# Freight Systems  From System Construction to System Optimization[^1]

## Executive Summary

In recent decades, the freight transportation system has been in
transition from an era focused primarily on system construction toward
an era that will focus increasingly on system optimization. Past efforts
at developing the transportation infrastructure were oriented around
system construction. The railroads in the 19^th^ century and the highway
system in the 20^th^ century connected all parts of the nation, and
opened up markets for moving freight and passengers. Today, these
systems are extensive and mature. Ports, airports, and other freight
systems have been developed, and technological and management change has
increasingly focused on optimizing the use of available physical assets.
Those mature assets require large expenditures of resources to maintain
and preserve asset conditions, meaning that fewer resources are
available to build new capacity.

Optimizing freight operations and productivity has occurred within the
context of deregulation, economic globalization, and increasing
congestion on the nation's transportation system. Deregulation has
resulted in excess capacity being eliminated from highway and rail
freight services and facilities. Intermodal services and facilities have
revolutionized international trade, and made all modes more productive.
Ports and airports have seen services and demand grow rapidly. Freight
services are now more efficient and in many cases lower in cost (in
constant dollars) than in previous decades. But the elimination of
excess capacity has resulted in systems with less redundancy and less
ability to withstand shocks or disruptions. Congestion is growing on
many key freight segments of the transportation system, and congestion
can drastically reduce the productivity of the overall freight network.
This congestion and incident-related delay could vastly increase the
costs of those freight movements that are today managed to exacting
schedules.

By definition, optimization of a system means that the highest
productivity is being squeezed out of that system as it currently
exists. If new demands are placed on the optimized systems, then those
demands must be met through a coordinated set of capacity and system
optimization enhancements. Further, a less redundant system also means
that the impacts of work zones must be more carefully managed. Finally,
major surges in movements, such as defense or emergency deployments,
also require more attention in a system already operating at peak
capacity.

The public and private sectors are faced with two questions: What is the
best response to growth in demand for freight services? How can a
coordinated program of actions that takes full advantage of new
technologies as well as of the traditional attributes of the nation's
successful freight systems be developed? Freight decisions must be made
across jurisdictional boundaries and across boundaries that currently
exist between public agencies, private carriers, shippers, and the
affected communities and interests from the local to the global level.

## Introduction

Transportation systems, like other infrastructure systems, experience a
logical life cycle. When first developed, a transportation network
provides new linkages and capacity, opens up new markets, and introduces
superior service capabilities. The railways in the 19^th^ century and
the highways in the 20^th^ century united the continent with
transportation services that proved a boon to economic development. In
recent decades, airfreight, huge bulk vessels, and ever-larger container
ships have created tremendous productivity improvements in international
shipping and made possible the global economy. Over time, however,
demand catches up with capacity, maintenance and rehabilitation
requirements rise, populations and economic activity shift, and
bottlenecks and inefficiencies emerge in the transportation system. More
resources must be devoted to maintenance and preservation of facilities
and services, and fewer resources are available for expanding capacity
or adding new or improved services. Increasing attention is devoted to
doing the best with what is available by emphasizing operations. This
can be characterized as a shift from system construction to system
optimization.

This transition has been underway in the rail industry for decades and
is increasingly a focus for highways. System optimization is a driving
force for the rapidly growing intermodal system. Intermodal services and
facilities have grown around opportunities for system optimization,
utilizing available capacity by making selected operations and capital
investments that provide cost savings and improvements to services.

System optimization is a broad concept that includes incremental
adjustments, modifications, enhancements, and upgrades to
infrastructure, vehicles, information technology, management practices,
and improved operations. Specific examples of system optimization, which
may involve investment in new capacity, include the following:

-   Selected improvements to capacity or selected service changes to
    eliminate or avoid bottlenecks and to exploit underutilized
    facilities;

-   Improved components for vehicles and facilities to reduce life-cycle
    costs;

-   Vehicle technology to allow improved utilization;

-   Introduction of improved information technologies to allow better
    utilization of the infrastructure; and

-   Improved operations and service planning by carriers and third-party
    logistics suppliers to provide marketable services.

System optimization incorporates the responses of customers, the public,
and the economy to the transportation system -- specifically, the
adjustments that they make in terms of their own travel and locational
choices. New facilities and new services that are introduced to optimize
the system affect how logistics systems are structured and how much
freight flows over each part of the network. Government agencies respond
to transportation capabilities through regulatory and policy actions. In
turn, responsive policy-making requires ongoing adaptation to changes in
technology, infrastructure, and economic behavior.

Both system construction and system optimization have led to tremendous
improvements in productivity in the freight industry. It is natural,
then, for much of the discussion in this theme to revolve around where
future productivity gains might emerge or be encouraged to emerge.

While system optimization has many positive impacts, it may also have a
few unintended impacts. For example, the focus on system optimization
has resulted in much less redundancy in systems, but redundancy means
fewer response options to incidents or special circumstances, or to
rapid growth. Work zone management becomes more important and more
challenging. As national defense becomes more dependent upon excellent
strategic mobility, the systems may be less able to cope with surges in
defense flows. Intermodal connectors, ports, and airports are of concern
both as bottlenecks impacting normal freight flows and as potential
constraints on defense capabilities.

This paper explores the trends, implications, and issues involved in the
shift from system construction to system optimization.[^2]

## Trends

### Freight System Productivity

For a variety of reasons, the freight industry has achieved remarkable
productivity improvements in recent decades. Substantial benefits have
come from general economic growth and declining real dollar labor and
fuel costs. Economic growth almost automatically generates more capital
for investment by industry, although the public sector resources
generated through fixed per gallon fuel taxes do not respond
automatically to economic growth. Technology has also played a major
part, not just in the rapid advances in computers and
telecommunications, but in the development of larger, heavier, and more
fuel-efficient trucks. Deregulation and other policies aimed directly at
freight productivity were successful in fostering network restructuring,
fostering efficiencies in the use of labor and equipment, and reducing
prices paid by freight customers.

New transport services have been introduced and existing transport
networks have been expanded. Reductions in airfreight costs and
innovations in operations have led to the development of overnight
express networks, sparking a revolution in specialized land and
intermodal services to serve what was once the much maligned small
package segment of the freight market. The Interstate Highway System has
provided capacity for much faster and more reliable movements in larger,
heavier trucks.

