Transport Management & Theory Practices (6)

Management of Transportation

Seventh Edition Coyle, Novack, Gibson & Bardi

© 2011 Cengage Learning

Chapter 6The Railroad

Industry

1© 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.

© 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.

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Introduction

• Rail: 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

Introduction• Domination 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


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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


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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


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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


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• 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


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• 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


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• 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


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Operating and 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 freight

• Traffic shifts: Growth of intermodal traffic


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Operating and Service CharacteristicsConstraints 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


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Operating and Service CharacteristicsConstraints 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


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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

Operating and Service CharacteristicsEquipment

• 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


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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


– 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


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• 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


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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


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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


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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


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Cost Structure, cont’dEconomy of Density Example

Case I• Fixed C. $3.5M• Var. C. $2.5M• Total C. $6.0M• Revenue $7.0M• Profit $1.0M• Cost/Ton $0.03

Case II +20% Traffic• Fixed C. $3.5M• Var. C. $3.0M• Total C. $6.5M• Revenue $8.4M• Profit $1.9M• Cost/Ton $0.027


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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


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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


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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


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Current Issues

• Alcohol and drug abuse– Effect of and on work environment

• Rail: more energy-efficient than truck– Lower environmental impact

• Technology– Train, yard control systems, “smart” equipment

• Future role of smaller railroads• Customer service• Drayage for intermodal service

Transport Management & Theory Practices (6)

Business

Transcript of Transport Management & Theory Practices (6)