Chapter Six - Railroads
TRANSPORTATION PROFILE: CAPTURING INVENTORY IN-TRANSIT ON RAIL
-Rail is increasingly carrying inventory that is fueling a growing U.S. economy
-The railroads have enjoyed five years of steady growth in the carload volumes
-There is a greater need for visibility into inventory in transit as we move to shorter and shorter delivery cycles
-Rail has historically been a less visible supply chain
i. We were only able to trace at the car/container number level
-In order to effectively use rail in our in-transit inventory solution, it has to be:
i. Affordable
ii. Capable of being planned
iii. Predictable
iv. Visible
v. Flexible
-Affordable:
i. Competition for portions of the railroad’s market is very limited
a. Consolidations over the past several decades have happened
ii. Many markets have only one railroad serving them
iii. Railroads have pushed for price increases
a. Less incentive to invest in railroad shipping
-Capable of being planned:
i. Ability to generate information that can be made visible through forecasting models
ii. Ability to substitute virtual inventory
iii. Needs item level tracking
-Predictable:
i. Accurate tracking of where the car is
-Visible:
i. The infrastructure is in place, software for the customer to be able to view item level is still improving
-Flexibility:
i. Improved methods of tracking are emerging
a. Allows for faster responses
INTRODUCTION
-Scheduled common carrier freight and passenger service to the public began in 1830 between Baltimore and Ellicott’s Mills Maryland
-The railroad evolved from unconnected carriers focused on short-haul traffic to longer distance lines between:
i. The Atlantic Seaboard
ii. The Mississippi River
iii. St. Lawrence River
iv. Great Lakes
v. Potomac and Ohio Rivers
-Completion in 1869 of the first rail link between the Midwest and Pacific Coast
-Railroads helped landlocked areas
-Post 1870 boom of railroad network expansion:
i. Financed largely by private capital
a. This led to overbuilding of the network
-Many people build railroads with the intention of selling them to parallel railroads because they were threatened by the competition
-Erosion of the railroad industry began with the investment in hard-surface roads for automobiles
-The railroad industry has stabilized due to:
i. Alternate transportation modes with superior services or costs
a. Primary motor carriers and pipelines
ii. Resurgence in water transportation
iii. Changing needs of the U.S. Economy
-A new depreciation accounting system led to higher ROIs for investors
-Market share of tons has been decreasing, but total tons has been increasing
INDUSTRY OVERVIEW
Number of Carriers
-574 Different railroads
i. 7 are designated by the STB as Class 1 companies
a. Meaning they each generated revenue of 452.7 million annually
ii. Regional applies to the line-haul railroads operating at least 350 route miles or earning annual revenue of at least 20 million
iii. Local applies to everything below the regional criteria
a. Commonly referred to as short lines
b. Railroads that provide only switching and terminal service
-Some short line railroads are standalone railroads and others are subsidiaries of larger companies
i. Genesee & Wyoming, Inc. Purchased 112 subsidiary railroads including Rail America
-Reduction in railroads can be attributed to the destruction of duplicate railroads that were made during the boom period
Competition
-Consolidations within the industry have created a situation in which only seven Class 1 railroads generate 94.0% of railroad revenue
-The railroad industry can be classified as a differentiated oligopoly
i. Each large railroad serves somewhat different markets
ii. The major source of competition is intermodal
-Intramodal
i. Barriers to entry exist because of the large capital investments and fixed costs required along with commodity movements not easily diverted to motor or sea are transported by the major 7 railroads
ii. Many cities now have only one railroad serving them
-Intermodal
i. The relative market share of railroad intercity ton-miles has been steadily declining because of increased intermodal competition
ii. Railroads need to deliver on-time performance to stay competitive
iii. Government expenditure programs aimed at promoting other modes forces railroads to find ways to stay competitive
a. Low rates
iv. Staggers Rail Act removed significant economic regulation
a. Allows rails to be more competitive when setting rates
-Mergers
i. Early rail mergers grew out of efforts to expand capacity to benefit from large-volume traffic efficiencies and economies
ii. End to end mergers are a more recent development created to provide more effective competition
a. Customer service and reliability can be improved by these mergers because they reduce costs
b. Such improvements have been slow to develop
iii. In 1920, there were 186 Class 1 railroads; by 2013, the number had declined to 7
iv. This is because:
a. The way in which railroads are classified by revenue, when adjusted for inflation, fewer railroads qualify
b. Accelerating trend of mergers since the Staggers Act was passed
v. 7 Class 1 railroads:
a. BNSF
b. Canadian National
c. Canadian Pacific
d. CSX Transportation
e. Kansas City Southern Railway
f. Norfolk Southern