The capacity of the mainline rail system has been dramatically
increased, in large part through its conversion to a heavy haul network
capable of more throughput in longer and heavier trains. With help from
government agencies in increasing clearances, railroads have introduced
a national network for operating double-stack container trains. Despite
the conversion of many multi-track lines to single track, the capacity
of the mainline system has increased. Excess potential capacity is gone,
however, and today many parts of the rail network are operating at their
maximum capacities. The productivity of double-stack trains has
transformed the relationships among railroads, motor carriers, ocean
carriers, and third-party logistics providers. These changes have led to
containerized shipments, increasing dramatically the demand for domestic
as well as international shipping. Very significant investments have
been made in ports and other intermodal terminals in order to increase
the capacity of the system for handling the rapidly growing volume of
container shipments.

Today, a much greater variety of freight transportation services is
provided over improved networks than just 30 years ago. The
proliferation of services and improvements to the networks proved a boon
to shippers and a major source of productivity improvements to the
carriers. In short, the U.S. economy now benefits from an ubiquitous
truckload (TL) and less than truckload (LTL) system, as well as
extensive intermodal, rail, air, and express freight systems. Along
major waterways and along the coasts, there are extensive low-cost barge
and ocean shipping operations. All of the enhancements to these systems
and services have provided customers with new location options and new
logistics choices that can be exploited to competitive advantage. The
result has been that freight transportation costs and prices -- in real
terms -- declined over the latter quarter of the 20^th^ century.

However, over the next 20 to 30 years, there will be a far greater need
to maintain, rehabilitate, and optimize the existing networks and less
opportunity (domestically) to expand the networks and services provided.
The resources required for system maintenance and preservation limit the
availability of funds for capacity expansions. Increased scrutiny of
projects and increased concern about environmental and community impacts
also narrow the choices. For highways, it appears unlikely that truck
size and weight limits will change in any manner that would lead to
substantial new productivity gains. A "bridge formula" limits allowable
axle weights and configurations in order to protect the nation's
bridges. Legislatures have shown sensitivity to concerns about the
overall size and weight of trucks. For railroads, any increases in
weights for rail cars would have less of a percentage impact on
productivity than historical changes in rail car weights.

The potential inability of infrastructure capacity to keep up with
steadily increasing demands is a theme that has echoed throughout
investigations into the future of freight transportation in America.
Carriers, customers, and government agencies are all concerned about the
difficulty of adding capacity and of overcoming congestion.
Congressional hearings in 2001 have focused on congestion and the
viability of solutions. Issues of capacity and congestion, to a greater
or lesser extent, are of major concern for all of the freight modes.
Emerging problems include the following:

-   Portions of the freight system require substantial rehabilitation
    (e.g., inland waterway system; highway and railway bridges);

-   The costs of congestion and of delays associated with key
    bottlenecks are significant and increasing;

-   The rising costs for land, fuel, and labor threaten to offset recent
    gains in productivity; and

-   Increasing difficulties in obtaining land and financial resources
    for expanding facilities limit the additions that can be made to
    capacity.

There are no current proposals for massive new programs to add capacity.
The nation's most significant highway capacity initiative, the
Interstate Highway System, is nearly completed. Building more capacity
will become more and more difficult, not only because of the lack of
funds, but also because of the increasing social and economic cost of
neighborhood and environmental impacts.[^3] As the system ages,
maintenance and rehabilitation have become the new focus.

Although some new highway lane-miles continue to be added, they are not
being added quickly enough to stave off more and more traffic-related
delays. The capacity issue for highways is an issue of location and time
of day. Based on the total number of national lane-miles of highways and
roads, and total vehicle miles of travel, the average density of travel
across the system is calculated at some 40 vehicles per hour per
lane-mile, which would not be defined as congested. However, the most
important facilities are highly congested at particular times of the
day, and on those facilities, congestion is spreading over more hours.
Selected spot or bottleneck improvements, new lanes or new facilities,
or new modal options can help to relieve congestion. Still, resources
are so limited that many agencies can now address only a few capacity
issues every year, and are unable to keep pace with travel growth.

Congestion in the vicinity of cargo hubs (e.g., ports, intermodal
terminals, rail yards, and warehouse districts) has become a particular
problem because many of these facilities are located in the older, more
densely developed industrial areas of metropolitan areas. State and
local governments can and are investing to improve freight access in
congested metropolitan areas, but building public support for these
investments is often difficult. The costs are borne locally, but the
benefits often accrue over many states. The political struggle over who
pays and who benefits hamstrings many freight projects.

Foreign trade is an increasingly important part of the U.S. economy.
However, many ports are running out of room for terminal expansion, and
highway congestion threatens to impede access to ports. The U.S.
Department of Transportation's recently completed report on the
condition of the National Highway System (NHS) intermodal freight
connectors underscored the problem, with data showing that the condition
of intermodal roadway pavements and the level of investment in their
repair lagged significantly behind the average for other NHS
roadways.[^4] The move toward ever-larger vessels and load-center ports
could exacerbate this problem by creating demand for even greater
throughput at facilities that are already perceived as bottlenecks.

Barges are major movers of grain and bulk products. However, many locks
and dams are aging and in need of improvement. Moreover, portions of the
system have low utilization, and there have been suggestions that some
of the inland waterways system should be returned its natural state.

Air cargo also is becoming increasingly important in this age of
high-value commodities and direct-to-home shipping of consumer goods.
However, air cargo competes for landing slots and for airport space with
passenger needs, and it is very difficult to increase airport capacity.
The new Denver airport is the only entirely new, major facility that has
been completed in the last two decades. Most existing airports have
found it difficult politically, if not physically impossible, to add new
runways in order to increase capacity.

Since freight traffic is expected to continue to increase, the problem
of ensuring sufficient capacity will become more prominent. Indeed, in
order to continue to provide efficient and effective freight
transportation services, it will be essential to pursue creative
approaches to increasing productivity and expanding system capacity,
while reducing negative impacts on neighbors and the environment.

