MASTERING THE MIX
ou're looking at the annual report of the Fallen Flag & Eastern and you read, "Chemical revenues for the quarter were up 10% while carloads were up 15%." Then you see that the Fiddletown & Copperopolis reports chemical revenues up seven percent on four percent more carloads. Does this make one railroad a better performer than the other? How are you, the shortline operator, to know?
Norfolk Southern's 1998 average per carload automotive declined to $1,163 from $1,364 in 1997. One piece of the $200 average drop was the start of a new rapid turn, short haul parts move to accommodate a specific customer requirement and needing some aggressive pricing. And while this could be taken as bad news for the automotive group, it ain't necessarily so. The difference says Don Seale, VP Merchandise Marketing, is that the equipment turns three times a month vs. once a month elsewhere.
Yes, revenue per carload (event) in this parts service is half what it would be on a longer move and so per-carload revenue drops accordingly. Yet with each car (asset) making three moves in this service where it only made one before, each car earns 50% more revenue. And that's part of the reason total automotive revenue went up 15% to $566 mm from $492 mm a year ago on a 35% jump in actual carloads, to 487,000 from 361,000. Over at CSX, 50-70 car unit trains of rock, moving 200 miles each way and making nine trips a month have proven to be remarkably profitable. Here again the railroad looks at the revenue generated by the vehicle over time, not the revenue per move. And so we see CSX and NS are finding ways to lower prices to customers by bringing smarter products to market.
The message for shortline operators is clear enough. If you simply let your competition set your price, you're selling a commodity - a box is a box is a box, regardless of what kind of wheels are under it. If you create a specific product to meet a specific demand, you're selling value and you can price accordingly - a box on rails delivers more value than a box on the interstate. The trick is to bring in more revenue per train start, and if that means more trains, so be it.
A good shortline example might be plain old kernel corn inbound for use in animal feed. Price it in single cars to meet the local truck rate and margins will be too narrow to do any more than place and pull according the feed mill's dictate. Moreover, the Mill Man will probably save the rail corn to unload when he's not doing trucks, so dwell time, demurrage and car hire will be killers.
The alternative is to run unit trains of the customer's equipment and time delivery to meet mill requirements, not truck driver requirements. The serving road thus nets more earnings per bushel thanks to more revenue per train start while the mill gets scheduled delivery, more consistent feed production, fewer trucks cluttering up the yard, and no exposure to demurrage. In other words, the per bushel cost to the mill -- from origin bin to destination bin -- goes down.
Since most shortlines depend on connecting class1 roads for car supply, per-car yield could appear to be a less pressing matter. That is, until one takes into consideration the car owner's need to manage revenue per car (again, not car load). For example, say UP has two carloads of soy meal loaded at a bean processor, one bound to a UP point, the other on a shortline. Through rates are identical.
The commodity manager knows her on-line customer will unload the car in two days and she can get three turns a month with this origin-destination (O-D) pair. She also knows the shortline in question is slow to turn her cars and so she's lucky to get one turn a month on that O-D pair. In this case, per car yield is ratcheted down by shortline cycle time. So in periods of tight car supply, guess who gets the nod.
The correct answer to mastering the mix lies in determining how much money can be made from each car on the property. As long as revenues can be added faster than the costs to generate them, the operating ratio will go down and profitability will go up. The class 1 examples above show what can be done with creative asset management and value -- not commodity -- pricing. Shortlines must follow suit.