Assigning the depreciation of the NEC ROW to the NEC is standard accounting practice. However, since most of the rest of Amtrak's operations rent ROW, it gives a misleading conclusion about the comparative inefficiencies of its operations. Given the net profit of revenue over operating expenses there with Acela, and the enormous loss on operations on LD services, it is easy to conclude, as Joe Boardman does, that LD services [if deemed essential] should be separately funded [perhaps like EAS?] rather than be subsidized by Acela.
C&NW, CA&E, MILW, CGW and IC fan
erikem Ken, Keeping in mind that the goal of the company is to produce net income, I'd first subtract out the incremental cost of moving the car from Council Bluffs to Bloomington, then compare the remainder with the pro-rated costs for moving the car from Bloomington to the destination. If the remainder is less than the pro-rated costs then the branch line is almost certainly a loser, with the exception based on keeping an otherwise profitable customer. You're right in that the is a great deal of subjectivity in cost and revenue allocation. - Erik
Ken,
Keeping in mind that the goal of the company is to produce net income, I'd first subtract out the incremental cost of moving the car from Council Bluffs to Bloomington, then compare the remainder with the pro-rated costs for moving the car from Bloomington to the destination. If the remainder is less than the pro-rated costs then the branch line is almost certainly a loser, with the exception based on keeping an otherwise profitable customer.
You're right in that the is a great deal of subjectivity in cost and revenue allocation.
- Erik
That would have been a nice, clean way of doing it. Except....you really cannot "cost out" a carload movement on a diverse, complicated rail network. What you can do is take a bunch of averages, add them together and sort of, kind of, get a inkling of the average cost of moving the car of lumber from Council Bluffs to Bloomington, IL.
It's not like electricity where there is one product moving in one direction from one location (or a very few locations.). Boxcars aren't kilowatts. There is a great diversity of movement on a rail network that is lacking on an electric network. I know, there are all kinds of formulas, computer programs, etc. that purport to provide "The Cost". But they all rely on averages and they don't provide specific information detailed enough to begin to determine the incremental cost. I mean, just what was the incremental cost of taking two or three extra carloads of lumber over the hump at Markham each month? It had to approach $0. Same thing with putting those cars on a Council Bluffs-Markham manifest train. What do you get? Car hire and a very few gallons of fuel?
We could identify the costs of the branch because we could isolate its costs from the network. But when you're dealing with the mainline network it is impossible to isolate costs. They're part of a flow and increasing the flow by a few cars produces zilch in added costs.
However, if you go down this path and manage by those incremental numbers, you'll keep your branches and starve your mainlines. If you decide to keep the branches you've got to spend the money to operate them. What's left for the mainline? Can't spend the money twice.
But, it would be another number to take into consideration on what would eventually and inevitably be a judgment call.
Putting additional business on the mainline using incremental costing as a floor is a whole different can of worms
henry6Phillips may or may not be right in his interpretation.
Certainly many Amtrak watchers believe that Acela is Amtrak's most successful venture. However, Phillips would have us believe that all such people have been deceived by misinformation from Amtrak reported by young and naïve reporters.
greyhounds That would have been a nice, clean way of doing it. Except....you really cannot "cost out" a carload movement on a diverse, complicated rail network. What you can do is take a bunch of averages, add them together and sort of, kind of, get a inkling of the average cost of moving the car of lumber from Council Bluffs to Bloomington, IL.
Understood. I would argue about electricity being easier to cost out than RR freight traffic, especially when intermittent generation is involved.
Subtracting out the incremental costs for the mainline portion of the run is the most favorable analysis for keeping a branch line, if the branch doesn't pass that test, then there almost no way that keeping the line can be justified. A branch line that barely breaks even under this analysis is still a good candidate for abandonment as incremental costs don't include lost opportunity losses.
greyhoundsThat would have been a nice, clean way of doing it. Except....you really cannot "cost out" a carload movement on a diverse, complicated rail network. What you can do is take a bunch of averages, add them together and sort of, kind of, get a inkling of the average cost of moving the car of lumber from Council Bluffs to Bloomington, IL.
Exactly!
The allocation of costs is really squishy business. For example. I have two trains running from A to B. One has two locomotives and 10 cars. One has one locomotive and 7 cars, but those 7 weigh as much as the 10. The first train carries 50% more people than the second, but generates 75% more passenger miles. I have to allocate the cost for the track, crew, train dispatchers, fuel, locomotive dwell between trips. How do I allocate? By train count? Train miles? Passengers? Passenger miles? By time? By distance? By track capacity consumed? How do I divvy up the dwell between trips? Does it belong to where I use the locomotive next? Part of the previous trip? Split the difference?
