# Regulation  From Economic Deregulation to Safety Regulation[^1]

## Executive Summary

This paper traces the shift in the focus of federal government
regulation of freight trans­portation from economic deregulation to
safety regulation; discusses the implications of this trend; and
identifies issues to be considered in discussing options for a national
freight productivity program.

### Economic Regulation

The federal government began to regulate the railroad industry in 1887
with the enact­ment of the Interstate Commerce Act. The federal action
was a response to concerns that unfettered competition was bankrupting
some railroads while unregulated pricing was permitting others to charge
monopoly prices. In the early 1900s, Congress gave the Interstate
Commerce Commission broad powers to control entry and exit in the
industry, oversee services, assign routes, and set shipping rates. In
the 1930s, Congress established similar regulatory regimes for the
emerging motor carrier and air carrier industries.

Economic regulation stabilized the freight transportation industry, but
at the cost of dampening competition and sapping long-term
profitability. By the 1970s, bankruptcies in the rail industry; high
prices in the motor carrier, airline, and ocean carrier industries; and
inefficient services across all modes plagued the industry. One hundred
years after the Interstate Commerce Act, the federal government reversed
its policies and began deregulating to revitalize the industry and
improve productivity.

Economic deregulation was a success. Today, the freight transportation
industry is viable, competitive, and profitable. Productivity has
increased, and the industry is reorganizing to compete in North American
and global markets. But the trends suggest that the gains in
productivity achieved through economic deregulation have been largely
realized. There are relatively few opportunities remaining to increase
the productivity of freight transportation through economic
deregulation.

Deregulation triggered a massive restructuring of the transportation
industry that may create new regulatory challenges. The industry is
still working its way through a period of intense market-driven mergers
as carriers search for economies of scale and scope that will allow them
to compete and survive in the larger national, North American, and
global markets. The broad characteristics of the new business models
parallel the transforma­tions taking place in the automobile, banking,
and telecommunications industries. The new business models are likely to
be consolidated (through another round of mergers), international,
asset-based, and information driven.

These changes set up two issues for the future:

-   Influence of mergers and e-commerce on competition. The ownership,
    control, and technology of freight transportation will change
    significantly in the next decades. Today's mergers and e‑commerce
    technology may concentrate market power in a lim­ited number of
    carrier groups and could undo the competition resulting from
    economic deregulation. Will there be a need for re-regulation to
    preserve competition under the new regime? How might re-regulation
    affect productivity?

-   Government investment in freight infrastructure and the open-access
    debate. Rail­roads have made a spectacular comeback, but are not yet
    recovering their cost of capital. Mergers may allow the railroads to
    achieve the economies of scale necessary to earn their cost of
    capital, but the railroads also are beginning to look to state and
    local government to help finance rail infrastructure as is done with
    ports, airports, and highways. If the public sector invests in the
    infrastructure, what regulations will gov­ern who has access to the
    rail lines?

### Safety Regulation

Economic deregulation has been accompanied by an increased emphasis on
safety regula­tion. Fatality rates have decreased across the freight
transportation industry under deregulation, but the number of trucks,
trains, and planes and the number of miles they travel are increasing.
Unless safety rates improve, the absolute number of fatalities and
injuries will increase substantially in the next decades.

The public is pushing the freight transportation industry, especially
motor carriers, to further reduce accidents and fatalities. The pressure
comes from changing social values, expectations, and growth. But federal
and state governments no longer have the resources to set, monitor, and
enforce detailed rules governing equipment and operations. To reduce
fatalities, government regulators and industry safety managers are
betting on technology and performance-based, rather than rule-based,
safety standards.

The key issue facing the freight industry under this new approach will
be the cost and productivity impacts of safety regulation. New safety
technology and higher safety stan­dards will be costly, but the issue is
to what degree. Complicating the debates will be the lack of consistent
measures of safety and safety impacts across modes.

## Introduction

In 1800, the cost to move a ton of goods 30 miles inland was comparable
to moving it across the Atlantic. By mid-century, the railroads had
reduced the cost of delivering goods by as much as 80-90 percent.[^2]
But by 1900, a combination of cutthroat competition among the railroads
(where there was competition), and abuses of market power (where there
was no competition), had driven some railroads to the brink of financial
collapse and allowed others to charge monopolists' prices for
unsatisfactory levels of service.[^3] Public and shipper outrage
triggered a process of government regulation. Not until the 1970s did
support for government intervention begin to wane and the process of
deregulation of the railroads and freight transportation prices begin. A
similar pattern would repeat with respect to the motor carriers, ocean
carriers, and aviation/air cargo carriers.

By most accounts, the process of regulation and deregulation has come
full circle. The days of legislation designed to alter market-driven
outcomes are over, as are the days when frequent injuries and generous
levels of air, water, and noise pollution are accepted as "the cost of
doing business." A shift away from regulation of industry toward
regula­tion of impacts is underway -- there is less focus on economic
regulation, and more focus on safety and environmental regulation. This
paper discusses the history of freight trans­portation regulation and
deregulation, examines current work on safety regulation, and discusses
the implications of these trends for freight transportation. [^4]

## Trends 

### Economic Deregulation

Economic regulation stabilized the transportation industry, but at the
cost of dampening competition and the long-term viability of the
industry. By the 1970s, bankruptcies, high prices, and inefficient
services plagued the freight sector. The federal government began
deregulating to revitalize the industry and improve productivity. The
major deregulatory legislation is listed in Figure 1.

Figure 1. Major Federal Legislation Deregulating Commercial
Transportation

Deregulation was successful. Today, the freight transportation industry
is viable, com­petitive, and profitable. Productivity has increased, and
the industry is reorganizing to compete in North American and global
markets. But the trends suggest that economic deregulation will yield
diminishing returns in the future. Government and industry must look
beyond deregulation to maintain and improve productivity while ensuring
equity and public safety in the coming decades.

#### Rail Carriers

The federal government began to regulate the railroad industry in 1887,
with the enact­ment of the Interstate Commerce Act. Regulation was a
response to concerns of unfet­tered competition bankrupting railroads
while unregulated pricing was permitting others to charge monopoly
prices and inviting collusion. The Supreme Court had confirmed earlier
the rights of states to regulate the railroads, but the states found it
difficult to regulate consistently and effectively across state borders.
This is a pattern repeated today on a different scale as the federal
government considers the regulation of truck, rail, and air traffic
across international borders.