g. Union Pacific Railroad
-Abandonments
i. The railroads had to abandon significant portions of rail trackage to remain competitive
ii. To effectively compete with motor carriers for time-sensitive traffic, railroads had to focus on efficient routes
iii. Partial deregulation gave rail companies greater freedom to buy, sell, or abandon unprofitable tracks. Once the railroad companies abandoned the tracks, they sold the rails and ties to scrap dealers
iv. The program, Rail to Trails Conservancy has been highly successful in adding over 10,000 miles of trails to the country’s recreational facilities
v. The ICC, and later the STB, still regulate abandonments, but changes in the law made it easier
GLOBAL PERSPECTIVES: FLORIDA EAST COAST RAILWAY TO BE ACQUIRED BY GRUPO MEXICO
OPERATING AND SERVICE CHARACTERISTICS
General Service Characteristics
-When the railroads were primary source of transportation, they moved everything
i. Now they mainly move bulk commodities
-Have to compete with pipeline and motor carriers to move bulk commodities across land
-Coal
i. Railroads are the primary haulers of coal
a. This may increase if there are political changes in the Middle East that limit the supply of petroleum and related products
-Farm
i. Farm and food products constitute the fourth largest commodity group hauled by railroads
-Chemicals
i. Chemicals are transported in specially designed tank cars
ii. Rail carriers are the preferred method for moving chemicals, but motor vehicles actually move more chemicals, and compete vigorously for this traffic
-Transportation equipment
i. The transportation of transportation equipment has been increasing on rail since 2015
-Traffic shifts
i. Transportation is a derived demand
a. A demand that is based upon the demand for products to be moved
Constraints
-Railroads are constrained by fixed rights-of-way and therefore provide differing degrees of service completeness
i. Products can only be moved if both shipper and receiver possess rail sidings
-Shipments that are passed through different railroads make rate exchanges difficult and add delays in delivery
-Railroads dominate the market for hauling 30,000 pounds or more over distances exceeding 300 miles
-The industry is improving reliability, transit time, and equipment availability to make railroads more competitive in short-haul markets
Strengths
-Railroads are able to handle large-volume movements of low-value commodities due to:
i. Large carrying capacity of freight cars
ii. Economies of scale in freight train operations
-For the most part, the industry is not constrained to weight and volume restrictions
-Railroads can differentiate cars to meet needs:
i. Boxcars
ii. Tankers
iii. Hoppers
iv. Flatcars
-However, railroads have a high percentage of damage in transit
-Railroads have a higher percentage of goods damaged in transit due to:
i. Rough trip from vibrations and shocks from steel wheels riding on steel rails
ii. The high degree of multiple handlings
-Excessive loss and damage claims have eroded shipper confidence in the railroads
-Railroads have placed more attention on equipment and technology
i. EX: improved suspension systems
-AAR developed quality certification program (M-1003) to ensure freight car quality and technical specifications
-Trailer on flatcar and container on flatcar service
i. COFC is the use of double stacks which improves productivity
ii. Need to utilize this to compete with motor carriers
-Fiber optics are used to improve communications, which will in turn improve service and revenues
Equipment
-The carload is the basic unit of measurement of freight handling used by the railroads
-This has declined because of the larger car sizes
-There has been dramatic increases in the carrying capacity of railroad freight cars over the last 50 years
-A car with a 100-ton capacity probably represents the most efficient size with the present support facilities
-Car types:
i. Boxcar (Plain): Standardized roofed freight car with sliding doors on the side used for general commodities
ii. Boxcar (Equipped): Specially modified boxcar used for specialized merchandise, such as automobile parts
iii. Hopper Car: A freight car with the floor sloping to one or more hinged doors used for discharging bulk materials
iv. Covered Hopper: A hopper car with a roof designed to transport bulk commodities that need protection from the elements
v. Flatcar: A freight car with no top or sides used primarily for the TOFC service machinery and building materials
vi. Refrigerator car: A freight car to which refrigeration equipment has been added for controlled temperature
vii. Gondola: A freight car with no top, a flat bottom, and fixed sides used primarily for hauling bulk commodities
viii. 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
Service Innovations
-In recent years, rail management has developed or re-emphasized a number of service innovations to increase traffic volume
-TOFC service transports highway trailers on railroad flatcars
i. Combines the line-haul efficiencies of railroads with flexibility of local motor carrier pickup and delivery service
- ii. On-time deliveries
iii. Regularly scheduled deliveries
iv. Fuel efficiency
-The growing use of TOFC by motor carrier companies has also contributed to the recent growth
