Rail Cost Control Blog - Rail Rates

Rail Rates – When is Enough, Enough?

Carriers and shippers agree: railroads need to be profitable to have a healthy and vibrant railroad system. To provide the best service possible, railroads need to be able to make the capital investment needed to move traffic efficiently and that requires a good return on their investment in track, equipment, and facilities. Carriers and shippers, therefore, agree that railroads need to have a rate structure for their traffic that allows them to operate profitably and efficiently. 

The disagreement between carriers and shippers regarding soaring rates comes down to when is enough, enough? 

In other words, when are the rates and rate increases imposed on rail traffic excessive? This is an important issue as excessive rates can have many negative consequences. Excessive rail rates can be damaging to the U.S. economy, the economy of individual states as well as the financial strength of individual companies. The negative impact occurs because excessive rail rates can: 

  • Cause companies to move production off-shore; 
  • Result in an increase in imports into the U.S.; 
  • Cause bulk traffic to move from rail to already congested highways; 
  • Limit capital investment at operations subject to ever increasing high rail rates; and, 
  • Put companies at a competitive disadvantage in domestic and export markets. 

Shippers understand that rail rates which are too low can be damaging to railroads. Railroads do not, however, seem to fully recognize that excessively high rail rates are damaging to both rail shippers, AND the economy. The question that needs to be answered, is: 

What are “reasonable” rates for railroads to charge for moving their traffic? 

The level of rate increase for rail freight, compared to other benchmarks, is a good indicator of railroads concern about the impact of their rates on companies. The illustration below tracks the historical percent change in rail rates against rates for long-distance trucking and inflation. Rail rates are determined using Association of American Railroads (AAR) average revenue per car data.

Rail Rates Increased More than Inflation

The illustration shows that rail rates increased by 94.2 % over the fifteen years between 2004 and 2019 (2019 is the last year reported).

During this same time frame, Long Distance Trucking freight rates increased 31.7%. Rail rates, therefore, increased three times more than the rates for trucking which is the railroad’s primary competitor. Inflation, as measured by the CPI, increased 35.4%. Rail rates, therefore, increased 2.7 times more than overall inflation.

As a result of the change in economics between truck and rail, trucks are now competing against railroads for longer distance movements. The big increase in the cost of rail freight has made trucking less expense than rail for many movements. This has resulted in traffic being taken off rail which contributes to greater congestion on highways. The cost of moving traffic by truck no longer appears to be effective competition as railroads have increased their rates 63% more than truck rates over the last fifteen years.

The remarks in this article should be qualified by saying that we have the highest admiration for the management of railroads. They have been a huge success for their investors as shown by the increase in the value of their stock. Rail management has taken the advantages and disadvantages of the current regulatory system and used it very effectively to create value for its stockholders. That is what effective management of any company should do and the railroads have done it better than most. On the other hand, shippers are concerned that railroads have become too adept at using the existing regulatory environment to their advantage.

Shippers are concerned about the power of railroads to keep churning out rate increases even as shippers fight for survival during these troubled times.

In looking at the current railroad industry I am reminded of a negotiation I was involved in many years ago. In this negotiation I asked the question, “When is enough, enough?” The response was very honest, “It is never enough!” The troubling fact is that this appears to be the mantra when it comes to rail rates today.


Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program to help shippers reduce rail expenses by managing costs and empowering negotiations. For more information about RCC and other related articles, visit the RCC Blog.


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Benchmark to Reduce Rail Expenses

Benchmark to Reduce Rail Expenses

To reduce rail expenses and consistently improve performance, companies need to consistently benchmark. The reason for benchmarking is simple. If you do not benchmark, you will likely do things the same way next year as you did this year. This means the problems you have this year will not get corrected.

When negotiating with railroads that have monopoly power over your traffic it needs to be recognized that:

You will always tend to receive rate increases


You do not know what reasonable rates are for your movements.