Under the Interstate Commerce Act, railroad rates were to be "reasonable
and just," but the new Interstate Commerce Commission (ICC) found the
concept difficult to define and enforce, as had the states. Congress
amended the ICC's powers in the early 1900s, giving it broad powers to
set rates and control entry and exit in the industry. Through the 1950s,
railroads, shippers, the ICC, and Congress struggled to set equitable
rates. The railroads argued for higher, value-pricing rates based on
supply and demand, while shippers pushed for lower, cost-of-service
rates. The ICC struggled to determine cost-of-service rates, but usually
opted for more easily enforceable, standardized base rates that
generally under-priced rail service and sapped railroad profitability.
Congress reinforced the ICC decisions by responding to public and
business pressures to keep transportation costs low through World War I,
the Great Depression, and World War II.

By the 1960s, the railroad industry was replete with bankrupt or
financially weak carriers. Deteriorating capital stock, intense
competition from motor carriers, changing markets, and poor management
had brought much of the industry to the edge of collapse. In 1976, more
than 47,000 route-miles, approximately 25 percent of the nation's
total, were oper­ated at reduced speeds due to dangerous conditions.[^5]

In the 1970s, Congress and the ICC began to ease railroad rate
regulation, and permitted the railroads to abandon unprofitable
passenger service in order to salvage freight serv­ices. The ICC allowed,
then encouraged, mergers to rationalize the rail system.

In 1973, the Regional Rail Reorganization Act (3‑R Act) merged seven
large, bankrupt eastern railroads to form Conrail. The mergers kept the
railroads alive, and marked the beginning of the end of efforts by the
ICC and Congress to manage the railroads' route structures and rate
making.

Four years after the creation of Conrail, the Rail Revitalization and
Regulatory Reform Act (4‑R Act) was passed, giving the ICC the power to
deregulate rates and approve market-based tariffs. In 1980, Congress,
responding to the slow moving ICC, completed the intended, partial
economic deregulation of the railroad market. The Staggers Act of 1980
allowed railroads to write contracts directly with shippers for rail
service, and, while keeping controls on the maximum rail rates charged
to captive shippers, liberalized rail­roads' ability to set prices and
enter and exit markets.

In 1996 the ICC was abolished and the remaining regulatory controls
transferred to the U.S. Department of Transportation's new Surface
Transportation Board.

The impact of deregulation on the railroad industry is difficult to
overstate. The industry went from being the "sick man" of the
transportation world to being a lean, productive, and relatively
profitable industry. The following changes have come about largely due
to deregulation:

-   **The industry consolidated through mergers and acquisitions.**
    Conrail was privat­ized in 1987, and purchased by CSX and Norfolk
    Southern in 1999. Today, there are seven Class I railroads in the
    United States, down from 36 in 1980.[^6] The big four -- Burlington
    Northern, Union Pacific, CSX, and the Norfolk Southern -- are
    jousting to see who will lead the next round of mergers that will
    form transcontinental railroads.

-   **Ninety-one thousand miles of rail line were abandoned** or sold by
    major railroads. The Class I railroads now own approximately 100,000
    miles of road (route-miles), a decrease from 192,000 in 1975. Many
    of the lines were sold to new regional and short-line railroads. In
    1998, regional and short-line railroads operated 50,000 miles of
    road, some of it owned by state governments anxious to preserve rail
    access to rail-depend­ent manufacturers and shippers.[^7]

-   **Rail rates declined.** Average rail rates, adjusted for inflation,
    for Class I railroads decreased 46 percent between 1982 and
    1996.[^8]

-   **The amount of freight hauled by the railroads increased**.
    Compared to 1980, railroad tonnage in 1999 increased 15 percent and
    ton-miles increased 56 percent.[^9] In the future, rail tonnage is
    expected to rise an average of 1.0 to 1.5 percent per year.[^10]

-   **Railroads established connections with trucking and ocean-shipping
    companies.** Intermodal traffic expanded from 3.1 million trailers
    and containers in 1980 to 8.8 mil­lion in 1998.[^11] Intermodal
    traffic is expected to double in the next decades.

-   **Labor productivity increased significantly.** Revenue-ton-miles
    per employee are approximately four times higher today than in 1980.
    Railroad productivity growth has outpaced the U.S. economy as a
    whole.[^12]

Despite these positive changes, rail freight revenues have remained flat
and profits low. The rate of return on net investment has increased from
less than two percent in the mid-1970s to approximately seven percent
today. Even so, this has not been enough to sustain interest from Wall
Street. The industry continues to earn less than its cost of capital,
which the Surface Transportation Board estimated at 10.8 percent for
1999. The railroads' struggle to finance their operations under a
deregulated market will dominate their busi­ness over the next several
years.

#### Motor Carriers

The motor carrier industry has followed a similar pattern of regulation
and deregulation. In the mid-1930s, trucking began displacing the
railroads as the dominant mode of domestic freight transportation, just
as the railroads had displaced the riverboats and barges a century
earlier. Trucking captured first local freight, then regional freight,
and eventually most of the higher-value national freight traffic.
Trucking was more flexible and time-sensitive than rail support, and
could provide customized support to manufac­turers and distributors. Well
before the Interstate era, trucking was capturing a growing portion of
the nation's total freight shipments by value, although railroads would
domi­nate the freight industry through the 1950s.[^13]

As with the railroads, the growth of the motor carrier industry
initiated cutthroat compe­tition among trucking companies, which
threatened to destabilize the industry, as well as abuse of market power
by both carriers and shippers. In 1935, Congress applied the regulatory
framework that it had developed for the railroad industry to the motor
carrier industry. The Motor Carrier Act gave the ICC authority to
control entry and exit in the industry, regulate prices through uniform
tariff rates, specify the types of commodities to be hauled, and
determine the routes to be served by each carrier. Carriers had to
demon­strate the public convenience and necessity of their proposed
services before the ICC would issue a certificate of operating
authority. Once issued, carriers jealously guarded their operating
authority rights against would-be competitors.

Unlike the railroads, the trucking industry prospered under the ICC's
regulation. The market for truck services was growing. The states in the
1950s and the federal govern­ment in the 1960s subsidized the
construction of a national highway system that both expanded the
trucking market and increased trucking productivity. But the ICC's
regulations imposed a cost on business and the economy. Regulation kept
trucking prices relatively high and the number of carriers competing for
work relatively low.

