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Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 6 Railroads 1 © 2010 Cengage Learning. All Rights Reserved.

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Presentation on theme: "Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 6 Railroads 1 © 2010 Cengage Learning. All Rights Reserved."— Presentation transcript:

1 Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 6 Railroads 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 © 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 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 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 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 © 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

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8 Industry Overview Competition Intensity changed during 2 nd half of 20 th 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 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 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 © 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 © 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 © 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 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 © 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 © 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 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 © 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 © 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 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 © 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 © 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 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 © 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 © 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: 2 nd largest component of variable costs Locomotives: increasingly productive and fuel efficient

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 © 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 © 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 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 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 © 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 –Decrease in train accidents Down 70% from –More and improved tailored services and equipment for shippers –Greatly improved financial condition

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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