CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

PAPER

MAY 2005

Freight Rail

Transportation:

A Review of the

2004 Experience

CBO

TR002563/Photodisc/Getty Images

The Congress of the United States O Congressional Budget Office

CBO

Freight Rail Transportation:

A Review of the 2004 Experience

May 2005

A

PAPER
Note

Unless otherwise specified, the years referred to in this paper are calendar years.
Preface

In 2004, the freight rail industry in the United States faced a surge in demand for its services as the economy expanded, international trade increased, and farmers harvested bumper 

crops of grain. As demand for transport by freight rail heightened, policymakers, shippers, 

and transportation analysts expressed concern over whether the railroads would be able to 

meet shippers’ needs.

This Congressional Budget Office (CBO) paper—prepared at the request of the House Committee on Transportation and Infrastructure—examines the confluence of events that led to 

last year’s rise in demand for rail transport and analyzes measures taken both by the railroads 

and by shippers to accommodate that demand. The review suggests that although some shippers did experience delays and added costs, major disruptions to the overall economy were 

avoided. In keeping with CBO’s mandate to provide objective, impartial analysis, the paper 

makes no recommendations.

Elizabeth Pinkston of CBO’s Microeconomic and Financial Studies Division wrote the paper 

under the supervision of Roger Hitchner and David Moore. Several external reviewers offered 

valuable comments, including Michael Redisch and his colleagues at the Surface Transportation Board, Craig Rockey of the Association of American Railroads, Marvin Prater of the 

Department of Agriculture, and Francetta Willet of the Bureau of Labor Statistics. (The assistance of outside reviewers implies no responsibility for the final product, which rests solely 

with CBO.) Within CBO, Chad Chirico, Arlene Holen, and Tom Woodward provided helpful comments.

Loretta Lettner edited the paper, and Christine Bogusz proofread it. Maureen Costantino 

designed the cover and prepared the paper for publication. Lenny Skutnik produced the 

printed copies, and Annette Kalicki prepared the electronic version for CBO’s Web site 

(www.cbo.gov).

Douglas Holtz-Eakin

Director

May 2005

Summary and Introduction 1

The Railroad Industry and the Economy 3

Recent Increases in Rail Traffic 5

Industry and Market Responses to Increased Demand 7

Actions Taken by the Railroads 7

Actions Taken by Shippers 13

Events That Eased Demand Pressures 13

Policy Implications 14

CONTENTS
vi FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE

Figures

1. Distribution of Intercity Freight Traffic, by Mode of Transport,

Measured in Ton-Miles, 2001 3

2. Distribution of Intercity Freight Traffic, by Mode of Transport,

Measured in Tons, 2001 4

3. Distribution of Freight Revenues, by Mode of Transport, 2001 5

4. Freight Transported by U.S. Railroads, Measured in Ton-Miles,

1890 to 2003 6

5. Freight Transported by U.S. Railroads, Measured in Ton-Miles,

1990 to 2003 7

6. Intermodal Traffic, Measured by Numbers of Shipping Containers and

Trailers, 1990 to 2003 8

7. Carloads of Freight Transported by Rail, 1990 to 2003 9

8. Weekly Traffic Statistics for Major U.S. Railroads, by Carloads and

Intermodal Units, 2003 to 2004 10

9. Rail Price Indexes, January 2003 to December 2004 11

10. Producer Price Indexes for the Freight Rail Industry Compared with

Those for Finished Goods, January 2003 to December 2004 12
Freight Rail Transportation:

A Review of the 2004 Experience

Summary and Introduction

In 2004, as rail traffic reached all-time highs, policymakers and shippers expressed concerns about whether the 

freight rail industry would be able to meet an expected 

surge in demand for its services. The increasing demand 

for rail transport was fueled by an expanding economy, 

growth in international trade, and bumper grain harvests. 

The overriding concern—that shipping delays would adversely affect the overall economy—centered on the complex and somewhat elusive concept of capacity. 

In the transportation industries, “capacity” is usually defined in terms of a level of service, such as how many cars, 

trains, or airplanes can be handled efficiently and effectively by a facility or network in a given amount of time. 

Congestion occurs as the number of vehicles rises to such 

an extent that previous speeds are no longer sustainable. 

If the number of vehicles rises sufficiently, the “throughput” of the system—the number of vehicles or volume of 

cargo that passes a set point in a given amount of time—

actually diminishes. In the extreme, a systemic breakdown may occur, in which traffic comes to a halt. 

Capacity can be constrained by a shortage of any critical 

input—infrastructure (for example, tracks or switching 

systems), equipment (locomotives and other railcars), or 

labor. And because the transportation industries are networks, the existence of capacity constraints at one key 

junction or along one key corridor can cause delays that 

cascade throughout the system. A late afternoon thunderstorm at a hub airport, for example, can cause airplanes 

destined for that hub to be grounded at numerous other 

locations. Even people traveling between cities with clear 

weather may be delayed, either because they have to 

travel through the disrupted hub or because the aircraft 

they are supposed to fly aboard has been held up. Such effects can occur in the freight rail industry and were a 

source of last year’s concerns about potential systemwide 

problems.

This Congressional Budget Office paper assesses those 

concerns and examines measures taken both by the railroads and by shippers to mitigate the effects of demand’s 

outpacing capacity. Although shippers did experience 

some delays, inconvenience, and added costs, the railroads were able to meet most of the demand and avoid 

major disruption to the overall economy, despite carrying 

record volumes of freight.

