Rail mergers and pricing

[daveklepper]

Thanks for this discussion.

[bobwilcox]

QUOTE: Originally posted by MP173

The split of revenue, as mentioned by Greyhounds is based on "divisions" or what we called in the LTL industry "factors".

A book of factors was used based on common interline points. Points within a state were then assigned factors to these common points. Then the revenue would be divided accordingly.

For instance...and these are not accurate, but are probably close.

A shipment from Ft Wayne, Indiana to Los Angeles, Ca interlined at Chicago.

Factor from Ft. Wayne to Chicago = 68
Chicago to Los Angeles = 450

Originating carrier receives 68/518 of revenue or 13%
Terminating carrier receives balance or 87%

These LTL factors were based on rail rates from the early 1900's believe it or not. They did tend to give a higher percentage to the short haul carrier, rather than mileage factors (Ft Wayne to Chicago - 200 miles, Chicago to LA - 2200, resulting percentage = 8%).

I am sure, but not positive the rails did something very similar.

If it was a contracted move, such as a stack train or a coal unit train, the rate divisions were no doubt negotiated based on other factors such as costs for picking up and delivery and who's power is used.

ed

There were factors before Staggers but they have gone away in the post Staggers enviroment. It's up to each carrier to negotiate what they think they can get via the junction the think they can get.

[MP173]

The split of revenue, as mentioned by Greyhounds is based on "divisions" or what we called in the LTL industry "factors".

A book of factors was used based on common interline points. Points within a state were then assigned factors to these common points. Then the revenue would be divided accordingly.

For instance...and these are not accurate, but are probably close.

A shipment from Ft Wayne, Indiana to Los Angeles, Ca interlined at Chicago.

Factor from Ft. Wayne to Chicago = 68
Chicago to Los Angeles = 450

Originating carrier receives 68/518 of revenue or 13%
Terminating carrier receives balance or 87%

These LTL factors were based on rail rates from the early 1900's believe it or not. They did tend to give a higher percentage to the short haul carrier, rather than mileage factors (Ft Wayne to Chicago - 200 miles, Chicago to LA - 2200, resulting percentage = 8%).

I am sure, but not positive the rails did something very similar.

If it was a contracted move, such as a stack train or a coal unit train, the rate divisions were no doubt negotiated based on other factors such as costs for picking up and delivery and who's power is used.

ed

[bobwilcox]

QUOTE: Originally posted by piouslion

Back to mergers for a moment; from all the conversation, I get the idea that Canadian Pacific CP is odd one out. Seven large systems merge down to two super roads remaining from the combination of any three in the article. HOW SAYS THE FORUM?

I think the merger talk is sheer speculation. The logic of mergers has gone and the fed, on paper, says it will be much harder to get a merger approved. The only opening I can see is if one of the US Class Is get in very serious financial shape as was the case with the SP.

[greyhounds]

QUOTE: Originally posted by toyomantrains

Could any of you great minds dumb this down a bit for someone like me and expand a little further if possible?
Can you give a generic example (maybe in percentages) of something like ,say a Maersk ship off-loads its containers at the Port of La. A consist is made on the UP with half of its containers headed for Chicago and the other half for Pittsburg.
How are the different carrier costs divied up? What if they have to re-route due to a derailment? How do trackage rights play-in?
I'm not asking about the customer- they probably are most likely locked-in to a rate, correct? How do the different rail carriers deal with each other and problems that arise during transit?
It doesn't have to be intermodal from West coast to midwest- any product that changes hands between supplier to user.

Rerouting due to dreailments etc. doesn't affect the pricing.

The revenue split can be set up in several different ways. Each road can bill for its own portion of the money or one road can collect all the money from the shipper/receiver and pay the connecting carrier a "division" of the revenue. It just depends on who's in charge and how he/she wants to do things. In the end, it doesn't make much no never mind.

[Anonymous]

Back to mergers for a moment; from all the conversation, I get the idea that Canadian Pacific CP is odd one out. Seven large systems merge down to two super roads remaining from the combination of any three in the article. HOW SAYS THE FORUM?

