Falcon48 wrote: As you have surmised, "profit" when you're talking about individual carloads or trains is a pretty elusive concept. The reason why is that many railroad costs are "fixed" in the sense that they don't vary with an individual carload or an individual train (or "common" in the sense that they are incurred by several segments of traffic but can't be avoided if just one of those segments goes away). The railroad, as an entity, needs to make enough money that it covers all of its costs, and makes a return on investment adequate to continue attracting investment. But the amount individual segments of traffic contribute to this goal can be all over the lot - some traffic returns a greater proportion of overall costs than others (sometimes called "differential pricing"). As a general rule, traffic that isn't returning its directly variable costs (ie the costs that can directly be traced to the handling of that segment of traffic, like car hire, fuel etc.) is truly unprofitable and the rates should either be increased or the traffic shouldn't be handled. Traffic making some return on variable costs will normally be attractive ('profitable") when a railroad is in an excess capacity mode (as the rail network was until recent years), even if the return isn't very great. The reason is that, in this situation, the traffic is making at least some contribution to overall costs, and the railroad is better off with it than without it. That equation changes when a railroad is at capacity. In this case, handling the "low contribution" traffic can be consuming capacity that could be used to move higher contribution traffic. That actually represents an economic cost to the railroad of handling the lower contribution traffic (sometimes called "opportunity cost"). Or, handling the traffic may require the addition of additional capacity, in which case the cost of the capacity is also an economic cost of handling the traffic. If these economic costs offset the nominal contribution from the traffic, the traffic is actually unprofitable in an economic sense.Now you may ask, why doesn't a railroad simply throw up its hands in frustration and apply a uniform markup to all of its traffic which is sufficient to generate the necessary return on investment? Why make something complicated that's easy? The trouble is, it isn't easy. If a railroad did that, shippers of the lower value traffic would simply go away, and the contribution from that traffic, though lower than the average, would be entirely lost. In that case, the railroad is actually worse off than it would be if it priced the low traffic at a below average level, so that it continues and gives the RR some contriibution. Airlines, of course, do this all the time. It's why businesspeople who have to fly on short notice and place a relatively high value on the ability to do so, pay "above average" air fares while passengers who, in the airline's judgement, are filling up space that would otherwise go unsold if it didn't offer them a "below average" price are paying much lower prices.Needless to say, this sort of pricing isn't a science (in railroads, airlines or anywhere else). Railroad pricing personnel make judgements about which traffic can bear a greater than average portion of total costs, and which traffic can bear only a below average portion of total costs, and the point at which the railroad is not willing to go below (which will be higher than directly variable costs, but could vary depending on the state of the economy, relative capacity and demand in different areas of the country, and so forth). What I've described is what they are trying to accomplish when they make these pricing decisions. The best they can probably reasonable hope for is that their decisions roughly approximate the theoretically ideal price distribution (which, of course, they can never know with any certainly) Finally, we get to R/VC ratios (R/VC stands for "revenue-variable cost") This ratio measures the percentage of a railroad's "variable costs" (as determined by STB formulas) being returned by revenue on particular segments of traffic. An R/VC ratio of 180%, for example, means that the revenues being generated by the traffic are 1.8 times the variable costs incurred for that traffic. But keep in mind that this is not actually the "profit" the railroad is earning from the traffic - in other words, in my example, the 180% R/VC ratio isn't generating a profit of 80%. The reason is that the ratio doesn't include the railroad's non-variable costs, which are a large part of its total cost structure. However, R/VC ratios can indicate relative profititability - in other words, traffic with a higher R/VC ratio is probably more profitable than traffic generating a lower R/VC ratio. The thing to be careful of in this kind of comparison is assuming that the R'VC ratios are indicating anything about relative rate levels or revenues. It's very common that two segments of traffic with identical rates generate substantially different R/VC ratios. Similary, traffic with a relatively low R/VC ratio can actually have a higher rate than traffic with a relatively a high R/VC ratio. The ratio tells you only one thing - the relationship between revenues and variable costs - nothing else.Writing this was more fun than doing the laundry, which I promised my wife I would finish before she came home. But now it's time to pay the piper.