Throughout 2004, expectations that rail capacity might 

not be sufficient to meet a surge in demand for freight 

transportation—especially as the peak back-to-school and 

holiday seasons approached—received widespread coverage in the news media. An article in Traffic World, a major 

trade publication, reported in August 2004 that “the 

freight transportation industry is bracing for a peak season meltdown.”1 The article went on to explain that “the 

potential for a meltdown is part of an overall freight 

economy that’s moving faster and heavier than ever but 

without a corresponding increase in infrastructure or capacity.” The article further suggested that “potential 

problems loom largest at West Coast ports.”

A few months earlier, the Los Angeles Times had reported 

concerns about congestion at the busiest ports in the nation, the California ports of Los Angeles and Long Beach. 

It warned: “In the summer and fall, the ports’ volumes 

will surge 30 percent or more as Asian goods arrive for 

the back-to-school and holiday seasons, and some observers fear that the increase will overwhelm Union Pacific

1. John Gallagher, “Fraying Supply Chain,” Traffic World (August 2, 

2004).
2 FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE

[Railroad] and disrupt the economy if the bottlenecks 

aren’t fixed.”2

The Department of Agriculture reported concerns about 

the availability of rail service in light of the agency’s forecast of record crops and strong export demand:

“Agricultural producers will have unusually stiff 

competition for limited rail capacity because yearto-date rail traffic is up across nearly all of the major 

commodity groups. Furthermore, some railroads are 

contending with rail service delays caused by the early 

retirement of train crew members, rail line and switching terminal congestion, and lack of equipment to 

handle unexpected demand.”3

In June 2004, Roger Nober, chairman of the Surface 

Transportation Board (STB), the federal agency charged 

with regulating the railroads and ensuring adequate service, wrote a letter to the heads of the seven major freight 

railroads asking how they intended to meet the unprecedented surge in demand.4 In his correspondence, Nober 

expressed concern that the railroads’ performance in recent months had faltered, as measured by several indicators. Those included factors such as the number of cars 

on-line, system train speed and yard dwell time, on-time 

performance, train- and engine-crew utilization, locomotive utilization, and infrastructure and capacity improvements.

Responding individually, the railroads indicated that they 

were indeed facing unprecedented demand but that they 

were taking action, such as adding more equipment and 

hiring greater numbers of new employees than previously 

planned. Some railroads also stated that they were planning to reroute traffic to avoid bottlenecks.5

In August 2004, the Association of American Railroads 

convened a meeting of representatives from its member 

railroads, the STB, shippers, and other interested parties 

to discuss potential problems arising from the surge in 

demand. At the STB’s urging, the Union Pacific Railroad 

also held its own customer forum in San Francisco, and 

CSX Transportation held one in Atlanta.

Throughout 2004, the demand for rail transportation 

was strong, setting an annual record for traffic as measured in ton-miles and setting weekly records for intermodal service (truck trailers and containers transported 

on railcars) in 28 weeks of the year.6 Even so, as of April 

2005, the feared “meltdown” of service had not materialized. Actions taken by the railroads to increase capacity or 

manage demand apparently were successful at avoiding 

massive systemic problems. The railroads dramatically 

accelerated their hiring and training, acquired new equipment, and modified their operations in order to increase 

capacity. They also raised rates on some commodities and 

services and asked shippers to moderate their demands.

Shippers made accommodations in various ways to limitations in the availability of rail service. Some shippers 

combined into one shipment goods that might otherwise 

have been sent in several shipments. Some stockpiled materials in anticipation of delays, and some postponed 

making shipments at peak periods. Some sought alternative shipping methods, such as using less-congested rail 

routes, trucks, or air freight. As noted previously, as rail 

traffic continued to grow, railroads raised rates on certain 

commodities and services.7

 That market mechanism 

helped allocate the scarce capacity to shippers who valued 

it most, thus limiting potential damage to the economy.

Other factors helped moderate demand for rail transportation. For example, although 2004 marked the second 

year in a row of record grain harvests, grain prices were 

somewhat weaker than in 2003. That development may 

have reduced pressures to sell—and consequently transport—grain, which many farmers had reportedly felt the 

2. James F. Peltz, “Struggling to Get Back on Track: Union Pacific 

Deals with Major Congestion as the Improving Economy Brings 

More Cargo Through Southern California,” Los Angeles Times, 

Home Edition (May 14, 2004), p. C1.

3. Department of Agriculture, Agricultural Marketing Service, 

Transportation and Marketing Programs, Transportation Services 

Branch, “Grain Transportation Report” (August 26, 2004), 

available at www.ams.usda.gov/tmdtsb/grain.

4. Letter from Roger Nober, Chairman, Surface Transportation 

Board, to the heads of the seven Class I freight railroads, June 9, 

2004, available at www.stb.dot.gov/stb/docs/fallpeakletter.pdf. 

As the successor to the Interstate Commerce Commission, the 

STB regulates certain economic aspects of the rail industry. The 

Federal Railroad Administration regulates rail safety.

5. For example, see the Union Pacific Railroad’s response to the 

Surface Transportation Board, July 9, 2004, available at 

www.stb.dot.gov/stb/docs/upfallpeakletter.pdf.

6. A ton-mile is the measure of one ton of freight transported the 

distance of one mile.

7. Other factors, such as rising fuel prices, also played a role in the 

railroads’ decision to increase rates.
FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE 3

previous year. In addition, the combined ports of Los Angeles and Long Beach experienced problems getting 

enough workers to unload ships in a timely manner, creating a major bottleneck and thus moderating the flow of 

shipments to the railroads. At one point, there were reportedly 94 cargo ships waiting to be unloaded, and 43 of 

those could not even get into the harbor.8

In sum, the freight market functioned well in the short 

run: price signals were sent and received, allowing the 

costs associated with an increase in demand to be accommodated without serious damage to the economy. Yet 

certain factors that contributed to the surge in demand—

increased international trade and intermodal shipping—

are likely to continue to grow in the future. That raises 

questions about how the market will work to provide sufficient capacity for the transportation of freight and how 

federal policy will influence the mix of capacity among 

rail, road, and water carriers. Such longer-term considerations, however, are beyond the scope of this review.