Calls by shippers for reform peaked in the mid-1970s. The U.S. economy
was transitioning from a nationally focused manufacturing economy to a
internationally focused and service economy.[^14] It was recovering from
the economic and social impacts of the Vietnam War, but growth
alternated with periods of sharp recessions. Unstable fuel supplies and
prices sent shock waves through the economy, dampening domestic and
international trade. Jobs were lost to the booming, low-wage Asian
economies. Tradi­tional manufacturing jobs were replaced by jobs in the
growing service industries and in the technology sector. The resultant
economic pressures resulted in a massive restructuring of businesses. By
1975, businesses were lobbying intensively for lower transportation
costs to help compete in domestic and international markets.

Congress took action in 1980, passing the Motor Carrier Act, which
deregulated interstate trucking. The Act effectively erased barriers to
entry, permitted price competition, and lifted anti-trust laws that
permitted collective rate setting. But motor carriers were given only
partial satisfaction; the Act did nothing to loosen restrictions on
intrastate commerce, and as time passed the costs associated with
shipping across state borders and shipping within state borders widened
dramatically. In 1994, 41 states still maintained some form of economic
regulation over intrastate trucking, and intrastate rates were an
average of 40 percent higher than rates for interstate moves of the same
distance. Not until 1995, and the passage of the Interstate Commerce
Commission Termination Act, was economic regulation of intrastate
trucking lifted and the ICC itself broken up.

As with the deregulation of the railroads, the impact of deregulation on
the trucking industry was significant:

-   **The number of trucking companies increased dramatically.**
    Existing carriers expanded into new services with new routes, and
    new smaller carriers entered the business. The number of interstate
    motor carriers increased from 18,000 in 1975 to over 500,000 in
    2000.

-   **The industry restructured itself.** Truckload (TL) carriers, no
    longer restricted to set routes and commodities, merged and
    consolidated to provide national coverage. Less-than-truckload
    carriers (LTL), under attack from TL carriers intent on carving off
    large-lot shipments, shrank and streamlined their operations. And
    the use of private carriers (i.e., company-owned or "in-house"
    trucking fleets) declined as companies chose to take advantage of
    the lower rates and improved services offered by newly competitive
    for-hire carriers.[^15]

-   **Lower trucking prices benefited the U.S. economy as a whole.**
    Prior to deregulation, trucking expenditures were 5.7 percent of
    GDP, while in 1997 they were less than 5.0 percent. This is the
    equivalent of \$60 billion saved in national income.[^16]

-   **Trucking's share of the freight market expanded.** Today, the
    trucking industry has 80 percent of the U.S. freight transportation
    market by revenue although the railroads still carry the largest
    share by tonnage.

The trucking industry -- at least those firms that survived the
transition from the regulated to the deregulated market -- is lean,
competitive, and profitable. But the future is less cer­tain. Fuel costs
are up; drivers, especially in the long-distance truckload sector, are
increasingly difficult to find and retain at current wage levels; and
highway congestion threatens to erode the industry's ability to deliver
fast and predictable service.

#### Ocean Carriers

Ocean carriers are regulated through laws governing conferences and
cabotage. Carrier conferences, typically associations of carriers
serving similar markets and sea-lane, were established in the 19^th^
century to protect national and carrier interests. The conferences set
rates and managed competition among carriers. The Shipping Act of 1916
endorsed anti­trust immunity for the ocean carrier conferences in
exchange for "common carriage" (e.g., agreements by the ocean carriers
that all shippers, small or large, would be treated equally by
carriers). The 1916 Act required the conferences to file these
agreements with the Federal Maritime Commission (FMC). The agreements
were reviewed and approved for antitrust purposes under a "public
interest" test. To protect against monopolistic price gouging, the
carriers were obliged to share this information with all other shippers,
which could then demand similar rates from ocean carriers. This law
regulated the ocean ship­ping industry for the next 68 years.

After World War I, Congress enacted the Merchant Marine Act of 1920, now
known as the Jones Act. The Jones Act mandated that only vessels built,
owned, and registered in the United States could be used in waterborne
commerce along inland waterways and the eastern seaboard, across the
Great Lakes, and between the U.S. mainland and noncontigu­ous states and
territories. The purpose of the Jones Act was to protect domestic
shipping services from foreign competition (a practice known as
cabotage) and to ensure that domestic merchant marine vessels and crews
would be available to America's armed forces in times of national
emergency.

The Jones Act remains in force today, but the regime of carrier
conferences began to weaken in the 1960s and 1970s. Shippers wanted
lower prices to compete in foreign mar­kets, and containerization forced
a restructuring of industry. By building larger container ships,
carriers could drive down unit costs for shippers and capture larger
market shares, but only by rationalizing their services. This meant
giving carriers the flexibility to build new alliances, abandon less
profitable routes and ports of call, contract with railroads and motor
carriers for feeder and distribution services, and focus on profitable,
high-volume, international routes.

The Shipping Act of 1984 responded to these needs. The Act reaffirmed
the function of conferences, giving shippers expanded immunity from
antitrust actions, and eliminating the requirement that the FMC approve
conference agreements. Carriers were free to rebuild their alliances.
The Act required that conferences file their tariffs with the FMC, and
that the FMC make the tariffs public. However, the Act also authorized
"independent action." Upon 10-days' notice, any conference member could
offer lower rates or better services than the conference standard. In
effect, shippers and carriers gained the ability to negotiate
competitive service and price contracts. These contract negotiations
were not confidential.

The Act also opened the door to other players in the ocean shipping
industry. Freight forwarders were authorized to consolidate cargoes from
small shippers in order to achieve the same benefits and economies of
scale as large shippers. Non-vessel-operating com­mon carriers (NVOCC),
companies that provide common carrier service by renting space on ships
owned and operated by a vessel owner, were allowed to operate under the
same rules as the ocean carriers.[^17]

Responding to these changes, the shipping industry underwent a major
consolidation during the 1990s in an effort to improve efficiency and
productivity. The largest carriers (e.g., P&O, NedLloyd, Neptune Orient,
APL, Sealand, and Maersk) merged and re-merged seeking competitive and
profitable configurations. Routes and services were restructured, and
new equipment and technologies were introduced to improve productivity.