As you have surmised, "profit" when you're talking about individual carloads or trains is a pretty elusive concept. The reason why is that many railroad costs are "fixed" in the sense that they don't vary with an individual carload or an individual train (or "common" in the sense that they are incurred by several segments of traffic but can't be avoided if just one of those segments goes away). The railroad, as an entity, needs to make enough money that it covers all of its costs, and makes a return on investment adequate to continue attracting investment. But the amount individual segments of traffic contribute to this goal can be all over the lot - some traffic returns a greater proportion of overall costs than others (sometimes called "differential pricing").
As a general rule, traffic that isn't returning its directly variable costs (ie the costs that can directly be traced to the handling of that segment of traffic, like car hire, fuel etc.) is truly unprofitable and the rates should either be increased or the traffic shouldn't be handled. Traffic making some return on variable costs will normally be attractive ('profitable") when a railroad is in an excess capacity mode (as the rail network was until recent years), even if the return isn't very great. The reason is that, in this situation, the traffic is making at least some contribution to overall costs, and the railroad is better off with it than without it. That equation changes when a railroad is at capacity. In this case, handling the "low contribution" traffic can be consuming capacity that could be used to move higher contribution traffic. That actually represents an economic cost to the railroad of handling the lower contribution traffic (sometimes called "opportunity cost"). Or, handling the traffic may require the addition of additional capacity, in which case the cost of the capacity is also an economic cost of handling the traffic. If these economic costs offset the nominal contribution from the traffic, the traffic is actually unprofitable in an economic sense.
Now you may ask, why doesn't a railroad simply throw up its hands in frustration and apply a uniform markup to all of its traffic which is sufficient to generate the necessary return on investment? Why make something complicated that's easy? The trouble is, it isn't easy. If a railroad did that, shippers of the lower value traffic would simply go away, and the contribution from that traffic, though lower than the average, would be entirely lost. In that case, the railroad is actually worse off than it would be if it priced the low traffic at a below average level, so that it continues and gives the RR some contriibution. Airlines, of course, do this all the time. It's why businesspeople who have to fly on short notice and place a relatively high value on the ability to do so, pay "above average" air fares while passengers who, in the airline's judgement, are filling up space that would otherwise go unsold if it didn't offer them a "below average" price are paying much lower prices.
Needless to say, this sort of pricing isn't a science (in railroads, airlines or anywhere else). Railroad pricing personnel make judgements about which traffic can bear a greater than average portion of total costs, and which traffic can bear only a below average portion of total costs, and the point at which the railroad is not willing to go below (which will be higher than directly variable costs, but could vary depending on the state of the economy, relative capacity and demand in different areas of the country, and so forth). What I've described is what they are trying to accomplish when they make these pricing decisions. The best they can probably reasonable hope for is that their decisions roughly approximate the theoretically ideal price distribution (which, of course, they can never know with any certainly)
Finally, we get to R/VC ratios (R/VC stands for "revenue-variable cost") This ratio measures the percentage of a railroad's "variable costs" (as determined by STB formulas) being returned by revenue on particular segments of traffic. An R/VC ratio of 180%, for example, means that the revenues being generated by the traffic are 1.8 times the variable costs incurred for that traffic. But keep in mind that this is not actually the "profit" the railroad is earning from the traffic - in other words, in my example, the 180% R/VC ratio isn't generating a profit of 80%. The reason is that the ratio doesn't include the railroad's non-variable costs, which are a large part of its total cost structure.
However, R/VC ratios can indicate relative profititability - in other words, traffic with a higher R/VC ratio is probably more profitable than traffic generating a lower R/VC ratio. The thing to be careful of in this kind of comparison is assuming that the R'VC ratios are indicating anything about relative rate levels or revenues. It's very common that two segments of traffic with identical rates generate substantially different R/VC ratios. Similary, traffic with a relatively low R/VC ratio can actually have a higher rate than traffic with a relatively a high R/VC ratio. The ratio tells you only one thing - the relationship between revenues and variable costs - nothing else.
Writing this was more fun than doing the laundry, which I promised my wife I would finish before she came home. But now it's time to pay the piper.
It seems you've got a pretty good handle on this pricing thing. Hope you're as good with the laundry.