The Railroad Industry and the

Economy

There are seven Class I freight railroad systems—defined 

by the Surface Transportation Board as those with more 

than $277.7 million in annual revenues in 2003—in the 

United States.9

 Four of those railroads together account 

for 93 percent of operating revenues and 94 percent of 

the ton-miles of Class I railroads. They are the Union Pacific Railroad Company (UP) and BNSF Railway (formerly known as the Burlington Northern Santa Fe), 

which operate in the western United States, and CSX 

Transportation, Inc., and Norfolk Southern Railway, 

which operate in the East. The three smaller Class I railroads are the Grand Trunk Corporation (a unit of the Canadian National Railway Company), Soo Line Railroad 

Company (a unit of Canadian Pacific Railway), and Kansas City Southern Railway Company.

Figure 1.

Distribution of Intercity Freight

Traffic, by Mode of Transport,

Measured in Ton-Miles, 2001

(Percentage of ton-miles)

Source: Department of Transportation, Bureau of Transportation 

Statistics, National Transportation Statistics 2004 (January 2005), Table 1-46, available at www.bts.dot.gov/

publications/national_transportation_statistics/2004/

index.html.

Notes: The traffic total excludes freight carried by pipeline and air 

carrier.

A ton-mile is the measure of one ton of freight transported 

the distance of one mile.

Railroads in the United States transport about 47 percent 

of freight, measured in ton-miles, and 30 percent, measured in tons (see Figures 1 and 2).10 In 2003, they carried 1.8 billion tons of freight a total of about 1.6 trillion 

ton-miles.11 Because rail rates are generally lower than 

8. Barney Gimbel, “Yule Log Jam: The Holiday Shipping Season 

Was Chaos at the Biggest U.S. Container Port,” Fortune (December 13, 2004), pp. 162-170.

9. The threshold is $250 million in 1991 dollars. The Surface Transportation Board adjusts the threshold annually to reflect the 

effects of inflation.

10. These numbers exclude pipelines and air freight. Pipelines are 

not generally in direct competition with railroads, nor is air 

freight. Air freight accounts for a very small proportion of freight 

tonnage and ton-miles. Ton-mile data are from Department of 

Transportation, Bureau of Transportation Statistics, National 

Transportation Statistics 2004 (January 2005), Table 1-46. Tonnage data are from Rosalyn A. Wilson, Transportation in America, 

19th ed. (Washington, D.C.: Eno Transportation Foundation, 

2002), p. 44.

11. Association of American Railroads, Railroad Facts, 2004 Edition

(Washington, D.C.: AAR, October 2004), pp. 27-28.

Truck

 (33%)

Class I Railroad

 (47%)

Water Carrier

 (20%)
4 FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE

Figure 2.

Distribution of Intercity Freight

Traffic, by Mode of Transport,

Measured in Tons, 2001

(Percent)

Source: Rosalyn A. Wilson, Transportation in America, 19th ed. 

(Washington, D.C.: Eno Transportation Foundation, 2002), 

p. 44.

Note: The traffic total excludes freight carried by pipeline and air 

carrier.

rates for trucking or air freight, however, railroads take in 

only about 13 percent of intercity freight revenue—about 

$33.5 billion in 2001 (see Figure 3).12

Railroads carried shipments valued at $320.5 billion in 

2002. By comparison, during the same period, trucks 

transported shipments worth $6.2 trillion, air carriers 

transported shipments worth $279.5 billion, and water 

carriers transported freight worth $90.9 billion.13 The 

value of freight rail shipments in 2002 represented 3.1 

percent of gross domestic product (GDP) for that year; it 

was 10.7 percent of the nonservice (durable plus nondurable goods) portion of GDP.14 The value of rail shipments accounted for nearly 17 percent of the value of 

goods imported into and exported from the United States 

in 2002.15

Rail transportation is particularly important to certain industries. About 70 percent of coal delivered to power 

plants in the United States travels by rail, as does about 

70 percent of all automobiles manufactured domestically.”16 Approximately 32 percent of grain shipments are 

transported by rail.17 The chemical industry also relies 

heavily on railroads.

With the exception of a slight dip in 1997, rail traffic, as 

measured in ton-miles, has risen steadily since 1990 (see 

Figures 4 and 5). A market segment that has experienced 

particularly rapid growth is intermodal transportation. 

Strictly speaking, “intermodal” refers to any shipments 

that are carried by more than one mode, such as rail and 

truck or rail and water carrier (for example, ocean liners 

or barges). But it also generally connotes coordinated 

movement of freight that remains in the same container 

or truck trailer until it reaches its final destination.

Intermodal traffic—as measured by the number of trailers and containers on railcars—grew by 60.2 percent 

between 1990 and 2003, while the total number of rail 

carloads (including intermodal traffic) grew by 35 percent during that period (see Figure 6 on page 8 and 

Figure 7 on page 9).18 About half of rail intermodal shipments are exports or imports—a growing part of the 

overall U.S. economy.19

12. This excludes revenues from pipelines and air freight. If air freight 

was included, the rail share would drop to 12.4 percent. Air 

freight would account for 3.8 percent, reflecting its relatively high 

prices and revenues.

