RailroadsRailroads

Railroad Industry Characteristics

• Return on Investment– Increased from 5.7% in 1984 to 9.4% in 1996.

• Accounts for 1% of GDP• Employs over 200,000 (0.19% of population)• Shipped about 40.6% of all ton-miles moved

in U.S. (down from 75% in 1929)• Ton-miles moved (1997) = 1,375 billion• Total of 530 Line-Haul Railroads

– 9 Class I; remained Regionals, Locals, & Switching carriers

General Service Characterisitics

• Commodities Hauled– Coal

• Primary haulers of coal (43.8% of total tonnage)

– Farm Products (1.4 million tons)– Chemicals (1.04 million tons)– Motor Vehicles & Equipment– Non-metallic minerals

Constraints

• Limited to fixed rights-of-way

• Door-to-Door service only available if both shipper & receiver possess rail sidings.

• On-time delivery

• Frequency of service

• High percent of goods damaged in transit (3% of total tonnage shipped)

Strengths

• Can handle large-volume movements of low-value commodities over long distances

• Can haul a larger variety of products than pipelines

• Assume liability for loss & damages

• Offer TOFC (trailer-on-flatcar) & COFC (container-on-flatcar) service

Equipment Used

• Carload– Basic unit of measurement of freight handling by

railroads– Average carrying capacity = 91.9 tons– Some newer cars exceed 100 tons– Railroads typically own & maintain their own

rolling stock

Most Common Car Types

• Boxcar (plain)– Standardized roofed freight car with sliding doors– Used for general commodities

• Boxcar (equipped)– Specially modified boxcar used for specialized

merchandise (such as automobile parts)

• Hopper car– Freight car with floor sloping to one or more hinged doors– Used for discharging bulk materials

• Covered hopper– Hopper with roof designed to haul bulk commodities that

require protection from elements

Most Common Car Types

• Flatcar– Freight car with no top or sides– Primarily used for TOFC service machinery and building

materials

• Refrigerator car– Freight car that provides controlled temperatures

• Gondola– Freight car with no top, flat bottom, & fixed sides– Used for hauling bulk commodities

• Tank car– Specialized car used for transporting liquids & gases

Unit Train

• Specializes in transport of only one commodity (usually coal or grain) from origin to destination

• Shipper typically owns cars

• Train is basically rented to the shipper for the movement

Cost Structure

• Fixed Costs– Account for 30% of total cost structure– Railroads & pipelines only modes that own &

maintain their own network & terminals– Typically operate their own rolling stock– Rights-of-way

• Railroads own, operate, & maintain

– Terminals– Equipment

• $6.9 billion investment in 1996• Class I railroads alone operated 19,269 locomotives &

1,240,573 freight cars in 1996

Cost Structure

• Semivariable Costs– Account for 40% of total cost structure– Maintenance of rights-of-way, structures &

equipment– Roughly about $10 billion per year

Cost Structure

• Variable Costs– Account for 30% of total cost structure– Labor

• Average hourly gross wage = $20.05• Average earnings of $50,611• Labor represented by 14 different unions

– Operating unions– Non-operating craft unions– Non-operating industrial unions

– Fuel• $2.4 billion spent on fuel in 1996

Key Benefit of Railroads

• High Economies of Scale• Note example in textbook

– 200 million tons of freight hauled at average charge of $0.035 per ton.

– With fixed costs of $3.5 million– Plus variable costs of $2.5 million (assuming $0.0125 per

ton hauled)– And revenue of $7 million (200 million tons @ $0.035 per

ton)– Railroad earns $1 million in profit– Railroad’s costs are $0.03 per ton ($6 million total costs

divided by 200 million tons hauled)

Key Benefit of Railroads

• Now assume a 20% increase in traffic at same rate charged (assumes capacity requirements equal)– 240 million tons of freight hauled at average charge of

$0.035 per ton.– With fixed costs of $3.5 million– Plus variable costs of $3 million (assuming $0.0125 per

ton hauled)– And revenue of $8.4 million (240 million tons @ $0.035

per ton)– Railroad earns $1.9 million in profit– Railroad’s costs are $0.027083 per ton ($6.5 million total

costs divided by 240 million tons hauled)