Depending on how you proceed, you can get radically different...and misleading...answers, none wholly right or wrong.
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
erikem greyhounds That would have been a nice, clean way of doing it. Except....you really cannot "cost out" a carload movement on a diverse, complicated rail network. What you can do is take a bunch of averages, add them together and sort of, kind of, get a inkling of the average cost of moving the car of lumber from Council Bluffs to Bloomington, IL. Understood. I would argue about electricity being easier to cost out than RR freight traffic, especially when intermittent generation is involved. Subtracting out the incremental costs for the mainline portion of the run is the most favorable analysis for keeping a branch line, if the branch doesn't pass that test, then there almost no way that keeping the line can be justified. A branch line that barely breaks even under this analysis is still a good candidate for abandonment as incremental costs don't include lost opportunity losses. - Erik
Cost models are terrible "what if" tools. They are good at before/after however.
John WRDo you suggest (as Don Phillips does) that Amtrak misrepresents their long distance trains as loosing large amounts of money when in fact most long distance trains make a profit?
Seems like I recall reading a few years back, that Amtrak was (arbitrarily) shortening the projected life of some of it's equipment, based upon experiences it was having with some equipment. When you do things like that you force the cost to be amortized over fewer customer uses, so it's DEFINITELY possible that games such as those mentioned are being played.
Hypothetical scenario: If properly maintained sleeper cars can expect a 15 year service life, but budgeted maintenance funds are redirected elsewhere, and the cars are allowed to fall in such severe disrepair that they ultimately are scrapped after 8 years, CAUSING a revision to the life expectancy of all cars of it's type, and accounting practices are subsequently revised to amortize the car cost over the new lifespan....couldn't the claimed "cost" of operating the long distance trains can be conveniently inflated to the point that they no longer make economic sense to operate?
I'm not sure how much discretion is allowed in determining depreciation rates since there has to be consistency in this matter. Allocation of costs can be discretionary, those of us with some seniority can remember the discussion in the pre-Amtrak era over "fully allocated" vs. "solely related" costs as related to passenger train contributions to the bottom line.
CSSHEGEWISCHI'm not sure how much discretion is allowed in determining depreciation rates since there has to be consistency in this matter.
It would indeed be informative to know if Amtrak uses the same projected service life that the private railroads used back in the day.
My recall is that the last time I priced sleeper service, the charge appeared way too high. And a few months later I read somewhere (perhaps an item in Trains mag?) that the service life projections were being shortened.
At the time is was just a 'wrinkle the eyebrows" moment for me, but for an expert like Phillips to take notice might be worth pondering.
Ken:I would really enjoy sitting down with you over a diet cola or adult beverage and discussing costing of transportation. My experience in LTL trucking was similar to the carload railroading. At certain points it becomes next to impossible and you just have to go with assumptions. How does one allocate costs for humping 3 extra cars at Markham...or the costs of 3 pallets thru a terminal? I basically figured the LTL peddle run was a fixed cost and tried to throw as much freight onto that truck as possible, both for deliveries and pickups.
I read Phillips' column last night and have this possible explanation for the difference in depreciation between the LD trains and the NE Corridor.
Depreciation for LD and other trains are basically determined by the equipment. Let's say you have a train of 10 cars plus 2 locomotives = investment of $40million (may or may not be accurate). Depreciation schedule - 15 years/ straight line depreciation = $2.67 million per year or $7305 per day.
Now, run that train on the NE Corridor, lets say from Boston to Florida and the depreciation costs are much more. Not only does one allocate the equipment, but also Amtrak owns the NE Corridor. What is the value of NE Corridor? I have no idea, but let's say $2 B. Depreciation of that over 40 years = $50,000,000 per year for property. Divide that by the number of trains and one has significantly higher depreciation rates for the trains running on the NEC. Add in the station costs, etc. and soon you are talking real $$$.
Not an accountant, but I do read annual reports, so I have a little idea of how finances work.
The best method of analyzing profitablity of a company is looking at the Cash Flow statement. Is the company generating positive cash flows yearly? Not much a CFO can do to cook those books.
Ed
MP173 Divide that by the number of trains and one has significantly higher depreciation rates for the trains running on the NEC. Add in the station costs, etc. and soon you are talking real $$$.
As soon as you start allocating, you can't accurately get the true cost of an incremental anything. The increment changes the denominator, but you have no idea what will happen to the numerator.
