A Tale of Two Roads ....

[Anonymous]

BNSF 4th Quarter Operating Ratio: 77.1

http://www.bnsf.com/news/articles/2005/01/2005_01_25a.html?index=/news/index.html

UP 4th Quarter Operating Ratio: 93.7

http://www.uprr.com/newsinfo/investor/2005/0124_4qearnings.shtml

The revenue growth for both roads was extraordinary. This bodes well for the future of western railroads.

[daveklepper]

Thanks

[Anonymous]

so explain this to the village idiot...the higher the percentage the worse the operating ratio? dollars spent in relation to dollars earned i'm assuming, as i'm no financial wiz.

[mudchicken]

BNSF Case: $100 comes in the door. It costs $77.10 in wages, materials, fuel etc. to make that $100. In Wall Street's and FRA/DOT's eyes, the railroad is not "revenue adequate" until those costs drop into the low $60's....Railroad is not investing enough in its future and not making a fair return for its stockholders (who in turn will not invest more $$ for growth).

[Anonymous]

awesome and thanks, that's what i was lookin for. so what railroad has had the best operating ratio in the last, say 5 years? best ever?

[mucable]

QUOTE: Originally posted by farmer03

awesome and thanks, that's what i was lookin for. so what railroad has had the best operating ratio in the last, say 5 years? best ever?

While I don't exactly remember the exact OR's the N&W and the Southern used to do exceptionally well. The FEC did quite well also.

[Anonymous]

I know the Illinois Central had operating ratios in the mid 60s before CN bought them.

[Anonymous]

QUOTE: Originally posted by mucable

QUOTE: Originally posted by farmer03

awesome and thanks, that's what i was lookin for. so what railroad has had the best operating ratio in the last, say 5 years? best ever?

While I don't exactly remember the exact OR's the N&W and the Southern used to do exceptionally well. The FEC did quite well also.

I know I'm going to get yelled at for asking this, but I have to ask: Including Michael27's remarks on the IC, were all these low OR's occurring before Staggers or after Staggers?

[daveklepper]

Look, we knew already that the UP had to spend lots of money to get itself out of the jam, and isn't this reflected in the operating ratio? But shouldn't we expect a dramatic improvement to follow?

[PNWRMNM]

Dave,

The answer to your question is it depends. The cost of hiring and training new people will show in the operating ratio. Capital investments will not because they are not operating expenses. It depends on how you spend the bunch of money.

Yes, I would expect the UP's OR to improve. It can not get much worse.

Mac

[oltmannd]

NS was doing ORs in the mid 70s prior to the CR merger. Conrail once had a goal to get the OR into the 80s in the 1980s. You had to start somewhere! It was down to the low 80s in the mid 1990s.

Conventional wisdom holds that you need to sustain an OR below 80% in order to sustain yourself without resorting to "eating your foot".

[Anonymous]

QUOTE: Originally posted by PNWRMNM

Dave,

The answer to your question is it depends. The cost of hiring and training new people will show in the operating ratio. Capital investments will not because they are not operating expenses. It depends on how you spend the bunch of money.

Yes, I would expect the UP's OR to improve. It can not get much worse.

Mac

Mac,

I think what I'm getting at is that these low OR's of N&W, Southern, and IC occured prior to Staggers. That tells me that under a regulated environment railroads were more prone to reinvest revenues into improving rail operations, while after Staggers they became more prone to invest revenues outside of rail operations. If this is consistent, then the question is begged: Are high OR's an unintended consequence of the partial deregulation borne by Staggers?

[MP173]

The OR is a measurement of how efficient a carrier is. Operating expenses divided by operating revenue gives the ratio. Obviously the lower the better. Debt does not come into play into this ratio, nor does non operating revenue such as investments.

I do not have the data available at this time, but generally the OR's fell after Staggers. This was for several reasons. First the carriers got rid of lines they did not wish, usually low revenue branch lines. Second, the crew sizes started getting much smaller. At one time five crewmen was standard in some states, others had four.

Negotiations with the unions dropped the size from 4 to 3 and finally at 2.

IC's OR in the 60's was a function of elimination of most branch lines and simply running the hell out of the Chicago to New Orleans main line. Double track was eliminated. Single track CTC was established. The CTC was paid for with the value of the rail which was sold. The CEO, named Moyers, allegedly came up with this idea while in the shower one morning.

It worked for the IC.