13. Department of Transportation, Bureau of Transportation Statistics, National Transportation Statistics 2003, Table 1-52, available 

at www.bts.gov/publications/national_transportation_statistics/

2003/index.html. These numbers double-count the value of 

goods carried by more than one mode.

Railroad

 (30%)

Truck

 (57%)

Water Carrier

 (13%)

14. Council of Economic Advisers, Economic Report of the President

(February 2004), Table B-1.

15. Ibid., Table B-24.

16. Association of American Railroads, “Economic Impact of U.S. 

Freight Railroads” (Washington, D.C.: AAR, February 2005), 

available at www.aar.org.

17. Department of Agriculture, Agricultural Marketing Service, 

Transportation Services Branch, Transportation of U.S. Grains: A 

Modal Share Analysis, 1978-2000 (October 2004), p. 10.

18. This annual carload series includes intermodal traffic. The weekly 

traffic data presented later in this paper account for carloads and 

intermodal separately. The two series also differ in the way they 

account for traffic of U.S. railroads that are owned by Canadian 

railroads.

19. Association of American Railroads, “Economic Impact of U.S. 

Freight Railroads.”
FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE 5

Figure 3.

Distribution of Freight Revenues, by 

Mode of Transport, 2001

(Percent)

Source: Department of Transportation, Bureau of Transportation 

Statistics, National Transportation Statistics 2004 (January 2005), Table 3-18, available at www.bts.dot.gov/

publications/national_transportation_statistics/2004/

index.html.

Notes: The total excludes revenues from pipelines and air carriers. 

The trucking total includes local, short-haul shipments.

Technological advances in railroad equipment over the 

past two decades have propelled intermodal growth. The 

development of equipment that can carry large containers 

on either railcars or trucks and that can carry multiple 

containers on a single railcar has reduced shipping costs. 

The emergence of intermodal transportation has affected 

the relationship between the freight rail and trucking industries: trucking companies are both competitors to railroads and major customers and collaborators as well. For 

example, the large trucking and logistics company 

Schneider National no longer transports freight by truck 

between Los Angeles and Chicago; instead, it loads truck 

trailers on railcars for that trip.20 In December 2004, a 

spokesman for United Parcel Service (UPS), which spent 

an estimated $750 million on rail service in 2004, was 

quoted as saying: “If a ground package is going 750 miles 

or more, it is more economical and efficient for us to load 

the trailers, move them to the railhead, and put them on 

a flatcar” than it is to send the same package by truck.21

Freight sent by rail generally has to travel by truck for local pickup and/or delivery, unless both the shipper and 

customer have direct rail access (as is mostly the case for 

coal, which trains can carry straight from the mine to a 

power plant).

Recent Increases in Rail Traffic 

In 2004, rail traffic reached new highs. The number 

of nonintermodal carloads of freight (17.4 million) was 

2.9 percent higher than in 2003, and intermodal traffic—nearly 11 million trailers and containers—was up by 

10.4 percent.22 As previously noted, intermodal volume 

set weekly records in 28 weeks of 2004 (see Figure 8 

on page 10). The Association of American Railroads 

reported that total traffic as measured in ton-miles—an 

estimated 1.61 trillion ton-miles—“was also higher in 

2004 than ever before.”23

The increase in overall economic activity, growth in international trade, and large grain harvests all contributed to 

an increase in demand for rail transportation. The economy continued its recovery in 2004, with real (inflationadjusted) gross domestic product 3.8 percent higher in 

the fourth quarter of 2004 than in the fourth quarter of

Truck

 (85%)

Class I Railroad

 (13%)

Water Carrier

 (2%)

20. Scott Arves, President of Transportation, Schneider National 

(presentation given at the Association for Transportation Law, 

Logistics, and Policy’s Transportation Forum, October 6, 2004).

21. Norman Black, United Parcel Service spokesman, as quoted by 

Jim Haug, “Iron Tracks Provide an Alternative Route,” Daytona 

Beach News-Journal (December 5, 2004).

22. Intermodal traffic is not included in the carload numbers in these 

weekly traffic reports, in contrast to its inclusion in the annual 

series presented above. See footnote 18 on page 4 of this report.

23. Association of American Railroads, “U.S. Freight Railroads Complete Record-Breaking Year” (press release, Washington, D.C., 

January 6, 2005).
6 FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE

Figure 4.

Freight Transported by U.S. Railroads, 

Measured in Ton-Miles, 1890 to 2003

(Billions)

Sources: Association of American Railroads, Railroad Facts, 2004

Edition (Washington, D.C.: AAR, October 2004), pp. 27 

and 32, and Rosalyn A. Wilson, Transportation in America, 

2000, 18th ed. (Washington, D.C.: Eno Transportation 

Foundation, 2001), p. 12.

Notes: Class I railroads are those with revenues that exceed a 

threshold set by the Surface Transportation Board or by its 

predecessor, the Interstate Commerce Commission.

A ton-mile is the measure of one ton of freight transported 

the distance of one mile.

2003.24 Nominal GDP (based on current-dollar values) 

rose by 6.2 percent in that time period.

