Improving Railroad Financials:

1
Improving Railroad Financials
The Facts on Pricing, Network Efficiency, and
Cost Control
Larry Shughart, Vice President Hrishi Nulkar,
Software Analyst Larry_at_InnovativeSc
heduling.com (352) 284 -1250
2
Traditional Railroad Axioms

• Higher density improves profitability
• Yards and terminals are costly necessities
• Intermodal does not make money
• Heavier cars are more efficient
• Long hauls are better than short hauls
• More HP/TT on trains increases velocity
• Crew wages are the biggest driver of operating
  cost
• Fuel is second biggest driver of operating cost
• If costs go down and revenue goes up,
• operating ratio gets better

3
Widely Accepted Perceptions (Regarding recent
industry trends)

• Railroads are aggressively raising prices
• Operating ratios are sub-standard (costs must be
  out-of-line)
• Costs are out-of-line because
• Traffic is up and railroads are experiencing
  capacity problems
• Crew wages and fuel costs are outside management
  control
• Track, locomotive, and crew shortages are the
  root cause of network problems
• Velocity is an output not an input

4
Model for Examining the Facts
Production Efficiency
Network Efficiency
Pricing Efficiency

• NOTE
• All presentation data is derived from the AAR
  Analysis of Class I Reports
• Cost and revenue figures are stated in 2004
  constant dollars

5
Perception is wrong !!
6
The axioms are right !!
7
Most operating statistics are favorable. (by
traditional measures)
8
Locomotive productivity is a glaring exception.
9
10 improvement in fuel efficiency partially
offsets 40 increase in cost.
kGTM per Gallon of Fuel - Total U.S.
0.860
0.840
0.820
0.800
kGTM/Gallon
0.780
0.760
0.740
0.720
0.700
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
10
Car productivity merits close monitoring.
11
Traffic mix is another driver of network
efficiency.
12
Traffic mix also affects price efficiency.
Revenue per Ton Originated - Total U.S.
160
Traffic Mix Revenue Originated ()- Total
140
Auto
U.S.
120
100
Revenue / Ton
80
Intermodal
60
40
Merchandise
20
Grain
Coal-Coke-Ore
0
2004
2003
1996
2000
2001
2002
1997
1998
1999
Year
13
Is velocity an input or an output?
14
Opportunities for Management Science

• What is the root cause of velocity degradation?
• Trains too long?
• Dispatcher decisions?
• Bunching at terminals?
• Infeasible meet-pass plans?
• Service Design not robust?
• Do we understand price elasticities?
• Velocity
• Frequency
• Reliability
• Stay focused on the facts.

15
Opportunities for Operations Research

• Locomotive productivity is 6 worse than
  historical
• Equivalent to 1,350 locomotives wasted
• Increasing velocity from 19 to 21 mph saves 880
  locos
• Car Management
• Empty car management
• TOFC/COFC hitch utilization
• Pooling of private fleets
• Yield Management?
• Flatten day-of-week and seasonal traffic patterns
• Short haul vs. long haul
• Head haul vs. back haul
• By corridor
• By car type

Demand Management!
16
Conclusions

• No one company sucks at everything.
• No one company is great at everything.
• Everyone excels at something.
• We all can learn from each other.
• A rising tide raises all ships.