[bobwilcox]

Tim-Rerouting of cars due to derailments, floods, bursh fires, etc. are accomedated by reciprocal operating agreements between railroads worked out in advance. They are sometimes refered to as General Manager's Agreements.

Trackage rights are basically contracts to rent someone else's railroad to run your trains. The details can be quite varied depending on the situation. Often they were set up with rr A saying I will let rr B on my track in return for rr B letting me on his track at another location. Many of these agreements flow from ICC/STB cases involving abandoments and mergers.

[Anonymous]

Could any of you great minds dumb this down a bit for someone like me and expand a little further if possible?
Can you give a generic example (maybe in percentages) of something like ,say a Maersk ship off-loads its containers at the Port of La. A consist is made on the UP with half of its containers headed for Chicago and the other half for Pittsburg.
How are the different carrier costs divied up? What if they have to re-route due to a derailment? How do trackage rights play-in?
I'm not asking about the customer- they probably are most likely locked-in to a rate, correct? How do the different rail carriers deal with each other and problems that arise during transit?
It doesn't have to be intermodal from West coast to midwest- any product that changes hands between supplier to user.

[Overmod]

MP, rr_guy gave a definition in one of the previous posts (on page 1)

Google up

"Rule 11" +waybill

for some discussion of this: one definition is at

http://www.bnsf.com/tools/glossary.html#gr

(scroll down to the listing)

[MP173]

slotracer:

What are rule 11 rates?

ed

[slotracer]

I cannot even guess the proportion of thru vs rule 11 rates, they tend to be driven first by commodittee market, then sometimes either customer driven and finally railroad or market manager strategies. Some vary, I have seen given products move strictly by rule 11 rates change to only through rates from a change in market dynamics or carrier philosophy, the same type of behavioral strategy changes I have witnessed in zero mileage vs full milaege rates.

As a shipper I have seen changes both ways in teh past year, as railroad mergers down to too few competitiors and too much capacity rlimination has allowed railroads to pretty much dictate what they want to occur. I have seen refusal to renegotiate rule 11 rates and an instance on through rates in an effort to mask which carrier is gouging the customer and I have seen former through rates come up for negotiations that the rails refused to talk about anything other than rule 11 to extend.

As far as tariffs are concerned, there is an increase in the use of tariffs, as we have seen numerous examples in the past 9 months of carriers refusing to publish rates in private contracts, some of these tariffs are through rate and sme proportional, but they are for the most part, higher rates and subject to increases of any amount and any frequency the carriers feel they need. When there was more competition in the rail industry this would not have been easy to implement, but with in most cases, one competitor at best and the knowledge he has as much business as he wants the stage is set to dictate to teh customer what teh rate will be, take it or leave it. This was not generally as possible on a widespread basis when teh industry had more competition

[MP173]

Ok, we are stalling here just a bit. Lets move on to intermodal pricing.

To me, intermodal pricing would seem to be a very simple thing. You have a very simple situation with the competition. The trucking rates are pretty much out in the public, either by tariff, or otherwise. The rails factor in the costs for drayage to and from the end points, subtract from the trucking rates and one has a starting point for intermodal rates. From there the rates would more than likely fall.

Typically, what kind of discount from trucking rates, if any did the rail have to offer to get business?

From everything I have read, UPS is not demanding on rates, but is demanding on service. How does that play into the equation? If a railroad knew they would have say...15 trailers on average per night for UPS, would that be enough to open a new route?

Today much of the intermodal moves on container. How much more is that discounted off of trailer rates? Would those same container rates apply for someone like JB Hunt as to the large container lines?

I often see NS intermodal trains thru town and will count the units and then attempt to figure revenue per train. What is the break even point generally for intermodal (number of units). For example NS230 out of Jacksonville is usually a large train with 125+ units, yet 217/218 to and from Greensboro is usually around 50 units. It seems 217/218 would be in danger of being cancelled, unless it is a small part of a big picture.

ed

[Anonymous]

QUOTE: Originally posted by passengerfan

In the merger article in trains one wasn't mentioned and that was a combination of BNSF, CN and KCS. This would probably be the ultimate merger combination with through routing between Canada and Mexico as well as virtual control of much of the western US and Canada. With the new Container Port facilities to be built at Prince Rupert the possibilities for a merger of these three is limitless for doublestack traffic. and even the long thought of Land Bridge comes closer to reality.

