1. Private Transportation

2. What is Private Transportation? NOT the opposite of public (government) transportation. Defined as not-for-hire transportation of goods owned by the firm that also owns (or leases) and operates the transportation equipment for the furtherance of its primary business. Private carriers do not service the general public, though are allowed to do so. Private trucking is the most prevalent mode.

3. Private Rail Transportation There are no private railways, per se. –Some exist to transport products within large industrial complexes or in logging operations. Primary form in this industry is that of privately owned railcars moved by a common carrier railroad. Many firms purchase specialized rail equipment (hoppers, tank cars, etc.) to ensure an adequate supply. When privately owned railcars are used, a “car allowance” is generally provided by the rail line. –Generally takes the form of a mileage allowance or –Reduction in the published rate for a particular commodity –Car allowance recognizes that the user has incurred some of the transportation cost.

4. Private Rail Transportation Private rail transportation incurs the following: –Cost of a private siding or spur track connecting the main rail line with the user’s plant/warehouse. –Maintenance of the private siding Without a private siding, must use a public side track and incur additional accessibility costs. –Cost of privately owned (& maintained) rail cars Some large firms own for-hire railroads that primarily connect the owner’s facilities with other for-hire railroads.

5. Private Air Transportation Used extensively, if not exclusively, to transport people (unlike most other private carriers). Private air fleets are purchased & operated to serve the travel needs of executives. They are used in emergency situations to transport freight. –Documents needed to consummate an important sale –Repair parts needed to prevent an assembly line from shutting down Cost of flying via a company plane generally runs 3 – 4 + times the cost of a commercial flight –One of the reasons such flights are normally restricted to just the firm’s “top” management (lower-level managers usually take commercial flights).

6. Private Water Transportation Company-owned ships/barges common in the transportation of bulk, large-volume products. –Coal, ore, oil Primarily focused on barge operations. Most advantageous when used for movement of bulk, low-value products moved in large volume between limited origins and destinations. Considerable capital investment required –Barges, tugboats, ships, and dock facilities (though dock facility expense is suffered whether private or for-hire transportation is used)

7. Private Oil Pipeline Transportation Similar to private rail transportation Most pipelines are for-hire Some firms have investing in for-hire pipelines to ensure guaranteed transportation of their products.

8. Private Trucking Most frequently used & pervasive form of transportation in the U.S. –Accounted for 52% of the 1996 intercity truck expenditures of $230 billion. Difficult to determine exactly how many private fleets exist. –Firms not required to report private trucking operations to the STB. –However, all private trucking firms must now register with the DOT

9. Advantages of Private Trucking Get Improved Service –Convenience –Flexible operation –Greater control –Lower transit times –Lower inventory levels –Reduced damage –Driver as salesperson/customer relations rep –Last resort Lower cost –Reduced transportation costs? –Reduced inventory levels –Rolling advertising –Bargaining power with for-hire carriers

10. Disadvantages of Private Trucking Higher cost –Transportation cost higher than for-hire? –Empty backhaul –Lack of managerial talent –Added overhead and managerial burden –Capital requirements –Cargo damage & theft responsibility –Liability for accidents –Increased paperwork –Breakdowns on the road Dealing with labor unions

11. Costs of Private Trucking Fixed Costs –Depreciation on trucks, trailers, garage, office –Interest on investment (vehicles, garage, office) –Management costs Salaries and fringe benefits FICA, workers’ comp Travel & entertainment –Office & garage costs Salaries & fringe benefits FICA, workers’ comp Utilities Rent or property cost Supplies Communication equipment & services

12. Costs of Private Trucking Operating Costs –Labor (drivers) Wages, benefits, government, layover allowances –Vehicle operating costs Fuel, oil, grease, filters Maintenance (labor + parts) Road service Tolls –Insurance Liability, collision & comprehensive, cargo –License & registration fees –Highway user taxes

13. Equipment Selection Factors and Implications Selection Factor/CharacteristicEquipment Implication Large shipments (>35,000 lbs.)Vehicles that haul up to 80,000 lbs. Small shipmentsVehicles that haul up to 30,000 lbs. Low density products (< 15lbs/ft 3 )High cube-capacity vehicles (trailers 110” high, 102” wide, 57’ long) High density productsNormal cube capacity <75,000 miles annuallyGasoline-powered vehicles >75,000 miles annuallyDiesel-powered vehicles Trips >1000 one-way milesDiesel with sleeper City operationsGasoline-powered Intercity operationsDiesel-powered Mountainous terrainHigher-powered engines Controlled temperatures neededRefrigerated vehicles Customer required unloadingPower tailgates

14. Leasing Full-service Lease –Includes leased vehicle + variety of operating support services –May require lessor to provide fuel, license, registration, payment of highway use taxes, insurance, towing, road service, tire repair, washing, substitute vehicles, & preventive maintenance. –The more services required, the higher the lease fee. –Fee usually is a per vehicle weekly or monthly fee, plus a mileage fee. –Cost of fuel purchased from lessor also charged –Commonly used with trucks that require high & frequent maintenance

15. Leasing Finance Lease –Only a means of financing equipment –Lessee pays monthly fee that covers purchase cost of equipment & lessor’s finance charges –No services provided by lessor –Commonly used with trailers that require little maintenance

16. Leasing Advantages Increases working capital Sometimes does not impact borrowing limits negotiated with lending institutions Reduces much of the risk associated with private trucking –Can lease on a trial basis –Operating costs are known during the lease period –Can quit trucking at the end of the lease (or even activate a cancellation clause in the lease contract)

17. Leasing Disadvantages May end up costing more than owning –Especially is the fleet is large (30+ vehicles) If excess funds are available, a truck fleet may offer an acceptable return on investment Do not get to enjoy the residual value of the equipment Tied into the lease (unless have cancellation clause)