International trade continued to grow in 2004, fueling 

demand for rail transportation. The value of goods imported into the United States rose by $213.1 billion from 

2003, to a total of $1,473.8 billion.25 The value of goods 

exported rose by $94.5 billion from 2003, to a total of 

$807.6 billion. Exports of grain and feed rose from $14.8 

billion in fiscal year 2003 to $17.9 billion in fiscal year 

2004.26 In terms of volume—a unit relevant for measuring the demand for rail transportation—wheat exports 

rose from 24.3 million metric tons in fiscal year 2003 to 

31.1 million metric tons in fiscal year 2004, and exports 

of coarse grains (corn, barley, sorghum, oats, and rye) increased from 46.1 million metric tons to 52.6 million 

metric tons.27 Adding to the demand for rail transportation from West Coast ports—particularly the ports of Los 

Angeles and Long Beach—were imports from Asia. Total 

imports from China rose to nearly $197 billion in 2004 

from $152 billion in 2003.28

The rising costs facing the trucking industry, the railroads’ major competitor, have contributed to an increase 

in demand for rail. Trucking companies have apparently 

found it difficult to attract enough drivers willing to endure the lengthy separations from home and family that 

are characteristic of long-distance trucking. Scott Arves, 

the transportation-sector president of Schneider National, which employs 15,000 drivers, has suggested that 

the “average annual pay for a truckload driver may have 

to rise from about $40,000 to $60,000.” In 2004, 

Schneider offered a $5,000 signing bonus to experienced 

drivers.29 Moreover, escalating fuel prices have affected 

truckers as well as railroads. Both trucking companies 

and railroads typically impose surcharges that reflect increases in fuel prices, but those surcharges have not kept 

pace with rising fuel costs.30

24. Department of Commerce, Bureau of Economic Analysis, “Gross 

Domestic Product: First Quarter 2005—Advance Estimates” 

(press release, Washington, D.C., April 28, 2005), available at 

www.bea.gov/bea/rels.htm.

25. Department of Commerce, Bureau of the Census, “U.S. International Trade in Goods and Services Highlights” (February 10, 

2005), available at www.census.gov/indicator/www/ustrade.html.

1890 1910 1930 1950 1970 1990 2003

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

All U.S. Railroads

Class I Railroads

26. Department of Agriculture, Economic Research Service, “Outlook for U.S. Agricultural Trade,” AES-44 (November 22, 2004), 

available at http://ers.usda.gov/publications/so/view.asp?f=trade/

aes-bb/.

27. Ibid.

28. Department of Commerce, Bureau of the Census, “Foreign Trade 

Statistics: Trade (Imports, Exports, and Trade Balance) with 

China,” available at www.census.gov/foreign-trade/balance/

c5700.html.

29. Rick Romell, “The Cost of Shipping Is Likely to Rise Significantly—Along with Drivers’ Salaries,” Wichita (Kan.) Eagle

(November 28, 2004), quoting Scott Arves of Schneider National.

30. Scott Flower, “Air Freight and Surface Transportation: 3Q Rail 

Preview: A Mixed Bag to Say the Least,” Citigroup Smith Barney 

(October 12, 2004), and Sean Kilcarr, “Fuel’s Wild Ride,” Fleet 

Owner (August 1, 2004), available at http://fleetowner.com/

management/feature/fleet_fuels_wild_ride/.
FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE 7

Figure 5.

Freight Transported by U.S. Railroads, Measured in Ton-Miles, 1990 to 2003

(Billions)

Sources: Association of American Railroads, Railroad Facts, 2004 Edition (Washington, D.C.: AAR, October 2004), pp. 27 and 32, and Rosalyn 

A. Wilson, Transportation in America, 2000, 18th ed. (Washington, D.C.: Eno Transportation Foundation, 2001), p. 12.

Notes: Class I railroads are those with revenues that exceed a threshold set by the Surface Transportation Board or by its predecessor, the 

Interstate Commerce Commission.

A ton-mile is the measure of one ton of freight transported the distance of one mile.

Industry and Market Responses to 

Increased Demand

Railroads and shippers took a number of steps in 2004 

to avert the feared breakdown in rail service. In addition, 

outside events helped relieve pressures on the rail transportation system.

Actions Taken by the Railroads

In response to rising demand for their services, the railroad companies took several actions: they increased supply, raised rates, and imposed limits on shippers.

Increasing Supply. As they indicated in their respective 

responses to the chairman of the Surface Transportation 

Board, the railroads added more cars, engines, and other 

equipment than they had planned, and they hired and 

trained more new engineers and conductors than they 

had in many decades. For example, the Union Pacific 

Railroad hired more than 5,000 workers to help meet increased demand. It also completed an additional 10 miles 

of double track west of El Paso, Tex., along the congested 

Sunset Route.31 Norfolk Southern hired more than 2,000 

train and engine crew members, purchased more than 

200 locomotives, and continued testing and implementing train control technologies.32 CSX hired about 1,400 

train and engine employees, purchased or leased about 

280 locomotives, and implemented the first phase of its

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

All U.S. Railroads

Class I Railroads

31. Jack Koraleski, Executive Vice President-Marketing and Sales, 

Union Pacific Railroad, “Service Updates,” letter to customers 

(January 11, 2005), available at www.uprr.com/customers/

updates/2005/011105.shtml.

32. Norfolk Southern Corporation, Annual Report 2004, pp. 15-16, 

available at www.norfolksouthern.com/nscorphtml/ar04/pdf/

p17.pdf.
8 FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE

Figure 6.

Intermodal Traffic, Measured by Numbers of Shipping Containers and Trailers, 

1990 to 2003

(Millions)

Source: Association of American Railroads, Railroad Facts, 2004 Edition (Washington, D.C.: AAR, October 2004), p. 26.

Note: Data are primarily for Class I railroads, but traffic for some non-Class I railroads is included for each year. Beginning in 1995, the data 

exclude two small Class I railroads, the Grand Trunk Corporation and the Soo Line Railroad Company, which are owned by Canadian

railroads. The railroads whose traffic is included represent approximately 96 percent of the U.S. intermodal rail units.