Congress took the last step toward deregulation of the ocean shipping
industry in October 1998, passing the Ocean Shipping Reform Act (OSRA).
OSRA allowed shippers and ocean carriers to enter into confidential
service contracts negotiated on a case-by-case, one-to-one basis between
a shipper and a carrier. The shipper and carrier were required to file
the contract with the Federal Maritime Commission, but were not obliged
to share the contract terms with conference members and other shippers.

To date, the benefits of OSRA have been mixed. In May 2000, Timothy J.
Rhein, Chairman of American President Lines, Ltd. and John P. Clancey,
Chairman of Maersk Inc., testified that:

> *"OSRA is fulfilling the purposes for which it was intended, the
> primary one being to create an atmosphere in which the liner industry
> becomes even more responsive to market forces and to the commercial
> needs of shippers and carriers."*[^18]

The FMC, in a June 2000 report, agreed and argued that the new law is
having "positive effects on the business of ocean shipping," citing
strong growth in the use of individual service contracts between
shippers and carriers.[^19]

On the other hand, some carriers appear to be taking advantage of a
loophole in the law by charging steep fees for online access to ocean
shipping tariffs. Under the provisions of OSRA, carriers are no longer
required to file general rate tariffs with the FMC, but must make this
information public via the Internet. The FMC expected the carriers to
charge a "reasonable" access fee, enough to cover the costs of posting
information online, but as industry observer Michael Fabey noted wryly,
"greed got in the way." One tariff pub­lisher charges 90 cents per minute
to view its site. Another charges \$450 per month, with a three month
minimum, meaning that a shipper seeking only a single price quote would
be forced to spend \$1,350. As a result of such practices, many small
shippers have suf­fered from OSRA. Fabey believes that unless carriers
take steps to voluntarily reduce their Internet access fees, the FMC
will move to impose fines or other penalties.[^20]

#### Aviation/Air Cargo Carriers

Until two decades ago, the Civil Aeronautics Board (CAB) regulated air
carriers in the United States. The CAB determined flight routes and
prices for the airlines. These restrictions caused market distortions
and inefficiencies, driving up ticket prices and skewing the demand for
air travel. The cost of an unregulated intrastate flight, from Los
Angeles to San Francisco, for example, was often less expensive than a
regulated interstate flight of equal distance.

This situation persisted until the late 1960s, when aircraft
manufacturers began rolling out the first wide-body aircraft. The
Boeing 747, capable of transporting 400 passengers, twice as many as its
707 predecessor, offered airlines the opportunity to dramatically
increase capacity, particularly on longer transcontinental flights. But
in 1973, the Arab oil embargo caused the price of oil to triple in a
matter of months. As energy costs skyrocketed, so did inflation and
unemployment, and the world economy slid into recession. Air carriers
were particularly hard-hit.

With seating capacity rising, demand falling, and costs spiraling
upward, the CAB sought a reasonable rate of return for airline carriers.
In 1974, it approved a series of fare increases, mandated a four-year
freeze on new services, and agreed to allow carriers to limit capacity
on major routes. The measures were unpopular among travelers and did not
solve the carriers' financial problems. The CAB recognized the
ineffectualness of its policies and reversed their stand abruptly. In
1975, the CAB issued a report declaring that air carriers were
"naturally competitive, not monopolistic," and began to loosen pricing
and route controls.[^21]

Congress took the first steps toward formally deregulating the airline
industry in 1977, when it gave air cargo carriers the freedom to operate
on any domestic route and charge according to the market. The CAB was
authorized to approve new cargo services, not on the usual basis of
"public need and convenience," but on the basis of whether the carrier
was "fit, willing, and able."[^22] Deregulation of the passenger
industry followed deregula­tion of the cargo industry. In 1978 Congress
passed the Airline Deregulation Act, which led to a phase-out over four
years of all scheduling, route, and fare restrictions. The CAB was
disbanded in 1985.

The federal government continues to regulate two important areas in air
cargo transpor­tation, including the review and approval of airline
mergers, and the awarding of interna­tional landing rights. In reviewing
mergers, the government attempts to determine whether the proposed
merger will improve or degrade service, whether competition will be
heightened or reduced, and whether the interests of consumers will be
served. Inter­national landing rights are negotiated on a bilateral basis
between countries, with the State Department representing the interests
of the United States abroad. These negotiations have led to "Open Skies"
agreements between the U.S. and 51 other countries. Open Skies
agreements allow market conditions to dictate routes, frequencies, and
prices for passen­ger and cargo flights.

Over the past two decades, deregulation, along with expanding markets
and new technolo­gies, created significant growth opportunities in the
aviation and air cargo industries:

-   **Passenger volumes tripled**. Passenger enplanements increased from
    200 million in 1975 to nearly 600 million in 1999.

-   **Fares declined.** Between 1978 and 1998, real airfares declined by
    more than 30 percent in domestic markets and by 43 percent in
    international markets, contributing to the development of a mass
    market in air travel.[^23]

-   **The industry returned to profitability.** As a result of declining
    fares, the industry yield (revenues per revenue-passenger-mile) has
    declined, but the airlines remain profitable.

-   **The air cargo segment of the industry expanded rapidly.** After
    deregulation in 1978, the air cargo industry experienced 500 percent
    growth, increasing from five billion revenue-ton-miles in 1975 to 25
    billion revenue-ton-miles in 1999. The air cargo sec­tor's growth
    eclipsed passenger sector growth. The growth of all-cargo air
    carriers is responsible for most industry growth. All-cargo carriers
    moved more than two-thirds of domestic freight revenue-ton-miles in
    1999.[^24] Overall, the air cargo industry is pro­jected to triple in
    the next two decades.

-   **Labor productivity of the air cargo sector increased.** The ratio
    of revenue-ton-miles per employee increased 89 percent between 1975
    and 1999.[^25]

Another significant impact of deregulation was the rapid expansion of
overnight air deliv­ery of documents and small packages. Overnight
delivery of high value and time sensi­tive packages and documents began
in the early 1970s; however, deregulation gave express carriers the
operating freedom to develop high-quality services. The result was
outstanding growth. In 1994, Congress further deregulated this part of
the airline indus­try by preempting state efforts to regulate intrastate
air/truck freight and express package shipments.[^26]

### Safety Regulation

Economic deregulation has been accompanied by an increased emphasis on
safety regula­tion. Despite the positive safety improvements since
deregulation, the public and govern­ment are pushing the freight
transportation industry, especially motor carriers, to further reduce
accidents and fatalities. The pressure comes from changing social
values, expecta­tions, and growth. Fatality rates are decreasing across
the freight transportation industry, but the number of trucks, trains,
and planes and the number of miles they travel are increasing. Unless
safety improves, the absolute number of fatalities and injuries will
increase substantially in the next decades. To counter this trend,
government regulators and industry safety managers are betting on
technology and performance-based, rather than rule-based, safety
standards. This section examines accident trends and emerging safety
strategies.

