Do Railroads Make A Profit? A Comprehensive Analysis


With the amount of railways throughout the world, both private and publicly funded, it is no surprise those who commute daily and enthusiasts alike wonder if they make a profit. Publicly and privately funded railroads have many differences, however, oftentimes the private entities make the profit.

Do railroads make a profit? Yes, railroads make a profit, and a significant one as well. Private railways are worth hundreds of millions of dollars, with shareholders and a well paid chief executive officer (CEO). 

Railways, especially in the United States, Canada, and the United Kingdom experience immense profits from their services. Freight railways in the United States encompass some of the largest market share compared to any other business, and continue to streamline operations to collect additional profit.

United States & Canada

Background

In the United States and Canada, freight railroads are the main generators of revenue, as it is one of the most inexpensive modes of land transport. North America has the most dense rail freight network in the world, and is the leader in revenues, miles traveled, and volume. This dense network promotes economic growth and viability, while transporting goods in an efficient manner.

Freight rail companies in North America operate as corporations, and are owned by the various individuals who invest in the company. The railroads must focus on yielding a profit to ensure the shareholder’s best financial interest, and to ensure their continued investment in the firm.

In most cases, railroads in the United States and Canada are placed into various categories:

Class 1 Railroads: A railroad is considered a class 1 carrier, if their revenues exceed $346.8 million. According to the Association of American Railroads, the seven class 1 carriers among to 67% of the freight hauled in the United States.

Class II (Regional Railroads): Regional railroads make quite a sum of money as well, as they rack up anywhere between $40 million and $346.8 million. Regional railroads are oftentimes classified as Class II railroads, and usually span anywhere between 350-600 miles of trackage.

Class III: Class III railroads, also called local railroads, do not earn in excess of $40 million. These types of railroads oftentimes operate on short stretches of track, usually around 60-70 miles, and rarely cross state lines.

Terminal Railroads: A terminal railroad is the lowest earning class, and is usually relegated to local services and switching operations. Oftentimes, these types of railroads will pick up cars from a yard location, and bring them to their final destination.

Jonathan Lee

Although there are various types of mixed freight trains containing various materials, one of the railroad’s biggest money maker is the utilization of intermodal transport. This type of transport allows the train to haul multiple kinds of materials on similar types of cars, however, the largest commodity transported is coal, accounting for a staggering 44% of tonnage, and 21% of the railroad’s revenue, per the AAR.

Since the 1930s, road transport such as trucks have posed a stark competition with the railroads. However, trucks and other modes of road transport usually travel less than 750 miles, as opposed to railroads, who travel in excess of 2,000 miles. Interestingly, freight rail companies in North America own the right-of-way they operate over, and are responsible for regular maintenance and other repairs. Thus, the freight railroads own much of the system utilized by passenger trains.

According to the National Traffic Service Freight railroads make money utilizing the ton-mile measurement, meaning the railroad charges each mile a ton of freight is moved. In fact, freight rail transports more freight by ton mile by 10.5%, as railroads account for 39.5%, while trucks and other forms of road transport account for 29%. Freight rail continues to climb in popularity, as its efficiency, reliability, and cost effectiveness is unmatched by any ther mode of transport, thus, rail transport is expected to increase by 22% by 2035, according to a 2010 report.

Today’s flourishing freight rail industry can be attributed to the Staggers Rail Act of 1980, which introduced stark de-regulation throughout the industry. Prior to 1980, the rail industry was heavily regulated by the government, which severely hindered the industry to turn a profit, and sent many railroad companies into bankruptcy, most notably the Penn Central. Because the federal government set the fees that the railroads could charge, which prevented healthy competition, and crippled the industry.

Ben Sutton

After the act was passed in 1980, and the freight railroads became more competitive, they were able to set their own rates, creating a significant revenue, and enabling the industry to become a lucrative business entity. The North American freight rail industry is effectively one of the most competitive industries in the world, accounting for some of the world’s most competitive rates for freight rail services.

With the present efforts of railroads, especially class 1’s in cutting costs, additional profit has been garnered for the corporations and shareholders, however, much to the chagrin of engineers, conductors, etc., as various layoffs have occurred throughout the industry while freight rail companies harness this approach.

According to the Bureau of Transportation Statistics, between 2016-2017, the value of freight transported between the United States and Canada racked up to a staggering $582.4 billion, while increasing from the previous period by 7.1%. Of all commodities transported between the two countries, automobile parts and accessories were the most commonplace, amounting to $43.7 billion.

Although freight rail in North America is a lucrative business, it is somewhat unpredictable. For example, according to Railway Age, a select week in March of 2019, 509,958 car loads were transported, however, it was down 4.6% from the same week the previous year. However, various carloads, such as petroleum and other similar commodities experienced a slight increase.

According to an article published on Progressive Railroading In the forthcoming years, it is expected for freight rail revenues and carloads to increase. In the article it states that the Chief Executive Officer of the Canadian Pacific Railway explained how carloads and revenues have grown across every aspects of the company’s spectrum.

As the freight rail industry continues to expand exponentially, carloads are expected to continue increasing by copious amounts, as many expect intermodal to continue to increase throughout the coming years, yielding high profits to all freight rail companies.

United Kingdom

Background

From 1948-1997, the railways in Britain were publicly owned and operated by government run British Rail. However, under a conservative government, the publicly owned system shifted to a franchised system between the years 1994-1997.