If you have a hump yard that humps 1000 cars a day and has, maybe, 12 yard jobs to make it happen. What happens if I dump 100 more cars a day in there. Maybe nothing....maybe I need some overtime a bit more often. Maybe I need another job a day? Cost models won't tell you that.
Suppose I have a medium sized flat yard that has a fairly low cost per car handled. A large customer dries up. Now, my cost per car handled go up. Oh, no! Better try to drive traffic to lower cost places! Oh, no! Even less traffic, unit costs rise some more! Better start yelling at the supervisor to get his costs under control! What happened to the traffic you drove away? Some of it is now being handled twice at other "lower unit cost" places. Overall costs go up. Network velocity goes down. All driven by misusing the cost model.
Convicted One CSSHEGEWISCHI'm not sure how much discretion is allowed in determining depreciation rates since there has to be consistency in this matter. It would indeed be informative to know if Amtrak uses the same projected service life that the private railroads used back in the day. My recall is that the last time I priced sleeper service, the charge appeared way too high. And a few months later I read somewhere (perhaps an item in Trains mag?) that the service life projections were being shortened. At the time is was just a 'wrinkle the eyebrows" moment for me, but for an expert like Phillips to take notice might be worth pondering.
I seriously doubt Amtrak's sleeper pricing has anything to do with cost. They can't raise the fares high enough to cover the costs w/o driving away all the traffic. The Superliners and Viewliners are nearly all fully depreciated, anyway. Faster depreciation makes costs in the out years lower, anyway.
oltmanndFaster depreciation makes costs in the out years lower, anyway.
Funny, but I don't recall Amtrak ever lowering ticket prices as the result of completed depreciation cycles.
Nope, it is all (sleeper fares) a matter of supply and demand.
Don, I believe the entire costing model can only be based on historical accounting data. Thus, if your 1000/day yard cost $X, then you divide $X/number of cars handled and factor in inflationary costs and you have your new cost for the year.
I like to know what level of volume is driving a business and for railroads in my area, I listen carefully to the defect detectors which give axle counts. True, it is not a scientific measure, but certain trains typically run certain lengths and axle counts. When that number increases, or the railroad runs X or S trains, one know the volumes are picking up.
Does anyone know what railroads allocate for humping a car? $100? $200? I cannot even get a handle on that cost by guessing.
MP173 Ken:I would really enjoy sitting down with you over a diet cola or adult beverage and discussing costing of transportation. My experience in LTL trucking was similar to the carload railroading. At certain points it becomes next to impossible and you just have to go with assumptions. How does one allocate costs for humping 3 extra cars at Markham...or the costs of 3 pallets thru a terminal? I basically figured the LTL peddle run was a fixed cost and tried to throw as much freight onto that truck as possible, both for deliveries and pickups. Ed
Ed,
I'd sure like to get together over a cold one and talk about transportation costing and pricing. I'm fascinated by those things and, frankly, I don't find too many people I can talk with about the long run average cost curve of a railroad.
If you think your LTL operation was similar to a railroad operation, there's a reason for that. When interstate motor freight was regulated in 1935 a bunch of guys at the ICC went into a room and came out with a design for the US motor freight system.
Now, normal folks would have flinched at such a daunting task. But, unfortunately, these guys plowed ahead. The fact that they knew almost nothing about trucking didn't seem to bother them a bit. What they designed was ludicrous, but we got stuck with it for 45 years.
They created the regular route LTL system in the image of a railroad. A local truck (local train or industry job) would go out and do pick ups and deliveries. Then it would bring the freight back to a terminal (rail yard). Then the LTL would be sorted into line haul trucks (switched into trains). The line haul truck would then move to another terminal (destination rail yard). At the destination terminal (another rail yard) the LTL would be sorted (switched) into local trucks (locals or industry jobs) and delivered.
They greatly restricted the line haul routes allowing almost no deviation. (US Highway 6 west to the junction with US Highway 45, then south to state route 17, etc.)
They literally designed a trucking system in the image of a railroad, because a railroad was what they knew. This denied one of the main economic advantages of a truck, its flexibility. Because of the very restrictive route assignments the highways unnaturally became as restrictive as a rail line in geographic coverage.
This nut bag Federal design greatly increased the cost of moving goods and hurt the economy as well as the American people. It was centralized economic planning. Something that has never worked. But it was all the rage under FDR.
You know what happened after deregulation. More efficient methods of moving the LTL quickly developed and the regular route carriers, the truck lines created in the image of a railroad by the central planners, died like flies. And the country got a better, more efficient, logistics system.
greyhoundsThey greatly restricted the line haul routes allowing almost no deviation. (US Highway 6 west to the junction with US Highway 45, then south to state route 17, etc.)