And you bring out a really good point. A shipper moving the same commodity, the same distance, over different lines can get widely different rates. Some of 'em will go crying to the politicians who will huff and puff, hold hearings, and threaten to send the railraods back into the dark ages. (Representative Oberstar, D-MN, comes to mind.)
But it's perfectly justifiable based on the capacity utilization of the rail line. I don't imagine the UP is cutting too many deals for the use of its ex-CNW line between Chicago and the Missouri River, which is at or near capacity. On the other hand, I imagine a shipper might be able to get a "good deal" price out of the UP for freight on the ex-CNW line between Chicago and the Twin Cities, which is well under capacity.
NS is certainly a strong company that is doing many things correctly. However, there are a lot of Wall Street bloggers that pull data together and try to give the impression of being experts while throwing a lot of buzz words at the fan. I would like to know what share of this guys assets are invested in the NS. Comments like "one of the industry's largest shippers of coal" makes me wonder if this blogger understand the NS' didn't ship a pound of coal last year; their customers shipped the coal. I wonder if he knows about coal on the BNSF and UP.
Time will tell of course as the NS' stock price changes in the future.
I was reading the MSN Money Journal by Jubak about Railroads stocks.
Gaining market share
Falcon48 wrote: Writing this was more fun than doing the laundry, which I promised my wife I would finish before she came home. But now it's time to pay the piper.
So, you're saying it had a low R/VC ratio?
greyhounds wrote: Railway Man wrote: Prestige doesn't count -- there's no one to impress. You're also asking about profit, not revenue, correct?It's not feasible to break down profit on a "train" basis but only on a by-shipper basis because many shippers of identical commodities have a very different profit basis and distance, geography, and competition of source, material, and mode all affect the profit margin. In extremely rough terms, commodities ranked in terms of profit, high to low, are:chemicalsinternational containershigh-value bulk commodities, e.g., fertilizer, concentratesgraincoaldomestic containers and LTLhighly truck-competitive commodities such as lumber and hard perishableslow-value bulk commodities, e.g. scrap metal, cottonseed, waste paper autosAmtrak -- the worst by far.RWMThat's interesting. I would have never guessed autos to be toward the bottom.Anyway, since people sometimes use words to mean similar but slightly different things, in this case how is "profit" being used. Is it the R/VC ratio, the total commodity contribution, or ?.
Railway Man wrote: Prestige doesn't count -- there's no one to impress. You're also asking about profit, not revenue, correct?It's not feasible to break down profit on a "train" basis but only on a by-shipper basis because many shippers of identical commodities have a very different profit basis and distance, geography, and competition of source, material, and mode all affect the profit margin. In extremely rough terms, commodities ranked in terms of profit, high to low, are:chemicalsinternational containershigh-value bulk commodities, e.g., fertilizer, concentratesgraincoaldomestic containers and LTLhighly truck-competitive commodities such as lumber and hard perishableslow-value bulk commodities, e.g. scrap metal, cottonseed, waste paper autosAmtrak -- the worst by far.RWM
Prestige doesn't count -- there's no one to impress. You're also asking about profit, not revenue, correct?
It's not feasible to break down profit on a "train" basis but only on a by-shipper basis because many shippers of identical commodities have a very different profit basis and distance, geography, and competition of source, material, and mode all affect the profit margin.
In extremely rough terms, commodities ranked in terms of profit, high to low, are:
RWM
That's interesting. I would have never guessed autos to be toward the bottom.
Anyway, since people sometimes use words to mean similar but slightly different things, in this case how is "profit" being used. Is it the R/VC ratio, the total commodity contribution, or ?.
Soo 6604 wrote:This is out of my league but I'm going to guess that any train that moves makes money for the railroad
I agree that any trains that's move from point A to point B would make a profit or R/E.
The answer to that might be "not neccesarily". MichaelSol recommended a book about Chicago, from the economic point of view. In it, a good case was made, for running some trains at what you and I migh consider *below cost*. The justification was, that while maybe the train didn't make a profit in the accounting sense, it did add some dollars to the bottom line, to cover some fixed costs that would be there whether a train was run or not.""