I just hope that the execs and the financial folks that do that merger like the taste of the worms that would be found in that can, not to mention the lawyers paradise that would occur when the anti-competition crowd get hold of it .

[passengerfan]

In the merger article in trains one wasn't mentioned and that was a combination of BNSF, CN and KCS. This would probably be the ultimate merger combination with through routing between Canada and Mexico as well as virtual control of much of the western US and Canada. With the new Container Port facilities to be built at Prince Rupert the possibilities for a merger of these three is limitless for doublestack traffic. and even the long thought of Land Bridge comes closer to reality.

[bobwilcox]

In the commodities I worked with (chemicals and petroleum) their was very little traffic moving on combination rates but is you used a tariff rate the local rate and the combination rate would be the same. However, I beleve the grain people used a lot of combination and proportional rates and I do not know how they compaired with the local rates. Also TOFC rates were lower if someone else provided the drayage at origin or destination.

[bobwilcox]

QUOTE: [i]Originally posted by greyhounds
The CNW had little choice in the matter. It either had to match the ICG offer or loose the business. One of the many ways economic deregulation benifited the shipping public. It allowed price competition.

I remember this race to the bottom! PPG had us(CNW) in their office asking for an allowance during the time between Carter siging Staggers and its effective date.

[MP173]

I talked to one of my customers today, a significant shipper of rail services...they own or lease about 3000 cars.

They indicated they have both thru and combination rates in effect, based on specific movements.

Ok, here is the next question (or two):

Lets assume there are no thru rates in affect. Thus, either specific commodity rates or tariff rates apply for both legs of the movement. Further, lets say that tariff rates apply. As I indicated earlier, based on my LTL days, the rates would include provisions for pickup and delivery. One would assume those rates are based on single pickup and single delivery. Do these combination rates reflect the fact that there is NOT a cost involved for either the pickup or delivery, since it is interchanged with another railroad?

In my LTL days, we called these rates Assembly or Distribution rates and those rates were lower than regular rates. Why? Because there was no pickup or delivery associated with the movement. Usually there was private carriage either to the terminal (brought in by private fleet or common carrier on truckload rates) or the opposite with freight assembled and stuffed into a private carrier or truckload carrier for final delivery.

Hope this is not too confusing, but my feelings are if there is a large percentage of rail traffic moving on combination of rates, then there would be very little incentive to move that as single line rates, particularly if there is no river/water or pipeline competition.

Bob, Greybeard...help me out here.

ed

[greyhounds]

QUOTE: Originally posted by piouslion

The question that comes now is; Do railroads have treaties between themselves for certian parts of business they interchange much as the life insurance business has between companies when assessing and dividing risk risk for an offer of coverage?

Well, I wouldn't call the agreements "treaties". But they have to agree on the through rate and which carrier gets how much of that rate. They also have to agree on "car hire". If BNSF originates a load in one of its own cars going to a CSX destination, CSX will have to somehow compensate BNSF for use of the freightcar.

In the bad old regulated days this was one master agreement. That became illegal under dereg and each road had to work out specific arrangements with each connection.

Dereg also allows rebates. The prime example I know of was on very lucrative movements of soda ash out of Wyoming originating on the UP. Under economic regulation this moved east primarily routed UP-CNW. The ICG was a party to the through rate but there was no incentive for the shipper to use the ICG between Council Bluffs and Chicago. Since the traffic was lucrative, the ICG didn't have much of it, and it was a low cost "bridge" move with little terminal handling, the ICG simply offered to give back a portion of its "division" to the shipper if the shipper routed ICG.

The CNW had little choice in the matter. It either had to match the ICG offer or loose the business. One of the many ways economic deregulation benifited the shipping public. It allowed price competition.

