Railroad Performance:
How good can it get? Quantifying the Opportunity
Larry Shughart, Global Lead Transportation
(352) 284 1250
Examines cost drivers (fuel, labor, cars, etc.)
Analyzes price per revenue ton-mile
Allocates all expenses across traffic using activity based costing methods
Uses economic theory to estimate a production function, costs and operating ratio by commodity by railroad
For the last 10 years WorleyParsons analysts have
maintained a model that estimates U.S. railroads’
costs and prices by commodity and railroad.
Example Price Analyses: Where are prices too low or too high, and by how much? What prices are constrained by trucks, regulators, or other railroads? What is the top line growth potential if optimal prices were achieved?
Example Cost Analyses: Where can each railroad lower costs as compared to their competitors? How do current costs and productivity compare to historic best? What is the income growth potential if optimal costs were achieved?
Example Traffic Mix Analyses: What income is expected from a 25% shift from single to double stack? If coal volumes go down 25% and chemical volumes increase 25% what
is the impact on revenue, costs, income, and operating ratio? Sensitivity of Operating Ratio different volume growth scenarios?
This model can be used to analyze prices, costs,
and traffic mix changes.
Railroads have done a great job raising prices on most commodities to meet customers’ willingness-to-pay
Pockets of opportunity to raise prices remain for some commodities
We constrain prospective price estimates by regulatory threats and trucking competition
PRICE: Our work suggests railroads still have room
to raise prices on some commodities.
CSX NS BNSF UP KCS CN CPBase Revenue 10,310$ 11,123$ 20,445$ 20,093$ 1,253$ 2,670$ 1,519$
Incremental Potential Opportunity 2,392$ 1,720$ 5,870$ 4,767$ 452$ 723$ 612$
Prospective Revenue 12,702$ 12,844$ 26,315$ 24,861$ 1,704$ 3,393$ 2,131$
Opportunity % of Base 23% 15% 29% 24% 36% 27% 40%
Revenue Performance Opportunity$Millions (Most recent 4 Quarters of QCS data)
We constructed a truck cost model for each commodity and geography, including: Product density (cube out or weight out) Speed (adjust for length of haul) Equipment cycle time and maintenance costs Driver costs (wages and benefits) Fuel efficiency and price (including highway taxes)
We assume truck price = truck cost
We reduce truck price by a “logistics penalty” to find rail
indifference price 10% modal penalty for “ease of doing business” applied to non-bulk
commodities Inventory carrying cost reflects the value of the commodity being
shipped and the added in-transit inventory time on rail vs. truck
Railroads should be able to price up to an
indifference level with truck, adjusting for service.
We constructed a railroad cost model for each commodity and company, including: Productivity and unit costs unique to each railroad company as
reported to the STB in the R-1
Applied standard operating practices for time factors, intermediate handlings, and train lengths
We include depreciation and an allocation of SG&A in our definition of “long term variable costs”
We assume 200% of LTVC is a good surrogate for regulatory “threshold of pain”
We cap our estimate of maximum price at 200% of
long-term variable cost to reflect regulatory threats.
We benchmark costs within East and West to adjust for geography
Rebuilding traffic density is one element of regaining cost efficiency, but management focus remains the principle driver of cost control
These numbers should be viewed as conservative, as we do not account for new technology or any expectation of new productivity gains
COSTS: Our work suggests railroads can lower
costs by matching historical best performance.
CSX NS BNSF UP KCS CN CPBase Operating Expense 8,397$ 8,505$ 14,589$ 14,241$ 877$ 2,035$ 1,191$
Total Opportunity 1,307$ 1,472$ 1,430$ 1,347$ 161$ 438$ 237$
Prospective Operating Expense 7,090$ 7,034$ 13,159$ 12,894$ 716$ 1,596$ 954$
Opportunity % of Base 16% 17% 10% 9% 18% 22% 20%
$Millions (Base adjusted for mostt recent volume)
Expense Performance Opportunity
Many are surprised to find that NS costs per KGTM
are higher than CSX in most categories.