#### Motor Carriers

Highway crashes, fatalities, and injuries have declined steadily over
the past decade (see Figure 2).[^27] From 1988 to 1998 (the last year
for which comparative fatality and injury rates are available), the
fatality rate for passenger vehicle crashes declined 30 percent and the
rate for large-truck-involved crashes decreased 33 percent. But there
has been less progress in recent years. Overall fatality and injury
rates have declined only slightly, and the absolute numbers remain
unacceptably high. More than 41,000 people died on highways in 1998,
down only eight percent compared to 1988. Almost 3.2 million people were
injured in 1998, a number virtually unchanged from a decade earlier. Of
the 41,000 people who died in 1998 in highway crashes, 5,395 were killed
in traffic crashes involving large trucks.

Figure 2. Truck-Involved Fatalities and Injuries

![](media/image1.wmf)

Source: Federal Motor Carrier Safety Administration, Safety Action Plan,
1999; and Monthly Progress Report, September 2000.

Trucks are involved in a disproportionately high number of fatal
accidents. Although they make up just three percent of all registered
vehicles and seven percent of all vehicle miles traveled, large trucks
were involved in 13 percent of the fatalities in 1998. The num­bers being
tabulated and reported for 1999 are similar, with truck-involved
fatalities declining by a modest 0.6 percent from 5,395 to 5,362.

The Secretary of Transportation and the Federal Motor Carrier Safety
Administration (FMCSA) have set a goal to significantly reduce the
number of truck-related deaths and injuries over the next 10 years.
Using 1998 as the baseline, their goal is a 50 percent reduction in the
number of people killed in large-truck-involved crashes by 2010, and a
50 percent reduction in the number of people injured in
large-truck-involved crashes by 2010. These goals indicate that the
FMCSA must reduce the number of people killed from 5,400 to 2,700 and
the number injured from 127,000 to 63,500.[^28]

Halving the number of truck-involved fatalities in a decade is a major
challenge. The number of interstate motor carriers within the FMCSA's
jurisdiction has more than dou­bled in the last decade, growing from
approximately 200,000 in 1990 to more than 500,000 in 1998. In 1999
alone, between 55,000 and 60,000 new carriers registered with the FMCSA,
most of which are small businesses. Seventy percent of these carriers
have six or fewer trucks. Of the 500,000 interstate motor carriers
registered with the FMCSA, only about 25 percent have been reviewed and
given a safety rating by federal or state inspec­tors; 75 percent have
never been reviewed or rated. Although the FMCSA and the states are
hiring more inspectors and enforcement officers, the resources for
federal and state motor-carrier safety programs have not kept pace with
the growth in motor carriers and the corresponding increases in vehicles
and drivers.[^29]

A number of regulatory strategies are being pursued today to reduce
truck accidents which include:

-   **Targeting safety enforcement.** The federal government has
    systematically collected data on motor carrier accidents and safety
    inspections. Because research has shown that past safety records are
    the best predictors of future behavior, this data can be used to
    identify high-safety risk carriers. Once these carriers have been
    identified, their management and safety procedures can be targeted
    for review, and their vehicles and drivers targeted for more
    frequent weigh-station and roadside inspections. The data can also
    be used to screen carriers applying for permits or re-registering
    trucks to pre­vent carriers with the worst safety records from
    obtaining credentials.

-   **Revising the hours of service (HOS) regulations.** Truck
    technology has improved significantly in recent years. While
    mechanical problems such as brake failures can still cause
    accidents, such problems are becoming increasingly rare. As a
    result, safety managers have begun to look more carefully at the
    role that driver behavior, fatigue in particular, plays in
    accidents. The motor carrier industry has chafed for years about
    hours of service (HOS) regulations. The existing regulations,
    established in the 1930s, limit a driver to a 10-hour shift followed
    by eight hours' rest, and restrict the cumula­tive number of hours a
    driver may work in successive days throughout a week. The U.S.
    Department of Transportation (DOT) recently proposed new rules that
    would allow drivers to work (either driving, or loading and
    unloading) for 12 hours every 24-hour period. Each work shift would
    be followed by 10-12 consecutive hours of off-duty time. The new
    rules governing cumulative hours would discourage shifts that rotate
    around the clock, which are thought to disrupt a driver's circadian
    rhythms and contribute to fatigue-related accidents. The proposal
    triggered an intense debate in which the FMCSA argued that new HOS
    regulations would significantly reduce crashes, fatalities, and
    injuries, and the motor carrier industry argued that the safety
    benefits were overestimated and the cost to industry ignored or
    underestimated. Congress imposed a one-year moratorium on
    implementation of these rules in the 2001 U.S. DOT Appropriation
    budget to let FMCSA and the industry reconsider the issues.

-   **Mandating the use of on-board recorders.** Most modern trucks are
    equipped with on-board computers that monitor in precise detail the
    performance of the vehicle's engine, transmission, brakes, and other
    mechanical components. The technology is well established, and is
    used to provide information to improve maintenance. The FMCSA has
    proposed mandating this technology to gather data about crashes and
    is debating extending its use to monitor drivers' hours-of-service
    and record their driving behavior. Equipping trucks with "black
    boxes," an on-board trip recorder, would make it more difficult for
    drivers to falsify their hours. (It is a common, but illegal,
    practice to maintain two sets of logbooks: one for the motor carrier
    inspectors and one for the driver's own billing records.)

