Urban Freight Economics: A New Rail Paradigm For Large Lots.

Abstract

The generalization that trucks are more efficient for short-haul freight than railcars does not pertain where shipment size and complementary traffic levels are sufficiently large. In particular, there appear to be enormous opportunities for the competitive movement of truckload- and larger-sized lots by rail within urban areas, which have a sufficient concentration of freight activity to justify minimum right-of-way maintenance and reliable switching service on industrial branch lines. The recognition of this urban rail opportunity, in an age of escalating road degradation and congestion, would have farreaching implications for regulators, urban planners, and rail management, all of whom have heretofore assumed that railroads' urban future lies only in disgorging trucks onto the urban road network from intermodal terminals.

How will freight move in tomorrow's cities? If you look at futuristic Walt Disney models and Star Wars movies, through vacuum tubes and over hovercraft highways. If you read contemporary transportation articles, over conventional roads.

This article will suggest that the emergent realities of twenty-first century congestion will highlight another alternative that is often already superior for large-lot shipments--conventional railroad. A hub-and-spoke system of railroad freight pickup and delivery should be more economical than truck for large lots in urban areas, and could have sufficient reliability and velocity to meet most large-lot shippers' needs. Widespread understanding of urban rail freight economics could alter the course of evolution in the urban landscape.

U.S rail freight revenues of $35 billion in 1998 were about one tenth of the expenditures on truckload lots, which approached $300 billion in 1998. [1] It is the hypothesis of this article that the competitiveness of rail vis-a-vis truck is a function of shipment size and accessibility to rail infrastructure and non-circuitous service, not a function of distance. Therefore, because a large portion of the $300 [+ or -] billion worth of ground transportation now moving in truckload volumes (even a large portion of the $100 [+ or -] billion truckload moving less than fifty miles) is moving from and to urban areas where there is sufficient concentration of transportation demand to support minimum right-of-way maintenance and daily switching service, a huge truckload market would be vulnerable to rail-direct if rational service and rates were offered.

What are the economics of urban freight movement? Comprehensive statistics do not exist, so historically we have believed what seems reasonable. In his 1877 paper, "The Fixation of Belief," [2] Charles Peirce, the great American logician and philosopher, enumerated four ways we can come to accept a belief. Two methods are pertinent here: (1) because a belief is agreeable to reason, or the "a priori method," and (2) because a belief is agreeable to experience, or the "method of science." Peirce clarified in 1893 what he meant by #1 as "merely accepting without question a belief as soon as it is shown to please a great many people very much." By #2 he meant "the method of scientific investigation."

This article will suggest that the current belief about short-haul rail economics--that trucking is inherently less expensive than rail for shorter hauls--may seem reasonable, but that upon investigation this belief needs revision.

THE OLD PARADIGM [3]

"Trucks serve the low density and short-haul freight markets more efficiently than rail..." That is the old paradigm as stated in Improving Railroad Productivity, [4] a government report prepared for President Nixon's Council of Economic Advisers in 1973. The report committee was chaired by John R. Meyer of Harvard University.

As much as any other individual, Meyer articulated the current belief about urban freight transportation economics. In 1959, he co-authored The Economics of Competition in the Transportation Industries, [5] which concluded that piggyback should replace rail-direct merchandise service on low-density spur lines and industrial sidings. [6] In 1971, Meyer co-authored The Role of Transportation in Regional Economic Development, which flatly stated:

The railroads' role in carrying manufactured commodities is limited by high terminal cost, large capacity, and low speed. The line haul costs of rail transport are lower than those of trucking, but rail terminal costs are much higher....In particular, piggyback decreases rail terminal costs (although piggyback terminal costs are higher than truck terminal costs) and decreases the railroads' disadvantage in pick-up and delivery service. [7]

In Chapter V of Improving Railroad Productivity, Meyer prophesied:

...[A]s the railroads continue to specialize as carriers of a limited number of bulk commodities and of long hauls of manufactures, the prospect is for continuing concentration of rail movements over a more limited rail network.

