant economic expansion, and Interstate Highway construction. Railroads blamed everything under the sun, but the overall statistics clearly explain why railroading was anemic, at best, and it really didn't have all that much to do with railroading.

But, you can also see the dramatic economic expansion since then. Why shouldn't railroads be doing great? Perhaps the question is why aren't they doing much better than they are.

Suppose Staggers hadn't happened at all?

Do you suppose that this economic growth pattern would have been reflected by the industry? Historically, it would have.

On a more micro scale, the railroad industry very closely tracked the national economy in terms of profitability during the 50s and 60s. The industry was perhaps a kind of economic "canary." When the economy did well, railroads did well. When it did poorly, railroads did poorly. The Decade of the 70's was not so much a crisis of railroading as it was a crisis, period. Railroading reflected that.

There seems to be some -- some -- evidence that this connection is not as strong as it was during that earlier era, that in some ways the industry has become disconnected from national economic trends on the positive side, while extremely sensitive to it on the negative side.

The Billion dollar question is why railroading is not more profitable and the financial condition of the companies much stronger, based on the historical connection to national economic conditions?

Taken alone, the positive benefits of Staggers should have propelled these companies to very positive positions. They should be rolling in ca***aken alone, that is without the Staggers changes, the vast improvement in national economic conditions should have propelled these companies to very positive positions. They should be rolling in cash.

Taken together, that really didn't happen. They are not rolling in cash, but rather the opposite, very large negative working capital positions and generallly negative cash flows.

Well, there is an interesting story in there somewhere, and I have a feeling the answer may be found in the Staggers Act. since that represented a key change.

Best regards, Michael Sol

[selector]

There is no one answer, I'm sure, but industry has improved their material deliverables, both out and in, by improving logistics (e.g.-just-in-time supply). It could be that, while trucking satisfied customer needs in the 80's-90's due to their relative speed, rail has overtaken them with their low unit cost per ton moved. in these times of increased fuel costs.

[ValorStorm]

True, there is no one answer. There are three. And Mark Hemphill enumerated them:
1. Deregulation
2. Deregulation
3. Deregulation
Other answers were quite informative, like a 100 level accounting class. However, "Thank you Data, that will be all."

[Anonymous]

QUOTE: Originally posted by ValorStorm

True, there is no one answer. There are three. And Mark Hemphill enumerated them:
1. Deregulation
2. Deregulation
3. Deregulation
Other answers were quite informative, like a 100 level accounting class. However, "Thank you Data, that will be all."

1. Wrong
2. Wrong
3. Wrong

Of course, the question is rhetorical, since the railroads are still struggling to cover costs of capital, ergo they are not all that "profitable". However, they do have certain advantages they did not have before that keeps them in the mix like the proverbial 600 lb gorilla:

1. The partial deregulation of Staggers, which allowed....
2. The mega mergers of the 1990's, which resulted in......
3. Substantial retrenchment of trackage , which allowed....
4. Expanded pricing power over captive shippers, aka differential pricing, aka monopoly power.

Contrasted against this is the continually shrinking customer base (a problem not addressed by Staggers), faulty claims of "efficiency gains" promised by the move to heavier cars and longer slower trains (an unintended consequence of Staggers[?]), and no market based incentive to innovate (a concept omitted from the Staggers legislation).

Bottom line: Railroads are the 600 lb gorilla, too big to die but not ingenious enough to serve the public in any meaningful manner.

[bobwilcox]

QUOTE: Originally posted by futuremodal
4. Expanded pricing power over captive shippers, aka differential pricing, aka monopoly power.

Gee Dave railroads were doing differental pricing by the time the B&O rolled into Harper's Ferry. That was about 150 years before Staggers was passed. Must have been those purple oligarchs hiding under the rocks in the Potomic.

[edblysard]

QUOTE: Originally posted by futuremodal

QUOTE: Originally posted by ValorStorm

True, there is no one answer. There are three. And Mark Hemphill enumerated them:
1. Deregulation
2. Deregulation
3. Deregulation
Other answers were quite informative, like a 100 level accounting class. However, "Thank you Data, that will be all."

Bottom line: Railroads are the 600 lb gorilla, too big to die but not ingenious enough to serve the public in any meaningful manner.

Railroads are not run to "serve the public in a meaningful manner"; they are run to serve the paying customer.
Why do you still seem to believe that railroads are public utilities?
Because they are not, they are businesses, designed and run to pay their shareholders a profit on their investments.


Ed

[Anonymous]

I must say this has been one very informitative Topic Line, I picked this up a Month after the first thread. And read through three pages of text, to only find that Rail Roads are profiitable when the Nations Economy is doing well. Go figure :-)

[MP173]

I bailed out of this thread a month ago, and wish I hadnt. Good stuff.

Michael, I have to disagree with your assessment that there has been more growth the past 5 years than the decades of the 50's and 60's combined.

Look at the numbers:

1950 - 16.23% of 2000
1969 - 25.7% of 2000

That is a 58.3% increase over a 20 year period

2000 - 100
2005 - 110.89

which is a 10% increase over 5 years.

The economy in the early part of the decade was in the can, then 911 completely shut things down.

I cannot figure the compound rates of return at this time...cant find the owners manual to the calculator, but I am sure someone out there will supply the percentage.

ed

[BNSFGP38]

Slow moveing long distance passenger trains will surely have made railroads more profitable. [}:)]

[Anonymous]

Raising Freight rates to super high levels.
Allan.