“ONE Plan” to improve network efficiency.33 BNSF 

hired about 3,000 employees in 2004 and expects to add 

about the same number in 2005.34 The railroad is working to finish double-tracking the single-track segments of 

its intermodal network in the Southwest and to add sidetracks and improve tunnel capacity on its northern 

lines.35 It also undertook initiatives to improve the flow 

of trains through terminals and to increase the number of 

cars per train in order to enhance capacity.36 Where possible, several railroads rerouted traffic to avoid bottlenecks, even though that entailed some trains’ having to 

travel greater distances.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

2

4

6

8

10

12

33. Clarence W. Gooden, Executive Vice President and Chief Commercial Officer, CSX Corporation (presentation to the Association of American Railroads, Fall Peak Planning Forum, Kansas 

City, Mo., September 9, 2004, available at www.csx.com/share/

csx/corporation/genericdocs/docs/AAR_Fall_Peak_Forum_-_

Sept_7-REF21440.pdf.

34. Susan Green, “You’re Hired,” Railway: The Employee Magazine 

of Team BNSF (January/February 2005), p. 8, available at www

.bnsf.com/employees/communications/railway/pdf/200501.pdf.

35. “Perspective,” interview with BNSF Executive Vice President 

and Chief Operations Officer Carl Ice and Executive Vice 

President and Chief Marketing Officer John Lanigan, Railway: 

The Employee Magazine of Team BNSF (January/February 2005), 

pp. 4-5, available at www.bnsf.com/employees/communications/

railway/pdf/200501.pdf.

36. Patrick Hiatte, “BNSF Makes Best Use of Resources Handling 

Record Volume Growth,” Railway: The Employee Magazine of 

Team BNSF (January/February 2005), p. 9, available at 

www.bnsf.com/employees/communications/railway/pdf/

200501.pdf.
FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE 9

Figure 7.

Carloads of Freight Transported by Rail, 1990 to 2003

(Millions)

Source: Association of American Railroads, Railroad Facts, 2004 Edition (Washington, D.C.: AAR, October 2004), p. 24.

Note: Data are for Class I railroads and include intermodal traffic.

Increasing Rail Rates. As demand rose in 2004, the railroads increased their rates, as reflected in the Bureau of 

Labor Statistics’ (BLS’s) producer price index (PPI) series 

(see Figure 9).37 Rates for intermodal service rose by 5.6 

percent from January 2004 to December 2004, compared 

with 1.8 percent from January 2003 to December 

2003.38 Rates for carload service rose by 6.5 percent from 

January 2004 to December 2004, compared with 2.6 

percent from January 2003 to December 2003.39 The 

PPI for finished goods rose by 3.4 percent from January 

to December 2004 and by 2.6 percent from January to 

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

5

10

15

20

25

30

35

37. Department of Labor, Bureau of Labor Statistics, “Producer Price 

Index Industry Data,” available at www.bls.gov/ppi/home.htm. 

The BLS index samples a representative mix of rail movements, 

which are held constant. (Whenever a movement in the sample 

is discontinued or is no longer available, BLS substitutes another 

movement.) By contrast, the rate inflation index calculated by 

the Surface Transportation Board is based on a sample of waybills 

in the current period and thus reflects a shifting market basket. 

The STB index measures rate changes for aggregate sets of rail 

service, such as all grain movements in the western United States 

or all coal movements in the East. The STB index has generally 

indicated less of a price increase (indeed, generally a downward 

trend in rates) than the BLS index. However, the processing of 

waybill data and the calculation of the STB’s index take about a 

year, so current data were not available for this paper.

38. The term “rates,” as used here, refers to what the Bureau of Labor 

Statistics calls the net transaction price, which includes the base 

freight charge, accessorial charges, discounts, and surcharges 

(including fuel surcharges) involved in a rail movement.

39. The producer price index numbers reported here are not seasonally adjusted. Trucking rates also rose in 2003 and 2004. The 

price index for truckload service, which is the closest substitute for 

rail for most types of shipments, rose by 3.2 percent in 2003 and 

by 3.9 percent in 2004. The price index for less-than-truckload 

service rose by 2.3 percent in 2003 and by 7.2 percent in 2004. 
10 FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE

Figure 8.

Weekly Traffic Statistics for Major U.S. Railroads, by Carloads and Intermodal 

Units, 2003 to 2004

(Thousands)

Source: Association of American Railroads, “Weekly Traffic of Major U.S. Railroads,” available from weekly press releases at www.aar.org.

December 2003 (see Figure 10).40 Railroads are continuing to raise their rates in 2005. For example, the Union 

Pacific has announced rate increases ranging from 8 percent to 100 percent for goods shipped to and from Arizona, where the Phoenix yard is clogged with traffic.41

In 2004, the railroads were able to raise rates for some 

traffic to adjust to changes in market conditions. That experience suggests that the railroads have greater flexibility 

in rate-making compared with the regulatory environment in which they once operated. The amount of rail 

traffic subject to rate regulation was substantially reduced 

by the Staggers Rail Act of 1980, although the Surface 

Transportation Board still has authority to regulate rates 

on traffic for which certain conditions are met.42

1 15 29 43 1 15 29 43

0

50

100

150

200

250

300

350

400

2003 Week 2004

Carloads

Intermodal Units

40. Broader gross domestic product indexes, which are reported on a 

quarterly basis, rose by somewhat less over the period. The GDP 

implicit price deflator rose by just under 1 percent from the first 

to the fourth quarter of 2003 and by 1.7 percent from the first 

to the fourth quarter of 2004. The GDP chain-type price index 

rose by 1 percent from the first to the fourth quarter of 2003 and 

by 1.7 percent from the first to the fourth quarter of 2004. See 

the Economic Report of the President (February 2005),Table B-3, 

p. 212.