After the country’s railways were privatized, various train operating companies (TOCs) began bidding for operations of certain railways. The rail franchising system is a highly debated element of the nation’s railways, especially the system in which the companies bid for operation, which is highly competitive.

Furthermore, once franchises are awarded to a certain TOC, the company could face competition from other companies, serving similar routes and destinations. Originally, the individual franchises were only scheduled to last three years, however, this proved unpopular with the general public, and was increased to seven years.

The TOCs amass a significant profit, as they earn most of their profit in fares, they also have the ability to lease out commercial assets in stations and other properties. If there is a case where the franchisee is struggling to produce revenue, various government subsidies are available. Similar to North American rail companies, the UK franchises are owned by various shareholders, many from other countries, such as France, Italy, and the Netherlands.

According to the Independent, although the opportunity to turn a profit is viable, many train operating companies claim losses, and many with very little profit. This issue further fuels the debate of whether the franchising system is more effective in creating competition between the rail operators.

Richard Dyke
Current Train Operating Companies

There are well over a dozen passenger rail franchises in the UK active at any given time, and each operate a certain geographical area or route contracted to them. Franchises range from everyday commuter services, intercity, and even overnight sleeper trains.

Caledonian Sleeper: The Caledonian Sleeper travels the route between London Euston and various points in Scotland such as Glasgow, Inverness, and Aberdeen. The train travels via the West Coast Mainline, and provides various amenities such as private rooms and meal service. The franchise, operated by SERCO, has suffered losses in the last few years, reporting a profit of just £19.1 million in 2017, and had decreased at a steady rate compared to years prior.

Chiltern Railways: Operating between London and Birmingham, Chiltern Railways operates trains along the Chiltern Mainline that parallels the M40 corridor. Chiltern has experienced a significant loss as well, as the profit earned by the company have been on the decline in recent years. The company’s woes began in 2015, when various infrastructural issues came to a head.

East Midlands Railway (EMR): Operating the Midland Mainline between London and Sheffield, East Midlands Railway operates express and various Intercity services throughout the midlands, connecting places such as Leicester, Derby, and Chesterfield.

Profits for the EMR’s predecessor, East Midland Trains had experienced losses for the last few last, as according to Insidermedia, the railway earned just £19.2 million from April 2018, down from the previous year’s profits of £25.2 million. This, coupled with various other issues, resulted in the ending of the franchise, being taken over by EMR.

Greater Anglia: Greater Anglia provides various regional and intercity services throughout eastern England. Intercity trains depart London Liverpool Street station, and terminate in Cambridgeshire. This franchise has also suffered financial issues, as various government subsidies have been acquired by the operator in the form of £80 million over the course of two years. Accurate earnings for this franchise are not available, however, profit would prove slim.

Great Western Railway: Named after the famous railway that built the line, the GWR operates between London Paddington and South Wales, terminating at Cardiff. Owned by Scotland’s own First Group, the franchise has recently received a £40 million dividend payment, although operational performance was at an all time low, according to the Financial Times.

London North Eastern Railway (LNER): Assuming services on the east coast mainline in June 2018 from Virgin Trains East Coast, LNER operates between London King’s Cross and various destinations throughout Scotland. Interestingly, the operator is owned by the Department for Transport, as opposed to a private entity, therefore, it is completely tax payer funded, therefore, shareholders and other persons are a non issue.

Avanti West Coast: Operating the West Coast Mainline between London Euston and Glasgow Central, the Avanti franchises has began operations on the line from previous operator, Virgin Train, which operated the route since privatization in the late nineties. According to The Guardian, the Virgin Trains franchise had amassed a profit of £306 million in dividends since the franchise’s inception in 1997.

Future of Franchising

One of the main issues with rail franchising is the increasingly expensive ticket prices. According to the Mirror, between the years of 2007-2017, the franchises made a combined sum of £3.5 billion. The Mirror explains how the increase in ticket price reflects the money given to shareholders and CEO’s of corporations, instead of being reinvested into the rail network.

Japan

Railways in Japan have been privatized since the late eighties, and have been separated into six  privately owned companies under the collective Japan Railways Group. These six companies are JR East, JR Central, JR West, JR Kyushu, JR Hokkaido, and JR Shikoku.

JR East: The East Japan Railway Company operates various routes including various high-speed Shinkansen lines, and various regional services. In 2019, JR East accrued a revenue of ¥3,002,043 million, similar to previous years.

JR West: Operating various rail lines such as the San’Yo Shinkansen, JR West has earned ¥109 billion through March 2018 ($978 million, £752,057,550 million).

JR Central: JR Central operates the very first Shinkansen line, the Tokaido Shinkansen, and earns much of its revenue through its Nozomi, Hakari, and Kodama Shinkansen services. In 2018, JR Central earned a profit of ¥438.7, according to Statista. And been increasingly steadily since 2011.

JR Kyushu: Operating the Kyushu Shinkansen, along with an array of regional and intercity lines, JR Kyushu amassed a profit of ¥440,358 million.

JR Hokkaido: JR Hokkaido operates the Hokkaido Shinkansen, in addition to various regional and intercity lines. However, the company recorded significant losses in 2018, as according to Nippon.com, the company expects to record a net loss of about ¥ 17.5 billion in 2018.

 

 

Josef

Lifelong Rail Enthusiast and Owner of Worldwide Rails

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