A comparison of railroad’s historical rate changes indicate that railroads are very active with rate benchmarking. The graph below provides an example of the results from railroad benchmarking. It shows the percent change in average rate per car for all Food Product (STCC 20) BNSF movements, versus UP.

Rail Rate Benchmarking Blog Illustration 1

The illustration shows that over the last five years the percent change in the average rate per car for all Food Product moves on BNSF are very similar to those of UP. The percent change in the average rate per car for BNSF and UP frequently separate, but they always tend to come back to the same type of rate change. The overall average rate change is similar for both railroads during most periods with the railroads exchanging places as to who has the highest rate increases from time to time.

Rail shippers should learn from the practices of railroads and use the data available to them to benchmark their rates against the rates of their competitors.

This is valuable information that will show whether a shipper is being put at a competitive disadvantage in its markets. This market intelligence helps shippers improve their competitive position in markets.

Benchmarking is just common sense. It is always important to find out how well you are doing in the market compared to other companies. To demonstrate, the chart below tracks Grain Mill Products (STCC 204) rates, for movements into the Dallas TX market from major origin locations. Rates are organized on the vertical axis and distance shipped on the horizontal axis.

Rail Rate Benchmarking Blog Illustration 2

The first thing to notice in this illustration is, that the miles for a movement do not necessarily determine the level of the rate for a movement.

For example, movements from Wichita, KS go the shortest distance to Dallas, TX (370 miles) and movements from Des Moines, IA go the longest distance to Dallas, TX (950 miles). However, many of the rates for both of these origins are similar even though Des Moines, IA moves go almost three times the distance. A similar relationship happens with moves from Kansas City, MO. All the rates from Kansas City, MO are similar to rates from Des Moines, IA even though Kansas City, MO moves go one half the distance to Dallas, TX. This shows that just because you have a geographic advantage in a market does not mean you have a competitive advantage in a market. This is important information for shippers marketing and sales departments to know.

When looking at this graph, assume a supplier to this market is located in Davenport, IA with shipments that travel 850 miles at a rate of $4,821per car, which is the average rate for all shippers from Davenport, IA into Dallas, TX. Some may say this shipper is getting the average rate from Davenport, IA and has nothing to complain about. But, from the shipper’s point of view:

  • Many competitors ship into Dallas, TX for considerably lower rates;

  • Most shippers from Des Moines, IA have significantly lower rates, while shipping a longer distance; and,

  • The average rate into the Dallas, TX market for all movements is $4,033 which is $775 less than this shipper’s rate.

If you are a Davenport, IA shipper with a $6,000 rate you would have even more important issues to discuss with your railroad. If you are a Des Moines, IA shipper with a $7,000 rate, then benchmarking will likely create substantial savings.

Once you know how your rate stacks up against competitors in a market, you have a different negotiation with railroads. You also have different preparation for negotiations, especially if this is one of your more important markets. There are a number of questions the benchmarking exercise raises:

  1. Are there other opportunities to reduce the transportation cost through a forward storage site, or transload?

  2. Can a commodity swap with another supplier be negotiated in exchange for supplying one of their customers at another destination?

  3. Can your competitive carloads be bundled with captive carloads to obtain better rates on captive traffic?

  4. What is the impact on the railroad if you don’t serve this market?

Benchmarking rates into a market leads shippers to explore other alternatives for reducing and evaluating rates. The carrier will always say your rate is a market rate; but the carrier’s interpretation of a market rate will include the highest rate any other shipper pays, not necessarily the average rate and certainly not the lowest rate. As long as there is one other shipper with a higher rate, then your carrier’s interpretation will likely be that you have good rates.

Benchmarking helps you educate railroads on:

  • The rates you need;

  • Why you need them; and,

  • The reasons a railroad should give these rates to you.

It is important to benchmark rates with railroads that have monopoly or duopoly power over your traffic. It is important because, this is how you determine what rates are reasonable for your traffic. Without the knowledge obtained from benchmarking you will always tend to get rate increases. Companies benchmark to cut costs and improve performance. Railroads do this and so should shippers!

