Railway Age, September 1997

So--Are You Making Any Money?

Bob Bailey, President of the 2.2 mile Port Jersey Railroad says, "In this environment you have to keep thinking and looking for new ways to serve your customers. We've found it next to impossible to grow earnings without increasing revenue." This month's column returns to a theme we've played before: that the fastest way to increase profits is to increase sales, at times by going against conventional wisdom.

The Port Jersey Railroad operates on the Jersey City waterfront literally in the shadow of the Statue of Liberty. Its biggest commodity group is STCC 20, food and related products, amounting to nearly two-thirds of the total. Since the PJRR customer base is mostly warehousing and distribution, it's a highly truck-competitive business, where success is measured by the inventory turnover ratio. What's new here? PJRR has become a partner in managing the inventory stream by placing and pulling cars the same day if need be to keep stocks and shelves filled. His serving railroad, Conrail, is not positioned to provide that kind of on-call service, and that's where the Port Jersey has established a clear niche for itself.

Bailey also turns conventional wisdom upside down building his plastics business. He stores loads for free. In this way he's built PJRR's resins business from fewer than 50 cars in 1994 to more than 1,000 cars in 1997. To be sure, he could pick up a few bucks charging demurrage for private cars constructively placed on railroad-owned track. The threat of demurrage would encourage his customers to wait till the last minute to order the next car, or worse, when less than a carload is needed, they'd use the nearest CR transload. Having the resins in those cars readily available puts carload revenues in Bailey's pockets fastest. And if the car owners don't mind, neither does Bailey.

Conventional wisdom is dealt another blow in southern NJ. Here, Conrail, the Winchester & Western, and the Southern Railway of NJ have teamed up to generate new revenue streams by improving private car productivity with a bi-directional move of rock and sand.

Here's how it works: Conrail's central Pennsylvania customer loads 50 cars of stone into privately owned rapid-discharge hoppers in Pennsylvania. The train moves as a unit to SRNJ at Winslow for unloading. SRNJ passes the cars to the W&W for sand loading and return to Conrail at Millville. One of the most unusual aspects of this move is having CR interchange the cars to one shortline at one place and take them back from another railroad at a different place. However the benefits to the customers are substantial: cars run loaded each way on an average cycle time of 6-8 days driving down the landed cost of commodity, a tough assignment in this low-margin trade.

Further west, in central Pennsylvania, entrepreneur Andy Muller has built what was a 13-mile tourist road into a 300-mile freight system since his 1983 start-up. This year Muller expects his Reading & Northern to handle a record 20,000 revenue carloads. His particular formula for success is following two simple principles: make everything you buy connect with everything else and originate your own traffic in your own cars.

In Muller's case, the two complement each other perfectly. He operates in one of the world's richest anthracite coal reserves, and this is a commodity that is making a strong come-back fueling the new steel minimills. Sixty percent of R&N's coal goes to Canada, where Muller says demand is forecast to exceed supply for the foreseeable future.

Assembling this rail network required foresight and cash. The R&N worked closely with Conrail as one of the first Conrail Express Lines, building a strong and mutually beneficial partnership. As new lines became available in the R&N's service area, Muller's foresight had earned the R&N a place as the logical first-choice candidate. Moreover, R&N's cashflow assured CR of a solid transaction partner because, let's face it, when you have a 90-day exclusive on a property you can't afford to be making the rounds of the banks looking for bucks.

The R&N business plan assures a ready cash flow because, for one thing, net revenues are improved by not having to pay out car hire to foreign roads. For another, the road invests wisely in good track to keep maintenance and (shhh!) derailment costs down. And one of the secrets of success in this capital-intensive business is maximizing the return on a heavy fixed-cost investment. It is not trying to squeeze down costs to maximize earnings on little or no revenue growth.

The common thread among these shortlines is maximizing the business opportunity, given the tools at hand. Whether bound on three sides by water or four sides by mountains, each of these lines has found that managing for results means managing for profit and opportunity. One can do no less. Return to:

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