Yes, exactly. In a strictly accounting sense, the "below-cost" train would be a loss, but generate cash and a positive cash flow.
It's the reason many businesses with heavy losses can afford to stay in business during years they are unprofitable. Many of the expenses a railroad incurs on the income statement comes from annual depreciation on "property, plant and equipment." It's a non-cash charge that can easily create a loss.
If I may add, it may also be good business to take a slight loss on a train than to axe it altogether and force the business to a competitor.
Ignatius.
Railway Man wrote: TTX is owned by the railroads, so there's no one to sell or lease the racks to but each other. Murphy, RWM
TTX is owned by the railroads, so there's no one to sell or lease the racks to but each other. Murphy,
Thanks to Chris / CopCarSS for my avatar.
Railway Man wrote: TTX is owned by the railroads, so there's no one to sell or lease the racks to but each other. Murphy, I like your last sentence, but for the word "stole" we could substitute "needed to fill its capacity in the worst way."RWM
TTX is owned by the railroads, so there's no one to sell or lease the racks to but each other. Murphy, I like your last sentence, but for the word "stole" we could substitute "needed to fill its capacity in the worst way."
CSSHEGEWISCH wrote: Murphy Siding wrote: bobwilcox wrote: It's my impression the railroads supply the cars for auto shippers where in bulk unit train movements or loose car chemicals the cars are supplied by the shippers. The tri-levels can be very specialized for use by only one shippers autos. If another railroad takes away the auto shipper's business, would the railroad who lost it have some specialized equipment sitting idle? What then? Lease it to the railroad who stole your auto business?Autoracks are an interesting situation. The racks are owned by the railroads but the majority of the flatcars are owned by Trailer Train. I would assume that in the situation described above, the racks would be leased or sold.
Murphy Siding wrote: bobwilcox wrote: It's my impression the railroads supply the cars for auto shippers where in bulk unit train movements or loose car chemicals the cars are supplied by the shippers. The tri-levels can be very specialized for use by only one shippers autos. If another railroad takes away the auto shipper's business, would the railroad who lost it have some specialized equipment sitting idle? What then? Lease it to the railroad who stole your auto business?
bobwilcox wrote: It's my impression the railroads supply the cars for auto shippers where in bulk unit train movements or loose car chemicals the cars are supplied by the shippers. The tri-levels can be very specialized for use by only one shippers autos.
It's my impression the railroads supply the cars for auto shippers where in bulk unit train movements or loose car chemicals the cars are supplied by the shippers. The tri-levels can be very specialized for use by only one shippers autos.
Autoracks are an interesting situation. The racks are owned by the railroads but the majority of the flatcars are owned by Trailer Train. I would assume that in the situation described above, the racks would be leased or sold.
And that is the single biggest cost associated with the use of tri-level autoracks. At $160,000 a unit (non-aluminum), with the current 16 day cycle time, each carload costs $823 to service the equipment financing charges.
Railway Man wrote: MP173 wrote: Only a guess, but BNSF's high revenue per tonmile for automotive is probably based on the light density nature of automotive. Low weight per carload will move those numbers to the high side. What is the tonnage for a autorack compared to grain or coal?edAs well as a very high empty return rate, expensive equipment costs born by the railroad, high operating costs to meet service guarantees, volume rebates that are paid even when the volume targets aren't met, high costs for terminals, and high payments for damaged lading.RWM
MP173 wrote: Only a guess, but BNSF's high revenue per tonmile for automotive is probably based on the light density nature of automotive. Low weight per carload will move those numbers to the high side. What is the tonnage for a autorack compared to grain or coal?ed
Only a guess, but BNSF's high revenue per tonmile for automotive is probably based on the light density nature of automotive. Low weight per carload will move those numbers to the high side. What is the tonnage for a autorack compared to grain or coal?
ed
As well as a very high empty return rate, expensive equipment costs born by the railroad, high operating costs to meet service guarantees, volume rebates that are paid even when the volume targets aren't met, high costs for terminals, and high payments for damaged lading.
passengerfan wrote: Those boxcars loaded by a freight forwarder don't make the kind of money they used to and are in steady decline.
Those boxcars loaded by a freight forwarder don't make the kind of money they used to and are in steady decline.