### Capacity Investment Trends and Implications

#### Highway

Emerging environmental concerns, the increasing cost of facilities, and
increasing congestion have limited the ability to create major new
highway capacity in most parts of the country. Highway system expansion
has not kept pace with the growth in vehicle miles of travel (VMT). As
shown in Figure 1, VMT rose 72 percent between 1980 and 1998, while over
the same period the number of roadway miles increased one percent. While
capacity in terms of roadway miles does not have to directly track VMT
in order to maintain service levels, the lack of new capacity almost
assures that service levels will deteriorate unless massive shifts in
travel patterns occur. However, traffic grew on most facilities, and
those close to or at capacity experienced significant problems due to
additional delays and spreading of the peak periods.

Figure 1. Growth in Vehicle Miles of Travel and Road Miles

*Vehicle travel grew by 72 percent, road miles by
1 percent between 1980 and 1998*

![](media/image1.wmf)

Source: Federal Highway Administration, Highway Statistics.

With maturation of the Interstate Highway System, the development focus
for highways has been on linkages, through designation of the NHS, the
national defense Strategic Highway Network (STRAHNET), and intermodal
connectors.

#### Rail

Capacity for other modes has also failed to keep pace with the growth of
traffic. In the case of rail, the length of the mainline track network
has actually declined, along with the num­ber of locomotives and rail
cars. Despite this reduction, rail ton-miles have increased, due to
heavier cars, longer trains, and faster throughput. Today, the nation
relies on fewer rail cars and locomotives to haul more freight than ever
before. Excess capacity and redundancy -- in effect, the "slack" in the
system -- are gone from the network. As an unintended consequence of
tightening the slack, operations have become much more susceptible to
breakdowns from the loss of a specific link due to incidents or other
causes. The lack of redundancy also decreases the options available to
shippers and customers. Options have value to shippers in terms of
increasing competition and holding down rates.

The overall route structure of the nation's mainline rail system has
been changed only modestly since 1975. The most notable expansions have
been in the creation of mechanized intermodal terminals, often by
converting former marshaling yards. Despite the creation of many new
short-line and regional railroads, the network of light density rail
lines has also continued to shrink, continuing a process that began
early in the 20^th^ century.

In recent years, the rail industry has begun to focus on rationalizing
its network. A succession of mergers and acquisitions has left the
nation with a handful of very large (Class I) railroads operating on a
significantly consolidated mainline network with connections to many
light density lines served by a large number of short-line and regional
carriers.

#### Ports

In the last 25 years, U.S. coastal ports and coastal and inland
waterways have undergone major improvements. These improvements have
come primarily in response to the container revolution and growth in
bulk trades, as well as to competition among ports seeking the economic
benefits associated with trade. Containerization has driven much of the
growth in port tonnages. More containerization and larger vessels have
resulted in faster offloading and quicker turnaround. While almost all
coastal ports experienced growth over the last 25 years, ports on the
west and southeast coasts experienced the greatest growth, reflecting
changes in U.S. trade relationships. However, obtaining additional
landside access, constructing major landfills for port expansion, and
implementing major channel deepening projects all involve long and
difficult processes.

In interviews with carriers, concerns have been raised that the land
"crunch" for freight-related facilities is becoming a major problem.
Port and intermodal facilities and related terminal and service
facilities will need to be expanded, but these facilities are
concentrated in older centers where land available for expansion is
severely limited. One metropolitan planning organization, the North
Jersey Transportation Planning Authority, has compiled a list of
"brownfields" -- abandoned industrial sites in urban areas -- that may
be appropriate for port-related uses. "Freight-oriented development,"
like "transit-oriented development," could play an important role in the
economic revitalization of downtown areas, while reducing pressure to
develop unspoiled land outside the city limits.

#### Economic Geography and Location Trends

When considering trends in freight flows and productivity over the
course of several decades, it is necessary to recognize the importance
of fundamental trends in economic geography, i.e., in the distribution
of economic activity around the globe. A major factor driving the growth
in intermodalism and developments in intermodal technology, for example,
was the increase in imports from the Pacific Rim and the need for
low-cost transport from the west coast ports to the major markets in the
central and eastern parts of the U.S.

For the railroads, shifts in the market for coal have had major
consequences; coal accounts for roughly 40 percent of the industry's
tonnage. Environmental considerations have led to greater use of
low-sulfur coal, which has affected coal freight flows dramatically. The
production of coal from Wyoming's Powder River Basin has increased
rapidly over the past 20 years, leading to increased coal movement on
the western railroads. In the east, coal production and coal
transportation have declined because of lower foreign demand and because
of a shift toward low-sulfur western coal. The use of alternative energy
sources and the possibility of mine-mouth generation are two other
factors that may affect the long-term demand for coal transportation.

Agriculture is highly sensitive to changes in transportation services
and costs. Today, American farmers successfully compete in world markets
thanks to competitive rail service and low-cost barge and ocean
shipping, but major shifts in agricultural production and distribution
could occur within 20 to 30 years. For example, soybean production is
growing rapidly in Brazil and Bolivia, where agricultural production
costs are well below what they are in Iowa, the most important soybean
producing state in the U.S. As the transport systems improve for South
American agricultural products, soybeans and other agricultural products
will become more competitive worldwide, with important implications for
U.S. agricultural production and transportation systems.

The changes in markets and economic geography also open up opportunities
for new linkages, including new terminals and services. Every change in
market forces creates opportunities for investments that take advantage
of the enhanced productivity or lower cost of moving freight from a
place of production to an ultimate market.

### Congestion

The Texas Transportation Institute (TTI) monitors highway congestion in
metropolitan areas across the nation with a measure called the
congestion index, which is the ratio of travel time in the peak period
compared to off-peak periods (Figure 2). The congestion index in
metropolitan areas of all sizes has increased dramatically since the
early 1980s, and is expected to worsen in the future. Likewise, TTI also
estimates the costs of congestion, which have been increasing
significantly year by year.

Freight carriers and shippers experience congestion-related losses in
several ways. First, trucks need access to ports and terminals that are
often located in the most congested parts of the most congested urban
areas. Second, trucks need to make deliveries to customers in these
congested cities, at times of day where street space is at a premium.
Third, trucks are often blamed for congestion problems, and their needs
are seldom well understood by the public and by transportation
decision-makers at the local and regional level. All losses due to
congestion are passed on in terms of higher prices and lower economic
productivity, impacting all consumers and all industries.

