MP173 I hate to keep pounding a dead horse, but who establishes what the variable costs are? Obviously it would be the carrier, based on their cost accounting of handling the freight including car hire, local placement for loading, local pickup, terminal operations, line haul, plus local placement for delivery. The costs involved are a moving target. How many loads per day is the shipper tendering? That affects the cost for the local. Ditto at the receiving end. How many cars (tons) are handled on the line haul movements, etc. Perhaps one can have an overall costing model, possibly even a specific costing model for certain shippers, consignees, and customers, but those numbers can be fudged. Years ago we acquired a new account. Big time beer company which you have heard of. We did custom graphics printing for them. The quantities varied based on need (type of truck, etc). The agreement reached was that we would mark up the selling price a certain percentage above our costs. It was an arbitrary agreed to "markup". How do you think that worked? It was great while it lasted (several years). There is a new iron pellet plant down in Reynolds, Indiana which features ore coming down from the Upper Range, processed into pellets and shipped on to Ohio. Why Reynolds, In? Probably a number of reasons, but a primary reason (IMHO) is there are two railroads there...CSX and TPW. Both have access. That is the best way to keep rates in check. Ed
I hate to keep pounding a dead horse, but who establishes what the variable costs are? Obviously it would be the carrier, based on their cost accounting of handling the freight including car hire, local placement for loading, local pickup, terminal operations, line haul, plus local placement for delivery.
The costs involved are a moving target. How many loads per day is the shipper tendering? That affects the cost for the local. Ditto at the receiving end. How many cars (tons) are handled on the line haul movements, etc.
Perhaps one can have an overall costing model, possibly even a specific costing model for certain shippers, consignees, and customers, but those numbers can be fudged.
Years ago we acquired a new account. Big time beer company which you have heard of. We did custom graphics printing for them. The quantities varied based on need (type of truck, etc). The agreement reached was that we would mark up the selling price a certain percentage above our costs. It was an arbitrary agreed to "markup". How do you think that worked? It was great while it lasted (several years).
There is a new iron pellet plant down in Reynolds, Indiana which features ore coming down from the Upper Range, processed into pellets and shipped on to Ohio. Why Reynolds, In? Probably a number of reasons, but a primary reason (IMHO) is there are two railroads there...CSX and TPW. Both have access.
That is the best way to keep rates in check.
Ed
Ed,
The Surface Transportation Board establishes what a particular railroad's variable cost are. (Not really, but they do pretend to do that to serve their own purposes,)
Here, in all its fallacious glory, is the official USDOT/STB sanctioned and approved Uniform Rail Costing System. It was developed out of the old ICC "Rail Form A" costing nonsense. Things really haven't gotten any better. No one can possibly do what they purport to do. But they require a number. So they basically just generate one. How close it is to reality is of no never mind to the bureaucrats.
http://www.stb.dot.gov/stb/industry/urcs.html
In "Railroads, Rates, and Regulation" by William Z. Ripley, the author (who is certainly NOT anti-regulation) indicates the primary motivation for regulation of tariffs was not concerning rates. Rather it was brought about because of repeated examples of discriminatory practices by the rails. [Ripley's 1912 book is available online free through several sources.]
http://babel.hathitrust.org/cgi/pt?id=njp.32101065180505;view=1up;seq=9
C&NW, CA&E, MILW, CGW and IC fan
I have finished the book, and am not as impressed with it as Greyhounds is. Overall I would give it about a C grade.
The authors missed a golden opportunity to describe the costs and failures of the regulatory system as applied to railroads between 1887 and today. They generally recognize the costs, but failed to clearly state them and to demonstrate them for the reader's benefit. Only Albro Martin, in Enterprise Denied, attempted this but his book only goes to WW I, and there were many more abuses of the carriers to come.
The authors discuss value of service pricing vs. cost of service pricing and conclude that the only workable system is value of service. Unfortunately the reader may come away with the idea that VOS was something invented by the ICC. That is not so, the carriers invented it and it was well established by the time that the ICC came along. Since this is still an important issue, the authors should have dealt with it more extensively than they did.