-USPS has been a supporter of rail intermodal service for some time and is the largest single customer of some railroads
-The biggest change came when two of the largest truckload carriers, Schneider National, and J.B. Hunt, purchased equipment to use rail intermodal service on an extensive basis
i. Significant influence on the growth of rail intermodal service
-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
-Land-bridge traffic
i. Substitutes railroads for ocean vessels for part of the journey
ii. More widely used in international commerce
a. Because it facilitates the handling of export-import commodities
-Unit train:
i. Moves only one commodity, from origin to destination
a. Usually coal or grain
ii. Many times, the shipper owns cars and the train is renter to the shipper for a period of time
-Because there is only one commodity and the need to maintain regularly scheduled movements, empty backhauls occur
i. This is offset by high revenue-producing capabilities of the unit train with improved car utilization
COST STRUCTURE
Fixed Costs
-The railroad industry’s cost structure in the short run consists of a large proportion of indirect fixed costs rather than variable costs
i. This is because they own and maintain their own network and terminals
ii. They also operate their own rolling stock
-Up to two thirds of the industry’s cost did not vary with volume
-A major cost is rights of way
i. Rights of way means railroads have to construct their way to make movement
-Another major cost component is the investment in private terminal facilities
i. Freight yards where trains are sorted and assembled
ii. Terminal areas and sidings where shippers and connecting railroads are serviced
-Because of the ownership of fixed assets, the railroads are not as responsive as other modes to the volume of traffic carried
Semivariable Costs
-Semivariable costs
i. Maintenance of right of way
ii. Structures
iii. Equipment
iv. Accounted for more than 40% of railroad outlays
-Recently, maintenance schedules have been implemented on a regular basis so that service would not further deteriorate
Variable Costs
-Labor cost is the largest single element of variable costs for railroads. Fuel and power costs are the next largest group of variable costs
-Labor Costs:
i. Three major classifications of labor unions:
a. Operating
b. Nonoperating craft
c. Nonoperating industrial
ii. Each represents a different category of employee and each union guards its rights
iii. Unions are just starting to allow innovation
iv. Conrail started a program in 1981 to buy off unnecessary brakemen and firemen; this program eliminated more than 1,900 positions, yielding a savings of $85 million
v. Starting in 1982, rail management removed all cabooses and saved $400 million per year
vi. Managers feel that there must be continuing changes to compete in the present
-Fuel
i. Fuel costs make up the second largest percentage of the revenue dollar
ii. Railroads have very efficient fuel efficiency
a. The industry has been able to offset the increase in fuel costs by making locomotives more efficient
Economies of Scale
-Fixed costs are incurred regardless of traffic volumes
-Variable costs vary or change with the volume of traffic moved
-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.
-An increase in output will not be accompanied by a proportionate increase in total costs
-If average revenue stays the same, the economies of scale not only lower costs per unit but also increase profit
FINANCIAL PLIGHT
-Establishment of the Interstate Commerce Commission (ICC)
i. Created to regulate maximum rates and prevent discrimination to protect the rail shipper
ii. In later years, the ICC’s objective was to promote intermodal competition
-The financial position of the railroads grew increasingly worse after World War II
-The railroads were plagued by decreasing market shares, poor future prospects, and high debt ratios
-The main obstacle that needed to be cleared from the railroad’s path to survival was probably excessive regulation that restricted their ability to compete
LEGISLATION REFORM
-Rail Passenger Act of 1970
i. Created the National Railroad Passenger Corporation (Amtrak)
a. Relieved railroads of their requirement to provide unprofitable services
-Regional Rail Reorganization Act of 1973 (3R Act)
i. Attempted to maintain rail freight service in the Northeast by creating Conrail
a. Formed from six bankrupt northeastern railroads
ii. Also created the United States Railroad Association
a. Government agency responsible for the financing and restructuring of Conrail
-Bidding war between CSX and NS over Conrail settles in a split of Conrail
-Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) had two primary purposes:
i. Provide authorization for federal funding of Conrail
ii. Provide greater freedom to railroads by reducing aspects of economic regulation
-Staggers Rail Act of 1980
i. Major reductions in economic regulation
ii. Legalization of contract ratemaking
a. Enabled rail carriers to attract business with the use of confidential contracts tailored to conditions
-ICC Termination Act of 1995
i. Eliminated the ICC and transferred economic rail regulation to the STB
IMPROVED SERVICE TO CUSTOMERS