41. Union Pacific Railroad Company, Internet Bulletin, “Arizona 

Price Changes and Capacity Management” (February 8, 2005), 

available at http://dx01.my.uprr.com/pubdir/inetbull.nsf/

$$industrialByNumber?OpenView.

42. The Staggers Rail Act of 1980 (Public Law 96-448, 49 U.S.C. 

10101) removed many regulatory restrictions on the railroads and 

enabled them to operate more efficiently.
FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE 11

Figure 9.

Rail Price Indexes, January 2003 to December 2004

(January 2003 = 100)

Source: Department of Labor, Bureau of Labor Statistics, Producer Price Index Industry Data, available at www.bls.gov.

Rates that are potentially subject to regulation are those 

that are available to shippers as part of railroads’ “common-carrier obligation.”43 Common-carrier rates are 

subject to maximum-rate regulation only where the STB 

finds the existence of market dominance by a railroad. To 

make a finding of market dominance, the STB must determine that there is no effective competition from other 

railroads or other modes of transportation for the traffic 

in question and that the revenues from that traffic equal 

or exceed 180 percent of the railroad’s variable cost of 

providing the service.

The other major set of rates are those that are covered by 

individual contracts between railroads and shippers. They 

are not subject to STB regulation, except that the terms 

of contracts for certain agricultural commodities must be 

filed with the STB.

A large portion of rail traffic—estimated in 1999 to be 

about 70 percent, measured in tons—moves under 

long-term contracts for which rates can change only as 

the contracts provide.44 Contracts often have costadjustment provisions based on indexes such as the STB’s 

“Rail Cost Adjustment Factor” (RCAF).45 Demandbased adjustments may have been rare in past contracts, 

but at least one railroad reportedly is planning to include 

provisions for turning away traffic if the volume of a cusJan.

2003

Mar.

2003

May

2003

July

2003

Sep.

2003

Nov.

2003

Jan.

2004

Mar.

2004

May

2004

July

2004

Sep.

2004

Nov.

2004

0

94

96

98

100

102

104

106

108

110

112

Intermodal

Carloads

43. Until passage of the Interstate Commerce Commission Termination Act of 1995, common-carrier rates had to be filed with the 

ICC. They are now required to be publicly available, but the railroads have a choice of ways to comply with that requirement.

44. General Accounting Office (now known as the Government 

Accountability Office), Rail Regulation: Current Issues Associated 

with the Rate Relief Process, GAO/RCED-99-46 (February 1999), 

pp. 3 and 16. The percentage of traffic under contract has probably declined since 1999 as some coal and agricultural movements 

have shifted to common-carrier rates. Because the terms of contracts are not made public, it is not known to what extent they 

provide for surges in demand. Before the Staggers Act, contract 

rates were used very little because of uncertainties about their legal 

status.

45. The STB has two versions of the RCAF: an RCAF-A, which 

is adjusted for productivity increases, and an RCAF-U, which is 

simply an input-price index, not adjusted for productivity 

increases.
12 FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE

Figure 10.

Producer Price Indexes for the Freight Rail Industry Compared with Those for 

Finished Goods, January 2003 to December 2004

(January 2003 = 100)

Source: Department of Labor, Bureau of Labor Statistics, Producer Price Index Industry Data, available at www.bls.gov.

tomer’s shipments exceeds a set amount.46 In any event, 

the BLS price index data suggest that railroads have been 

able to raise rates within the terms of their contracts. 

Moreover, the average length of contracts has shortened 

in recent years. Contracts for coal movements negotiated 

in the first few years after the Staggers Act went into effect reportedly were for periods as long as 20 years, as 

electric utilities and railroads sought to lock in rates and 

service levels. In recent years, as both railroads and electric companies have been buffeted by regulatory and market changes, they have been more reluctant to enter into 

such lengthy contracts.

In sum, the ability of railroads to raise rates served as an 

indicator of a surge in demand, a mechanism for allocating scarce capacity to shippers who valued it most highly, 

and a signal that more investment is needed to increase 

capacity.

Imposing Limits on Shippers. Railroads also asked 

customers to limit or consolidate shipments or otherwise 

moderate their demands. For example, Union Pacific discontinued expedited intermodal service to United Parcel 

Service on the busy Sunset Route between Los Angeles 

and El Paso.47 The UP also set limits on the number of 

railcars available to carry aggregates in Texas, requiring 

shippers to wait until they had full carloads. By combining shipments into fewer but longer trains, that action 

subsequently enabled UP to move 48 percent more rock 

traffic.48

According to the Los Angeles Times, BNSF “set limits on 

some eastbound international cargo from Los Angeles to 

Jan.

2003

Apr.

2003

July

2003

Oct.

2003

Jan.

2004

Apr.

2004

July

2004

Oct.

2004

Dec.

2004

0

95

100

105

110

115

Rail Carloads

Rail Intermodal

Finished Goods

46. Joe Ruff, “Union Pacific Plans to Charge More, Turn Away Less 

Profitable Cargo,” Associated Press Newswires (January 27, 

2005).

47. Jack Koraleski, Executive Vice President-Marketing and Sales, 

Union Pacific Railroad, “Service Updates,” letter to customers 

(May 4, 2004), available at www.uprr.com/customers/updates/

050404.shtml.

48. Jack Koraleski, Executive Vice President-Marketing and Sales, 

Union Pacific Railroad, “Service Updates,” letter to customers 

(November 17, 2004), available at www.uprr.com/customers/

updates/111704.shtml.
FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE 13

prevent congestion as Asian imports rise. The company 

started a system on June 18 [2004] that sets maximum 

container-cargo volumes for ocean-shipment haulers.” 49

Such actions imposed costs on shippers—costs that are 

difficult to identify and quantify—such as those associated with holding inventories. 