Much of the book is about the process of deregulation brought on by the failure of Penn Central. This was well done, but the authors did not lay the foundation for the failure. They should have gone back to about 1945 to examine the diversion of traffic to truckers, the ever growing passenger deficit, discriminatory property tax burdens, the overbuilt rail network, and the effects of trying to force PC to carry the money loosing New Haven. That treatment would have brought everything together, but they made no attempt.
Their discussion of how partial deregulation came about was very good. There is no discussion of how Conrail took advantage of the several changes to make itself a usefull and profitable railway.
There are several "sidebars" in the book. Unfortunately they are set apart from the text by a grey background which makes them very difficult to read under anything but direct sunlight. The material would have been set apart much better by simply placing a box around the material.
My summary is that the authors missed the opportunity to clearly tell the tale of the "Decline and Renaissance of American Railroads in the Twentieth Century."
Mac McCulloch
MP173 This is an important book to review and compare the rail industry of yesterday vs today. It is critical that this industry have as little regulation as possible, particularly on the economic front. Safety issues? Sure. Should there be regulatory issues regarding the transportation of oil? By all means. Hours of service? Already in place....etc. The authors make a compelling case for economic freedom of the rails, which I tend to agree with. However, if I were a captive shipping with several millions invested in plant and equipment, I would be seeking some sort of relief. New plants can simply find a junction with 2 or more rails servicing or find a shortline with connections. Greyhounds, can you describe the 170% above variable costs rule? How are variable costs determined? My background with LTL trucking costing/pricing tends to suggest that it is very difficult to determine variable costs involved in transportation movements. Perhaps you can shed some light on this. Thanks, Ed
This is an important book to review and compare the rail industry of yesterday vs today.
It is critical that this industry have as little regulation as possible, particularly on the economic front. Safety issues? Sure. Should there be regulatory issues regarding the transportation of oil? By all means. Hours of service? Already in place....etc.
The authors make a compelling case for economic freedom of the rails, which I tend to agree with. However, if I were a captive shipping with several millions invested in plant and equipment, I would be seeking some sort of relief. New plants can simply find a junction with 2 or more rails servicing or find a shortline with connections.
Greyhounds, can you describe the 170% above variable costs rule? How are variable costs determined? My background with LTL trucking costing/pricing tends to suggest that it is very difficult to determine variable costs involved in transportation movements. Perhaps you can shed some light on this.
Thanks,
It's not 170%, it's 180%, and it's basically one of those magic numbers used by the government in lieu of reality. As "American Railroads" points out, there is no lucid way for the government regulators to determine what a freight rate should be. So they've made something up out of whole cloth. What else could they do?
Both "American Railroads" and "Railroads, Rates, and Regulation" by William Z. Ripley say the same thing. It is impossible to determine the cost, variable or otherwise, of an individual rail shipment. There are too many diverse services sharing too many joint costs. To paraphrase Ripley, "we soon become lost in a sea of allocation." Ripley was also a Harvard economics PhD. His book is from 1912. "American Railroads" is from 2014. Written 102 years apart by Harvard PhD's, the two books say the same thing. The impossibility of realistically determining the cost of a specific railroad freight movement simply will not go away. (I think you and I both came to that same realization when we were moving freight. Setting a freight rate is more of an art than a science.)
But our government, undaunted, forges ahead using a fictitious cost number produced by the congressionally mandated Uniform Rail Costing System (U.R.C.S.) This system produces a GIGO number. In this case GIGO stands for Garbage In, Gospel Out. It is, in fact, the US Government approved fictional cost of a rail movement.
The 180% figure is the "Revenue to Variable Cost Ratio." It is the revenue for the shipment (very real) divided by the fictional variable cost of the shipment. If the GIGO R/VC ratio is below 180% the rail customer has no legal recourse available. If it is 180% or more the customer can run to Uncle Sam and say: "Make them quit charging me so much!" It is important to realize that the vast majority of rail shipments fall below the 180% threshold. Only about 6% of non-contract shipments exceed the 180% number. (Contracts involve an agreed price, so there is no conflict. Everybody agreed to the price.)
