DO NORTH AMERICAN RAILROADS UNDERSTAND THEIR COSTS? IMPLICATIONS FOR STRATEGIC DECISION MAKING

There is considerable evidence that railroads have misunderstood their own cost structures since before the turn of the 20th century. This persistent management failure to recognize costs led, in the early 20th century, to a failure to recognize that certain lines of business (e.g., long-distance passenger trains) were money losers and also led to excessive reliance on petitions for general rate increases instead of commodity- and service-specific rates. The downward rate trend since industry deregulation in 1981, the failure to recognize or profit from the value that shippers place on high-quality service, and a focus on cost-cutting rather than revenue growth suggest that the industry is still uncertain of the relationship between revenue, costs, and service quality. The result has been a loss of rail capacity, through reductions in the train and engine workforce and through abandonment of a large part of the national rail network. Reductions in the workforce and in track capacity have reduced net investment and the industry\u27s ability to compete for high-value commodities. Meanwhile, equipment productivity has risen far less than worker productivity, and equipment ownership and maintenance costs typically account for 40 to 60 percent of total direct movement costs. Returns must increase if investment in capacity is to be justified financially. Raising rates, the free-market response to capacity shortages, will raise public policy questions as additional traffic is diverted to the highways. A proper understanding of its cost structure will help the railroad industry make the right decisions for the future