Chapter 4

Railroads p127

Brief history of the rail industry• Rail transportation played a significant role in the

economic development of our nation. The railroad industry has declined in relative importance during the last 50 years or so. This decline can be attributed to the following events:

• the alternate transport modes with superior services and cost characteristics (primarily motor carriers and pipelines)

• a resurgence in water transportation • and changing needs of the economy

• It is important to note that rail ton-kilometres have continued to increase and railroads are still the largest carrier in terms of intercity ton-kilometres, but not in terms of tonnage or revenues.

• The rail industry may have a resurgence because as fuel prices escalate and highway congestion increases, intermodal shipments (which includes railroad) will become more attractive.

Industry Overview p130

Intermodal

• The relative market share of the railroad has been steadily declining because of increased intermodal competition. Governmental expenditure on infrastructure (highways, roads, harbours and airport) has facilitated this.

Intermodal cont’

• Customers look for consistent on-time performance. Railroads need to provide this level of service to stay competitive. Railroad companies usually cannot deliver freight early because the customer then has to find a place to store it.

• New developments, such as unit trains carrying one commodity like coal or grain from one shipper to one consignee (receiver), helped the railroads operate profitably.

OPERATING AND SERVICE CHARACTERISTICS P135

General Service CharacteristicsCOMMODITIES HAULED• In the 19th century, when the railroads were the

primary source of transportation, they moved almost every available type of product or raw material.

• Today, the railroad system has evolved into a system that primarily transports large quantities of heavyweight, low value commodities (bulk products).

COMMODITIES HAULED cont’

• Motor carriers concentrate on the handling of small volume, high-value finished goods, whereas water and pipelines carry the larger volumes of the lowest types of bulk commodities.

• The railroads therefore find themselves engaged in intense competition with these other modes for the opportunity to ship many product categories.

General commodities hauled are:• Coal, Farm Products, Chemicals, Transportation

Equipment.• Although the commodities shipped by the railroad

industry are mostly the movement of low-value, high volume bulk materials, the railroads are still a possible mode of transport for many different types of goods, including both high-value merchandise and raw materials alike.

COMMODITIES HAULED cont’

TRAFFIC SHIFTS• The demand for freight transport is derived

demand; that is, transportation that is based upon the demand for products and related matters.

• Consequently, economic conditions have an impact upon the demand for transportation service. This is especially true for railroads because they primarily move basic raw materials and supplies.

Railroad Constraints

• Railroads are constrained by fixed rights-of-way and therefore provide differing degrees of service completeness.

• For example, if both the shipper and receiver possess rail sidings, then door-to-door service can be provided. However, if no sidings are available, the movement of goods must be completed by some other mode.

Constraints cont’

• If line-haul mileage continues to decline (as indicated by current industrial trends), the industry will become less service-complete and even more dependent on other modes of transportation for completion of many types of moves.

• The through service is unique, but multiple handlings can create rate-division problems and delays in delivery.

Constraints cont’

• Although on-time delivery performance and the frequency of service had deteriorated in the past, improvements have been made in recent years.

• If rail transport is going to expand, reliability and transit time will have to improve as well as equipment handling availability.

Railroad Strengths

• A large carrying capacity enables the railroads to handle large-volume movements of low-value commodities over long distances.

• Motor carriers, on the other hand, are constrained by volume and weight to the smaller truckload (TL) and less-than-truckload (LTL) markets.

• Furthermore, although pipelines compete directly with the railroads, they are restricted largely to the movements of liquid and gas (and then only in one direction).

Strengths cont’

• In addition, railroads are able to use a variety of car types to provide a flexible service because the rolling stock consists of boxcars, tankers, gondolas, hoppers, covered hoppers, flatcars, and other special types of cars.

Strengths cont’

• Another important service is that the liability for loss and damage is usually assumed by the railroads.

• Railroads, however, have had a comparatively high percentage of goods damaged in transit.

• In addition, the incidence of loss is usually higher than on other modes because of the high degree of multiple handlings.

• Excessive loss and damage claims have tended to erode shipper confidence in the railroad’s ability to provide adequate service.

Strengths cont’

• Finally, equipping cars with instrumentation packages to measure forces that might cause damage reduces the damage potential.

• One area that has received much attention has been the intermodal era, namely, trailer-on-flatcar (TOFC) and container-on-flatcar (COFC) service.

• The railroads realized the necessity of improving the TOFC and COFC service to compete effectively with motor carriers.