I'd like to see an example of a real "Captive Shipper". I mean Cargill may have limited (but real) choices except for the BNSF out of Montana. But Cargill certainly has other choices elsewhere. If I were negotiating rates for Cargill and the BNSF tried some games in Montana I'd simply point out that if they screwed me in Montana I'd screw them in a lot of other places. This isn't bean bag. It's major players negotiating. Government fiction doesn't belong in the game.
There's more wrong with that stupid revenue/variable cost ratio. But I've written enough for now.
dakotafred More great info from MP and Greyhounds. Thanks for refreshing our memory of those frantic, everyone-looking-for-a-home days of the 1960s and '70s. The railroad scene has now been comparatively stable for so long, it's easy to forget that scramble by which dozens of Class Ones became our present seven. Great reading! I will go shopping for American Railroads for sure.
More great info from MP and Greyhounds.
Thanks for refreshing our memory of those frantic, everyone-looking-for-a-home days of the 1960s and '70s. The railroad scene has now been comparatively stable for so long, it's easy to forget that scramble by which dozens of Class Ones became our present seven.
Great reading! I will go shopping for American Railroads for sure.
http://www.amazon.com/s/ref=nb_sb_ss_i_1_18?url=search-alias%3Dstripbooks&field-keywords=american%20railroads%20decline%20and%20renaissance%20in%20the%20twentieth%20century&sprefix=american+railroads%2Cstripbooks%2C222
MP173 Greyhounds... Can you briefly describe the pricing models used by ICC and post ICC? I am not an economist and am getting lost a little. I am reading the chapter on Staggers and the coal pricing. In particular, can you explain the theories involved with pricing of coal?Ed
Greyhounds...
Can you briefly describe the pricing models used by ICC and post ICC? I am not an economist and am getting lost a little. I am reading the chapter on Staggers and the coal pricing. In particular, can you explain the theories involved with pricing of coal?Ed
Ed, are you talking about chapter 9? "THE MAKING OF THE STAGGERS RAIL ACT, AND EXPERIENCE UNDER DEREGULATION". Can you cite a particular passage that you have a question regarding?
I'll try to help, but I'm not a economist either and I never priced a coal move.
Ken
.
dakotafred Wonderful read, Greyhounds. Thank you indeed for taking the time. I am printing out your post for cross-reference with my pre-merger Official Guide. Nothing beats the view of one who was there. I'm afraid my high estimation of the GM&O was based on those gorgeous red and maroon passenger trains I used to see at train changes in Chicago 50 years ago. Four pairs of them between Chicago and St. Louis, as I recall. Sorry I was never going that way and missed riding them. Now I wonder what in the world made this "turkey" attractive to the IC in the first place!
Wonderful read, Greyhounds. Thank you indeed for taking the time. I am printing out your post for cross-reference with my pre-merger Official Guide.
Nothing beats the view of one who was there. I'm afraid my high estimation of the GM&O was based on those gorgeous red and maroon passenger trains I used to see at train changes in Chicago 50 years ago. Four pairs of them between Chicago and St. Louis, as I recall. Sorry I was never going that way and missed riding them.
Now I wonder what in the world made this "turkey" attractive to the IC in the first place!
The only explanation I ever got as to why the IC wanted to merge with the GM&O was that they didn't want anyone else to get the GM&O. It was defensive. There apparently was significant concern that some other railroad could get the GM&O, rehab it, and compete with the IC for the export grain movement from the Midwest to the Gulf Coast and the paper traffic out of the south.
The GM&O was looking for a merger partner. So the IC took it in to keep someone else from getting it. Or so I was told.
You're right about those passenger trains. Back in "The Day" they were high class and good speed. Parlor cars, observation parlor cars, diners, lounges and coaches. Through Chicago sleepers to/from Texas via St. Louis and the MP. The "Alton Limited", "Abraham Lincoln", "Ann Rutledge", "Prairie State Express", and the "Midnight Special" with overnight service and sleepers between Chicago and St. Louis. But the railroad couldn't earn a living off those passenger trains.
CSSHEGEWISCH I'm not too sure of this but I remember reading that the IC repurchased the Iowa line as a way of maintaining their independence by making them less desirable as a merger partner. Not that it worked.
I'm not too sure of this but I remember reading that the IC repurchased the Iowa line as a way of maintaining their independence by making them less desirable as a merger partner. Not that it worked.