[bobwilcox]

QUOTE: Originally posted by piouslion

The question that comes now is; Do railroads have treaties between themselves for certian parts of business they interchange much as the life insurance business has between companies when assessing and dividing risk risk for an offer of coverage?

I do not understand your question. How about an example.

[Anonymous]

The question that comes now is; Do railroads have treaties between themselves for certian parts of business they interchange much as the life insurance business has between companies when assessing and dividing risk risk for an offer of coverage?

[bobwilcox]

QUOTE: Originally posted by MP173

Bob:

One more question (got a feeling I will use this statement often)...in your review of the styrene shipper, you mentioned the word "charter". Is that the same as a contract? Or do you mean charter as in a "charter air flight" in other words specific movement for then entire vessel? Might be splitting hairs here.


The key ingredient in any negotiation is leverage. Regardless of if you are selling freight service or software. Knowing the competition is critical, not only from a pricing standpoint, but also service and reliability.

ed

Yes. Barges for commodities such as stryrene are very very expensive and can only be financed if the lender can see a contract to use the barge untill the loan is paid off.

[MP173]

Bob:

One more question (got a feeling I will use this statement often)...in your review of the styrene shipper, you mentioned the word "charter". Is that the same as a contract? Or do you mean charter as in a "charter air flight" in other words specific movement for then entire vessel? Might be splitting hairs here.


The key ingredient in any negotiation is leverage. Regardless of if you are selling freight service or software. Knowing the competition is critical, not only from a pricing standpoint, but also service and reliability.

ed

[MP173]

Thanks for getting this going guys.

RR guy, if I read you correctly...majority of traffic today moves via contract rates. Correct? Then these are not public pricing, or is it handled as a percentage discount to the published rates?

In LTL we had class rates, as greyhound described. Then, as pricing pressures mounted, discounts were given to shippers. As long as it was a single line move...all was good. When it became an interline (which was very common in the early 80's), there had to be an agreement not only for the interlining of freight, but also for general discounts to be honored.

Are today's rail rates generally commodity type rates as contract (subject to only the shipper and the carrier, confidentially) or are they published rates, then discounted?

Also, it has been mentioned that most traffic moves on thru rates, with divisions of revenue. I am not doubting the source of that, simply verifying (Ronald Reagan's old saying "trust, but verify"). I think I talked to a customer of mine...a large grain products shipper and she told me she would get a bill from each carrier on each leg of the movement. That is a heck of a lot of billing! I will verify with her today, if possible.

Years ago, as a young adult I was attracted to the world of rates, ratemaking, tariffs, etc. Fortunately, I then moved into a more free market business setting. But the yearning of picking up a well worn tariff, marked by sections, still lingers!

ed

[Anonymous]

QUOTE: Originally posted by bobwilcox

You mentioned cost in your post. Only after you have determined what the customer is willing to pay for your service do you check your costs to determine if you are interested in the traffic.

Unless the customer is a newbie, he/she will have a pretty good idea of the transporter's cost construct. In this day of the information age, finding that lucrative "sucker born every minute" is getting to be rather difficult, and most potential customers know when they're getting a screw job, thus the recent moves to re-regulate railroads. There are, of course, the exceptions to the rule, thus we have energy firm Sempra buying UP's pitch to locate a coal fired power plant in Southern Idaho, forever captive to UP's rate setting. Those Sempra folks must not read the energy press, probably their management is made up of rejects from the tech sector.

[bobwilcox]

QUOTE: Originally posted by toyomantrains

How do trackage rights play into this in billing between carriers or is that different altogether?

Trackage rights are treated as an operating cost. They do get involved with the rate making process.

[Anonymous]

Great thread and great info! I asked questions similar to this a year or so ago and now I have a better handle on how it's determined.

In one example above it's mentioned that , in a proposal, two carriers could agree on a through rate and divide the revenue based on the haul length. How do trackage rights play into this in billing between carriers or is that different altogether?

[bobwilcox]

The vast majority of carload rates are published as through rates. Just from an accounting aspect this makes sense. The customers only wants to get one freight bill. If the railroads are fighting through service competition they will make a rate together and divide on a mileage prorate. If not they will make the will add up their indivdual factors to make a through rate from the customer.

