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."
RWM
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, RWM
TTX is owned by the railroads, so there's no one to sell or lease the racks to but each other. Murphy,
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.
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.
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:
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 ?.
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.
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?
I was reading the MSN Money Journal by Jubak about Railroads stocks.
Gaining market share
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.
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.
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.
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