Before his death, I was friends with Doug Hagestad. Doug had been VP Marketing for the ICG.
One day we were talking about the IC and the Iowa line. Doug said to me: "I'll never understand why Hunter bought it back." Doug moved in more elevated circles than I did.
I can't see why they bought it either. They certainly don't seem inclined to use it very much.
I loved that merger (CN). My IC stock went to CN and has split a number of times.
GM&O had that great Chicago - St. Louis line...for passenger service. Interesting there was very little originating freight other than the refineries and the power plant at Joliet.
Neither carrier was in great shape at the time of the merger.
GM&O had 2734 miles, handled 527,000 carloads of freight, $97,000,000 in freight revenue, ($184 per carload) with an average haul of 294 miles. Revenue ton miles was $1.17. It's largest commodity hauled by revenue was pulp. Their operating ratio was 76.2%
IC was larger at 6766 miles and handled 1.56 million carloads, $302million in freight revenue ($193 per carload), with an average haul of 270 miles. Revenue ton miles was $1.32. Coal and food were IC's main commodities...both about 15% of revenue.
I believe IC saw the writing on the wall and the Chicago freight was rapidly moving away. In the late 60's the Chicago and Eastern Illinois lines to Evansville and Southern Illinois went to L&N and MoPac with both carriers now gaining access to Chicago. Personally I saw the freight dwindle on the branchline from Evansville to Mattoon from close to 100 cars per day each way in the late 60s to 30 car trains a few years later. I believe a big reduction was the elimination of L&N freight at Evansville which went up the C&EI line. Birmingham and Southeastern freight had to have been dropping.
Missouri Pacific now had access to Chicago and interline freight from the Southwest thru St. Louis must have dried up. Both L&N and MoPac began the stranglehold on the Mainline of MidAmerica.
Who was left? GM&O or Southern. Southern was looking at Santa Fe in the mid 70s, What would have happened if Southern Pacific had grabbed GM&O and had the St. Louis line? Oh crap.
My little branch line had horrible rail and went from 35mph to 10mph and less. It was typical of the many branch lines in Illinois. Light rail, boxcars loading grain elevators, and little else.
The merger did work, eventually. By the end of the 80s the IC was lean and extremely profitable. By 1998 it was owned by CN. Did they shed too much? Probably. The Meridian Speedway became a very valuable line. They did repurchase the Iowa line, although I am not sure why. Today it only has 1 train each way (plus ethanol trains). The GM&O is pretty much gone, except for the Chicago to Joliet line and the line to Mobile.
GM&O survived by running long trains and operating as a regional. There probably wasnt much Chicago to New Orleans or Mobile traffic.
Both railroads had too many branch lines in Illinois and Mississippi.
I spent many days back in the mid 70s at Effingham watching the action of IC and PC. PC was in the coffin and IC barely escaped that fate.
Okay, I'll try to find a copy!
NorthWest Thanks, Greyhounds. That was excellent! I've been wondering what the railroad system would look like today had the ICC encouraged end-to-end mergers over parallel mergers. Great thought provoking piece.
Thanks, Greyhounds. That was excellent!
I've been wondering what the railroad system would look like today had the ICC encouraged end-to-end mergers over parallel mergers. Great thought provoking piece.
Well the subject book goes into the parallel vs end-to-end merger discussion to a good degree. Gallamore wrote his doctoral dissertation under Meyer's guidance about the results of parallel rail mergers. They did not produce the projected savings and did result in the Penn Central disaster.
End-to-end mergers, such as the UP-Rock Island, would have upset the intra-railroad competitive balance and resulted in the needed creative destruction required to invigorate the industry and the US economy. If the ICC did one thing well, it prevented change. But it prevented needed change. And that hurt the railroads and the people of the United States.
If you think what I wrote was through provoking, you should read "American Railroads" by Gallamore and Meyer. I don't hold a candle to their work.
Ed & Fred,
I do not have enough years left in me to do justice to the ICG "Flop Squared" story.