This is why FEC refers to anything other than COFC's, TOFC's and rock as "dead loads".
Ted M.
got trains?™
See my photos at: http://tedmarshall.rrpicturearchives.net/
Railway Man wrote:As well as ... high payments for damaged lading.
"The damage measurement used by the automotive industry is the ratio of claims to vehicles shipped. Back in the early '90s, that ratio was 3% to 4%. ... Today the ratio of damage claims to vehicles shipped has fallen below one-half of 1% on an industry-wide basis, and on Norfolk Southern ... damage claims ratio with Toyota and General Motors is close to two-tenths of 1%." Railway Age, November, 2006.
In 1994, damage claims for automotive traffic were 19% of all railroad damage claims; today the ratio of damage claims is nearly the same as for all other classes of traffic.
The contribution to cost of operation, of claims, on a $3,130 carload is $6.26, and if it wasn't for that, BN could charge $3,123, instead of $3,130, for a loaded autorack travelling 1,000 miles.
Railway Man wrote: As well as a very high empty return rate ...
As well as a very high empty return rate ...
Compared to what?
The 50% empty return rate for coal and ag -- much of that unit trains? These constitute nearly 70% of all railroad shipments. What is "very high" compared to that? Intermodal has operated at as high as a 56% empty rate. Between domestic and imports going in opposite directions, the railroad I am most familiar with had about a 28% empty rate on autoracks: utilization was very good, it was very profitable traffic.
MP173 wrote: Only a guess, but BNSF's high revenue per tonmile for automotive is probably based on the light density nature of automotive. Low weight per carload will move those numbers to the high side. What is the tonnage for a autorack compared to grain or coal?
?
Maximum net load on a trilevel autorack is 79,000 lbs. For 1000 ton-miles, the average rate per carload, BN, would be $3,130. To ship the same net tonnage as a 120 ton car, it would cost $4,740.
For grain ("Ag"), a 120 ton hopper travels 1000 miles at $2,620 (unless you ship from Montana and then it will cost you about $3,500). For International intermodal, the max loaded container weight is 67,200 lbs. A container travels at $1,041 to cover 1,000 miles. For coal, a 120 ton carload at 1000 miles travels at an average rate of $1,373.
MP173 wrote: One more thing...and we have discussed this previously. Are most interchanged movements moving on joint line rates or proportional rates these days? Is there a movement to the joint line (revenue sharing) rates?ed
One more thing...and we have discussed this previously. Are most interchanged movements moving on joint line rates or proportional rates these days? Is there a movement to the joint line (revenue sharing) rates?
Most interchanged cars Class I to Class I are moving on through rates. Most interchanged cars with a short line as part of the route are moving on a handling-charge basis on the short line. There are no mileage-based rates or proportional rates per se.
Most short lines are handling carriers and get a flat fee from the Class I carrier based on the commodity and car type. These are negotiated and contained in a contract between the Class I and the short line. The Class I quotes whatever it wants to the shipper for a contract rate, or the shipper accepts the public tariff rate, and when the car moves, it moves on a single waybill, the shipper pays the Class I, and the Class I pays the short line the agreed-upon handling charge.
Cars moving between Class Is may move either on a through rate that is negotiated between the Class Is, or two local rates, or two public tariffs. If it's a through rate usually one of the Class Is takes the lead in negotiating with the shipper, and the shipper just sees the total charge on a single waybill. The shipper pays one of the Class Is and that Class I settles with the other Class I. It the car is moving on two local rates or two public tariffs, then the shipper sees two waybills and settles with each Class I individually.
For example, if the car originates on a short line, moves over two Class Is, and terminates on another short line, the car most likely is moving on a through rate negotiated between the two Class Is, and each short line collects a handling charge fee which is a separate negotiation between each of the short lines and the Class I it interchanges with.
Railroads are pushing more and more toward public tariff rates for small customers. Large customers are still able to negotiate contract rates but the contracts are for shorter and shorter terms, and have escalation clauses built in. The right of the railroad to tack on fuel surcharges is usually included in the contract. Fuel surcharges of 35% are being seen now.
