Search BTN:

• HOME
• ARCHIVE
  • Archive By Date
  • Archive By Program
  • Archive By Publication
  • Archive By Theme
• ABOUT
• SUBSCRIBE

Tracking productivity in line-haul railroads

By Brian Chansky and Michael Schultz

Chugga-chugga, Choo! Choo! For many of us, this sound alone is enough to conjure up vivid memories of Thomas the Tank Engine rolling across our childhood TVs. Thomas and Friends taught valuable lessons and the show was entertaining, but whether you realize it or not, their real-world counterparts play a crucial role in your everyday life. In a typical year, line-haul railroads carry 1.9 billion tons of raw materials and finished goods across the country.¹ That is roughly the equivalent of 5.7 tons of goods per American every year.

This Beyond the Numbers article will examine labor productivity in the line-haul railroads industry from 2012–21. Labor productivity is a measure of operational efficiency that relates the output of an industry to the labor hours that went into producing that output. Specifically, we will explore how rail companies implemented a labor-saving operating system called precision scheduled railroading (PSR) from 2012–19 to increase productivity and cut costs. This article will analyze how the implementation of PSR caused a decline in employment leading up to the COVID-19 pandemic. The period after the pandemic, when PSR, supply chain struggles, and labor tensions all affected railroad operations will also be discussed.

A wealth of data covering freight rail operations is collected by the Surface Transportation Board (STB), an independent federal agency. The Bureau of Labor Statistics (BLS) Productivity program uses data from STB reports as well as data from Amtrak to derive productivity and related series, therefore these measures only cover the largest railroad companies, also known as “class I carriers.”² Smaller railroads known as “short-line” rail and urban transit rail systems are not covered in this article.³ The BLS Productivity program measures output for line-haul railroads based on the total amount of freight-ton miles and passenger miles, weighted together using their relative share of operating expenses.⁴

Railroad dynamics

The line-haul railroads industry serves as a valuable link in the American supply chain. The industry operates railroads for the transport of passengers and/or cargo over a long distance within a rail network. Trains move between cities using the terminals and stations on main and branch lines of a line-haul rail network.

The core nature of rail transportation puts constraints on how railroad companies can efficiently move goods from origin to destination. An important characteristic of railroads is that the transportation of any given quantity of passengers or freight requires a relatively fixed level of physical capital. For railroad companies, capital consists primarily of locomotives, shipping containers, rail cars, track, and structures (such as stations and rail yards)–all of which are necessary to transport freight. These components of capital are subject to physical and regulatory limitations: trains may only go so fast, rail cars can only carry so much weight, a certain amount of horsepower is necessary to pull freight up the inclines where track routes run, and so on. This means if rail lines want to cut costs, there are few ways they can reduce their stock of capital and continue to meet customer demand.

Railroad companies also have a limited capacity to reduce their energy, materials, or maintenance costs related to running trains. Energy costs are driven by the market price of fuel and the fuel efficiency of their locomotives, neither of which can be rapidly changed by railway companies. So long as trains are operating, replacement parts as well as regular maintenance must be supplied. The fixed nature of capital and intermediate inputs in this industry means that if railroad companies want to control costs, they are incentivized to find ways to cut labor costs.

A history of precision scheduled railroading

If the primary means of cutting cost is reducing labor hours, how did railroad companies achieve this without reducing output? The answer is precision scheduled railroading (PSR). First developed in the late 1990s, PSR is a set of core principles designed to allow a railroad to maintain the same level of output as traditional methods, but with fewer workers.⁵ In general, PSR directs rail operators to standardize the composition of its trains and balance the load of the overall system. Assets should be in constant use since idle trains generate no revenue, and freight should be distributed over the track network in an efficient manner to minimize power and fuel requirements while reducing congestion.

Before PSR, most railroad companies used a “hub-and-spoke” operating system, in which railcars enter a hub or terminal, are placed on different engines, and then are routed to their intended destinations. This strategy focused on moving long trains, to maximize train capacity and the efficiency of labor and locomotive power. The PSR concept replaced the hub-and-spoke strategy with a “loading-dock-to-loading-dock” system. Using this method, a railroad company eliminates much of the railcar switching and traffic that could occur as trains converged on hubs. Hauling freight from origin to destination directly eliminates idling time of trains as they wait for cargo to be switched at hubs.

More flexible routing made departure scheduling possible: requiring trains to leave on time, regardless of whether a customer’s railcars are ready to depart with their scheduled train or not. Railroad companies using PSR strategies lowered their operating costs by eliminating the jobs that were necessary to maintain the more labor-intensive hub-and-spoke system. They also reduced their costs by eliminating extra locomotives and railcars.