It wasn't quite Penn Central north-south. The ICG did not go broke. But it never was financially successful. The GM&O was a turkey in need of a home. The old C&A lines north and west of St. Louis had very little freight. Their Chicago operation originated only one through freight per day. It went to Kansas City. That train, or a local, took the St. Louis and beyond loads to Bloomington, IL where a through freight originated for St. Louis. Everything else north and west of St. Louis was a local. (There were some unit coal trains from near Tayloville to Chicago.) The Kansas City line was 90 pound rail which the ICG eventually tried to run unit coal trains over. Chicago-Joliet had good freight originations due to the refineries.
Eventually everything ex C&A except Chicago-Joliet was sold to the start up Chicago, Missouri and Western. The CM&W didn't last a year.
South of St. Louis the GM&O found some tough grades in Illinois over Alto Pass. After using the IC's Cairo bridge over the Ohio the GM&O had two decrepit light rail parallel lines south through Mississippi to Mobile. An indirect branch went through Jackson, MS to New Orleans. (Mississippi being the poorest state in the union.) A good chunk of the GM&O's business in the south was pulpwood. Short hauls and low rates.
When I got to the ICG the turkey had found a home but there had been precious little effort to integrate the turkey into the home. That one Chicago originating train was still running out of the GM&O's Glenn Yard instead of IC's Markham Yard. So if the ICG received a car for Kansas City they would have to hump it twice at Markahm. (Glenn cars went over the north hump but had to go over the south hump first if received from eastern connections.) Then take a transfer run to Glenn. Then get switched at Glenn into the train. That got expensive and did not give good service. Finally, well after I got there, and several years after the merger, they built a connection at Springfield and we could originate the KC train out of Markham.
After the merger there were four north south lines running the length of Mississippi. And that didn't change for a long, long time. Today there is one line and it can easily handle all the business.
I could go on and on. But basically no one took expedient steps to capture any possible savings from the merger. (If there were any savings to be had.) With salient exceptions, leadership at the ICG was lacking. Bunch a Good Old Boys never meaning no harm. It did not help that the VP-Law was from the GM&O and Mississippi. He hated confrontation. (Hey lawyer, that's what you're for.) He just didn't want to get rid of any trackage because he knew he'd be in a court fight.
Too much track, not enough business, people in love with their regulatory chains, etc.
I know this has been a disorganized ramble. But, as I said, I do not have the years left to unravel that mess. (No, I am not terminally ill. I'm just 63 years old and that doesn't leave me the time.)
The question (for which we will hope for insights by Greyhounds) is whether the merger was flawed because of the kind of physical issues raised by MP or because of execution. IC + GM&O was seemingly the kind of merger of parallels favored in the '60s and '70s.
We know one of the problems of Penn Central -- besides the well-publicized cultural clash -- was chronic shortage of the cash needed to fix things. (The same problem inherited at NYC by Al Perlman 15 years before, which he managed to overcome -- sort of.) Did this hinder ICG?
Another big merger of parallels was BN, which struggled for a while but blossomed after the ICC was gotten out of the way.
In theory, ICG should have been good: reduction of redundancy, Amtrak about to relieve it of passenger losses. Wha' hoppen?
MP173Greyhound: Now, the authors are into the USRA and the creation of Conrail. I actually have my bound copies of the USRA Preliminary and Final System Plans out and a trusty Official Guide at the ready. To me, one of the great stories of railroading was the USRA's work in developing a plan. The authors describe the agency's role, but only briefly and understandably so. This volume must cover well over 100 years. Their work on the subject, while brief, is informative. Ed
Greyhound:
Now, the authors are into the USRA and the creation of Conrail. I actually have my bound copies of the USRA Preliminary and Final System Plans out and a trusty Official Guide at the ready. To me, one of the great stories of railroading was the USRA's work in developing a plan.
The authors describe the agency's role, but only briefly and understandably so. This volume must cover well over 100 years. Their work on the subject, while brief, is informative.
Greyhound....let's talk Illinois Central Gulf and flop squared!
I can pull out my Moody's and throw considerable financial data but the numbers probably will not tell the story, only the results.
My guess, and only a guess is that ICG was Penn Central north/south. Too many branch lines, not enough revenue to support branch lines, five man crews, commuter losses in Chicago, etc.
Off to church, more to follow.