Strengths cont’

• The developments include terminal facilities for loading and unloading, as well as changes in the railcars and trailers and containers.

• However, the changes have not stopped here. The railroads have invested a significant amount of money recently in improving right-of-way and structures to help improve service by preventing delays.

Railroad Equipment• The carload is the basic unit of

measurement of freight handling used by the railroads.

• A carload can vary in size and capacity depending on the type of car being used.

• There is a trend to increase the carrying capacity with a 100-ton capacity probably representing the most efficient size with the present support facilities.

Railroad Equipment cont’

Today’s car fleet is highly specialized and is designed to meet the needs of the individual shipper. Following is a list of eight generalized car types:

• Boxcar (plain): Standardized roofed freight car with sliding doors on the side used for general commodities

• Boxcar (equipped): Specially modified boxcar used for specialized merchandise, such as automobile parts

Railroad Equipment cont’

• Hopper car: A freight car with the floor sloping to one or more hinged doors used for discharging bulk materials

• Covered hopper: A hopper car with a roof designed to transport bulk commodities that need protection from the elements

• Flatcar: A freight car with no top or sides used primarily for TOFC service machinery and building materials

Railroad Equipment cont’

• Refrigerator car: A freight car to which refrigeration equipment has been added for controlled temperature

• Gondola: A freight car with no top, a flat bottom, and fixed sides used primarily for hauling bulk commodities

• Tank car: Specialized car used for the transport of liquids and gases

• To remain competitive with the other modes of transportation, the railroads have increased their capacity.

• The average freight train load also has increased; in 2001 more than 3,005 tons per load were carried as compared to barely 800 tons per load in 1929.

• This increase in capacity will be necessary if more bulk commodities are to be shipped longer distances in the future.

Service Innovations

• TOFC service transports highway trailers on railroad flatcars.

• It combines the line-haul efficiencies of the railroads with the flexibility of local motor pickup and delivery service.

• On-time deliveries, regularly scheduled departures, and fuel efficiency are the major reasons for the present growth and future potential of TOFC service.

Service Innovations cont’

• For example, a 100-car train (which places two trailers on each flatcar] is more economical to run than 200 trucks over the road. Fuel is saved and railroad economies of scale are realized. Traffic congestion, road damage, and maintenance and repair costs are all reduced because of the reduction of number of trucks out on the highways.

Service Innovations cont’

• COFC is the international form of transportation for containers and is equivalent to domestic TOFC movements.

• A container does not have wheels and must therefore be placed on a flatbed truck for ramp–to-door delivery.

• The amount of handling is reduced because the container can be loaded and sealed at the origin and shipped directly to the consignee (receiver)

Service Innovations cont’

• Economies are realized because putting finished goods in containers means not only lower packaging and warehousing costs but also faster transit times because time and effort are saved in the loading, unloading, and delivery of goods.

Service Innovations cont’

• The unit train, which evolved from the rent-a-train concept for the movement of goods, specializes in the transport of only one commodity, usually coal or grain, from origin to destination.

• Many times the shipper owns cars, and the train is, in effect, rented to the shipper for a particular period of time.

• For example, a typical utility coal unit train move would involve the transportation of 10,000 tons of coal in 100 hopper or gondola cars, each with a 100-ton capacity.

Service Innovations cont’

• The movement would be directly from the mine to an electric power-generating station with no stops in transit, and loading and unloading would be accomplished while the train was moving.

• Because of the single commodity nature of the concept and the need to maintain regularly scheduled movements, empty backhauls occur.

• However, this drawback is offset by the high revenue-producing capabilities of the unit train resulting from the improved overall car utilization.

Service Innovations cont’

• Elaborate information and communication systems have been developed so that a railroad’s progress, status, and reliability can be monitored on an online basis.

• Car ordering and billing is simplified, while cars are traced and located, and orders are expedited at a faster rate.

• Computers are not a “cure all”, but they do help bring about increased efficiencies without any loss in service quality.

COST STRUCTURE p143

Fixed Costs• The railroad industry’s cost structure in the short

run (a period when both plant and capacity remain constant) consists of a large proportion of indirect fixed costs, rather than variable costs.

• This situation exists because the railroads, along with the pipelines, are the only modes that own and maintain their own network and terminals.

Fixed Costs cont’

• The major cost element borne by the railroad industry, and not found in the cost structure of other modes (excluding pipelines), is the operation, maintenance, and owner ship of rights-of-way.