As a example lets suppose you are making a two line rate on styrene from Houston to a polystyrene plant in in N. GA via UP-NOLA-CSXT. The two railroads will take a look at the demand for their service. Product Managers who do not look at the demand for the service but add a markup over cost soon get to be a yard clerk a days walk east of Rawlins, WY. I would expect the styrene shipper to move a 75-90% of his product by barge/truck via Chattanoga and the balance by rail.

If the customer's charter was over with the barge line the two railroads would review the cost of the barge/rail physical distribution system and compare it with a cost of a rail physical distribution system. In putting together a proposal to promote with the customer UP and CSXT would agree on an appropriate through rate and usually divide the revenue based each rrs portion of the haul. If CSXT had 60% of the miles they would get 60% of the revenue.

However, let suppose the barge charter has another five years to run and just the current rail tonnage is in play. Lets further suppose that one of the railroads has competition from another railroad but the other railroad serves the point exclusivly. Since this is stryrene the parties in the deal know long haul trucking or added barge capcity is very expensive.The railroads now face a very different competitive envrioment. They will look at their different indidual situations and make offer a through rate that is really made on a combination basis.

One big exception to this are the many grain shipments moving with combination rates over major terminals. As an examle grain from a country elevator on the IAIS could move into Council Bulffs, IA on a local rate in combination with a rate from CB to the Gulf on the UP, BNSF or KCS.

I know very little about intermodal rates but I beleve the are often ramp-to-ramp wholesale rates with the retailer putting together a total through door-to-door rate for his customer. I would like to hear from someone who knows something about intermodal ratemakeing.

You mentioned cost in your post. Only after you have determined what the customer is willing to pay for your service do you check your costs to determine if you are interested in the traffic.

[greyhounds]

I don't know. It's been a few years since I established a freight rate. I'm convinced the underlying economics of rail transportation haven't changed. But how these economics are applied through the actual rate structure may have changed in ways I no longer know.

In the past the answer would be "all of the above", or "a combination of any of the above."

Truck LTL moved on "class" rates. Each commodity had classification, or "class" that rated it. A "class 80" commodity took 80% of the full rate, etc.
There were weight and mileage breaks. It was an across the board thing.

Truckload and rail freight moved on "commodity" rates that established a specific rate for moving a given weight of commodity from a specific origin to a specific destination, often by a specific route.

Intermodal moved every which way. UPS traffic, and some other motor carrier business, moved on a through truck rate with the railroad technically taking a "division" of the rate as its payment. Some intermodal moved on a jumble of rates. i.e. a shipment from Buffalo to Denver routed Conrail-Chicago-CNW-Freemont-UP would move on a local CR rate to Chicago, then be crosstowned on the street to the CNW. From there it would move on a through rate to Denver. The third party middleman took care of this for the shipper and he only got one bill.

As I said, the economics haven't changed. But how they're structuring the rates now is something I no longer know.

[Anonymous]

Since I'm not a marketing type, I have to be careful what I say here, but, generally, the last thing that a customer wants to have happen is his traffic hitting a tarriff rate. By far, most rates are negotiated in today's environment. As for through rates, these can either be interline rates, where all involved agree upon a rate, or Rule 11, where each carrier protects their own revenue. If you could look at a waybill (which really don't exist in the traditional sense in the electronic universe we have today), you would be hard-pressed to tell the difference between an interline bill and a Rule 11 (letter "R" in the "Agent/Shippers" field is the clue).

The real magic is behind the scenes in each carrier's accounting systems and how they communicate with each other electronically to settle divisions. Even if the waybill is created incorrectly and the wrong rates are initially applied, the systems involved generally do a pretty good job of hitting the right contract and divisions through pretty sophisticated rule-based systems (if commodity "a", origin "b", destination "c", shipper "d", consignee "e", and over route "f", it's probably contract "g"). That's because it's extremely labor-intensive to work customer claims in this area. It is far more cost-effective to get it right up front. And if it's an unexpected move, it is always possible for a marketing rep to write a contract to cover a prior shipment, within reason.