Figure 2. Travel Rate Congestion Index\
*Peak-Period Travel Times Have Increased Significantly Compared to\
Off-Peak Travel Times in 68 Large Metro Areas*

![](media/image1.wmf)

> Note: Congestion index is the ratio of travel time during peak periods
> to travel time during off-peak periods.

## Implications and Opportunities for Further Productivity Improvements

Many of the major factors driving productivity improvement in freight
transportation over the past 20 years have largely been exhausted,
making continued improvements more difficult to achieve in the future.
Figure 3 shows the trend in total logistics costs. In recent years,
these costs have stalled at about 10 percent of gross domestic product
(GDP). The flattening of the curve suggests that shippers and carriers
have wrung most of the cost savings out of deregulation. Shippers are
spending proportionally less on transportation today compared to 20
years ago. Not only are they spending less, they are also getting much
more transportation for their dollar. Deregulation has 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.

Figure 3. Logistics Expenditures and GDP\
*After a Long Improvement, Total Logistics Expenditures\
Have Stalled at About 10 Percent*

![](media/image1.wmf)

In the future, returns from deregulation could diminish, forcing the
freight transportation industry to look beyond deregulation to maintain
and improve its productivity. The next sections explore some of the
opportunities for further improvements in productivity in each of the
freight systems.

### Rail Industry Productivity

#### Hubs and Terminals

The rail industry, after decades of plant reduction, now finds itself
short of capacity in certain key lanes and terminal areas. The problem
is particularly acute at hubs and terminals where carriers exchange
traffic, where they share facilities, or where one carrier's operations
interfere with another's.

The Chicago region represents the most critical example of this issue.
Although industry consolidation over the past 20 years has resulted in
six large North American systems, Chicago has not lost any of its
significance as the primary rail gateway between east and west. Although
alternative gateways are available for the four major U.S. systems,
network configuration continues to favor routing through Chicago. This
affects all types of traffic that must travel between east and west,
including unit trains, carload shipments, and intermodal shipments. For
most connections, trains must be routed through heavily congested
connecting lines, yards, and terminals that were designed to meet 19^th^
century requirements. Furthermore, in many cases, the traffic must be
handed off to one or more switching roads (primarily the Chicago Belt
Railway and the Indiana Harbor Belt) for classification and delivery to
the connecting road.

On a typical day, the Chicago region hosts 33,000 cars and 1,200
locomotives, along with 44,000 pieces of intermodal equipment.
Twenty-five percent of the nation's rail freight originates or
terminates in Chicago. A significant portion of this figure involves the
drayage of intermodal trailers and containers from one rail intermodal
facility to another, a direct result of the complexity and inefficiency
in providing steel-wheel interchange between eastern and western
carriers. In late 2000, the Association of American Railroads (AAR)
reported that the connection time for rail-bound carload traffic through
Chicago was approximately 40 hours. Other sources at recent meetings in
Chicago have cited 72 hours. While a significant improvement over the 90
to 100 hours that were common during the depths of the various
merger-related service crises in recent years, this performance is still
costly and uncompetitive.

The severity of the merger-related service problems in Chicago prompted
the creation of a special AAR committee with responsibility for
improving day-to-day coordination and also for developing longer-term
approaches to dealing with capacity and performance problems. Although
the short-term operational actions have had positive results, achieving
consensus among the carriers on more comprehensive solutions involving
substantial operational changes and/or capital investment will be
difficult, if not impossible. Even if agreement could be reached, the
price will likely be too high for the railroads to tackle by themselves,
no matter how great the expected savings and/or revenue gains from
improved service. The magnitude of the problem is sobering. The annual
cost of inefficient Chicago operations just for intermodal service is
estimated to be at least \$500 million. Add the delays in moving general
freight through the region, and the national significance of this
terminal area becomes more evident.

Solutions to such complex problems as these will require new models for
management and operations, such as the Alameda rail corridor that serves
the ports of Los Angeles and Long Beach. A publicly owned rail authority
conceivably could acquire the key rail lines within a metropolitan
region, and the private railroads could become tenants. The public
authority would then undertake capital improvements funded through the
Transportation Infrastructure Finance and Innovation Act (TIFIA) credit
program or other federal programs, and the railroads would pay the
authority on a per-car basis for use of the facilities. Obviously, such
a new approach would not be without risk. However, further progress on
the hardest problems will likely require riskier and bolder initiatives
than those taken in the past.

#### Rail Service

Railroads have sought to retain some truck competitive traffic through
deep discounts in pricing, but this has led to a vicious cycle of
cutbacks in operations and further deterioration of service. The
traditional carload business is particularly susceptible to further
declines in service and volume. Unlike intermodal and unit train
services, the carload product has not improved over the past 30 years
and, in recent years, has suffered through prolonged periods of
particularly poor service. Poor service has sometimes been related to
mergers and consolidations, as evidenced by the aftermath of the Union
Pacific-Southern Pacific combination. The railroads' service profiles
are another cause. For example, through competitive pricing, the
railroads have induced shippers to load multiple carloads. As a result,
many agricultural communities have been faced with the choice of either
losing their access to competitive shipping rates and services or
investing in infrastructure that supports unit-train loading. These
issues have been discussed in many forums including the Western
Governors' Association Freight Partnership meetings held in coordination
with the Federal Highway Administration (FHWA) and the states,
railroads, and shippers.

According to some officials, the industry could be headed for another
phase of plant rationalization and downsizing, with substantial amounts
of freight forced onto the highway system. Some industry officials have
sought a fundamental change in the business model for dealing with the
carload business. One option would entail establishment of a reservation
system in order to reduce demand volatility, allow railroads and their
customers to plan more effectively, and move freight more efficiently
and reliably. By smoothing demand and matching service commitments to
the available capacity, utilization can be increased while service
reliability is improved. Another would be to encourage shippers to own
their own rail cars. While this solves the problem of car availability,
it does not solve the problem of car scheduling.

