February 2001

A carload business model that works

"Run big
there are
enough cars"
no longer

Fact: Shippers pay top dollar for consistent and reliable transportation. Fact: The domestic commercial freight distribution market is worth $550 billion a year and the railroads get about seven percent of it. Fact: The traditional railroad operating model for merchandise carload freight Ė run big trains whenever there are enough cars Ė no longer applies. It canít provide consistent car supply, consistent transit times, or even reasonable transit times. What can be done?

Sometimes the best way to make big changes is to start small, and well-managed shortlines can be a tremendous resource for creating a new merchandise carload model that does work. Using their close customer contacts, their knowledge of how the class 1s work, and financial resources not available to large railroads, shortlines can take the lead in addressing two big problem areas. Hereís howÖ

Manage Car Supply. When transit times worsen customers need more cars to handle the same amount of goods. Itís bad for the railroads since the number of railroad-owned cars in the national fleet is on the decline. Itís bad for private car users because they have to go out and lease more cars for the same number of loads. And thatís bad for the railroads because it exacerbates congestion woes.

Add to that the simple truth that most private cars return empty to origin. That may have worked ten years ago when railroads owned 60% of the cars in the national fleet. But now itís down to less than 40% as the big railroads are putting 75 cents of every capex dollar into track and locomotives. (ROI on cars is terrible because poor service has driven rates so low they really canít support the cost of equipment.) So shippers and shortlines have filled in with cars of their own, but as we have seen that creates other problems.

Part of the solution is to match cars to loads close to the points where cars are made empty. That requires a reliable and predictable stream of cars and having the tools to match cars to loads. Shortlines are in a great position to do just this, especially where they connect with two or more class 1s or have access to other nearby shortlines. For example, New Jerseyís Winchester & Western and Morristown & Erie have each reloaded refrigerated boxcars made empty on the other. Sometimes a shortline origin can hook up with reloads where its own cars are made empty. The Ohio Central leases a fleet of boxcars for outbound paper and has been quite successful matching new loads with empties at or near destinations.

My guess is there will be some radical car-related developments this year, both with respect to ownership and load management. Forward-thinking shortline managers are in a unique position to benefit. They know their own and near-by markets, have or can facilitate access to them, and have the flexibility to manage change.

Run a Scheduled Railroad. Perhaps the all-time champ for running a scheduled freight network was the Illinois Central . Grain trains got six turns a month between the Midwest Grain Belt and the Gulf Coast. I remember Hunter Harrison saying the trick lay and scheduling everything (his emphasis). Now Harrison has taken the same rigor to the CN. Just as IC had the lowest operating ratio in the land, so does CN today, with BNSF and a couple others in hot pursuit.

Running to plan every day is crucial. Itís the only way BNSF can offer a money-back guarantee on the I-5 Corridor. Without it the CSXT-UP "Express Lane" reefer service could never earn a premium over the truck rate. Scheduling improves equipment availability and utilization, cuts the need for yard classification, and creates a predictable and reliable service, adding value for shippers and commanding premium prices. And taking points off the OR.

The shortline start point is the Interline Service Agreement. This little document spells out when and where class 1 interchange takes place. More important, it sets performance standards for both parties regardless of the day of the month or the individuals on duty. It gives both parties a performance measurement tool.

How important is it? Carl Ice, SVP Operations for BNSF, told the shortlines last October his goals for the merchandise (read carload) business are to tighten objectives, improve consistency, and increase the railroadís velocity. Shortlines, he said, can help by making each Interline Service Agreement (ISA) as complete a picture of their operation as possible, even down to average transit time between shortline customer locations and the interchange point. Only then can shortline O-D pairs be worked into the transit times posted at www.bnsf.com.

But most important of all is the effect scheduling has on car supply. A customer needs to know when he can load cars before he can make a delivery commitment to his customer. So scheduling empties is as important as scheduling loads. Shortlines can make it happen first.

At the end of the day a dependable car supply coupled with scheduled operations will deliver more revenue at less cost, improved stock prices, happier investors, and happier customers. Shortlines, a curious blend of class 1 customer and operating railroad, are in a unique position to get the wheels turning. What are we waiting for?

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