The Association of American Railroads (AAR) and the Surface Transportation Board (STB) calculate several indexes to measure inflation, cost increases, and productivity across rail lines. These indexes can be used to measure the health and status of the rail industry. Some rail contract rates are subject to a railroad cost index, and many contracts state that there will be a minimum increase imposed regardless of what the cost index indicates. This can result in the rail rates increasing even when the index does not. When shippers enter contracts subjected to railroad cost indexes, it is important to be aware of any minimum increase being imposed.
There are two main railroad cost indexes that are outlined below:
- The Rail Cost Adjustment Factor – RCAF (unadjusted and adjusted)
- The All-Inclusive Index Less Fuel – AII-LF
The Rail Cost Adjustment Factor (RCAF)
The Rail Cost Adjustment Factor (RCAF) was established in response to the Staggers Act of 1980 and is no longer the predominant railroad cost index used in contracts. The major issue with the RCAF is that it includes fuel costs, which are addressed by the fuel surcharge rates imposed by the railroads. The RCAF is published quarterly by the STB, as required by law under 49 U.S.C. § 10708, and measures the rate of inflation in railroad inputs, like labor, fuels, equipment, supplies, etc. The Association of American Railroads (AAR) calculates this number, and it is then reviewed, approved, and published by the STB.
There are two versions of the RCAF: the RCAF-Unadjusted and the RCAF-Adjusted. The difference is the consideration of productivity improvements. The RCAF-Unadjusted Index is based on several components, including labor, fuel, materials and supplies, equipment rents, depreciation, interest, and other expenses, but does not take productivity improvements into account. The RCAF-Adjusted Index adjusts the RCAF-Unadjusted for productivity gains and allows regulators to assess future rates relative to performance.
All-Inclusive Index – Less Fuel
The All-Inclusive Index – Less Fuel (All-LF) is the more widely used index in rail rate contracts today. It provides a parallel measure of the RCAF-Unadjusted without the influence of the fuel cost component, which can shift dramatically at different times. All other components (labor, materials, and supplies, etc.) match those used to calculate the RCAF, but productivity improvements are not factored into this index.
Railroad costing indexes may be used in contracts to apply rate increases. When negotiating rail rates, it is important to consider both the current rate, as well as the increase that may be applied. Many contracts that are subject to a railroad cost index also contain a minimum, which will allow the railroad to apply an increase even when their costs have not increased. Shippers can negotiate these contract terms; however, analyzing cost and rate trends and determining what they mean for your business can be a challenge. We’ve created useful tools, like Rail Impact, and guides, like the Shipper’s Guide to Rail Freight Rates, to make this data easier to use. If you’re uncertain about your rail rates or how to proceed, we’re happy to help.