WorleyParsons provides a framework to analyze the railroads’ own publically reported numbers
We work with clients to use our model to answer specific questions with detailed facts
We constructed the model to facilitate what-if analyses
The model totals cross-foot to actual reported numbers
These data are the railroads’ own numbers!
We fuse data from four publicly available data sets
with our expert knowledge of rail operations.
AAR Analysis of Class
I Railroads.xls
STB WaybillsSTB_yyyy.mdb
QCSQCS.mdb
Rail-TruckPricing
Opportunities
Truck-Rail Model.xls
Rev/RTM Analysis
Revenue Per RTM Analysis.xls
Length-of-Haul by RR and Commodity
Tons, Units, Rev by RR & Commodity
% LD Miles by RR by CarTypeHP/Loco & Loco Utilization by RR
LD Unit-Miles by RR by CarType
Sheet=Length of HaulRange=LOH
Sheet=AAR Data
Sheet=RTM CalculationsRange=LOH
Sheet=RTM CalculationsRange=LdCarMiles_AAR
Sheet=RTM CalculationsRange=PctRTM_STB
Sheet=STB DataRange=Inputs_STB
Sheet=QCS DataRange=Inputs_QCS
Sheet=QCS BaseRange=RevAllBase
Range=TonsAllBase
Range=UnitsAllBase
% Net Ton-Miles by RR & Commodity in
each CarType
Product density, tare & car capacity by East/West by Commodity
Tons, Units, Rev by RR & Commodity
UMLERReferenceTables
% of RR Car Fleet that is Privately Owned, by CarType
Sheet=Inputs - Commodity
Some key data lags several months
We use the model for strategic, trend, and sensitivity analyses rather than for tactical decision making
We update the model quarterly.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
AA
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STB P
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aybill Sam
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We examine the underlying drivers of performance.
Cost $/GTM
Revenue $/RTM
RTM / GTM
> > >
Cost Efficiency
Price Efficiency
Network Efficiency
Cost $ / GTM
Rev $ / RTM
RTM
GTM X =
Operating Ratio
Some key drivers impact all three performance
metrics; we examine facts at the commodity level.
Fuel Cost, Fuel
Efficiency
Labor Cost, Labor Prod
Track Maint. &
Track Capital
Train and Car
Velocity Tons per Carload
Length of Haul
Traffic Mix
Truck Pricing
STB Regulators
Cost $ / GTM P P P P P P P
Rev $ / RTM P P P P P P
RTM / GTM P P
U.S. business of: NS, CSXT, UP, BNSF, KCS, CP, CN
Commodity Groupings in the Model
Our system details all 98 railroad-commodity combinations in an easy-
to-see format, linked to 20 other spreadsheets of back up detail and summary reports.
We have detailed assessments readily available
for seven railroads and fourteen commodities.
Agriculture Automotive Chemicals Coal Coke Food
Products Forest and
Lumber
Intermodal-Conventional
Intermodal-Double Stack
Iron Ore Metals Phosphate Pulp and
Paper Stone and
Gravel
The model simulates an average train cycle for each
Railroad-Commodity combination.
NOTE: Data shown is an illustrative subset of the much larger model system
HP / TT
CSX BNSF
Chemicals Coal
Standard Train Formation
Average Freight Tons/Car or Intermodal Box 88 119
Average Car Tare Weight Tons/Car 35 23
% Loaded Mi les (rev. hi tch uti l . for intermodal) 51% 50%
Speed (mph) 18 16
Length of Haul 1-way (avg.) - mi les 536 1,036
Average Tons / Tra in (ld and mt) 4,220 9,180
HP / TT 1.3 1.0
Horsepower per Locomotive 3,545 3,839
Locomotives / Tra in 2.2 3.0
% of Cars Originated 83% 99%
Intermediate Handl ings / trip 1 0
% of Cars Terminated 85% 68%
Car Days per cycle
In-tra in Loaded Time (days) 1.3 2.6
Terminal Time per Cycle 5.6 1.9
In-tra in Empty Time (days) 1.2 2.6
The model attaches unit costs to each of the
physical work activities to estimate variable cost.