-Accidents and injuries in railroads have declined greatly
-Deregulation has brought improvements to the railroads and their customers
i. Provides more tailored service and equipment and negotiating contract rates for volume movements
ii. Worked hard on improving their operating performance times and reliability
CURRENT ISSUES
Alcohol and Drug Abuse
-Working in railroads has high rates of drug abuse due to:
i. Long hours
ii. Low supervision
iii. Nights away from home leading to loneliness and boredom
-The industry has established employee assistance programs (EAPs) that enable these troubled employees to be rehabilitated
-Rule G violation – substance abuse while on the job
-Railroad EAPs have risen rehabilitation rates by 70%
Energy
-Railroads are more energy efficient than motor
-Because railroads transport coal, they would be able to increase service to the utilities and capture more of the market using high-volume unit coal trains
Technology
-A line of smart locomotives is being equipped with onboard computers that can identify mechanical problems
-Red caboose was phased out by a small device that attaches to the last car of the train
-Other applications of computer technology:
i. Advanced Train Control Systems
a. Uses computers to track the flow of trains
ii. Rail Yard Control
a. Computer control of freight yards that is used to sort and classify railcars
iii. Customer service
a. Customer service phone number
iv. RFID
a. Tags to track equipment and improve visibility
Future Role of Smaller Railroads
-Consolidation of Class 1 Railroads led to an increase in the number of regional and small rail carriers
-Small rails
i. Disadvantages
a. Lack of economies of scale
ii. Advantages
a. More flexible and adaptable
b. Usually not unionized
-Many communities have had the advantage of continuing rail service that would not have been possible otherwise
-Small and regional rail carriers are usually more vulnerable if a large shipper decides to close its operations
i. The future is always uncertain for small carriers
Customer Service
-The large Class 1 railroads are perceived by some shippers as not being customer focused
-Many major railroads are clumped together even if some have better customer service
Drayage for Intermodal Service
-The pickup and delivery of trailers and containers in conjunction with a line-haul rail movement is usually referred to as local drayage
-Motor carriers that are willing and able to provide this service for the railroads are becoming scarce and charging relatively high rates for the service. In some instances, the pickup and delivery time adds significantly to the total transit time
SUMMARY
-The railroads played a significant role in the economic and social development of the United States for about 100 years and continue to be the leading mode of transportation in terms of intercity ton-miles, but they no longer dominate the freight market
-The railroad segment of the transportation industry is led by a decreasing number of large Class 1 carriers, but the number of small Class III carriers has been increasing in number since the deregulation of railroads in 1980
-Intermodal competition for railroads has increased dramatically since World War II, but the level of intramodal competition has decreased as the number of Class 1 railroads has decreased. The increased intermodal competition has led to more rate competition
-Mergers have been occurring among railroads for many years, but the pace has accelerated during the past 30 years, leading to rapid decrease in the number of Class 1 railroads
-In recent years, the railroads have become more specialized in terms of the traffic they carry, with the emphasis being on low-value high-density bulk products; however, there is some evidence of a resurgence of selected manufactured products such as transportation equipment
-In recent years, railroads have been emphasizing new technologies and specialized equipment to improve their service performance and satisfy customers
-Intermodal service has received renewed interest since 1980, and there has been a dramatic growth in the movement of such traffic by railroads
-Long-distance truckload carriers and other motor companies such as UPS have also begun to use rail intermodal service
-The railroads have a high proportion of fixed costs because they provide their own right-of-way and terminal facilities. Because the large railroads are multistate operators, the amount of fixed expenditures is significant
-The cost of labor is the single most important component of variable costs for railroads, but the railroad industry has been striving to reduce labor costs on a relative basis by eliminating work rules that were a carryover from another era.
-The high level of fixed costs helps give rise to economies of scale in the railroad industry, which can have a dramatic impact upon profits when the volume of traffic increases
-The financial plight of the railroads has improved since deregulation in 1980 as railroads have been able to respond more quickly and aggressively to market pressures from other modes, particularly motor carriers
-A number of important issues are facing railroads at present, including substance abuse, energy, technology, small railroads, and local drayage