The first large railroad company to adopt PSR was Canadian National Railway. Its transition to PSR successfully reduced labor costs, improved asset utilization, and maintained output. This allowed Canadian National Railway to effectively compete with larger class I railroad companies. By 2004, Canadian National Railway had the highest total profits ($1.22 billion in net income) and lowest operating margin among all North American railroad companies.⁶ Canadian National Railway’s successful implementation of PSR led Canadian Pacific Railway to follow suit in 2012. A few years later, the American line-haul railroads adopted PSR as well: CSX in 2017, Norfolk Southern Railway and Union Pacific Railroad in 2018, and Kansas City Southern in 2019. Only BNSF Railway has not fully implemented PSR.

Precision scheduled railroading’s effect on labor and capital

The transition to PSR is evident in the data. In 2012, the line-haul railroads industry employed about 184,300 workers and hours worked were approximately 294 million. By 2019, when 6 out of the 7 U.S. class I railroads had implemented PSR, the total number of workers had dropped to 158,800 and they worked a total of 261 million hours.

The BLS Productivity program also measures the amount of capital assets used by railroads. Capital is the physical equipment, structures, land, and inventories that are used for multiple years in the provision of services. From 2012 to 2019, railroad capital investment rose 19.5 percent. Chart 1 displays both the volume of hours-worked and capital used by railroad companies since 2012 in the form of an index. Capital increased steadily, while hours fell sharply in 2016, 2019, and 2020. The chart also shows the ratio of capital to labor, known as “capital intensity.” The dramatic increase in capital intensity reflects how PSR has changed the basic nature of railroad operations. Fewer workers are required for the operation of rail systems, with greater reliance on capital. Also noteworthy is the degree to which these changes have occurred: the decline in labor hours through reduced employment was more pronounced than the rise in capital over the same period.

Productivity gains through 2019

From a shareholder or managerial standpoint, the implementation of PSR was incredibly successful during the years prior to the COVID-19 pandemic. From 2012 to 2019, railroad companies maintained stable output from year to year. Firms also maintained steady, and even marginally declining, unit labor costs—the cost of labor for each unit of output. Additionally, from 2012 to 2019, labor productivity rose 16.6 percent cumulatively and average operating ratios (a key metric showing operating expenses as a percentage of operating revenue) fell 10.4 percentage points.⁷ Coupling the stable output and unit labor costs with rising labor productivity and falling operating ratios only further emphasized the success of PSR for railroad stakeholders. Chart 2 shows labor productivity increased in every year except one from 2012 through 2021. At the same time, unit labor costs were held constant; declining or flat in half the years shown.

An industry off the rails: effects of COVID-19 pandemic in 2020 and 2021

Through 2019, railroad companies successfully minimized their costs and maximized their labor productivity by optimizing their capital utilization and reducing their work force. From January 2018 to December 2019, the industry shed nearly 16,000 workers.⁸ When the COVID-19 pandemic began in 2020, this hyper-optimization became an operational liability. First, restrictions on travel directly reduced the number of passengers travelling by rail. Second, the U.S. economy dipped into recession, reducing demand for many types of goods. Fewer goods being bought and sold translated into less demand for freight transport, and this depressed demand for rail services. Line-haul railroad industry output plummeted 15.7 percent in 2020, the second largest decline on record for this industry. This sharp drop in output prompted railroad companies to make sharp cutbacks to their already reduced labor force—firms further reduced employment by 13.2 percent and labor hours by 16.3 percent.

As the economy rebounded in 2021, demand for freight transportation services spiked. However, transportation infrastructure faced difficulty meeting this demand. For example, U.S. ports faced a significant backlog of container ships. As shipping freight waited to be unloaded from the harbor, rail lines waited to be loaded at the docks. This backup caused an overwhelming spike in dwell times, the term for time that a train spends at a station without moving that is usually measured in hours. At its peak in April 2021, average rail dwell times reached 12.4 days.⁹

The delays at the ports were compounded by a core strategy of PSR known as “just-in-time" operations. Under the right conditions, this strategy increases efficiency and reduces costs by only moving goods precisely when customers need them, limiting wait times.¹⁰ However, this strategy reduces flexibility, and made rail lines unprepared for the 2021 shocks to shipping supply chains. In mid-July 2021, this weakness of PSR caused empty containers to pile up at stations in Chicago when they were needed on the West Coast. But railroad companies were unable to move them without the chassis that were being used at the ports. This problem ultimately forced Union Pacific to pause service on the West Coast for a week to resolve this issue.

Effects of declining employment on rail workers

After the employment cuts in 2020, the remaining employees faced an increased workload and grueling hours to keep up with the resurging demand in mid-2021. When overtime incentives started failing to entice employees, some companies resorted to punitive point systems to discourage employees from taking time off.¹¹ Employee morale soured, and this led to increased quits and greater difficulty in onboarding new employees. ¹² And although many rail companies offered onboarding bonuses to engine conductor trainees, it was an uphill haul for railroad companies to rebuild their labor force.¹³ The training for rail workers and conductors can take anywhere from 3 months to a year. ¹⁴ This means that even if railroad companies were successful in rebuilding their labor force, it would take time for the new recruits to become as skilled and productive as the workers that have retired or quit over the past several years.