-   **Introducing safety-warning systems.** The FMCSA and the U.S. DOT's
    Intelligent Transportation Systems (ITS) Joint Program Office have
    launched the Intelligent Vehicle Initiative (IVI), a program to
    advance the application of computers, advanced electronic sensors,
    and communications technologies to heavy trucks and buses. The IVI
    program is exploring several truck applications of this technology.
    The most promising include: proximity warning devices to minimize
    the risk of trucks backing into cars accidentally; rollover warning
    systems that assess the risk of a rollover and warn the driver to
    take emergency action; brake warning systems that provide earlier
    and more reliable predictions of imminent brake failure than
    traditional visual inspec­tions; and fatigue warning devices that
    monitor a driver's steering behavior or eye motion and trigger
    alarums if a driver begins to nod off at the wheel.

The focus today is on truck drivers, but the focus may soon expand to
include automobile drivers. In crashes involving a large truck and a
passenger vehicle, officers at the scene cited truck drivers for
driver-related errors (e.g., failing to yield right-of-way, driving too
fast, etc.) 26 percent of the time and passenger-vehicle drivers 82
percent of the time.[^30] Future safety research will examine strategies
that change the behavior of both truck and car drivers.

#### Rail Carriers

The responsibility of safety regulation, which originally fell under the
jurisdiction of the ICC, was moved to the Federal Railroad
Administration (FRA) when the U.S. DOT was created in 1966. The FRA
enforces minimum standards in a range of areas, such as track, signals,
and equipment. Until a few years ago, FRA's enforcement approach
depended heavily on aggressive enforcement of the standards, with
threats of fines as the primary means of ensuring compliance. In recent
years, the FRA has adopted a more cooperative approach and set about
transforming the federal railroad safety program. The goal is a safety
program that is more inclusive of the agency's customers, more
fact-based, and ultimately more effective, while also less intrusive,
less hierarchical, and less adversarial. Since 1995, FRA announced and
implemented three new safety programs:

-   Safety Assurance and Compliance Program (SACP), a new approach to
    safety inspec­tion and encouraging compliance. The cornerstone of the
    SACP is its methodology for detecting and focusing on the root
    causes of systemic safety problems, especially on large railroad
    systems;

-   Rail Safety Advisory committee (RSAC) to provide the agency with
    advice and rec­ommendations from the industry on a range of
    regulatory issues; and

-   Technical Resolution Committee (TRCs) in each of its technical
    disciplines (track, sig­nal, hazardous materials, equipment, and
    operating practices). TRCs address incon­sistent application of
    established policy or law, and unanswered questions of policy or
    law.

These approaches, in conjunction with routine inspections, have
prevailed in recent years, and the rail industry's safety record has
continued to improve.

Railroad safety initiatives are currently focused on the following
areas:

-   **Eliminating grade crossings and increasing public awareness of
    trains.** The majority of fatalities in railroad accidents are not
    railroad employees, but drivers and passen­gers of motor vehicles at
    grade crossings, and trespassers on railroad property (See Figure
    3). Education and enforcement are helping to reduce fatalities in
    both catego­ries. In the first category, the FRA is encouraging
    better grade crossing technology, abolition of whistle bans, and the
    closure of redundant grade crossings.

-   **Introducing Positive Train Control (PTC) systems.** Historically,
    the movement of trains was controlled by a timetable, overridden by
    orders from a dispatcher. As traf­fic increased, this was
    supplemented by visual signals along the right-of-way. For most of
    the last century, a variety of electro-mechanical systems (such as
    Automatic Train Control \[ATC\] and Automatic Train Stop \[ATS\]),
    which at minimum require train crews to acknowledge restrictive
    signals, were implemented where passenger trains operated at speeds
    generally in excess of 79 mph. With the reduction in passen­ger
    service since World War II, many of these systems were removed.
    However, planned growth in train speeds and density and a need to
    lower costs and improve performance over the traditional train
    control technology have led to a new kind of system, Positive Train
    Control (PTC). Using the Global Positioning System (GPS) and
    wireless data links, PTC can track train movements and enable a
    dispatcher to send orders directly to a locomotive's crew. Because
    PTC systems can monitor and enforce operating authority in a more
    refined and continuous manner than older technologies such as ATS,
    trains can be operated more safely at much closer headways.[^31]

Figure 3. Railroad Fatalities

![](media/image1.wmf)

Source: National Transportation Statistics Annual Report, September
1993, (Bureau of Transportation Statistics) and Railroad Safety
Statistics 1998 Annual Report (Federal Railroad Administration Office of
Safety Analysis).

-   **Strengthening environmental legislation.** Railroads are subject
    to environmental regulations. New limitations on nitrogen oxide
    exhaust emissions were recently put in place. The regulation
    involves some grandfathering of old equipment, but may lead to
    limitations in the availability of older locomotives. This will
    improve safety because new locomotives incorporate better safety
    features and are less prone to failure, but will impact the costs
    and productivity of smaller railroads.

#### Ocean Carriers

The number of fatalities and injuries caused by marine collisions and
other accidents is down significantly; however, the number of collisions
and accidents remains high (See Figure  4). The Coast Guard and the
Merchant Marine Administration are focused on navigation technologies to
reduce collisions and on stronger enforcement of environment safety
rules to protect public health and safety.

-   **Deploying navigation technologies.** The widespread use of the GPS
    in maritime navigation has greatly improved the safety and
    efficiency of waterborne freight movements. Differential GPS,
    operated by the U.S. Coast Guard, covers coastal and inland
    waterways and further enhances accuracy of positioning to within
    five to 10 meters. Vessel Traffic Service has been established at
    nine major U.S. ports and func­tions much like an air traffic control
    system, alerting and advising ship movements in and near the port.
    Other systems, including the Automated Identification System and
    Physical Oceanographic Real-Time Systems, assist vessels by
    providing a steady stream of information to land and navigating
    around oceanographic obstacles, respectively.[^32]

Figure 4. Marine Safety Trends

![](media/image1.wmf)

Source: U.S. Department of Transportation, U.S. Coast Guard, Office of
Investigations and Analysis, Compliance Analysis Division, G‑MOA‑2.

The key strategies being pursued to reduce marine accidents are:

-   **Adopting new vessel standards.** The International Maritime
    Organization (IMO) has imposed new standards that govern the
    construction of new vessels. The new stan­dards incorporate better
    safety design features. For example, the new IMO and United State
    vessel standards mandate the phase-out of older single-hull tankers
    and the con­struction of new double-hull tankers.

