Competition is the bedrock of our free enterprise system. When businesses compete against one another for customers, the end result is a superior product at a lower price for the consumer.
But when a market is void of robust competition and controlled by only a small few, businesses are free to set prices that maximize profit at the customer’s expense. These conditions, known as a monopoly or oligopoly, can stifle economic growth and harm the national interest.
While few industries in our economy today operate as an oligopoly, one such example is freight rail. This vital industry, which does more than $80 billion in annual revenue, is dominated by just seven Class 1 railroads, four of which actually control 90 percent of the market.
That’s because they are protected by federal laws that allow them to minimize competition. But unlike public utilities, which are regulated, the railroads are free to dictate prices and hold shippers hostage to them. That means more profit for railroads, but higher transportation costs for customers and American households.
Compare that setup to the highly-competitive trucking industry, consisting of more than 777,000 motor carriers. Following the deregulation of both industries in the 1980s, the number of trucking companies in the United States mushroomed, whereas the number of freight railroads actually shrunk from 40 down to just a single few.
While only seven (effectively four) railroads are free to divvy up their $80 billion revenue pie every year, more than three-quarters of a million trucking companies are in direct competition for business. That makes running a trucking company tough work. But it is healthy for the economy, delivering superior service and lower transportation costs for the American consumer.
Moreover, the trucking industry faces much tighter operating margins than railroads do. For every dollar of revenue generated by a motor carrier, 95 cents is spent on the cost of operations. By way of comparison, only 65 cents of every dollar earned by railroads is spent on operating costs. This disparity, coupled with low levels of competition in freight rail, creates super profits for railroads that aren’t seen in the trucking market.
Despite their enjoyed market advantages, rail’s biggest Washington advocate, American Association of Railroads (AAR), is taking gratuitous shots at the trucking industry with specious arguments about competitive fairness. Perhaps AAR is not accustomed to competition within their own industry, but we should be able to work together harmoniously as key partners in an intermodal economy. After all, trucking is one of freight rail’s biggest customers.
In order to carry more than 70 percent of the nation’s domestic freight tonnage, trucks indeed use American roads. There aren’t railroad tracks running to every warehouse, grocery market and corner store in America. Over 80 percent of communities in this country rely solely on trucks to deliver their goods. By way of contrast, 78 percent of rail freight stations are captive to a single railroad and, in more than half the states, at least 90 percent of stations are captive to just one railroad.
And while trucks account for 14 percent of vehicle miles traveled on our roads, the industry pays half of the Highway Trust Fund tab through a complex web of taxes and fees. We pay our fair share, and we are even willing to pay more.
But here’s a real question worth asking: Do freight railroads — an industry protected by federal laws that allow them to minimize competition — really need federal subsidies from the American taxpayer not afforded to trucking and other modes of freight?
Instead of trying to stifle competition throughout the broader freight economy, railroads would be wise to focus on ways to lower costs and improve service within their own industry.
AAR should move beyond the erroneous idea that freight is a zero-sum game, and instead embrace the notion that trucks and trains are fitting complements. Both modes can and do offer unique value to the economy and the American people whom we serve. Our economy is primed for growth. As the demand for transportation services grows with it, there is plenty of freight to go around. All modes can and should unify to the benefit of the nation.
Only in Washington would you find a trade association barking at its largest customer over the competition when the real problem is Washington itself. To achieve success, we recommend unity among all stakeholders — especially when it comes to our nation’s decaying infrastructure — and a stop to false suggestions that are, quite frankly, off the rails.
Chris Spear is President and CEO of American Trucking Associations