Railroad cars using steel wheels on steel rails transport freight in both the United States and Europe. However, there are fundamental differences between railroads in the United States and those in Europe. Why? What are some of the more important reasons for the differences?
Culture is one very big reason. The second is the metrics that each region considers to define the success of a railway project.
The culture of the United States depends on private institutions. Without delving into legal definitions and interpretations, the United States Constitution protects private property and its use through the Fourth Amendment (protection against “unreasonable searches and seizures” by the government) and the Fifth Amendment protects the right to private property (including unreasonable taking). Yes, there are a set of regulatory rules and procedures that govern the use and fares of railway property. But this is very different than in Europe.
In general, Europe has long since shifted from private to nationalized railways (Switzerland being perhaps the most notable exception). In general, the European Union does not have a constitution like the United States.
In Western Europe, government legislative and administrative bodies tend to favor mass movement of people by train. The 2012-13 Eurostat report shows that about 79 percent of European train miles are generated by passenger trains. This is due to public policy and financial support from taxpayers.
Increasing rail freight traffic is a long-term policy priority in Europe, but realistically, rail freight does not represent the primary role of trains on the continent. Yes, there are some exceptions. Freight rail use in parts of Eastern Europe and across the Swiss Alps is more intense than in Europe overall.
In stark contrast, rail freight is the king of train tracks in the USA. Amtrak passenger trains dominate a few of the largest metropolitan areas – such as New York City and the Northeast Corridor. But they are the exceptions.
The major railroads in the United States consist of more than 50,000 miles. More than 95 percent of these route miles are traveled by freight trains. For many of these lines/miles, there are no passenger trains due to the Amtrak system, which was established in 1970.
The Europeans are experimenting with some private freight train operators, running on nationalized railway lines. A number of these private freight train operations are financially successful and offer some very unique short train lengths and the short market, as well as high quality freight services to customers. These private operators are pioneers in short-haul intermodal vehicle distribution and turnkey vehicle distribution services. Interestingly, these sectors were not profitable for American railroads to operate.
Differences in metrics
Geography plays a role in the ability of rail freight to compete with trucks (and in Europe also with river barges and short-haul sea vessels). A typical freight movement by rail may travel 1,100 to 1,800 miles on average in the western United States and 400 to 600 miles on average in the eastern United States. In contrast, rail freight movement in Europe generally ranges between 100 and 200 miles.
Freight railroads in the United States lead train dispatch, typically running “high-tech” freight trains ranging from 3,000 tons to a maximum of 10,000 to 14,000 tons. In Europe – with the need to ensure passenger train routes – freight trains are operated in the range of 300 to 400 tons plus,
It is also worth noting that European axle weights are limited to 20 to 23 metric tons. In contrast, in the United States, Canada, and Mexico, freight is transported by rail in cars (freight cars) at a rate of 30, 33, and even 35 metric tons per axle. Most freight vehicles in both Europe and North America operate on sets of four axles.
The length of a freight train is also used to measure productivity. In the United States, freight trains are often 3,500 meters (2,175 miles) long; In Western Europe, freight train lengths approach 750 meters (less than half a mile).
As a result, unit costs per train in Europe are relatively high – and the rates paid by shippers are much higher than what a rail customer would pay for freight in the United States over a similar distance. For these reasons, the cost of transporting freight by rail per ton is much lower in the United States than in Europe. Customer rates are also paid.
In the United States (as well as in Canada), the profitability of rail freight is very high. Operating income margins for rail freight typically range between 30 and 40 percent (which translates to an operating ratio of 60 to 70). Operating ratios are a company’s operating expenses as a percentage of revenue and are often used to measure the efficiency of a company’s management. Railroads and other industries that require a large percentage of revenue to maintain operations use the operating ratio as a measure of efficiency; The lower the operating ratio the better. In railways, an operating ratio of 80 or less is considered desirable.
The profitability of European rail freight companies is much lower. The 2010 report showed that in all cases, the seven largest railroads in the United States had positive operating income (operating expenses were less than revenues earned). However, some newly established “open access” European freight rail companies have already lost money on an income statement basis.
Railroad margin as a percentage of revenue tells a story, too. In the United States, the percentages range between 28 and 34 percent. In Western Europe the average is less than 12 percent. What makes this even more interesting is that the average price charged by railways for transporting freight is two to three times higher in Europe than in the United States.
The European rail freight business model adds additional complexity. Due to public policy, nationalized railways retain ownership of the entire public/taxpayer-owned railway infrastructure, rights-of-way, bridges and other railway property. Some nationalized railway companies such as DB operate their own freight trains. These trains compete with the growing number of private freight train operators such as CP Cargo.
In the United States, many freight trains consist in large part (and sometimes entirely) of rented or privately owned freight cars—frequently operating as dedicated train sets under privately negotiated contracts for track time and transportation from the railroad company. These arrangements are largely unregulated by the government.
Conversely, EU policy requires the separation of nationalized train operations from rail freight access charges. This appears to be a “working principle that is still evolving.”
Ready meals
US and European business models provide rail freight jobs. Both have government oversight and regulations. Each model requires a different set of financing and investment risks borne by both investors and rail company owners. In today’s environment, the investment risks and failure of the American business model are minimal.
European and American rail freight models face an environment in which they increasingly compete with trucks to transport goods. Furthermore, both models face market share growth rate projections that are flat to small at best. At worst, both models face a significant long-term loss in freight market share compared to other modes of transportation. Neither model guarantees continued stability in market share. At least not yet.
Selected rail corridors linking source and destination markets with reasonably high daily or weekly traffic volumes appear to provide the best opportunities for either model to maintain or even selectively increase rail freight market share. For example, this might be the 2,200-mile route from Los Angeles to Chicago in the United States. In Europe, it may be from Hamburg, Germany to Italy via the Switzerland corridor.
Time will tell.