Thank you for this fascinating explanation of what was wrong with regulating the trucking industry. I hope I may be allowed a question: Exactly how did the ICC enforce their regulations on trucks?
A railroad can only operate on railroad tracks. A truck, however, can operate on any highway except those from which they are legally restricted. And a local truck driver knows his local roads. So what is there to prevent a local truck driver from simply driving from the pick up point to the delivery point despite ICC restrictions? Truck drivers are professionals who know the rules of the road and do not violate them; generally there is no reason for the police to pull over a truck. So what is to stop a truck driver from driving the obviously sensible route?
MP173Does anyone know what railroads allocate for humping a car? $100? $200? I cannot even get a handle on that cost by guessing.
It is location dependent around here. The cost model grinds out a different number for each location every month. Ball-parky: $10-$30 a car, long term variable. Which is what makes folk so cranky about sending cars to the BRC, et. al.
Convicted One oltmanndFaster depreciation makes costs in the out years lower, anyway. Funny, but I don't recall Amtrak ever lowering ticket prices as the result of completed depreciation cycles.
Like I said, the rates have nothing to do with the cost. They'd have to go WAY UP from where they are to get to what it costs to provide the service.
They are set by supply and demand, like Ed said.
MP173Don, I believe the entire costing model can only be based on historical accounting data. Thus, if your 1000/day yard cost $X, then you divide $X/number of cars handled and factor in inflationary costs and you have your new cost for the year.
Yes. But it doesn't tell you what your costs would be if you got 100 additional cars a day or if you shifted 100 cars a day from yard A to yard B. You can't just take the "rate" times the volume. The costs come in "chunks".
As a non accountant all that can be seen is a bucket full of worms.
All the following numbers are arbitrary. I buy 50 sleper cars at $4M per car taking 2 years delivery times. . I could depreciate each one as straight line based on expected miles traveled with a schedule of 20 years for no salvage value. Normal maintenance is an operating cost. Assuming equal mileage on each car after 10 years I then need to make a major life extension overhaul of each car of say $1M.extending life to total of 30 years
Now do I make that a one time maintenance cost or add that to the basis of each car? Do I make the mileage depreciation extend for another 10 years to 30 years or use initial mileage deduction? Extending makes value after overhaul now $3M.That would reduce the mileage depreciation how?. Do I keep same depreciation schedule so at 20 years value would be $1M at 20 year mark or extend value to 30 yrs & drop mileage depreciation to 67& of original ?
Then another overhaul at 20 years can extend life further.
As I see it there are just too many ways to do this and each car will have a different mileage and some may have been wrecked how ? All the methods of depreciation explained earlier in this thread can make it even more complicated and that is only one cost of operating a LD train.
oltmannd They'd have to go WAY UP from where they are to get to what it costs to provide the service. They are set by supply and demand,
They'd have to go WAY UP from where they are to get to what it costs to provide the service.
They are set by supply and demand,
Well if the "demand" is all that stiff, then isn't it more than just a little foolhardy to operate at a loss?
There are two things that can be argued without end -
Accountants and psuedo Accountants arguing how to 'accurately' account a company they have no 'inside' information about
Engineers and psuedo Engineers arguing on the intricacies and application of the various formulae concerning dynamic engineering situations.
Never too old to have a happy childhood!
Convicted One oltmannd They'd have to go WAY UP from where they are to get to what it costs to provide the service. They are set by supply and demand, Well if the "demand" is all that stiff, then isn't it more than just a little foolhardy to operate at a loss?
Yes, and maybe it isn't quite as stiff as we think it is....
John WR greyhoundsThey greatly restricted the line haul routes allowing almost no deviation. (US Highway 6 west to the junction with US Highway 45, then south to state route 17, etc.) Thank you for this fascinating explanation of what was wrong with regulating the trucking industry. I hope I may be allowed a question: Exactly how did the ICC enforce their regulations on trucks? A railroad can only operate on railroad tracks. A truck, however, can operate on any highway except those from which they are legally restricted. And a local truck driver knows his local roads. So what is there to prevent a local truck driver from simply driving from the pick up point to the delivery point despite ICC restrictions? Truck drivers are professionals who know the rules of the road and do not violate them; generally there is no reason for the police to pull over a truck. So what is to stop a truck driver from driving the obviously sensible route?