#### Technology

Innovation in basic railroad technology will continue. More durable
track materials are being developed and tested by the AAR as part of its
continuing effort to reduce track and equipment costs. In particular,
the rail industry has an extensive research program aimed at developing
track technologies to allow increases in axle loads and higher density
loading of vehicles. In the past 30 years, the industry has already
increased the typical limit for gross vehicle weight by over 40 percent,
from 200,000 pounds to 286,000 pounds. A further 10 percent increase to
315,000 pounds is now under consideration. Such an increase would have
implications for short-line railroads, which would be forced to make
investments to accommodate the heavier cars, and for rail transit
providers, which share rail lines in some urban areas with freight
trains.

Another set of initiatives is aimed at what might be called "precision
railroading." Advanced train control systems are probably the most well
known example, with their potential benefits in terms of safety and line
capacity. On-board computers and wireless digital communications offer
substantial operating advantages to railroads and provide a platform for
innovative information technology (IT) applications. Electronically
controlled pneumatic braking systems, which are in the initial stages of
deployment, offer greater control over train braking, permit safer
operations, and allow for shorter stopping distances. Remote-controlled
locomotives, which are used throughout Canada for yard switching, could
be widely used in the U.S. as well. Moreover, the concept of remote
control might eventually be extended to some line operations, as has
already been done in some transit systems. The Meteor line of the Paris
metro, the first segment of which began operating in the late 1990s, is
driverless.

#### Mergers

There may be further efforts at restructuring the rail industry,
including continuation of trends regarding mergers and short-lines. Some
observers believe that the industry is headed to two major
transcontinental systems covering the U.S. and Canada, which will help
reduce the inefficiencies associated with complicated east-west
interchanges at Chicago, Memphis, St. Louis, and New Orleans. However,
further consolidation will only reduce the level of competition within
the rail industry itself. Captive shippers believe that they will suffer
in terms of both services and rates as a result.

### Motor Carrier Productivity

#### Information Technology

Motor carrier officials expect information technology to drive a great
deal of productivity gains. One common objective is to use IT to
coordinate more effectively with customers to reduce the general
randomness of freight in the system and to provide a higher level of
service to the customer at a lower cost. The average length of haul has
declined for truckload carriers, obliging them to focus more on
equipment utilization.

#### Intermodal

Truckload and LTL carriers are using rail intermodal options, which
frees up highway capacity in congested corridors and may provide
productivity gains for the carriers. The substitution of a rail move for
a highway move can in some circumstances improve the cost structure for
over-the-road truckers. One official noted that the trucking industry
and the rail industry will also seek to use intermodal options to
address seasonal and regional flow imbalances, e.g., in moving empty
containers back to west coast ports during peak shipping seasons.

According to customers, intermodal service has not only recovered, it
reached an all-time high after the service disruptions associated with
recent rail mergers. However, this is the perspective of a high-priority
customer willing to pay for premium service. A larger question is how
much motor freight could reasonably be converted to intermodal and
handled efficiently within the capacity constraints of the rail system,
while taking into account the generally thin profit margins achieved by
this traffic. Even if the amount of intermodal traffic doubled, it might
have only limited impact on highway truck traffic volumes because of the
projected high overall freight growth as well as the longer-distances
(500 miles plus) required for intermodal to be most effective.
Intermodal operators feel that productivity gains must come from better
planning, terminal rationalization, more effective use of information
technologies, and asset management strategies, because the trains will
not run any faster. Operators favor the development of major new or
expanded hub terminals because these are more efficient in terms of
workload and in terms of providing connections to the rest of the
network.

#### Networks

The national LTL carriers have achieved productivity improvements by
restructuring their terminal networks and making greater use of rail
intermodal options for line-hauls. One of the national carriers, for
example, was able to cut a full day out of transit times by
restructuring its terminal network to increase the number of direct
shipments. Even though its trucks run no faster than they did 10 years
ago, the company now provides better service. Carriers also have made
effective use of warehouses located and designed to achieve productivity
gains, for example in terms of physical location, proximity to other
related land uses, and highway access. On-time service for the LTL
carriers is believed to be in the low 90 percent range. This means that
carriers can generally provide 95 percent on-time deliveries to a large
percentage of major customers, but on average have not achieved 95
percent on-time systemwide. Desired service levels, however, are a
shifting target, and some customers want deliveries planned to the
minute, which makes it more difficult for the carrier to develop
efficient delivery schedules. While increased speed limits have given
carriers some additional flexibility in meeting demanding schedules,
increased congestion and especially incidents make it much more
difficult to adhere to these schedules.

#### Drivers

The potential for rising factor prices (e.g., fuel, materials, labor) is
a threat to further productivity improvements. The ability to obtain,
train, and retain truck drivers is a major concern to motor carriers, as
discussed in a related theme paper in this series, Economy: Rapid Change
in Manufacturing and Service Sectors. According to one motor carrier
executive, "the quality and availability of drivers is very much of a
problem and this problem is intimately bound up with service
performance." Insurance costs are another problem, especially for small
carriers. The same trucking industry executive observes: "the twin
forces of higher and even unavailable insurance plus higher fuel prices
are destroying profitability." This latter concern was echoed by other
motor carriers that fear that U.S. Environmental Protection Agency (EPA)
mandates for emissions control will reduce fuel efficiency and increase
fuel costs.

#### Vehicle Technology

Trends in vehicle technology may provide grounds for carrier optimism.
Continued advances in vehicle technology may lead to lighter, more
fuel-efficient vehicles that can carry somewhat heavier payloads under
current truck size and weight constraints. Information systems may
continue to provide greater ability to avoid incidents or bottlenecks.
However, this is the case only if the system has enough redundancy to
provide for other route choices.

### Water Carrier and Port Productivity

According to National Transportation Statistics, the inland waterway
system moves 650 million tons of primarily bulk freight at low rates.
These commodities would otherwise have to move on highways and railways
at higher costs. From a barge company's perspective, the primary concern
is not so much to seek productivity improvements, but simply to maintain
and retain the current system.

