Management of Transportation Chapter 4 The Railroad Industry © 2010 Cengage Learning. All Rights...

Management of Management of TransportationTransportation

Chapter 4The Railroad

Industry

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1

IntroductionIntroductionRail: dominant mode from 1850s to WW II◦Superior in both price and service quality to road

transport for most of this period◦Superior in service quality to water transport

Development facilitated by standardization of track gauge and rolling stock

Pivotal role in U.S. economic development◦Great expansion in track mileage, post-1870s◦Financed by private capital◦Too much track mileage relative to demand


IntroductionIntroductionDomination begins to wane after 1920◦1929: rail carried 75% of freight ton-miles◦Today: carries about 43% of freight ton-miles◦Some reasons for relative decline

Large-scale government construction programs for roads and inland waterways

Private financed construction for oil pipelines Government also helped develop air transport that

provided superior service for passengers and mail Economy and shipper service-related needs change

◦Note: total rail ton-miles continue to grow


Introduction

Railroads remain vital part of U.S. economy ◦Industry revenues about .4% of GDP◦Industry revenues about 12.7% of total

expenditures for freight transport service in U.S.

◦Railroads employ about 187,000 people◦Railroads invested over $117B in new

plant and equipment in 2007© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4

Industry OverviewNumber of Carriers

Industry structure◦Concentrated: Small number (565)

dominated by a few large (Class I) carriers 7 Class I railroads Rest are regional or local (short line) carriers

Total rail system mileage◦Reached peak in 1916 (254,251 miles of

road)◦Today: about 94,440 miles of road◦ Reasons for decline


Industry OverviewCompetition

Intensity changed during 2nd half of 20th century

Intramodal (between railroads) competition◦Current industry structure is a differentiated

oligopoly Small number of large carriers Few places served by multiple railroads

◦Number of carriers is small in part due to Large financial barriers to entry Financial attractiveness of mergers and

consolidations © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8

Industry OverviewIndustry OverviewCompetitionCompetition

Intermodal (between modes) competition◦Very intense for non-bulk traffic

Some modes offer service advantages over railroads Other modes offer price advantages over railroads

◦Staggers Rail Act Helped railroads to become more price competitive Helped railroads to develop more customized

responses to customers’ level of service needs



Mergers Large number over time, trend accelerated in

1980s following Staggers Act Motivation

Early mergers made to expand capacity, create EOS Side-by-side mergers done to strengthen financial

position and reduce duplication End-to-end mergers done to improve competitive

position, first vs. other RRs, then vs. other modes, and service levels via fewer interchanges between railroads

Consequence - small number of carriers own majority of track and carry majority of rail freight © 2011 Cengage Learning. All Rights Reserved. May not be

scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10


Abandonment of rail lines◦Context: early over expansion followed

by increased competition between modes◦Most abandonments involve duplicate

track or track serving small markets with little rail freight

◦Some track taken over by smaller railroads

◦Alternative uses for land Rails-to-Trails Conservancy Rail-banking program


Operating and Service Operating and Service CharacteristicsCharacteristicsGeneral Service CharacteristicsGeneral Service Characteristics

Characteristics of principal commodities◦Railroads carry wide variety of products

But, 83% of total 2007 rail carloadings concentrated in low-value-to-weight (bulk) products

Principal commodities hauled◦Bulk products: coal, farm products, chemicals,

food and kindred products, nonmetallic minerals◦Non-bulk: Transportation equipment, intermodal

mixed freightTraffic shifts: Growth of intermodal traffic


Operating and Service Operating and Service CharacteristicsCharacteristicsConstraints and StrengthsConstraints and Strengths

Constraints on railroads◦Fixed rights-of-way impedes door-to-door

service◦Other service level limitations

Strengths of railroads◦Large carrying capacity (few size or weight

constraints) enable low average cost operations ◦Capable of handling almost any type of cargo◦Railroads assume liability for loss and damage

Railroads tend to have higher damage claims


Operating and Service Characteristics Constraints and Strengths

Strengths of railroads◦Recent emphasis on equipment, technology

innovations, and quality programs Improved suspension, end-of-car cushioning

devices, and in-car force instrumentation packages Quality certification program (M-1003)

◦ Intermodal services Double-stack services – greatly improve

productivity Terminal improvements, equipment redesign, and

right-of-way improvements designed to reduce in-transit delays

◦Microprocessors for communications and signaling © 2011 Cengage Learning. All Rights

Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15

Operating and Service CharacteristicsEquipment

Carload: basic unit of measure◦Carloadings declining due to increasing

average car size, improving carload productivity

◦Ave. carload in 2007: 99.5 tons and growing◦Standard gross vehicle weight: 263K lbs

May rise to 286K, bridge and track constraints

◦RRs own and maintain 42% of rolling stock Non-railroad companies own 58%, growing

trend© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16

Composition of rail car fleet has changed over time to meet changing shipper requirements◦Historically, standard box car was most

numerous car in fleet – used for hauling general mfg. goods

◦Today, fleet contains many specialized rail car types Cars custom designed to accommodate different types

of bulk products or shipper need More than 85% of car fleet designed for transport of

bulk products and raw materials© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17