-   **Enforcing stronger environmental safety regulations.** The U.S.
    maritime cargo industry must comply with a number of federal
    statutes established in the last 25 years. These address various
    safety and environmental concerns, including air and water pollution
    generated by ships and facilities, spills of oil and other hazardous
    sub­stances, shrinking wetlands, and disappearing marine life.
    Stricter environmental regulation has caused an increase in foreign
    vessel detentions for non-compliance in U.S. Ports, from eight in
    1990 to 70 in 1997.[^33]

#### Aviation/Air Cargo Carriers

The safety record of U.S. airlines has been improving steadily despite
concerns that deregulation might induce poorer safety performance. In
the 15 years prior to deregula­tion, the major U.S. carriers averaged one
fatal accident per 830,000 flights. In the 15 years following
deregulation, they averaged one fatal accident per 1,400,000
flights.[^34] The num­ber of air fatalities is quite small compared to
the number of traffic deaths on an annual basis, but the future is
problematic because the number of planes in the sky is increasing
rapidly. Boeing estimates that by 2015 there will be one plane crash per
week worldwide.[^35]

Air cargo carriers constitute a relatively small portion of the total
air fleet, and large vol­umes of air cargo are carried in the cargo holds
of passenger planes, so data on freight-related safety trends are
difficult to separate from general aviation safety trends. However, a
number of strategies being discussed by the Federal Aviation
Administration (FAA) and the aviation industry are targeted at reducing
air cargo accidents:

-   **Coordinating aviation regulations on a global scale.** The FAA is
    harmonizing U.S. civil aviation regulations, practices, and
    procedures with those of the Joint Aviation Authorities of Europe,
    and with certification authorities in the Former Soviet Union,
    China, and other countries that manufacture aircraft. In addition,
    safety-related tech­nical assistance are being provided to
    authorities around the world.

-   **Monitoring hazardous materials.** The FAA estimates there were
    50,000 daily ship­ments of hazardous materials on domestic passenger
    and cargo aircraft. Following the May 1996 ValuJet crash that killed
    109 passengers and crew, the FAA reexamined its safety monitoring of
    "new entrant" carriers. It found no connection between the crash and
    a lack of agency oversight; however, the FAA has increased oversight
    of hazard­ous material shipments.[^36]

-   **Strengthening the requirements regarding collision avoidance
    equipment.** The FAA does not require aircraft carrying fewer than
    10 passengers to have high-tech collision avoidance equipment,
    making most cargo planes exempt. The FAA and the air cargo industry
    are exploring the costs and benefits of extending the requirements
    to cover a larger proportion of the air cargo fleet.

## Implications for Freight Transportation Systems

The deregulation and safety trends suggest that the freight industry may
observe several changes in the future.

#### Diminishing Returns from Economic Deregulation

The freight transportation industry may see diminishing returns from
economic deregu­lation over the next decade. The trends suggest, and many
industry managers and observers agree, that transportation in the U.S.
has reached the end of a regulatory cycle and realized most of the
productivity gains from economic deregulation. There appear to be few
opportunities to stimulate major improvements in freight transportation
produc­tivity through additional modal deregulation.

This observation appears to be borne out by the statistics tracking
total logistics cost as a percentage of the Gross Domestic Product
(GDP). Total logistics cost is the sum of busi­ness and industry
expenditures for the movement of goods through supply chains and
distribution networks and includes administration, transportation, and
inventory carrying costs. These costs peaked at about 16 to 17 percent
of GDP in the late 1970s and early 1980s, then dropped steadily through
the early 1990s as shippers and carriers took advantage of deregulation
to reduce costs (See Figure 5).

In recent years, total logistics costs have stalled at about 10 percent
of GDP. The flattening of the curve suggests that the shippers and
carriers have wrung most of the cost savings out of deregulation.
Shippers are spending, proportionally, more on transportation today
compared to 20 years ago. However, they are getting much more
transportation for their dollar. Deregulation lowered transportation
prices and improved quality, allowing ship­pers to substitute low-cost
transportation (in the form of frequent, just-in-time deliveries) for
high-cost inventory. The combination of lower transportation costs and
reduced inventory carrying costs saved businesses and consumers billions
of dollars.

If this interpretation of the logistics-cost trend is correct, then the
deregulation well is dry, and the freight transportation industry must
look beyond deregulation to maintain and improve its productivity.

Figure 5. Logistics Expenditures and Gross Domestic Product

![](media/image1.wmf)

Source: Cass/ProLogis 10^th^ Annual State of Logistics Report, 1998.

#### Emergence of New Business Models

New business models for the organization and operation of freight
transportation services are emerging.[^37] The new business models will
constitute a significant change in the ownership, control, and
technology of freight transportation. Deregulation triggered a massive
restructuring of the transportation industry. The industry is still
working its way through a period of intense market-driven mergers as
carriers search for economies of scale and scope that will allow them to
com­pete and survive in the larger national, North American, and global
markets. The broad characteristics of the new business models that are
emerging parallel the transformations taking place in the global
automobile, banking, and telecommunications industries. The new business
models are likely to be:

-   **Consolidated.** The freight transportation firms or consortia that
    emerge from deregulation to compete in tomorrow's markets will be
    consolidated. The motor car­rier industry has gone through several
    waves of mergers and reorganization and is relatively stable at the
    moment; but the capital-intensive railroads and the globally
    ori­ented ocean and air-cargo carrier sectors are still evolving. The
    railroads and ocean carriers appear headed for at least one more
    round of mergers within the next three to five years.

-   **International.** The major freight transportation players will be
    international. U.S. firms have been slowly exploring international
    alliances. The emergence of strong European competitors such as
    Deutsche Post (the German postal service) as major integrated
    freight players will likely accelerate the formation of
    international mega-firms.

-   **Asset-based.** Most of the firms will be asset-based. The trend
    toward gray ships and boxes -- that is, toward use of shared
    containers and truck chassis, vessel-space char­tering agreements,
    and expanded use of independent owner-operators in trucking world --
    will continue. Third-party logistics companies (3PL) -- firms that
    match ship­pers and carriers -- will play a significant role, but the
    major players will likely main­tain control of critical assets to
    ensure control of costs and service quality.

-   **Information-driven.** The dominant freight transportation
    consortia will be those that control the information systems. The
    successful business models will be determined more by who controls
    access to information regarding the availability of assets and the
    pricing of transportation services and less by who controls the
    assets. An initial com­petition between new dot-com companies, which
    have the technological knowledge to build e‑business processes and
    e‑commerce marketplaces, and established carriers, which have the
    industry experience, is underway now. Carriers are coming to realize
    that the firms or consortia that control information concerning
    freight demand and flows will likely control the allocation of
    business within the freight market.

