How to lose money running a railroad January 1st, 2006
By RailPAC President Noel T. Braymer — The issue of profits and subsidy for rail service is confusing. Countries differ, but most rail service world wide make or lose money the same way. After World War II, most European and some Asian governments paid subsidies to maintain a high level of rail service in their counties. The United States, on the other hand, saw major reductions in the rail system in the 1950â€™s and 60â€™s in the face of shrinking profits and traffic.
Those counties that subsidized their nationalized rail service spent most of their money to prop up commuter rail service, branch line service (particularly in rural areas), and freight. Many countries, including the United States, subsidize commuter rail service. In the past, railroads were more in the real estate than the transportation business. Commuter railroads created the first suburbs. The railroads often developed the land around their rail lines. Commuter service is unprofitable to operate because crews and equipment sit idle for long periods between rush hours, and the short distance traveled by most passengers doesnâ€™t generate enough passenger miles to bring in much money. But many major cities find that commuter rail is a cheap way even with subsidy to carry large numbers of people, compared with the cost of expanding highways and parking.
When you look at the trackage of most railroads, in mileage, most of it is made of branch and secondary lines. When you look at the traffic patterns of most railroads, the vast majority of the traffic is on a small percentage of their trackage. Most railroads traffic is on the mainlines. The branch lines feed traffic to the mainlines. But after World War II as rail traffic declined, many branch lines became money losers. The branch lines were expensive to maintain with their miles of tracks, but produced little income. Most of the track abandoned in the United States after World War II was branch lines or secondary lines. In Europe much of the branch line rail service, both passenger and freight was kept, particularly in the rural areas. This required a high level of subsidy.
It may seem odd in America to talk about rail freight losing money. But in Europe it is hard to go more than 400 miles in any direction even in the largest European Counties. Revenue for transportation is depended on ton miles for freight and passenger miles for passenger service. In many counties freight is largely a short haul operation. Even in America short haul service is far from highly profitable. Many foreign railroads make money on operation of intercity passenger service. Often these trains are international going fairly long distances.
In the last twenty years or so many counties have â€œprivatizedâ€ their government owned railroads. This meant selling off government own railroads and often breaking up the railroad into more than one company. The most famous example of this was the break up of British Rail. The result after privatization was a major jump in ridership and freight traffic in Britain. With this came major private investment in new rail equipment and station improvements.
But there was one major failure: the bankruptcy of Railtrack. Railtrack was the company that owned and maintained all the trackage of the old British Rail. The biggest headache for any transportation service is the cost of maintaining the infrastructure. Government usually takes care of roads, airports air traffic and waterways. These can be considered â€œsubsidies to transportationâ€. In this country the railroads are the only transportation mode which has to pay all infrastructure costs out of operating revenue. In other countries government subsidy pays for the infrastructure costs of the railroads. Railroads even in the glory days of the early 20th century suffered from low return on investment because of the high overhead cost of their infrastructure.
Running intercity passenger trains on mainlines at an operational profit is not as crazy as it may seem. As long as the bulk of the infrastructure is paid for by freight, well run passenger trains should be able to run at a profit and pay for their small share of infrastructure costs to the railroads. Trying to pay the full infrastructure costs of a railroad with just passenger service is generally impossible, at least with the level of passenger miles seen in trains in this country.
Recently, the State of New Mexico wanted to buy some of the railroad around Albuquerque and Santa Fe for a new commuter rail service. The BNSF said take the whole branch or no deal. The rail line between Belen to Trinidad through the Raton Pass was an expensive secondary line for BNSF which produced little revenue. Already California has bought rail rights of way which are used primarily for passenger service. We may see more rail lines bought by government. The railroads will be only too happy to sale in most cases. This would put the railroads more on par with other transportation modes in this country. The emphasis for government spending on rail should be on infrastructure. In order to operate passenger service at a profit, or at least a low level of subsidy they must be efficiently run. That means good utilization of crews and equipment, the longest possible average trips to maximize passenger miles and carrying the largest number of passengers possible on a train with long trains and good load factors.