1. Railroads

2. Railroad Industry Characteristics Return on Investment –Increased from 5.7% in 1984 to 9.4% in 1996. Accounts for 1% of GDP Employs over 200,000 (0.19% of population) Shipped about 40.6% of all ton-miles moved in U.S. (down from 75% in 1929) Ton-miles moved (1997) = 1,375 billion Total of 530 Line-Haul Railroads –9 Class I; remained Regionals, Locals, & Switching carriers

3. General Service Characterisitics Commodities Hauled –Coal Primary haulers of coal (43.8% of total tonnage) –Farm Products (1.4 million tons) –Chemicals (1.04 million tons) –Motor Vehicles & Equipment –Non-metallic minerals

4. Constraints Limited to fixed rights-of-way Door-to-Door service only available if both shipper & receiver possess rail sidings. On-time delivery Frequency of service High percent of goods damaged in transit (3% of total tonnage shipped)

5. Strengths Can handle large-volume movements of low- value commodities over long distances Can haul a larger variety of products than pipelines Assume liability for loss & damages Offer TOFC (trailer-on-flatcar) & COFC (container-on-flatcar) service

6. Equipment Used Carload –Basic unit of measurement of freight handling by railroads –Average carrying capacity = 91.9 tons –Some newer cars exceed 100 tons –Railroads typically own & maintain their own rolling stock

7. Most Common Car Types Boxcar (plain) –Standardized roofed freight car with sliding doors –Used for general commodities Boxcar (equipped) –Specially modified boxcar used for specialized merchandise (such as automobile parts) Hopper car –Freight car with floor sloping to one or more hinged doors –Used for discharging bulk materials Covered hopper –Hopper with roof designed to haul bulk commodities that require protection from elements

8. Most Common Car Types Flatcar –Freight car with no top or sides –Primarily used for TOFC service machinery and building materials Refrigerator car –Freight car that provides controlled temperatures Gondola –Freight car with no top, flat bottom, & fixed sides –Used for hauling bulk commodities Tank car –Specialized car used for transporting liquids & gases

9. Unit Train Specializes in transport of only one commodity (usually coal or grain) from origin to destination Shipper typically owns cars Train is basically rented to the shipper for the movement

10. Cost Structure Fixed Costs –Account for 30% of total cost structure –Railroads & pipelines only modes that own & maintain their own network & terminals –Typically operate their own rolling stock –Rights-of-way Railroads own, operate, & maintain –Terminals –Equipment $6.9 billion investment in 1996 Class I railroads alone operated 19,269 locomotives & 1,240,573 freight cars in 1996

11. Cost Structure Semivariable Costs –Account for 40% of total cost structure –Maintenance of rights-of-way, structures & equipment –Roughly about $10 billion per year

12. Cost Structure Variable Costs –Account for 30% of total cost structure –Labor Average hourly gross wage = $20.05 Average earnings of $50,611 Labor represented by 14 different unions –Operating unions –Non-operating craft unions –Non-operating industrial unions –Fuel $2.4 billion spent on fuel in 1996

13. Key Benefit of Railroads High Economies of Scale Note example in textbook –200 million tons of freight hauled at average charge of $0.035 per ton. –With fixed costs of $3.5 million –Plus variable costs of $2.5 million (assuming $0.0125 per ton hauled) –And revenue of $7 million (200 million tons @ $0.035 per ton) –Railroad earns $1 million in profit –Railroad’s costs are $0.03 per ton ($6 million total costs divided by 200 million tons hauled)

14. Key Benefit of Railroads Now assume a 20% increase in traffic at same rate charged (assumes capacity requirements equal) –240 million tons of freight hauled at average charge of $0.035 per ton. –With fixed costs of $3.5 million –Plus variable costs of $3 million (assuming $0.0125 per ton hauled) –And revenue of $8.4 million (240 million tons @ $0.035 per ton) –Railroad earns $1.9 million in profit –Railroad’s costs are $0.027083 per ton ($6.5 million total costs divided by 240 million tons hauled)