As employment continued to fall, railroad companies attempted to maintain their core high-skilled workers through increased hourly compensation. These efforts are evident in the employment and hourly compensation indexes as shown in chart 3. From 2012 to 2019, as firms transitioned to PSR, employment fell 13.8 percent, at an annual rate of -2.1 percent. During the same period, hourly compensation rose 16.2 percent, at an annual rate of 2.2 percent. Railroad companies were willing and able to increase compensation for a few highly skilled workers because they were still paying less in total compensation. Labor’s cost share is the percentage of industry revenue that is paid to workers in the form of wages and benefits. By 2021, the labor cost share had fallen below 23 percent—the lowest since the start of this series in 1987. (See chart 4).

The sudden decline in output caused by the COVID-19 pandemic only accelerated this trend, driving employment down another 13.2 percent and hourly compensation up 3.9 percent in 2020. Employment continued to decline from 2020 to 2021, a period of resurging demand when railroad companies were actively trying to rebuild their labor force. This illustrates that the increases in wages and sign-on bonuses were not enough to entice workers.

Unable to get workers back to the railyards, some companies tried to get increased utility from the remaining workforce by reducing the size of the crew on each engine.¹⁵ In years past, up to five workers operated a single train: an engineer, conductor, head brakeman, second brakeman, and sometimes an engineer trainee. This was reduced to only an engineer and a conductor, and some railroad companies are trying to reduce that to just one in-cab worker. This further exacerbated tensions between railroad companies and workers who saw this as an operational safety risk, prompting the Federal Railroad Administration to propose regulation requiring two in-cab crew members per train. Railroad companies pushed back against this proposed regulation, and it is yet to be seen how this and several other disagreements between railroad employers and workers will be resolved.¹⁶

Railroad operations after the pandemic

From 2019 to 2020, railroad output plummeted 15.7 percent due to the COVID-19 recession. But with the equally sharp drop in work hours, railroad companies managed to maintain stable labor productivity. Demand for freight services surged from 2020 to 2021, driving output to increase 7.8 percent. Labor productivity also rose 9.1 percent while hours worked fell by 1.2 percent.

Railroad labor productivity, output, and hours worked over the last 10 years are presented in chart 5. Output increased 7.8 percent in 2021, as the overall economy recovered from the pandemic-induced recession. However, at the end of 2021, railroad output was still substantially lower than it was at its peak in 2018. This situation may seem counterintuitive, as U.S. consumer demand for goods has been steadily increasing before, during, and after the pandemic.¹⁷ Other transportation industries such as truck transportation and couriers have been better able to meet this demand and consequently have had better output results than railroads. (See chart 6.)

A 2021 article from the Monthly Labor Review examined the recent performance of the railroad industry. The article illustrates how the declining demand for coal as well as trade restrictions in 2019 depressed demand for freight rail services. The labor strife in 2021 and 2022 was the eventual result of these demand-side pressures combined with the labor supply tightening created by the pandemic and the adoption of PSR. Consequently, the industry’s potential to take advantage of the economic recovery over the near term seems to be lagging other freight and goods transportation industries. Although railroad companies have effectively maintained their productivity and profit levels, they may have reached the limit of their labor cost savings and face the risk of being unable to adapt to future supply chain shocks.

Looking back down the line

Precision scheduled railroading (PSR) is a system of train operations designed to reduce labor costs and increase railroad efficiency. Since PSR’s widespread adoption by U.S. railroad companies in the late 2010s, the line-haul railroad industry has seen significant growth in labor productivity and declines in unit labor costs. However, there has been a growing number of concerns about PSR, which have intensified since the 2020 COVID-19 pandemic. The lower levels of employment enabled by PSR appears to hamper the industry's ability to respond to adverse and unforeseeable economic shocks. Additionally, the remaining workforce has reported a deterioration in working conditions that may outweigh increased compensation in the industry's effort to attract new workers. The pros and cons of PSR will likely be a continuing and contentious issue for the line-haul railroad industry in the coming years.

This Beyond the Numbers article was prepared by Brian Chansky and Michael Schultz, economists in the Office of Productivity and Technology, U.S. Bureau of Labor Statistics. Email: Chansky.Brian@bls.gov and Schultz.Michael@bls.gov; telephone: (202) 691-5621; or E-mail: productivity@bls.gov; telephone: (202) 691-5606.

If you are deaf, hard of hearing, or have a speech disability, please dial 7-1-1 to access telecommunications relay services or the information voice phone at: (202) 691-5200. This article is in the public domain and may be reproduced without permission.