"Well the ICC is a checkin' on down the line
I'm a little overweight and my log book's way behind
But nothin' bothers me tonight
I can dodge all the scales all right
Six days on the road and I'm gonna' make it home tonight"
From "Six Days On the Road" sung by the late Dave Dudley
http://www.youtube.com/watch?v=wHbGhEfnh2E
That's from a song about an independent owner operator trucker. Those guys often moved commodities that were never regulated, i.e. lettuce. They worked for themselves and broke (and continue to break) every rule they could get away with breaking. That's not applicable to the regular route carriers, which were the carries I was specifically writing about. The O/O's didn't move a lot of LTL, which was regulated, unless it wasn't, as in the case of lettuce. (All rail movement of lettuce was regulated. No truck movement of lettuce was regulated. Guess who wound up hauling the lettuce.)
The regular route carriers were corporations whose employees were paid by the hour. These employees were almost universally organized by the International Brotherhood of Teamsters. Now there's is a big difference between the motivations of an independent O/O working for himself and an hourly unionized worker.
The unionized worker had no incentive to break rules which promoted inefficiency. He, and his union brothers, benefited from the inefficiency. If he bypassed the terminals he took work away from the dock workers, who were also Teamsters. If he got to his destination sooner he cut his own paycheck.
If an LTL carrier did cheat they were very quickly turned in by the union.
The ICC did have an enforcement division which did go out and check as best it could. But they got a lot of help from people who liked the fact that the system was inefficient and wanted to keep it that way.
But this wasn't "The" problem with motor freight regulation. The problem with the regulation was that it existed at all. There is no possible valid economic reason for regulating truck rates. None. Zero. Zip. Nada. It was done to protect politically connected interests at the expense of the American people.
The government fools (economic illiterates) went along with it because they're always seeking to increase their power over the American people. Government types don't act in the best interest of the population, they act in their own best interest.
So all of the people involved acted in their own best interest. Which is something all human beings do.
BaltACD There are two things that can be argued without end - Accountants and psuedo Accountants arguing how to 'accurately' account a company they have no 'inside' information about Engineers and psuedo Engineers arguing on the intricacies and application of the various formulae concerning dynamic engineering situations.
Spot on! Unless one has access to Amtrak's accounting records they don't know how much depreciation is assigned to any capital investment. All we know from the public information, which as corporations go, Amtrak is pretty forthcoming, is the total depreciation charged to the income statement.
Oltman:$10 to $30 per humped car seems pretty reasonable to me, I anticipated more.
A few years ago I was bored and spent an hour on the Chicago Fort Wayne and Eastern tariff. IIRC properly there was either a $300 or $600 per car fee for cars rolling thru the IHB yard. Granted, there was more done than classification as CFE used IHB trackage rights to Tolleston, but that seemed really excessive.
Why do so many trains go thru BRC? CSX by my count has 9 and NS has 4 (could be incorrect on both of these). Is it due to lack of classification capacity in Chicago?Ed
As most of you know, BRC is a joint subsidiary of the Big 6 Class 1's (BNSF, CN, CP, CSX, NS, UP). If a specific run has not been pre-blocked at an outlying yard like for a specific connection, it's probably easier and cheaper to run it to Clearing and let BRC do the classification.
MP173 Oltman:$10 to $30 per humped car seems pretty reasonable to me, I anticipated more. A few years ago I was bored and spent an hour on the Chicago Fort Wayne and Eastern tariff. IIRC properly there was either a $300 or $600 per car fee for cars rolling thru the IHB yard. Granted, there was more done than classification as CFE used IHB trackage rights to Tolleston, but that seemed really excessive. Why do so many trains go thru BRC? CSX by my count has 9 and NS has 4 (could be incorrect on both of these). Is it due to lack of classification capacity in Chicago?Ed
More due to the lack of capacity just upstream and downstream from Chicago at places like Elkhart and Bellevue and the ability to do enough pre-blocking to move the freight through Chicago. BRC charges 2-3X what it cost to do the classification elsewhere.
You try to build blocks for your interchange partners so they can take the traffic decently deep into their territory, but there are limits to how many blocks you can make, how many they can take and how far those blocks might take the "dribs and drabs" out of their way. There might be more efficiency if each road thought the other wasn't trying to "pull a fast one." All of this conspires to keep the BRC, IHB et. al. in business.
CSSHEGEWISCH As most of you know, BRC is a joint subsidiary of the Big 6 Class 1's (BNSF, CN, CP, CSX, NS, UP). If a specific run has not been pre-blocked at an outlying yard like for a specific connection, it's probably easier and cheaper to run it to Clearing and let BRC do the classification.
Agree. It's not all bad just because it's expensive on a per unit basis.
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