BTW, just finished the chapter on Conrail...OUTSTANDING review. I wish they would have written an entire volume on the transition from PRR/NYC to PC to Conrail to NS/CSX. That story needs to be told in detail.
Please, Greyhounds, if you have the time, give us the particulars of this "flop squared."
No way did those volumes go though E. St. Louis.
The figures are cited as being from "Saunders, Merging Lines, 2001, pp. 315 - 317."
I cannot locate my printed "Merging Lines". It's a whole lot easier for me to find something in Kindle The only thing I can suggest is that the 3,500 cars per day figure for the IC is the total for the entire railroad. (And the 1,500 cars per day figure for the GM&O was for that entire railroad.) The point being that the projected engine savings in the St. Louis area were way "misoverestimated".
"American Railroads" says the IC-GM&O merger was a "Flop". I came to the ICG a few years after the merger and I'd have to say it was more than a "Flop". It was something like "Flop Squared".
Greyhound:You probably misunderstood my use of the word "dry". The early part of the book is "dry" to me. Any type of legislation / regulatory infrastructure to me is dry. Doesnt mean it is not important...just dry.
My guess is as the book progresses in time (and corresponds with my personal awareness in the industry) the "dryness" will disappear. The entire consolidation and merger movement of the 70s thru 90s to me is fascinating.
What I would really like is a book which specifically deals with the USRA's role and a behind the scenes look at how those people did what they did. Sort of an expanded "The Men Who Loved Trains" if you will.
Greyhound, you might know this. The authors touch on the IC/GM&O merger and quote Richard Saunders from "Merging Line" (another great book in my opinion)..."The studies show that six switching crews could be saved at St. Louis to handle the IC' daily 3,500 cars and the GM&O's daily 1,500 cars."
Did IC really move 3500 cars daily thru St. Louis? That would be 35 trains either into or out of St. Louis on the two lines. The mainline thru Effingham wasnt handling 35 trains per day, it was more like 20 freights per day, perhaps 24. GM&O with 1500 cars daily? Perhaps those numbers are correct....that would have been back in the day of 40 ft boxcars, but to me that quote seems inaccurate. Again, this was taken from Richard Saunders, so I do not attribute this to Gallamore and Meyer.
Very good book that is must for any railroad reference bookshelf
As many of you may have realized by now, I am absolutely agape and agog about this fantastic book.
Here's a slide show that author Gallamore gave at Michigan State University on the book.
http://www.slideshare.net/RobertGallamore/american-railroads-decline-and-renaissance-in-the-twentieth-century-38568778
And to any of you high schoolers out there, please note that the business school at Michigan State University now has a Railway Management program. If you're really into this thing you might want to check it out and consider applying.
Well, I thought the book was great. I did not find it "a little dry" at all. It is focused on the economics of railroading and the bad effects of government economic regulation. (The government was basically trying to do something that was impossible.)
I guess it's whatever floats your boat. I like the economic analysis because it rationally explains why things happened. But some readers may find it boring. Here's a quote from chapter 3:
"We may now apply this reasoning to the railway. The railway performs a vast number of heterogeneous services, some traveling long distances and some short distances, some moving in trainload lots and some in less than carload lots , some going at high speed and some at low speed, some moving in one direction and some in another, some possessing high value per pound and some low value . . . On what principle should the railroad fix the rates to be charged for these different services? Should it base its rates on the cost of performing each individual service . . . ? However desirable this basis might be if it could be realized in practice, the fact is that it can not be realized."
Gallamore, Robert E. (2014-06-17). American Railroads (Kindle Locations 652-657). Harvard University Press. Kindle Edition.
I find that very interesting. Others may not.
I did put a "Review" of the book on this forum for whatever that's worth.
http://cs.trains.com/trn/f/111/t/231141.aspx
I am reading "American Railroads, Decline and Renaissance in the Twentieth Century" by Robert E. Gallamore and John Meyer.
Greyhound had earlier announced the publication of this volume and it hit the library shelves last week (impressive on behalf of the selection committee). It is a little dry early on, but necessarily covers the regulation of the rails in the early part of the 20th century. I am only 3 chapters in so far.
Comments by those who have read it?Ed
Our community is FREE to join. To participate you must either login or register for an account.