This outcome is based on the premise that road use is less expensive than rail use for short-hauls. Taken at face, this premise may seem sound; indeed, it is a common explanation for railroads' short-haul market loss. However, there is reason to question the premise. This article will investigate its validity for freight movements originating and terminating in urban areas.

COMPARING URBAN TRUCK AND RAIL COSTS

Historical Cost Studies

A bad place to start an inquiry into the economics of urban freight would be the railroads' own switching cost studies. The Interstate Commerce Commission's Rail Form F methodology for switching costs was almost never used because it took too much time and effort for results that were too specific for broad application. Railroads invariably created switching cost studies that served their commercial purpose of setting high reciprocal switching fees, making it difficult for other railroads to reach their on-line traffic.

A good place to start is John Meyer's 1959 book. For urban truck data, he used a 1954 ICC report which estimated that the terminal cost for truck pickup or delivery of general freight was 84[cts.] per ton. [8] That is, using data from conventional accounting methods and not including cross-dock, billing, collection, detention, etc., the out-of-pocket truck operating cost of picking up a dry van trailer in the origin terminal area or delivering it in the destination terminal area was 84[cts.] per ton for a truckload.

Meyer made no attempt to calculate the comparable variable cost of urban boxcar pickup or delivery. All his rail costs were estimated as system-wide averages, using the statistical costing method of multiple regression. However, one regression result is of particular interest -- one which estimated that the variable cost of rail terminal operations would have been $17.83 per yard engine hour. [9] That is, the variable rail pickup or delivery comparable to dry van pickup or delivery depends on how much engine time was required to classify and pull or spot a ton of boxcar freight. In Meyer's words, "It is difficult to generalize about carload terminal expenses since they vary greatly depending on the volume of transportation requirements, the distance of a plant from a classification yard, and the concentration of plants in one area." [10]

However, this variable expense of $17.83 per yard engine hour gives us a good clue. Table 1 shows permutations of variable rail cost given different average tons of lading per boxcar and different numbers of cars classified and handled outbound or inbound by an eight-hour crew. Notice that all combinations to the right of the stair-step line generate a rail cost less than the truck cost of 84[cts.] per ton. For example, if local crews could classify and spot or pull six boxcars in eight hours, and if the average lading weight were forty-five tons per car, then the rail variable terminal cost in 1954-55 would have been 53[cts.] per ton (see boxed number in Table 1), which is 31[cts.] per ton under the truck cost of 84[cts.] That 31[cts.] would have been available for fixed costs like track maintenance, a lower rate, and profit. The point is: Dr. Meyer's conclusion does not follow from his own data and sensibilities. In mid-century, rail was not the unambiguous loser in short-haul economics.

1999 Cost Study: Data

Would a different and updated approach yield the same result? Instead of regression analysis [11] for rail, both urban truck and urban rail will be compared using accounting costs from direct observation. First, this complex problem is simplified by eliminating all costs with little intrinsic difference between rail and truck; thus excluded from this analysis as irrelevant to the comparison will be sales, administrative, billing, and collection costs. [12] Next, service differences must be addressed. Cass Information Systems estimates that non-transportation logistical costs, like inventory carrying costs and warehousing (which are highly dependent on service speed and reliablity), represented $334 billion, or 37 percent, of total U.S. logistics costs of $898 billion in l998. [13] Therefore, for a fair comparison without consideration of non-transportation costs, all rail costs are here predicated upon the normative expenses of daily and dependable rail switching service, which is often not now available for institutional reasons.

Pickup and delivery service can fall into the following categories:

either 1. drop and hook (where the tractor or engine uncouples from the brought equipment and leaves empty or with a different piece of rolling stock),

or 2. "live" (where the driver or crew remains in attendance while equipment is loaded/unloaded), and