Friday, November 25, 2005

Railroad Economics

I have noticed, riding in my car in Pennsylvania, that highways in rural areas seem to be very well cared for. New bridges are being built; limited access segments are being extended. Gravel roads are being covered with asphalt. Prosperity cries out from every I-beam.

This is all very nice. The Interstate Highway System in particular is one of my favorite things. It was a strategic creation, inspired by WWII's shortages and bottlenecks. It's designed for high speeds. It's even got room for makeshift aircraft landing strips. It has its downside, but it has brought a thousand decaying villages to life and improved productivity for freight and transportation to such an extent that many people think that railroads are obsolete. Most of these people tend to be Republican and non-urban, people who benefit from the remarkable upgrade of our highway system, while being insulated from the downward trend of our railroad infrastructure.

The contradiction here is that huge amounts are spent on the highway system, and no profit is expected. The few highways that charge tolls are unpopular with the voters. Railroads, however, are expected to pay their way every mile and every pound. The Nov.28/Dec 5 issue of TNR has a short editorial on why Amtrak shouldn't be expected to make a profit. They wonder why railroads and highways are held to different standards. But they merely scratch the surface of the economic dilemma.

Economically, Amtrak is like an airline, only more so. The driving force of both is the huge capital investment and fixed costs measured against relatively small passenger-mile costs. Both organizations do everything possible to enlist one more passenger. Each additional fare is pure gravy. Empty seats are lost opportunities. Airlines will sometimes cancel a flight with too few passengers, but the train will follow its schedule from necessity. The only way to enlist more passengers, of course, is by means of pricing and incentives. They try to lock in passengers as early as possible, but they also give price breaks at the drop of a hat. You get a special price on Amtrak for being a member of AAA! They go to great lengths tohide the real price of course. They certainly don't tell you about a better deal that you could have gotten, but customers have a way of getting educated. In the long run, if there is any competition at all, the prices of such services have a strong tendency to become too low. The companies find it easier to cut costs, to skimp on maintenance, to mortgage the future, than to raise prices. In short, they can't make a profit. Without intervention they will inexorably self-destruct. I know, I know, Southwest Airlines is doing pretty well, but what it's really doing is innovating faster than the others can catch up. They have a different cost structure and are selling a different product for the time being.

The same logic would prevent highways from becoming profitable. Highways, however, tend not to have a lot of competition between any two points. The pressure of a high toll would distort motorist behavior in many ways, but motorists have been more than willing to pay for a superior product. There is a place in NE Pennsylvania where the Turnpike travels virtually the same route as Interstate 81. In spite of the toll, the Turnpike does reasonably well simply because 81 has more traffic and occasional delays. The state police are also more lenient and less vigilant on the Turnpike, enough to make up for the cost and delay at the tollbooth. Hassle reduction pays. The HOV lanes from Virginia into DC also exact a toll of sorts. The normal traffic flow is so slow on these "super" highways that people are willing to carry extra passengers to meet the HOV requirements. Some have used dummies to simulate the requirement, and they're willing to accept the risk in order to partake of a superior product.

Now, I happen to believe that rail transport is socially superior to automobile. I have read that it takes as much fossil fuel to keep Amtrak running as we use per passenger-mile on the highways, but I frankly don't believe it. Besides, we could use alternate fuels on the railroad based on electrical generation technologies. Anyone who travels DC to Boston, the great Bos-Wash corridor, knows that Amtrak is a wonderful thing. It is convenient, productive and not too expensive for a business traveler. Amtrak itself is reputed to handle 50% of the DC/NYC person-miles. The Acela Express train, billed as a breakthrough, is merely an incremental improvement. The line itself, the track maintenance, the general deterioration, prevents any great improvements. But the Acela is downright embarrassing if you look to Japan or France for your yardstick. We are missing a lot by under-funding our most productive transportation mode. If you've seen the transportation system in the city where our congressmen make their living, you know that a little investment can make a big difference. The DC Metro system is the most effective mass transit system this side of Paris, and getting better all the time.

The strategic advantage of railroad should not be ignored either. Katrina and Rita have taught us that you can't evacuate a city through its highways. Even using contraflow, the highways could not cope. Unpredictable human behavior, road quirks and sheer volume cause too many bottlenecks. Railroads, OTOH, are accustomed to dealing with challenging schedules and conditions. They are great planners. If you give them a little bit of warning, they can arrange to handle the required volume.

In many places highways have reached the point of diminishing returns. Additional investment will not improve the performance of the highways significantly, but merely maintain a bad situation. The highways around our major cities are incapable of handling the normal load on a normal day while trains run at half-capacity for lack of upkeep and social support. I believe that our nation itself is running at half-capacity because of our unbalanced investments in these two modes of transportation.

11/25/2005 4:12 PM

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At Saturday, November 26, 2005 4:29:00 PM, Blogger mal said...

the big advantage that the highways have over the railroads is flexibilty. Driving you have true point to point capability and "go when you are ready" scheduling. People do pay for the highways in fuel, fuel taxes, vehicle capitalization etc.. There is no question the rails can moving anything at the third lowest cost per mile, but as long as users have choices that better serve their needs, they will take it.

At Monday, November 28, 2005 6:53:00 PM, Blogger jj mollo said...

Yes the highways serve our needs better for the most part, but it is an artificial situation. Highways are being made safer and easier to use all the time. Cars and trucks are always getting better, fuel prices have been going down in real terms since the seventies. The highway system is a big commons, which is used by all in productive and non-productive ways. This is good as long as the social benefits outweigh the externality costs. They don't. Among other things, fuel prices should be higher.

The railroads hold the same position as providing universal benefit, but are, IMO, getting harder and more expensive and possibly riskier to use. There are no new railroads being built. There are no serious improvements. Even the most productive existing lines are underfunded. No one takes the trouble to beautify the railyards, but thousands volunteer to beautify their highway miles.

When they built the RR system in the US, they let the canal system go to pot. If the canal system had been available in WWII, it would have been used to maximum effect. If the canal system were available today it would be priceless as a recreational facility if nothing else. It would not have taken much effort to keep it working. The diversity of infrastructure would pay off to this day. I am opposed to monoculture of all kinds.


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