Ed,
I can answer your question about CSX unit grain trains. Most of the unit trains are 65 cars due to the limitations of the elevators. Track space and loading time are issues. I work the Great Lakes Division and Grain is HUGE! There are a few elevators that pay a little more for what we call an express loader. These trains are usually spotted, loaded, and then pulled within 24 hours. The power also stays with the train at the customer site.
Lately, there have been upgrades to some of the elevators and they have the capacity to handle larger grain trains. The ADM plant in Beech Grove, IN lately had a lot of upgrades and we have been running huge BNSF wheat trains into there. I've seen 112 loads go in before.
Couple of notes:
ADM has over 15000 cars which they either own or lease. They have their own railcar repair shop in Decatur, Il.
Railway Man wrote: LTL = Less Than Trailerload. These are trucking companies that consolidate many small shipments into trailers, using a network of city trucks to gather the freight from the shipper and bring it to a freight house, the freight house to sort shipments for like destinations and consolidate them into trailers, and line-haul trucks (often double or triple pups) to move the consolidated freight to freight houses in other cities, where it is broken down and distributed to city trucks for delivery to consignees. LTL truckers include Yellow, FedEx Ground, and UPS. Cost of entry is very high and cost of operation is very high, meaning there are very few players with the cash and market position to be in this business.TL = Trailerload. Trucking companies that carry trailers loaded with one shipper's goods only from dock to dock. Often these are regular, contract services for large shippers such as Proctor & Gamble. TL truckers include J.B. Hunt, Schneider International, Werner, and many many more. Cost of entry is very low and there are many small firms with a few dozen trucks.Forwarder -- a company who arranges dock-to-dock shipments for the shipper, in effect acting as the shipper's transportation manager. The forwarder arranges for the truck, the container, the dray, the paperwork, the insurance, the train, the export-import documents, the taxes, the fees, and so forth, using whatever combination of modes and transportation companies necessary to meet the price and service requirement of the shipper. Forwarders usually provide their own trailers or containers if they are engaging in intermodal service. Examples of forwarders include Hub Group and Pacer.RWM
LTL = Less Than Trailerload. These are trucking companies that consolidate many small shipments into trailers, using a network of city trucks to gather the freight from the shipper and bring it to a freight house, the freight house to sort shipments for like destinations and consolidate them into trailers, and line-haul trucks (often double or triple pups) to move the consolidated freight to freight houses in other cities, where it is broken down and distributed to city trucks for delivery to consignees. LTL truckers include Yellow, FedEx Ground, and UPS. Cost of entry is very high and cost of operation is very high, meaning there are very few players with the cash and market position to be in this business.
TL = Trailerload. Trucking companies that carry trailers loaded with one shipper's goods only from dock to dock. Often these are regular, contract services for large shippers such as Proctor & Gamble. TL truckers include J.B. Hunt, Schneider International, Werner, and many many more. Cost of entry is very low and there are many small firms with a few dozen trucks.
Forwarder -- a company who arranges dock-to-dock shipments for the shipper, in effect acting as the shipper's transportation manager. The forwarder arranges for the truck, the container, the dray, the paperwork, the insurance, the train, the export-import documents, the taxes, the fees, and so forth, using whatever combination of modes and transportation companies necessary to meet the price and service requirement of the shipper. Forwarders usually provide their own trailers or containers if they are engaging in intermodal service. Examples of forwarders include Hub Group and Pacer.
Thanks!
Murphy Siding wrote: Railway Man wrote: 4-5 major forwarders10-15 major LTL and TL shippersRWMWhat is a forwarder? Can you explain what you mean by LTL and TL shippers? Thanks
Railway Man wrote: 4-5 major forwarders10-15 major LTL and TL shippersRWM
Thanks, Murph. I was wondering that myself. - al
Railway Man wrote:The automakers are very big gorillas and use their market power to extract highly favorable rates from the Class Is in competitive bidding, and tend to award all-or-nothing contracts to ensure they get low rates even in high-demand lanes.
Insofar as the BN is concerned, the revenue received (2007) per ton-mile for automotive is by far the highest of any general category of freight, at $79.23 per thousand ton-miles. This compares to $31.15 per thousand ton-miles for international intermodal and $11.44 for coal.
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