The cost structure of U.S. railroad industry, 1980-81

Tenpao Lee

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The proposed Coal Rate Guidelines published by the Interstate Commerce Commission imply that the railroad industry can raise rates on the so called "captive" coal to achieve the goal of revenue adequacy. Revenue adequacy is defined as a level of earnings sufficient to enable a carrier to meet all of its expenses, retire a reasonable amount of debt, cover plant depreciation and obsolescence, and earn a return on investment adequate to attract new capital. If the proposed Coal Rate Guidelines are implemented on coal traffic, it is expected that similar guidelines will be applied to other so called "captive" commodities, such as grains, fertilizers, chemicals, and agricultural products. The proposed Guidelines emphasize the inelastic demand for railroad transportation of "captive" coal, but ignore the cost side and the structures of the railroad industry as a crucial part in achieving railroad revenue adequacy;To estimate the potential in achieving the goal of revenue adequacy of the railroad industry from a cost saving point of view, two flexible functional forms, the translog and generalized Leontief models were used to estimate cost behavior under different scenarios. The results indicate that: (1) the railroad industry has substantial returns to traffic density and to average length of haul; (2) the railroad industry has small returns to firm size; (3) the net effects of returns to density, length of haul, and firm size are large and positive; (4) capital and labor are highly substitutable while labor and fuel, and capital and fuel are less substitutable; (5) labor costs are the major component of total costs; (6) all input price elasticities of demand are less than unity; (7) the railroad industry had excess capacity in 1980-81; (8) a cost saving policy can, in part, achieve the goal of revenue adequacy for the railroad industry in 1980-81;This study is based on 1980-81 Class I railroad data, hence the interpretation of the results is limited to the cost structure of these years. As the railroad industry has experienced rapid technological change, further research may be needed when new data become available. Moreover, the model specification can be further improved if less aggregate data are available.

Date: 1984-01-01
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