Actions Taken by Shippers

Seasonal and cyclical shortages of capacity can be disruptive—at a minimum to the rail customers whose shipments are delayed, and sometimes also to workers and 

businesses in ancillary industries. There often are ways of 

responding to such shortages, however.

The predictability of seasonal fluctuations enables some 

shippers to take measures to reduce potential disruptions 

associated with expected surges in demand, such as those 

of the fall peak season when merchandise is being shipped 

for the year-end holidays and when agricultural crops are 

harvested. For example, manufacturers and retailers could 

ship products to regional warehouses earlier in the year. 

That, of course, would entail higher inventory and storage costs than a just-in-time approach, but companies 

can make their own calculations as to whether incurring 

those costs would outweigh the risk of not having enough 

goods on the shelf to sell at a time of peak consumer demand. Some agricultural shippers have more flexibility 

than others, because nonperishables often can be stored 

for short periods until rail capacity is available. Temporary storage of grain under less-than-ideal conditions, 

however, usually results in some loss of value.

Most rail shippers also can use alternative modes of transportation. Agricultural and other goods that are not timesensitive can be shipped by barge if they originate along a 

waterway or close enough to one to be taken there economically by truck. High-value, relatively lightweight 

goods can go by air freight. Trucks can handle most shipments that otherwise would go by rail, albeit more expensively.50 (Trucking companies’ recent difficulties in finding enough qualified long-distance drivers rendered 

trucks somewhat less able than in past years to meet rising 

demand.) Some shipments from Asia that would have 

gone to Southern California ports could instead go to 

other Pacific ports, or they could go through the Panama 

Canal to East Coast ports—although the latter would increase transit time, and many ocean liners now are too big 

to traverse the canal.

Shippers made such adjustments in response to the events 

of 2004. For example, after encountering delays in shipping engines and other vehicle parts from California, 

Toyota Motor Corporation increasingly relied on truck 

transportation.51 After the Union Pacific Railroad 

pushed UPS trailers off its system in April 2004, other 

major trucking companies also shifted away from intermodal service. The chief executive officer of the large 

trucking company Yellow Roadway was reported in 

August 2004 as saying, “We’ve had to take more and 

more freight off the rail and put it on the road. There has 

been no sign of improvement.” Some shippers reportedly 

had to stop production temporarily, and one indicated 

that the lack of railcars “was having a significant cost 

impact.”52

Events That Eased Demand Pressures

Certain events also helped relieve pressure on the railroad 

system. Agricultural shippers reportedly placed less demand on the rail system in the fall of 2004 than they had 

in the fall of 2003 (and than had been expected in 2004, 

in light of the bumper crops). Grain prices were generally 

not as high in the fall of 2004 as in the previous autumn. 

As a result, the opportunity cost of storing rather than 

selling their crops immediately was less than it was the 

previous year, and farmers may have decided to hold 

crops in storage in anticipation of higher prices in coming 

months. For each week of the last three months of 2004, 

grain-car loadings were less than the three-year average 

for that week.53

49. “Burlington Northern Limits Some Cargo as Imports Rise,” 

Los Angeles Times, Home Edition (June 26, 2004), p. C2, drawn 

from Bloomberg News.

50. Using trucks not only generally increases shippers’ costs but also 

imposes wear and tear on highways and may add to congestion.

51. Peltz, “Struggling to Get Back on Track.” 

52. Gallagher, “Fraying Supply Chain.”

53. Department of Agriculture, Agricultural Marketing Service, 

Transportation and Marketing Programs, Transportation Services 

Branch, “Grain Transportation Report” (February 3, 2005), p. 3, 

available at www.ams.usda.gov/tmdtsb/grain.
14 FREIGHT RAIL TRANSPORTATION: A REVIEW OF THE 2004 EXPERIENCE

Also relieving pressure on the railroads were delays in 

unloading ships at the ports of Los Angeles and Long 

Beach. As noted earlier, the lack of enough dockworkers 

kept some ships waiting much longer than usual to be 

unloaded and helped moderate the flow of goods to the 

railroads.54

Policy Implications

The recent surge in demand for freight rail transportation 

appears to have been accommodated without significant 

effects on the overall economy and without substantial 

government intervention. The expression of concern by 

the Surface Transportation Board about the potential for 

a breakdown in service may have prompted the railroads 

to enhance their efforts to meet demand, but it would 

have been in the railroads’ own interest to do so anyway. 

If a temporary increase in demand stretches rail capacity 

to its limits, that does not imply a need for government 

intervention. In most industries, shortages of a product 

or service simply indicate a need for price increases in order to clear the market. If higher demand is the result of 

seasonal factors, producers may find it economically unproductive to expand their capacity to meet peak demand 

because then there would be excess capacity lying idle the 

rest of the time.

The demand for rail service has been trending upward, 

however, even when overall economic activity has dipped. 

That development suggests a need to consider how rising 

demand for freight transportation will be met in the future. It raises issues about whether current public policies 

affecting the rail industry—and, indeed, policies affecting 

the other freight transportation industries as well—are 

likely to lead to productive investments in transportation 

infrastructure and an economically efficient allocation of 

resources among transportation modes. Those issues are 

beyond the scope of this paper. 

54. Ronald D. White and Leslie Earnest, “Delays Mount at Local 

Ports as Shipping Surges: At the L.A.-Long Beach Complex, 

Vessels Filled with Goods for Holiday Shopping Must Wait Days 

to Be Unloaded,” Los Angeles Times (September 27, 2004), p. C1.