They became the model of the industry in the 90's and Mr. Hunter has tried to implement that standard with CN. Whether or not he has achieved success is often debated on this forum. It is obviously much easier to implement it on a system such as IC, essentially a mainline from point to point, than CN's situation.


ed

[greyhounds]

QUOTE: Originally posted by Michael27

I know the Illinois Central had operating ratios in the mid 60s before CN bought them.

I worked in marketing for the IC's predicessor, ICG, before and after deregulation.

Before dereg it was insane. The unions were bleeding us dry. We had to use 28 crewmen to move a train from Chicago to New Orleans. A financial guy told me they took $80 million a year in wasted money out of the company. On a total billing to customers of $700 million we couldn't afford that. I rode the cab of CM-1 through southern Illinois. The SD40 was bottoming out on its springs on the main line Blueford District at 25 MPH. We didn't have the money to keep the track in shape because the unions were requiring us to pay people to ride trains.

Crown Zellerbach Paper wanted an intermodal rate on filter paper from Bougalousa, LA to Sheybouygan, WI. I had to find a trucking company with "Authority" to haul the paper from Bougalousa to our ramp in Jackson, MS and then another trucking company with "Authority" to haul the loads into Wisconsin. And it was more than "Authority". They had to agree that their cut of the revenue would make them a profit. It did suck. It took months to get the GD "lawful" rate established and move the freight. After dereg, I could do it in one phone call since we, the railroad, could simply hire owner operators to do the trucking. The revenue hit the balance sheet a lot faster after dereg.

I worked on abandonments of branch lines. The US of A government regulations were nuts. A requirement was that we notify the top 10 shippers on a line that we were going to stop service. But what if there were not 10 shippers on a line? What do you do? I couldn't find 10 people to notify.

[Anonymous]

Ed and greyhounds,

Your posts explain a lot regarding some of the constraints railroads had to deal with prior to partial deregulation. What hasn't been explained is how railroads prior to partial dereg could get low OR's in the 60 to 70 range, but after partial dereg they still can't get OR's below 75. Will we ever see OR's in the 60 range again?

[MP173]

Future:

Could you illustrate which companies had OR's in the 60's before dereg? My guess is perhaps a coal hauler, such as NW or C&O.

I dont have any marketing info on railroads. I wish I did. It would be interesting to take a look at specific business segments of the railroads and put the slide rule to use (yes I still have my slide rule from high school).

Off hand, I am going to say it will be very difficult for the rails to get OR's into the 60's for the following reasons, qualified by the fact I am on the outside looking in:

1. Many railroads that I listen in on regularly have outlawed crews. I dont know how much a crew costs vs the revenue (Greyhound had great info for the 70's), but recrews have to be expensive. Just this week, CN had a 535 CP train sit nearly 24 hours here.
2. These outlawed crews are a factor of several items, but mainly terminal congestion and lengthen crew runs. The terminal congestion has to be a killer for an OR. When trains go dead, motive power sits. That aint cheap.
3. The rails growth, other than GNP, is intermodal, which has a natural check and balance in the trucking industry. Margins cannot be excessive, or the traffic will move via highway.

Greyhound, I would really like to pick your brain about the IC. That was one very unhealthy railroad in the 70's. If I remember correctly, their OR's were in the 90's. I recall seeing some monster trains at Effingham. What were the big money makers for IC at that time? There was some Southern Illinois coal which moved north to Inland Steel and Wisconsin.

The IC seemed to be very radical in their approach to post Staggers. In other words, the did a Conrail, shedding branches and developing marketing plans that worked. What was the biggest success story, in your opinion, on the IC? Perhaps it's biggest blunder was selling off the east west line in the south from Meridian to Shreveport, but who could have foreseen the importance of that line?

On a personal note, were you ever involved in the marketing/traffic on the Mattoon to Evansville line? I lived in a small town on that line and my daily existence was punctuated by the two daily trains. I remember the trains north out of Evansville would have piggyback trailers. I also came across a statement this weekend that the C&EI merger into L&N sealed the fate for that line. I did not realize the interchange was so heavy, but it sure makes sense now. It was quite a site seeing and hearing three black geeps coming up the little grade.

On another side note, my father secured a five year lease from the IC to have a garden on the ROW thru our town. He paid $1 a year. He wrote and asked the IC and they forwarded a contract for him to sign. It was a hell of a garden and we ate well.

ed