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program to help shippers reduce rail expenses by managing costs and empowering negotiations. For more information about RCC and other related articles, visit the RCC Blog.

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RCC Blog - Why Some Rail Shippers Get Lower Rates

Why Some Rail Shippers Get Lower Rates

Rail shippers that are smarter about their movements get better rates for their traffic.  

Escalation Consultants, Inc. is in a unique position to see this, as many shippers use our databases to get better rates for their rail movements. The fact is: shippers who know more about their traffic do better in negotiating rates with their railroads.  

Shippers least cost leverage for obtaining better rates from railroads starts with benchmarking and costing rates for their movements.  

The following are examples of how rail shippers have used Escalation Consultants’ market intelligence database to their advantage:      

 1. A Captive shipper showed the railroad the impact its current rate structure has on reduced volumes into major markets. Market intelligence showed the rates needed to protect this business.  

Result – Shipper’s rates were reduced more than 10% to pertinent markets.  

2. A railroad proposed a large rate increase on captive movements. The railroad was shown that its rates were already in the upper profitability quartile for moves in certain markets. Additionally, the railroad was shown that its proposed rate increases are higher than the average increase they are receiving from all movements of this commodity.

Result Railroad pulled back its rate increases, reduced rates on priority movements and signed a multi-year contract. 

3. A shipper performed an analysis of the profit structure for a company’s movements on its primary railroad. The analysis showed that the railroad was pricing its movements above competitors on both captive and competitive traffic. Rate Benchmark Analysis showed the rate structure needed to maintain and increase volumes in problem markets. 

Result – Rates were reduced in significant problem markets and the railroad increased the strike price for fuel surcharges without increasing the rates for movements.

4. The rates and the rail carriers’ profits on all movements from an important market area were analyzed. This determined the market price for the commodity and the impact of increased volumes and lower rates on railroads profit.

Result – Win/win opportunities associated with lower rates were put in place to the benefit of both the shipper and rail carrier. 

5. Rail rates for all coal movements originating in the PRB and terminating in a specific state were determined.  The range of rates being obtained by plants with and without competitive options was used to support the rates that were and were not reasonable for plants.

Result – Shipper obtained rates in line with its competitor’s plants.

6.The shipper determined competitors’ rates into markets to find out where its rail rates were putting it at a competitive disadvantage in markets.  

Result – Rates were reduced in primary markets to keep the shipper competitive.

7. Shipper determined the railroad’s cost and profit for movements and how its rates stacked up to others in major markets.   

Result – Rates in several primary markets were reduced to minimize the shipper’s competitive disadvantage in these markets. 

The common theme in these examples, is that the shipper was able to gather information on its markets.

This data allows shippers to clearly demonstrate a problem to the railroad and quantify the rate that provided an equitable solution. The point to be taken is that shippers who are well prepared for negotiations have better negotiations. They also get better rates than shippers that do not completely understand their markets. Rate benchmarking and the costing of rail movements provides ammunition that helps protect rail shippers from excessive rates charged by railroads. These resources are important to help counteract the monopoly or duopoly power railroads have over their customer’s traffic.

When railroads have monopoly power over movements it is up to the shipper to determine if the railroad is abusing this power. Thus, putting the shipper’s business at a competitive disadvantage.

Railroads are sensitive to hurting a companies’ ability to compete in markets. Therefore, benchmarking your rates against competitors is a productive exercise in preparing for rate negotiations. This can be the most productive and least costly option shippers have for obtaining competitive rates for their traffic. 

Uncovering, and quantifying rate problems is a major function of effective transportation departments! Many transportation professionals have found that determining reasonable rates for traffic is the first step in obtaining better rates.

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program to help shippers reduce rail expenses by managing costs and empowering negotiations. For more information about RCC and other related articles, visit the RCC Blog.


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