Much of the nation's inland waterway infrastructure is aging, with many
of its locks more than 50 years old and beyond their design life. A huge
backlog of rehabilitation and maintenance projects exists, and
enhancements are needed to update the system. Renewal of the system
infrastructure will be a major concern over the next 20 years. Planning
and rehabilitating will be complex tasks, because there is greater
concern for environmental issues than when the system was originally
built.

Labor productivity remains an issue in marine transportation. On the
West Coast, union work rules limit the hours for port operation. Hence,
opportunities exist for achieving further productivity improvement
through contract negotiations.

### Air Carrier Productivity

Dedicated air carriers have developed highly efficient hub and spoke
operations, and make intensive use of technologies for tracking
time-sensitive shipments. While the dedicated carriers have been able to
locate their hubs in airports with the capacity to handle their flights
and ground operations, the need exists for connections to other airports
that have capacity problems in terms both of landings and takeoffs and
of space for freight facilities. Internationally, non-dedicated
airfreight moves primarily in wide-body passenger jets with capacities
on the order of 100,000 pounds of freight. Productivity gains for
airfreight using non-dedicated aircraft are limited by the capacity
constraints impacting upon overall air travel today. Further growth in
productivity for airfreight almost certainly will require enhancements
to physical and operational capacities through capital investment in
either traditional facilities such as runways or investments in IT.

### Information Technology and Productivity

Both customers and carriers have developed high expectations for new
technology, especially information technology (IT) and intelligent
transportation systems (ITS), and these expectations likely will grow in
the future. In the private sector, IT and ITS technologies are expected
to improve scheduling, routing, dispatching, shipment tracing, and
terminal management. In the public sector, they are expected to help
with highway and traffic management and streamlined permitting. While
there are opportunities to utilize IT to a much greater extent, there
are also constraints. IT requires capital and operating resources, and
there may continue to be a shortage of skilled IT labor. Transportation
industries, whether public or private, have traditionally not provided
compensation at the top range of pay scales, and this is a particular
issue when many other industries are also seeking skilled IT labor.

The public sector may experiment with congestion pricing of bridges,
tunnels, roadways, and parking as a traffic management technique aimed
at squeezing more efficiency out of the highway network. As knowledge of
the importance of freight grows, more attention may focus on the
location and accessibility of freight terminals and hubs in the broader
planning and transportation planning process. Despite any potential of
IT or other improvements to systems and services, substantial need for
improvements to the physical capacity of freight systems will exist.

IT as an integrating technology was a prominent theme during interviews
with Professors Joseph Sussman and Henry Marcus, both with the
Massachusetts Institute of Technology Center for Transportation Studies.
Sussman sees major opportunities for IT in commercial vehicle operations
as states streamline their interface with truckers for routine
interactions. Marcus observes: "All of the steamship companies are
setting up logistics firms because they are paranoid about losing
control of the customer and becoming subject to commoditization." Both
professors expect carriers to achieve efficiencies from fleet
management, with a possibility that the technology will reward the
better carriers and foster rationalization. Both suggest that there is a
continuing need for federal research and development for transportation,
as past federal R&D has provided the basis for many of the productivity
improvements that have been achieved.

One motor carrier executive sees great potential in IT for shippers, who
will be able to track shipments and manage inventories more effectively;
at the same time, this executive questions how great the benefits will
be in reducing costs for the carriers. While satellite communications
have provided some operational gains, they have not been huge for the
truckload carriers. The overall gains from tracking trailers may be
greater than the gains from tracking tractors, but the shippers are
likely to get the greatest benefits. Several carrier officials
anticipate gaining considerable productivity from applications of IT and
operations research to integrated supply chain management. Again, it
ultimately is the customers, not the carriers, who stand to reap the
greatest benefits.

ITS is providing public agencies new capabilities for monitoring and
managing traffic flows. The use of ITS is clearly expected to help
offset some of the congestion problems in major metropolitan areas.

An emerging area of ITS/IT technology application is to improve
intermodal connection and intermodal asset management. The USDOT,
through ITSA, has convened an Intermodal Freight Technology Working
Group and conducted two national conferences on Intermodal Technology to
assess potential for technology applications to intermodal freight.
Several ITS operational tests are under way with public-private teams.

Carriers view IT as a way to work with customers to create 'customized
products with packaged information.' Carriers and customers will be able
to use timely, complete information to rationalize their traffic and
operations. A rail official suggested that railroads should "become
logistics providers, move heavily into information technology, and
greatly simplify their operations."

Barge companies use the global positioning system (GPS) and electronic
charts and look forward to the installation of Vessel Traffic Systems in
port. These systems will improve both capacity and safety. Carriers also
use satellite communications to monitor position, engine performance,
and other factors that will allow operating tradeoffs between speed and
fuel costs.

Tables 1, 2, and 3 illustrate some potential future productivity
improvements for highway, rail, and port freight facilities and
services. These are illustrative ideas; no evaluation of potential
actions is intended in this theme paper.

Table 1. Highway/Truck Operations -- Examples

  -----------------------------------------------------------------------
  **Operations      **Problem**       **Solution**      **Examples**
  Strategy**                                            
  ----------------- ----------------- ----------------- -----------------
  Corridor Traffic  Lack of           Corridor and      I‑95 coalition
  Information       corridor-scale    national travel   Fleet Forward
                    congestion and    condition         (operations
                    routing           information       test); rural ATIS
                    information for   services targeted program; roadway
                    truckers          to truckers       weather
                                                        information
                                                        systems

  Incident          Delays and        Proactive         Chicago Minuteman
  Management        deteriorating     response to       Patrol
                    reliability       incidents and     
                    because of        traffic           
                    incidents (e.g.,  management to     
                    breakdowns,       minimize backups; 
                    crashes, etc.)    expertise in      
                                      clearing heavy    
                                      truck-involved    
                                      incidents         

  Work Zone         Delays and        Specific          
  Management        increased risk of attention to      
                    accidents at work maintenance of    
                    zones; truck      truck flows at    
                    prohibited from   work zone and     
                    detour routes     along diversion   
                    because of low    routes            
                    bridge                              
                    clearances, etc.                    

