Transport Management & Theory Practices (6)

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Transport Management & Theory Practices (6)

  1. 1. Management of Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 6 The Railroad Industry 1© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  2. 2. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Introduction • Rail: dominant mode from 1850s to WW II – Superior in both price and service quality to road transport for most of this period – Superior in service quality to water transport • Development facilitated by standardization of track gauge and rolling stock • Pivotal role in U.S. economic development – Great expansion in track mileage, post-1870s – Financed by private capital – Too much track mileage relative to demand
  3. 3. Introduction • Domination begins to wane after 1920 – 1929: rail carried 75% of freight ton-miles – Today: carries about 43% of freight ton-miles – Some reasons for relative decline • Large-scale government construction programs for roads and inland waterways • Private financed construction for oil pipelines • Government also helped develop air transport that provided superior service for passengers and mail • Economy and shipper service-related needs change – Note: total rail ton-miles continue to grow © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3
  4. 4. Introduction • Railroads remain vital part of U.S. economy – Industry revenues about .4% of GDP – Industry revenues about 12.7% of total expenditures for freight transport service in U.S. – Railroads employ about 187,000 people – Railroads invested over $117B in new plant and equipment in 2007 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4
  5. 5. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 Industry Overview Number of Carriers • Industry structure – Concentrated: Small number (565) dominated by a few large (Class I) carriers • 7 Class I railroads • Rest are regional or local (short line) carriers • Total rail system mileage – Reached peak in 1916 (254,251 miles of road) – Today: about 94,440 miles of road – Reasons for decline
  6. 6. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6
  7. 7. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7
  8. 8. Industry Overview Competition • Intensity changed during 2nd half of 20th century • Intramodal (between railroads) competition – Current industry structure is a differentiated oligopoly • Small number of large carriers • Few places served by multiple railroads – Number of carriers is small in part due to • Large financial barriers to entry • Financial attractiveness of mergers and consolidations © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8
  9. 9. Industry Overview Competition • Intermodal (between modes) competition – Very intense for non-bulk traffic • Some modes offer service advantages over railroads • Other modes offer price advantages over railroads – Staggers Rail Act • Helped railroads to become more price competitive • Helped railroads to develop more customized responses to customers’ level of service needs © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9
  10. 10. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Industry Overview Competition • Mergers • Large number over time, trend accelerated in 1980s following Staggers Act • Motivation – Early mergers made to expand capacity, create EOS – Side-by-side mergers done to strengthen financial position and reduce duplication – End-to-end mergers done to improve competitive position, first vs. other RRs, then vs. other modes, and service levels via fewer interchanges between railroads • Consequence - small number of carriers own majority of track and carry majority of rail freight
  11. 11. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Industry Overview Competition • Abandonment of rail lines – Context: early over expansion followed by increased competition between modes – Most abandonments involve duplicate track or track serving small markets with little rail freight – Some track taken over by smaller railroads – Alternative uses for land • Rails-to-Trails Conservancy • Rail-banking program
  12. 12. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Operating and Service Characteristics General Service Characteristics • Characteristics of principal commodities – Railroads carry wide variety of products • But, 83% of total 2007 rail carloadings concentrated in low-value-to-weight (bulk) products • Principal commodities hauled – Bulk products: coal, farm products, chemicals, food and kindred products, nonmetallic minerals – Non-bulk: Transportation equipment, intermodal mixed freight • Traffic shifts: Growth of intermodal traffic
  13. 13. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13
  14. 14. Operating and Service Characteristics Constraints and Strengths • Constraints on railroads – Fixed rights-of-way impedes door-to-door service – Other service level limitations • Strengths of railroads – Large carrying capacity (few size or weight constraints) enable low average cost operations – Capable of handling almost any type of cargo – Railroads assume liability for loss and damage • Railroads tend to have higher damage claims © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14
  15. 15. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Operating and Service Characteristics Constraints and Strengths • Strengths of railroads – Recent emphasis on equipment, technology innovations, and quality programs • Improved suspension, end-of-car cushioning devices, and in-car force instrumentation packages • Quality certification program (M-1003) – Intermodal services • Double-stack services – greatly improve productivity • Terminal improvements, equipment redesign, and right-of- way improvements designed to reduce in-transit delays – Microprocessors for communications and signaling
  16. 16. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 Operating and Service Characteristics Equipment • Carload: basic unit of measure – Carloadings declining due to increasing average car size, improving carload productivity – Ave. carload in 2007: 99.5 tons and growing – Standard gross vehicle weight: 263K lbs • May rise to 286K, bridge and track constraints – RRs own and maintain 42% of rolling stock • Non-railroad companies own 58%, growing trend
