Rail freight transport plays an important role in sustainable transport policy because of its higher safety and lower environmental impacts compared with road freight. However, the share of rail in freight transport in Iran has declined in recent years, and the targets set for increasing rail’s modal share have not been achieved. Evidence suggests that supply-side constraints—particularly declining locomotive availability, breakdowns, maintenance limitations, waiting times, and the structure of traction allocation—play an important role in limiting effective capacity. This study applies a system dynamics approach to model the interactions among freight demand, mode choice, rail capacity, and the traction subsystem within an integrated quantitative framework. In the model, realized rail freight share results from the interaction between potential rail freight demand and effective available capacity, while locomotive availability is represented as an endogenous variable determined by utilization, wear, maintenance, and breakdowns. Mode choice is formulated using a logit model based on the relative cost, relative time, and relative accessibility of rail compared with road transport. The model was evaluated through structural validity, dimensional consistency, historical behavior reproduction, and extreme-condition tests. Simulation results indicate that removing stops associated with locomotive changes at regional boundaries can reduce transport time and increase both rail capacity and attractiveness, provided that fleet imbalances and coordination problems are effectively managed. Increasing the locomotive tariff adjustment factor strengthens maintenance resources and improves locomotive availability but, if passed through to final freight rates, also increases the relative cost of rail and reduces potential demand. Increasing the frequency of periodic inspections produces more persistent improvements when supported by adequate maintenance resources. Overall, the findings suggest that a sustained increase in rail freight modal share requires a coordinated package of allocation, maintenance, operational, and pricing reforms, potentially complemented by policies that reduce the relative attractiveness of road freight.