  Automated Border\ Delays at ports   Automated         ITS/CVO program;
  and Weigh Station of entry and      credential and    CVISN
  Clearance         weigh stations    weight            
                    for regulatory    pre-clearance     
                    and safety        screening;        
                    inspections       coordination of   
                                      customs, INS and  
                                      DOT inspection    
                                      functions         
  -----------------------------------------------------------------------

Table 2. Rail Operations -- Examples

  ----------------- ------------------ ---------------- -----------------
  **Operations      **Problem**        **Solution**     **Examples**
  Strategy**                                            

  Increasing Rail   Complex            Positive train   Research is
  Headway and       interoperative     control          underway
  Capacity          systems are needed                  
                    to safely operate                   
                    freight trains at                   
                    speeds greater                      
                    than 79 mph                         

  Interchangeable   Equipment only     Domestic         EMP --
  Domestic          available to one   interline        participants are
  Container Pools   rail carrier is    container pools  NS, UP, CP, KCS,
  Which Add to      inefficient                         Wisconsin
  Speed and Service                                     Central, etc.\
  on Rail Lines                                         \
                                                        NACs --
                                                        participants are
                                                        BNSF, CN, CP,
                                                        CSX, IMRL

  Open Platforms    Single carrier     Web-enabled      ARZOON members
  for Rail Service  booking is time    communications   are US, CSX, NS,
  Booking Adds to   and labor          for booking and  and CP
  Customer Appeal   intensive          tracking         
  and Adds to                                           
  Velocity                                              
  ----------------- ------------------ ---------------- -----------------

Table 3. Port and Terminal Operations -- Examples

  ----------------- ----------------- ----------------- -----------------
  **Operations      **Problem**       **Solution**      **Examples**
  Strategy**                                            

  Remote Inland     Congested port    Move empty        Virginia Port
  Ports/\           terminals         containers to     Authority's
  Depots                              inland site       inland terminal

  Increase IT       Low terminal      Increased         Port of NY/NJ's
  Capability/\      productivity and  information/\     FIRST
  Automation        turn times        reservation       
                                      system            

  Agile Port        Need for          IT system         USDOD agile port
  Technology        increased port    integration       technology
                    throughput        between ship and  demonstrations
                                      train             
  ----------------- ----------------- ----------------- -----------------

## Issues in System Construction and Optimization

The nation's freight transportation system is mature, comprehensive, and
relatively efficient. The challenge for the future is to maintain the
capabilities of this system as demand increases. Although carriers'
productivity improvements cannot be expected to continue at the pace of
the past 20 years, some improvements can be achieved, especially through
the application of information technology. Nevertheless, additional and
substantial investments in highway and other transportation facilities
will be needed in areas of high growth or congestion. The previous
emphasis on system optimization has resulted in a rail freight system
that has higher productivity but with no excess capacity and that lacks
redundancy; a highway freight system in which costs have decreased and
in which deregulation has eliminated many inefficiencies such as empty
backhauls; an inland waterways system that moves bulk commodities at low
cost; a hub-and-spoke airfreight system that moves high-value
commodities quickly and efficiently at high cost; and an intermodal
system that takes advantage of the attributes of the various modes. The
systems individually and collectively represent a more optimized system
than decades ago. A characteristic of an already optimized system is the
need for major investments to increase capacity or quality of service
since, by definition, there is no excess capacity or system redundancy
left to exploit at low cost.

There are further important opportunities for intermodal and multi-modal
integration and coordination. The nation's highways, railways, and
waterways comprise a complex, effective system that supports freight
mobility throughout the country. To the extent that the railways and
waterways can move freight efficiently, the demand on the highway system
will be reduced. There is a clear federal role for promoting the best
use of each mode, encouraging intermodal coordination, and supporting
comprehensive freight planning processes at the state and local levels.
There is also a potential federal role for participating in or helping
to finance public/private efforts to address bottlenecks in the system,
including major freight bottlenecks such as the most congested
Interstate segments, or the previously cited network of rail lines and
terminals around Chicago. There is a strong national interest in
maintaining ubiquitous, high-quality freight transportation capabilities
and in continuing the longtime contributions of transportation
productivity improvements to the national economy.

Below, some of the key issues are synthesized from interviews and
assessments of the evolution of the nation's freight system.

#### To What Extent Can Information Technology Reduce the Need for Expanded Transportation Infrastructure?

IT offers great potential for optimizing the use of transportation
facilities, through travel planning and scheduling, reservation systems,
monitoring, and real-time control. All of the carriers who were
interviewed mentioned the potential productivity improvements achievable
from IT. The carriers and the customers both talked of the potential for
IT to improve coordination throughout the supply chain, leading to
increased productivity from smoothing traffic peaks, consolidating
shipments, and matching supply and demand. However, concerns were
expressed that IT alone cannot obviate the need for investment in
alleviating the bottlenecks within the networks.

#### Will Future Gains from Technology Be as Great as Past Gains?

Opportunities still exist for better vehicle design, improvements in
labor productivity, and technological benefits from automation, better
materials, and better components. However, these improvements are not
likely to be as great as in the past, in an absolute sense, because of
the remarkable economies already achieved.

#### How Will Freight Needs Be Represented in Public Infrastructure Investment Decisions?

System optimization, much more so than system construction, is an
ongoing process involving governments at all levels. Today, with more
limited capital investments, the demand forecasts -- and the interests
of freight -- need to be specified more accurately, as the consequences
of being wrong are much higher. A basic institutional difficulty that
must be addressed is the mismatch between the local focus of states and
MPOs and the increasingly national and global focus of the major freight
carriers and their customers (see Figure 4). Freight issues require more
extensive multi-jurisdictional coordination than do most passenger
issues.

Figure 4. Freight Transportation Perspectives State and MPO Focus\
is Regional and Local; Private Sector Focus is Increasingly\
National and Global

![](media/image1.wmf)

It will be appropriate to focus attention on infrastructure and planning
strategies at the local and regional level that consider the needs of
freight transportation in the same way that the needs of commuters are
handled. The MPOs tasked with developing long-range transportation plans
and transportation improvement programs are not all aware of or expert
in freight needs. The recent NHS intermodal connector report to Congress
highlighted the need for increased awareness and coordination in the
planning process, improved funding strategies, the application of
technology, and finally the resolution of community and environmental
issues.[^5]

#### System Optimization Does Not Mean That Capacity Investment Requirements Will Decline

As traffic volume grows so does congestion, and bottlenecks in the
system become more apparent. While improvements to the management of
critical parts of the system and better vehicle and control technology
can offer some relief, eventually investment will be required to expand
the capacity of the system. Given that capacity will likely be needed in
or near the most congested areas, the costs of these investments could
be much higher, per mile, than the average costs of constructing the
system initially.