  17. 17. Operating and Service Characteristics Equipment • Composition of rail car fleet has changed over time to meet changing shipper requirements – Historically, standard box car was most numerous car in fleet – used for hauling general mfg. goods – Today, fleet contains many specialized rail car types • Cars custom designed to accommodate different types of bulk products or shipper need • More than 85% of car fleet designed for transport of bulk products and raw materials © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17
  18. 18. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18
  19. 19. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Operating and Service Characteristics Service Innovations • Piggyback service: intermodal service directed to non-bulk, manufactured products – Includes both container-on-flatcar (COFC) and trailer-on-flatcar (TOFC) services • Definitions, basic differences between COFC and TOFC – Accounts for second highest number of carloadings – Competes directly with truckload (TL) service • However, some TL carriers are also major customers of piggyback service
  20. 20. Operating and Service Characteristics Service Innovations – Competitive advantage piggyback service • Combines cost-efficiency of RR long haul with flexibility of truck pick-up and delivery – Principal disadvantage of piggyback service • Transit time and on-time delivery performance – To counter service disadvantage • RRs create dedicated intermodal trains • Trains run on regularly scheduled departures and priority operating schedules © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20
  21. 21. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21
  22. 22. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 Operating and Service Characteristics Service Innovations • Public benefits of piggyback vs. TL services – Reduced fuel consumption – Reduced road congestion and road damage – Lower emissions • COFC: component of international trade – Land-bridge operations • Substitutes rail for portion of ocean voyage – Double-stack container trains • Greatly improves rail equipment and train productivity
  23. 23. Operating and Service Characteristics Service Innovations • Unit trains: specialized, one commodity trains – Direct origin to destination movement • Run on priority service schedules • No stops in-transit – Used frequently for coal and grain shipments – Shippers often own rail cars – Disadvantage: empty backhauls • Computer and communication systems – Management control and shipment monitoring – Car tracing, ordering and billing simplified © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23
  24. 24. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 Cost Structure Fixed Costs • Railroads have high % of indirect fixed costs in short run – Short run: means that capacity remains constant – Estimated 30% of costs do not vary with volume due to high % of long-lived (durable) assets • RRs own and maintain networks (rights-of-way) and terminals (freight yards) – Geographically fixed, impedes responsiveness to changes in demand • Equipment: locomotives and rolling stock • $ billions in annual capital expenditures
  25. 25. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 Cost Structure Semi-Variable and Variable Costs • Semi-variable costs: over 40% of total costs – Includes maintenance of rights-of-way, structures and equipment – Often deferred during financially difficult periods • Variable costs – Labor: Largest component of variable costs • 26.4% of each revenue dollar • Unionized work force, 14 craft unions • Work rules: productivity challenges and issues – Fuel: 2nd largest component of variable costs • Locomotives: increasingly productive and fuel efficient
  26. 26. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Cost Structure Economies of Scale (EOS) • Means falling average costs ($/ton) as scale or capacity increase, assuming capacity utilized • Economies of density or utilization – Falling average costs as volume carried increases, assuming capacity remains constant – Large among RRs due to high fixed costs – Following example indicates impact of higher utilization on average costs and profits
  27. 27. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 Cost Structure, cont’d Economy of Density Example Case I • Fixed C. $3.5M • Var. C. $2.5M • Total C. $6.0M • Revenue $7.0M • Profit $1.0M • Cost/Ton $0.03 Case II +20% Traffic • Fixed C. $3.5M • Var. C. $3.0M • Total C. $6.5M • Revenue $8.4M • Profit $1.9M • Cost/Ton $0.027
  28. 28. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 Financial Plight • Pre-WWII period – Dominant mode, periods of financial difficulties – Highly regulated economically • Post-WWII to 1975 – Other modes emerge, helped by public investment – Economic regulation hampered RR ability to compete, market share declines – RR industry suffers through several periods of severe financial distress, inability to earn adequate returns on investment
  29. 29. Financial Plight Legislative Reform • Reduces economic regulation – Regional Rail Reorganization Act of 1973 (3R Act) • Creates process to reorganize bankrupt railroads in northeast U.S. – Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) • Provides capital and operating assistance for Conrail • Reduces economic regulation of railroads, providing greater pricing and service flexibility © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29
  30. 30. Financial Plight Legislative Reform – Staggers Rail Act of 1980 • Further relaxes regulatory framework for railroads • Authorizes contract rate-making – Enables railroads to tailor services to shipper-specific needs – Evens playing field with truck and water carriers • Results in great improvement in RR financial condition – ICC Termination Act of 1995 • Eliminates Interstate Commerce Commission • Transfers remaining regulatory authority to Surface Transportation Board in U.S. DOT © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30
  31. 31. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 Financial Plight Improved Service to Customers • Many signs of improved service – Increase in intermodal traffic • Up 484% from 1980-2007 – Decrease in train accidents • Down 70% from 1980-2007 – More and improved tailored services and equipment for shippers – Greatly improved financial condition
  32. 32. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Current Issues • Alcohol and drug abuse – Effect of and on work environment • Rail: more energy-efficient than truck – Lower environmental impact • Technology – Train, yard control systems, “smart” equipment • Future role of smaller railroads • Customer service • Drayage for intermodal service

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