CSX BNSF
Chemicals Coal
Activity per cycle
Tra in Hours 59 127
Tra in Days 2.5 5.3
Ca lculated Locomotive Uti l i zation 45% 58%
Uti l i zed Locomotive Hours 130 380
Total Mainl ine Locomotive Days 12 27
Car Days 1,487 1,242
RTM / Cycle (loaded + empty) 2,525,326 13,716,401
GTM / Cycle (loaded + empty) 4,925,086 20,074,905
RTM/GTM 51% 68%
Unit Cost Assumptions
Main Line Tra in Crew and Management / Tra in Hours 223$ 221$
Track Maintenance / KGTM 1.39$ 0.67$
Track Depreciation & MOW Equipment / KGTM 2.16$ 1.49$
% of Cars Rai l road Owned or Leased 0% 39%
Adjusted Cost - Ownership + Maintenance / Car Day 0.11$ 15.97$
Locomotive Maintenance / Locomotive Day 144$ 180$
Intermediate Terminal costs / Car or Box handled 78$ 78$
Locomotive Lease + Depreciation / Locomotive Day 280$ 377$
Operations Overhead / Tra in Hour 65$ 121$
SG&A / Car Load 356$ 178$
We view “Fixed” costs as “Long-term Variable” and
allocate them to appropriate work activities to get a
“total cost” of the movement.
CSX BNSF
Chemicals Coal
Short Term Variable Cost / Cycle
Main Line Tra in Crew and Management 13,183$ 28,055$
Fuel 16,808$ 54,216$
Track Maintenance 6,844$ 13,521$
Car Costs 161$ 19,835$
Mainl ine Locomotive Maintenance 1,725$ 4,922$
Long Term Variable Cost / Cycle
Track Depreciation & MOW Equipment 10,626$ 29,922$
Mainl ine Locomotive Lease + Depreciation 3,350$ 10,298$
Operations Overhead 3,854$ 15,380$
SG&A 19,129$ 19,741$
Total Cost / Cycle 88,000$ 205,919$
We combine our cost model output with reported
revenue per car to estimate operating ratio by
commodity for each railroad company.
CSX BNSF
Chemicals Coal
Total Cost / Cycle 88,000$ 205,919$
Revenue
Yield - Revenue/kRTM 60$ 18$
Revenue / Carload 2,834$ 2,178$
Revenue / Cycle - on a Carload basis 152,228$ 242,187$
Operating profit
Operating profi t / cycle 64,228$ 36,268$
Revenue to tota l cost ratio 1.73 1.18
Estimated Operating Ratio 58% 85%
If coal volumes go down 25% and chemicals volumes increase 25% what is the impact on income?
TRAFFIC MIX: Coal vs. Chemicals Analysis
• UP Operating Ratio Impact: +84 basis points • BNSF Operating Ratio Impact: (29) basis points
Current
Carloads
per year
Future
Carloads
25 % change
Revenue /
Carload
Cost /
Carload
Estimated
Current
Income
(000,000)
Estimated
Future
Income
(000,000)
Net
Change
UP Coal 2,001,669 1,501,252 2,019$ 1,559$ 921$ 691$
UP Chemicals 1,149,990 1,437,488 3,242$ 1,605$ 1,882$ 2,353$ 240$
BNSF Coal 2,237,877 1,678,408 2,178$ 1,852$ 730$ 547$
BNSF Chemicals 705,137 881,421 3,631$ 3,062$ 402$ 502$ (82)$
Railroads can still raise prices 15% - 25%
Railroads can still lower costs 10% - 20%
Changes in traffic mix may impact bottom line performance in non-intuitive ways
Our model is a useful tool for examining these issues in detail
Summary
How can WorleyParsons help you ?