Operating and Service CharacteristicsEquipment

Operating and Service CharacteristicsService Innovations

Piggyback service: intermodal service directed to non-bulk, manufactured products◦Includes both container-on-flatcar (COFC)

and trailer-on-flatcar (TOFC) services Definitions, basic differences between COFC and

TOFC◦Accounts for second highest number of

carloadings◦Competes directly with truckload (TL)

service However, some TL carriers are also major

customers of piggyback service© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19


◦Competitive advantage piggyback service Combines cost-efficiency of RR long haul with

flexibility of truck pick-up and delivery

◦Principal disadvantage of piggyback service Transit time and on-time delivery performance

◦To counter service disadvantage RRs create dedicated intermodal trains Trains run on regularly scheduled departures

and priority operating schedules© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20


Public benefits of piggyback vs. TL services◦Reduced fuel consumption◦Reduced road congestion and road damage◦Lower emissions

COFC: component of international trade◦Land-bridge operations

Substitutes rail for portion of ocean voyage

◦Double-stack container trains Greatly improves rail equipment and train productivity



Unit trains: specialized, one commodity trains◦Direct origin to destination movement

Run on priority service schedules No stops in-transit

◦Used frequently for coal and grain shipments◦Shippers often own rail cars◦Disadvantage: empty backhauls

Computer and communication systems◦Management control and shipment monitoring◦Car tracing, ordering and billing simplified


Cost StructureFixed Costs

Railroads have high % of indirect fixed costs in short run◦Short run: means that capacity remains

constant◦Estimated 30% of costs do not vary with

volume due to high % of long-lived (durable) assets RRs own and maintain networks (rights-of-way) and

terminals (freight yards) Geographically fixed, impedes responsiveness to changes in

demand

Equipment: locomotives and rolling stock $ billions in annual capital expenditures© 2011 Cengage Learning. All Rights

Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24

Cost StructureSemi-Variable and Variable Costs

Semi-variable costs: over 40% of total costs◦ Includes maintenance of rights-of-way,

structures and equipment ◦Often deferred during financially difficult periods

Variable costs◦Labor: Largest component of variable costs

26.4% of each revenue dollar Unionized work force, 14 craft unions Work rules: productivity challenges and issues

◦Fuel: 2nd largest component of variable costs Locomotives: increasingly productive and fuel efficient


Cost StructureEconomies of Scale (EOS)

Means falling average costs ($/ton) as scale or capacity increase, assuming capacity utilized

Economies of density or utilization◦Falling average costs as volume carried

increases, assuming capacity remains constant

◦Large among RRs due to high fixed costs◦Following example indicates impact of higher

utilization on average costs and profits


Cost Structure, cont’dEconomy of Density Example

Case IFixed C. $3.5MVar. C. $2.5MTotal C. $6.0MRevenue $7.0MProfit $1.0MCost/Ton $0.03

Case II +20% Traffic

Fixed C. $3.5MVar. C. $3.0MTotal C. $6.5MRevenue $8.4MProfit $1.9MCost/Ton $0.027

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

27

Financial Plight

Pre-WWII period◦Dominant mode, periods of financial

difficulties◦Highly regulated economically

Post-WWII to 1975◦Other modes emerge, helped by public

investment◦Economic regulation hampered RR ability to

compete, market share declines◦RR industry suffers through several periods

of severe financial distress, inability to earn adequate returns on investment


Financial Plight Legislative Reform

Reduces economic regulation◦Regional Rail Reorganization Act of 1973

(3R Act) Creates process to reorganize bankrupt

railroads in northeast U.S. ◦Railroad Revitalization and Regulatory

Reform Act of 1976 (4R Act) Provides capital and operating assistance for

Conrail Reduces economic regulation of railroads,

providing greater pricing and service flexibility © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29

Financial Plight Legislative Reform

◦Staggers Rail Act of 1980 Further relaxes regulatory framework for

railroads Authorizes contract rate-making

Enables railroads to tailor services to shipper-specific needs

Evens playing field with truck and water carriers Results in great improvement in RR financial

condition◦ICC Termination Act of 1995

Eliminates Interstate Commerce Commission Transfers remaining regulatory authority to

Surface Transportation Board in U.S. DOT © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30

Financial PlightImproved Service to Customers

Many signs of improved service◦Increase in intermodal traffic

Up 484% from 1980-2007

◦Decrease in train accidents Down 70% from 1980-2007

◦More and improved tailored services and equipment for shippers

◦Greatly improved financial condition


Current IssuesAlcohol and drug abuse◦Effect of and on work environment

Rail: more energy-efficient than truck◦Lower environmental impact

Technology◦Train, yard control systems, “smart”

equipmentFuture role of smaller railroadsCustomer serviceDrayage for intermodal service


Management of Transportation Chapter 4 The Railroad Industry © 2010 Cengage Learning. All Rights...

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