The Ongoing War Against Innovation In the Railroad Industry
AP Photo/Elaine Thompson, File
The Ongoing War Against Innovation In the Railroad Industry
AP Photo/Elaine Thompson, File
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The Biden Administration’s recent executive order designed to boost competition across the economy has served to highlight the fact that this administration and Congress do not appear to be fans of freight rail. In the last six months they have tried to roll back innovations designed to improve productivity, re-regulate prices, and scuttle even minor acquisitions.

The net result of the government’s nonsensical assault on freight rail--if they ultimately achieve their intended goal--will be reduced rail competitiveness and more goods shipped via trucks, which would increase road congestion, greenhouse gas emissions, and shipping costs.

The latest salvo in this war is a recent executive order urging the Surface Transportation Board to examine mergers carefully and “combat” consolidation. While the clear target of this is a proposed merger between two Class 1 railroads, Kansas City Southern and Canadian Northern Railroad (which appears to have been stopped), another proposed merger, between Class 1 CSX Railway and regional operator Pan AM Railways, is in danger of being collateral damage.

However, it’s essentially impossible to pretend that a takeover of a regional operator by a Class 1 railroad is anti-competitive, although it’s clear that the mergers’ opponents will take their cues from these developments and attempt to claim such a thing.

The Pan Am/CSX deal has already received pushback from government officials: After delaying the merger by nearly a year largely on technical grounds, the Surface Transportation Board is now reviewing a revised application from CSX that the company filed in early July.

The very notion that the White House feels it acceptable to put pressure on an independent agency to act on matters currently before it via an executive order is not par for the course; Donald Trump’s attempts to pressure the FCC to rein in social media companies, for instance, was met with no small measure of outrage.

But the blanket hostility the Biden administration has for railroad mergers and the rail industry writ large appears to be predicated on a fundamental misunderstanding of the business and the broader shipping market in the U.S.

 The Reduced Competition Fallacy

The administration’s fact sheet accompanying the executive order actually harkens back to 1980, when there were 33 railroads, as if it were a golden age for rail freight transportation and something to which we should aspire. The simple reality unremarked upon in the fact sheet is that the vast majority of them--along with the industry itself--were failing and had been for decades. Between the intense rate regulation of the railroads by the government and the advent of the interstate highway system, railroads were in terrible shape.

The overregulated system encouraged unproductive and time-consuming handoffs between railroads and parallel tracks all over the country, which led to an environment where few railroads had the money to maintain their tracks, a problem that the intense government regulation exacerbated.

The deregulation of the industry--via passage of The Staggers Act in 1980--ended to industry’s price regulation and a plethora of other regulatory activities, allowing railroads to get bigger and take advantage of economies of scale. Just as it is economically nonsensical to have multiple electric utilities running parallel power lines to service a single community, it rarely makes sense to have two different railroads running tracks through a community.

The industry consolidation reduced the number of train transfers across railroads and gave railroads a new incentive to invest in their infrastructure--something that truckers do not have to do. In the last 20 years railroads have spent $250 billion on tracks and other rail infrastructure.

At the same time that railroads were closing duplicative or unproductive tracks, they were also rehabilitating or expanding their remaining lines, while taking additional steps to increase capacity and improve service.

Today, most shippers have direct access to only one railroad, but railroads compete against dozens of companies that will ship goods by truck. Shipping goods via truck can be faster than rail. Unlike rail, trucks have the advantage of public provision, given that trucks do not come close to paying for their own infrastructure. Still, trucks charge shippers considerably more to move goods via truck than comparable service on rail. Nevertheless, the truck industry transports over 15 percent more freight than rail.

The Priorities of Rail’s Opponents

Last year CSX, which is one of the seven large railroads (Class I) operating in North America, announced its intent to acquire Pan Am railways, a short regional line based in New England.

The Surface Transportation Board designates a railroad with annual revenues over $500 million as a Class I railroad, and they are subject to stricter and more costly regulatory oversight. Smaller, Class II railroads operate in small geographic areas, and they ultimately exchange nearly every car they handle with a Class I railroad for long haul shipment. The integration of the two railroads would allow CSX to handle cars from their pickup to the final destination, which would eliminate a cumbersome, costly and time-consuming handoff and greatly improve service.

The transaction initially appeared to be uncontroversial—Governor Chris Sununu of New Hampshire and Senator Susan Collins of Maine quickly offered their support for the transaction, which they saw as an opportunity to bring Class 1 rail level service into their states.

However, the state of Massachusetts, the Vermont Rail system and Amtrak opposed the merger. Vermont’s opposition is simple: Pan Am doesn’t provide a lot of service in its state, so the transaction benefits its neighbors but holds far less for its own businesses. However, the improved service in other states could be a competitive disadvantage from the state’s perspective.

Massachusetts’ opposition is similarly parochial: a good number of Pan Am jobs--such as dispatching--are currently in Massachusetts and would presumably move elsewhere with the merger. CSX’s more-efficient operations could also reduce the need for overlapping railroad workers, whose unions remain quite powerful despite their declining numbers. 

Amtrak’s opposition is even less defensible: Its CEO, Bill Flynn, seemingly wants to protect its ability to run future trains on Pan Am’s tracks. Given that these states already have regional passenger service and are within easy driving distance of Boston, it seems nonsensical to assume that the state’s residents are clamoring for more trains from Portland to Boston, but an underused railroad makes doing such a thing tractable if Congress hands Amtrak a bucket of money to expand in New England. The current infrastructure bill currently before the House of Representatives would do precisely this.

In bolstering their argument that the merger with Pan Am would actually benefit passenger rail in the region, CSX indicated that it plans to upgrade many of Pan Am’s existing 10-mph main line track to 25-mph standards, which would greatly improve safety and performance in the region. These long overdue investments would make the network more efficient and safer for freight rail and passenger service like Amtrak.

The Government has a Problem with Freight Rail

The litany of actions taken against freight rail by the Biden Administration may appear to be wildly disparate, but they have one thing in common: they would each serve to reduce--or undo--productivity improvements in the industry. Its main motivation appears to be to curry favor with the unions that represent railroad workers and protect a few little-used and hypothetical future Amtrak routes.

However, the implicit tradeoff therein is a bad deal for everyone else in America: for the sake of preserving a few jobs for a few more years, everyone else must deal with more congested highways, more greenhouse gas emissions, and higher shipping costs that show up in the cost of the final goods we buy in stores or via the internet.

Shortly after taking office President Biden signed an executive order that requires executive branch agencies to take into account the impact on equity and greenhouse gas emissions on every proposed rule they issue.

While the Order does not apply to the CSX--Pan Am merger--a merger is distinct from a rule issued by an executive branch agency--it is obvious that rejecting this transaction would not come close to meeting the ostensible priorities set forth in that Order.

Let’s hope that the independent Surface Transportation Board looks at the bigger picture and acknowledges that in today’s modern, and diverse economy, competition actually comes from a variety of sources, and that it dispenses with the antediluvian pressures to re-regulate the industry. More importantly, hopefully they will also acknowledge that the CSX--Pan Am merger would result in increased investment in an undercapitalized regional railroad network that will benefit the end consumers--both passenger rail riders or freight shippers.

Michael F. Gorman is the Niehaus chair in operations and analytics at the University of Dayton and editor-in-chief of the INFORMS Journal on Applied Analytics.

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