PLANNING FOR PROFIT Now's the time to be looking at ways to grow the franchise by replacing poor yielding customers with better ones. f you were to lose 10% of your customer base this year, how would you replace it? This is no academic exercise. Charlie Marshall, President of the Genesee & Wyoming shortline group, Pennsylvania neighbor, and friend for many years, cautions that every shortline should expect its customer base to turn over completely every ten years. So in order to grow, a shortline must be prepared to replace some customers every year. And become more profitable in the bargain. This month we'll look at four key initiatives leading to increased profits. Create a high-yielding merchandise business. Let me say right up front that the eastern rails' service missteps of the last six months will go away in the next six months. So now's the time to be looking at ways to grow the franchise by replacing poor yielding customers with better ones. Pick your targets now, run them by your class 1s, and make the pitch as the service improves. It's a fact of life that over the past 15 years rail rates have decreased along with the rail share of intercity freight revenue, a sure sign of selling on price. Yet customers repeatedly say they'd pay higher rates for better service. But because we often don't know the customer's economic process, we continue to quote cost-plus rates. Rates based on the customer's perceived economic benefit will always be more profitable. Right now there are eastern users of western products from propane to plywood who pay truckers three and four times the going rail rate to keep supply chains full. Every one has the same reason: rail is inconsistent and undependable. Fix the rail process to overcome those objections, offer premium service for premium rates, fit the service to the process, and you'll start to make some real money. Fill a niche. There are two ways to grow the franchise: run a longer railroad or do more with what you have. Adding track-miles is time consuming, expensive, and requires convincing somebody else to sell their railroad at your price. On the other hand, staying home can be quite lucrative -- if you think outside the box. Take Georgia's 10-mile long Sandersville Railroad, for example. Fifty years ago General Manager R.J. Tarbotton "bought or leased about all the terminal space in the vicinity so that anyone who ships from Sandersville ships by rail." So wrote Archie Robertson in his shortline classic, Slow Train to Yesterday. Today, Sandersville has a concentrated customer base representing 36,000 cars a year in kaolin and forest products to support the paper industry. Clearly this small line has done well by doing more of what it does best. And the Tarbutton family still runs it. Further south, the South Central Florida Express (SCFX) shortline operates a thriving business in the sugarcane fields. Six months a year the carrier handles 40,000 carloads of raw cane to on-line mills for processing. But SCFX isn't just raw sugar. Aggressive coverage of area businesses has built interchange traffic amounting to a healthy 20,000 cars a year of everything from sugar products to chemicals in and out. Like Yogi Berra said, "You can see a lot just be observing." SCFX observed the needs not met and saw way beyond the cane fields. Lock in dependable car supply. We've found the class 1s can't always provide equipment in the numbers needed or the timeliness required. The key question is, "What new business could I have with an assured supply of equipment?" Supplying cars isn't limited to originating roads, either. There may be origin vendors too small to lease cars who provide raw materials to a major user on your shortline. Having the destination customer (or even the shortline) lease the cars means controlling car usage and thus supply. Moody's says class 1s today own fewer than half the cars out there, and will own even fewer tomorrow. Fewer railroad-owned cars chasing more business is going to tighten supply, so the clever shortline marketer will want to take steps to insure HIS customers' equipment needs are met. And if that means he has to be a car broker, so be it. Money in the bank is what counts. The Railroad Industry Agreement (Railway Age, November 1998) presents another reason to supply your own cars. For example, two Pennsylvania shortlines are collaborating on an aggregates move with no class 1 involvement other than providing track space between origin and destination carriers. The only competitive way to beat the trucks is with mini-unit trains turning twice a week. And that means leased equipment. Get on the Internet. A website gives more new business prospects better access to the shortline. Class 1 retail (formerly tariff) rates are being simplified and made more competitive, and connecting shortline websites can link to them and all the other class 1 railroad web services. Doing so positions the serving shortline as THE focus for all rail services. The shortline customer never has to call the class 1. Ever. Finally, the web lets you buy everything from boxcars to brake beams cheaper and faster. No need to be limited to the vendors on your Rolodex. And the money you save can be used to keep customers delighted and surprised. Isn't that what it's all about?