#### Pressure for Fewer Accidents and Fatalities

The freight transportation industry of the future will be safer. Despite
the positive safety improvements since deregulation, public and
government pressure will push the industry to further reduce accidents
and fatalities. The pressure will come from changing social values,
expectations, and growth. About 40,000 people will die on the highways
this year. The FHWA and the National Highway Transportation Safety
Administration estimate that if the current fatality rate is not reduced
and vehicle-miles of travel increase at the current rate of 1.96 percent
annually, approximately 60,000 people will die in 2015 -- a 50 percent
increase in fatalities.[^38]

To reduce accidents and fatalities, government safety regulation will
shift toward per­formance-based safety regulation. The federal and state
governments no longer have the resources to set, monitor, and enforce
detailed rules on equipment and operations. The growth in the numbers of
carriers, equipment, and trips has far outstripped the govern­ment's
enforcement budget and staff resources. To compensate, regulators are
slowly moving away from rule-based safety enforcement toward
performance-based safety regulation. Federal and state governments will
continue to conduct inspections and enforce equipment and procedural
rules to maintain a level playing field among carriers. However, the
outlook is for a safety regulatory regime that measures safety
performance (focusing on accident, injury and fatality rates) and
targets enforcement (increased inspec­tions, progressive fines, and
withdrawal of operating permits) at carriers with poor safety
performance records.

To improve safety performance, carriers and the government will rely
increasingly on technology. Carriers will apply technology to improve
vehicle performance, diagnose system failures, and help drivers stay
alert behind the wheel. Regulators will apply tech­nology to monitor
safety performance by expanding the airline flight recorder "black box"
approach model to trucking and rail operations.

## Issues for the Future

Deregulation has created a highly efficient, market-driven freight
system with lower costs and increased responsiveness to shippers and
consumers. But the diminishing returns from economic deregulation, the
emergence of new business models, and the increasing pressure to reduce
accidents and fatalities will generate a new set of issues.

#### Influence of Mergers and E‑Commerce on Competition

The ownership, control, and technology of freight transportation will
change significantly in the next decades. A new era in freight
transportation is beginning. The changes may rival those experienced
with the emergence of the railroad industry in the mid-1800s, the
trucking industry in the 1930s, and the aviation industry in the 1950s.
Today's mergers and e‑technology may concentrate market power in a
limited number of carrier alliances, 3PLs, or dot-com marketplaces, and
could undo the competition resulting from economic deregulation. Several
questions come to bear in light of these observations. Will cutthroat
competition once again destabilize the freight transportation industry?
Will abuses of market power where competition is absent open the door to
price gouging and corrup­tion? Will there be a need for new regulation to
preserve competition under the new regime?

#### Government Role in Rail Productivity

Railroads have made a spectacular comeback, but are not yet recovering
their cost of capital. Solutions to achieving this goal are not at all
obvious. Mergers, one of the pri­mary tools used by the industry and
policy makers to improving financial performance over the last three
decades have become increasingly controversial. This controversy
cul­minated with the recent issuance of new rules governing mergers by
the Surface Transportation Board. It argued that mergers are no longer
needed to improve the efficiency of the railroad system, and raised the
bar needed for approval of new mergers. While the previous standard was
one of "maintaining competition," the new standard is "enhancing
competition."

Shippers, especially those who do most of their shipping by rail and
those who became enmeshed in the dramatic service failures surrounding
other mergers in recent years, cite the lack of direct or potential
competition as the cause of poor service and excessively "high" rates.
One potential remedy advanced by some shipper groups is "open access,"
an arrangement whereby another carrier or the shipper itself is granted
authority to provide service over a line or to an industry served by
only one carrier. The railroads regard the blanket application of open
access -- forced access from their point of view -- with abhor­rence, but
many have used negotiated trackage rights agreements (e.g.,
business-to-busi­ness "open access" agreements) to solve specific
problems, relieve bottlenecks, and meet specific regulatory requirements
to preserve competition.

Recent discussions have opened regarding the possible need for public
investment to address capacity and operational concerns in the nation's
rail system. After a hundred-year cycle of regulation and deregulation,
the accepted wisdom is to allow the market to sort out rail­road
financing. But the traditional role of the federal government has been
to finance freight improvements such as ports, canals, transcontinental
railroads, interstate high­ways, and major airports. Between 1981 and
1995, the federal government increased funding to the states for rail
freight planning and acquisition, rail facility construction, and
rehabilitation. The Railroad Rehabilitation and Improvement Financing
(RRIF) Program, under TEA‑21, authorizes loans and loan guarantees for
railroad capital improvements to state and local governments,
corporations, railroads, and joint ventures that include at least one
railroad. Many states now have made significant investments in
short-line rail­roads. Congress and the states may be asked to consider
capital investments to upgrade lines and eliminate bottlenecks on
congested rail and highway corridors (possible candi­dates are the
Mid-Atlantic Corridor between New York and Virginia, and the Chicago
intermodal hub). Still an issue is the federal role in financing future
rail freight improvements.

#### Cost Impacts of Safety Regulation

New safety technology and higher safety standards will be costly, but
the issue is to what degree. The trucking industry sought changes to
federal hours-of-service regulations to improve productivity, but the
U.S. DOT's initial proposal was rebuffed by the industry as being too
expensive. Senior managers at J. B. Hunt Transportation, one of the
nation's largest and most innovative truckload carriers, calculate that
the proposed hours-of-serv­ice regulations would cause a nine percent
loss in driver productivity and a 13 percent loss in transit time. There
are also concerns that regulations discouraging nighttime and weekend
driving will expose more drivers and trucks to weekday traffic
congestion thereby increasing the risk of truck-car accidents.

In today's competitive and highly differentiated trucking industry, it
will take consider­able time and effort to sort out the economic costs
and benefits of new safety regulations. The railroad and air cargo
industries will soon debate similar but less extensive changes to
hours-of-service regulations in their respective industries. More
charged debates face industry and government efforts to advance positive
train control systems, at-grade crossing protection systems,
weigh-station electronic screening systems, and on-board
driver-alertness monitors. Complicating the debates will be the lack of
consistent meas­ures of safety and safety impacts across modes.

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