• Rights-of-way describe what a carrier’s equipment uses to provide movement.

• For example, the railroads use track and ballast (coarse gravel laid to form a bed for railroads), while the motor carriers use highways.

• Initially, a large capital investment is required and annual maintenance costs become a substantial drain on earnings.

Fixed Costs cont’

• Another major component of the railroad industry’s high fixed costs is the extensive investment in private terminal facilities.

• These terminal facilities include freight yards, where trains are sorted and assembled, and terminal areas and sidings, where shippers and connecting railroads are serviced.

• Because of the large amount of fixed assets, the railroads as a group are not as responsive as other modes to the volume of traffic carried.

Fixed Costs cont’

• The costs associated with equipment are both fixed and variable depending on which costs are used and what time period is being considered.

• It is apparent that the railroads have a high proportion of expenses that are fixed and constant in the short run. However, they also have costs that vary substantially with volume.

Semivariable Costs

• Semivariable costs, which include maintenance of rights-of-way, structures, and equipment, have accounted for more than 40 percent of railroad outlays in recent years.

Variable Costs

• Variable costs are one of the immediate concerns of railroad management, accounting for a large proportion of every revenue dollar spent by the railways.

• Labour cost is the largest single element of variable costs for railroads.

• Fuel and power costs are the next largest group of variable costs.

• Together these two categories account for a major portion of variable costs.

Economies of Scale

• As previously indicated, railroads have a high level of fixed costs as contrasted with variable costs.

• Fixed costs, such as property taxes, are incurred regardless of traffic volume.

• Variable costs, on the other hand, vary or change with the volume of traffic; that is, they rise with increases and fall with decreases in traffic levels.

Economies of Scale cont’• The development of any railroad requires a very

large capital investment because of the cost incurred in buying land, laying tracks, building bridges, providing terminals, and providing right-of-way facilities.

• All costs are generally regarded as being variable in the long run because, as traffic increases, capacity is reached and new investment is needed in plants and equipment.

• However, because railroads are so large and facilities are durable, the short run can be a long period of time.

Economies of Scale cont’

• Our focus here is primarily on the short run. Consequently, you should make special note of the impact of the high level of fixed costs in the railroad industry.

• When fixed costs are present, a business will operate under conditions of increasing returns until capacity is reached.

• In other words, an increase in output (traffic) will not be accompanied by a proportionate increase in total costs because only the variable costs will increase.

• This will mean a decline in the per-unit costs because the fixed costs will be spread out over an increased number of units with subsequent unit-cost declines.

Economies of Scale cont’

• Let’s consider several examples that illustrate the impact of fixed costs and economies of scale.

• Suppose that C. B. N. Railroad carries 200 million tons of freight at an average charge of $0.035 per ton.

• It has fixed costs of $3.5 million and variable costs of $2.5 million:

Economies of Scale cont’

• Fixed Costs $3.5 million

• Variable Costs + $2.5 million

• Total Costs $6.0 million

• Revenue $7.0 million

• Profit $1.0 million

• Cost Per Ton $0.03

Economies of Scale cont’

• Let’s assume a 20% increase in traffic at the same average charge of $0.035 per ton and no need to increase plant size:

• Fixed Costs $3.5 million• Variable Costs + $3.0 million• Total Costs $6.5 million• Revenue $8.4 million• Profit $1.9 million• Cost Per Ton $0.0271

Economies of Scale cont’

• It is obvious from the above example that, if average revenue stays the same, the economies of scale not only lower costs per unit but also increase profit.

CURRENT ISSUES p148

Alcohol and Drug Abuse• The problem of substance abuse can be brought on

by the very nature of railroad work. Long hours, low supervision and nights away from home can lead to loneliness and boredom, which can lead to substance abuse.

Energy• Railroads, in comparison to trucks (a major

competitor) are able to move large amounts of freight with less energy and less harm to the environment.

TechnologyOther applications of computer technology are as

follows:• Advanced ‘Train Control Systems (ATCS): A

joint venture between the United States and Canada that will use computers to efficiently track the flow of trains through the entire rail system

• Rail yard control: Computer control of freight yards that is used to sort and classify as many as 2,500 railcars a day

• Communications and signalling: Provides quick and efficient communications between dispatchers, yard workers, field workers, and train crews

• Customer service: By calling a toll-free number, customers can receive information on the status of their shipments, correct billing errors, and plan new service schedules

• Radio Frequency Identification (RFID) tags to track equipment and shipments and improve visibility.