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Railroads

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  1. Railroads

  2. 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

  3. 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

  4. 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)

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. Cost Structure • Semivariable Costs • Account for 40% of total cost structure • Maintenance of rights-of-way, structures & equipment • Roughly about $10 billion per year

  12. 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

  13. 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)

  14. 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)