The theme paper Economy: Rapid Change in Manufacturing and Service
Sectors, which deals with the impact of economic changes on freight
transportation, has a conclusion directly relevant to this issue:

"The rising importance of the service economy will not diminish the need
for traditional transportation services. Bulk transportation -- by
railway, waterway, highway, or pipeline -- will continue to account for
the great majority of freight transportation. Efficient movement of
grain, coal, ores, and other bulk commodities will continue to be a
basic requirement of the freight system and an underpinning of the
national economy."[^6]

#### Intermodal Terminals Will Be A Focal Point for Public Concern

Ports and intermodal terminals will be a major concern for public
agencies interested in the freight transportation system. Intermodal
transportation is expected to continue to grow rapidly, with benefits to
the economy and to the public in terms of trade and the environment.
However, the intermodal transport system depends upon sufficient
terminal capacity, which is likely to become a constraint in many areas.
Intermodal terminals require a great deal of land, they attract a stream
of highway traffic, and they operate 24 hours per day. This combination
of attributes makes it difficult for private companies to find suitable
sites for new terminals or acceptable means of expanding existing
terminals. Left to themselves, railroads will tend to locate new
capacity well outside of major metropolitan areas, leaving long-drayage
moves along the most congested highways for the initial pickup and
ultimate delivery. Likewise, ocean carriers will tend to serve fewer
ports, with longer inland movements by truck or rail.

These solutions, while possibly satisfactory to the carriers and some of
their customers, fail to deliver the potential improvements in highway
congestion, safety, and air quality hoped for from increasing use of
intermodal transportation. This suggests that intermodal terminal
development is an area for public involvement. Terminal size, location,
and access are matters that can best be addressed in the context of
metropolitan land use, local development issues, and strategic plans for
regional transportation systems.

#### Competition Leads to Lower Prices -- But May Reduce the Robustness of the Freight System

Deregulation has played an important role in promoting an efficient,
productive transportation system. Widely believed to be responsible for
declining freight rates over the past 20 years, deregulation has also
led to a system that is quite different from the regulated system it
replaced. The current system is more productive, less costly, and more
flexible in terms of the variety of services that are offered. However,
the regulated system was more robust, in that it supported a higher
level of capacity relative to demand, and provided for redundancy in
terms of the facilities and services available. Part of the productivity
achievements represents a deliberate reduction in system redundancies
and buffer capacities. With better utilization comes higher
productivity, but there is also a loss in terms of robustness. Through
lower prices, customers and the public have been the major beneficiaries
of increased efficiency within the system -- but they also bear the
brunt of the service problems when the system breaks down, as has
happened recently for periods of time after recent rail mergers.

The public interest may be served by taking steps to ensure that the
efficiencies created through deregulation do not create a system that is
too fragile, with too little reserve capacity to respond to unexpected
events or to rapid growth in demand. Some amount of slack is desirable
to assure that services can be maintained. However, the question is how
much reserve capacity and system redundancy is desirable and at what
cost to public agencies, carriers, and shippers.

#### New Freight Systems Could Emerge

Although none of the stakeholders interviewed mentioned completely new
freight systems, the possibility exists that new systems could emerge in
the same way that new air and express package systems blossomed in
recent decades. For example, there have been some studies of "tube
transport systems," in which automated vehicles travel along a network
in tunnels below a city.[^7] Instances of specialized freight handling
services (e.g., loading docks and freight elevators for large buildings
or the remote and automated baggage systems used in airports) could be
expanded over a larger area. Separating some shipments from the urban
street network would be a way to avoid the most congested areas.

#### Intermodal Cooperation Could Lead to Innovations in Intermodal Technology

New designs for vehicles and terminals could promote more effective
intermodal and carrier/customer partnerships. A good example is the
distribution of new automobiles, where both railways and motor carriers
use specially designed equipment and terminals to serve this major
freight market.

More ambitious innovations can be imagined. For example, railroads can
readily transport wider and heavier containers than are allowed on the
nation's highway system. Is it possible to establish access roads to
major intermodal terminals that could accommodate wider and heavier
trailers and containers, thereby allowing efficiencies in drayage,
terminal handling, and line-haul operations? Undoubtedly, but only with
a major public involvement and a willingness to consider applying
different size-and-weight limits to a limited subset of highway
segments. Another possibility would be to use rail corridors as toll
routes for trucks where rail corridors might be suitable for dual use
during certain portions of the day.

#### The Challenge Exists...

There are parallel threats to freight improvements due to other
concerns. Pressures may mount to restrict freight operations for reasons
such as enhancing highway or rail passenger services, improving safety,
or reducing freight impacts on sensitive areas or low-income
communities. It is desirable to incorporate freight issues and
opportunities more fully into all transportation planning and
decision-making. Whether actions are aimed at system construction or at
system optimization, full coordination of public and private actions
will be necessary to assure that the most effective and desirable
enhancements are identified and implemented. Since freight concerns span
a wider geography than urban areas, enhanced and wider forums are needed
for coordinated system construction and system optimization strategies.

[^1]: This working paper was prepared by Cambridge Systematics, Inc.,
    and Reebie Associates, Inc., members of the Battelle Team providing
    research and analysis support to the Federal
    Highway Administration Office of Freight Management and Operations.
    It is one in a series of working papers providing initial analysis
    and discussion of the trends and issues affecting freight
    transportation productivity in the United States and North America.
    The series is available at
    http://www.ops.fhwa.dot.gov/freight/adfrmwrk/index.htm. The working
    papers were prepared under contract DTFH61-97-C-00010, BAT-99-020.
    The opinions expressed in the working papers are those of the
    authors, not the Federal Highway Administration. The working papers
    are being circulated to generate discussion about emerging freight
    issues and may be updated in response to feedback from public and
    private sector stakeholders.

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