management of transportation chapter 4 the railroad industry © 2010 cengage learning. all rights...
TRANSCRIPT
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
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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
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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© 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
© 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. 5
© 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. 6
© 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. 7
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
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Industry OverviewIndustry OverviewCompetitionCompetition
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
Industry OverviewIndustry OverviewCompetitionCompetition
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 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
© 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. 12
© 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. 13
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
© 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. 14
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
© 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. 18
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
Operating and Service CharacteristicsService Innovations
◦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
© 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. 21
Operating and Service CharacteristicsService Innovations
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
© 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. 22
Operating and Service CharacteristicsService Innovations
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
© 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. 23
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
© 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. 25
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 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
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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
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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
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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
© 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. 32