CARS AND FRENCH
magine wheeling into the local fast food joint hankering for a burger and some fries and being told they're out of fries. Soccer Moms will revolt! Markets would crash! Fries are big business and much of the supply moves by rail to regional DCs in private refrigerated rail cars. Car fleet operators are very particular about car cycle time in selecting destinations. If cars won't move right, no cars move. Being out of fries is not an option.
In the railroad business car supply, regardless of who owns the cars, is the biggest part of what a railroad sells. Without cars the cheapest rates in the world won't get you business, and without cars, the locomotives have nothing to pull. Yet as important as accurate and reliable car supply is to the business, car management is too often more akin to car manglement. Happily, solutions are at hand.
For instance, CSXT and Union Pacific have teamed up on a new "Express Lane" refrigerated carload service from California's San Juaquin Valley to NYC and Boston. The service is unique because (a) it is guaranteed eighth morning in NYC and ninth morning in Boston and (b) the railroads will pay a penalty of $200 a day upward for late delivery. Is it profitable? Absolutely. The $6,350 price for the NYC move, for example, is half again the old tariff rate yet a third less than truck. And all it took was putting cars in the lane and keeping them moving.
So why is car supply such a mess? Railroad love to deal in absolutes. A train runs or it doesn't, a switch is lined or it is not. Gross ton-miles, revenue ton-miles per mile of track owned, gross ton-miles per loco… all nice, clean measures. Railroads do not do well coping what I call the fuzzier aspect of the trade: keeping customers surprised and delighted.
Instead of trying to understand why customers behave as they do the typical response to service dissatisfaction has been to lower the rate. A nice, absolute response, to be sure, however it's partly why railroad revenue per ton-mile has been decreasing for the last decade. It's also the wrong approach. Charging less for a crummy product won't get many buyers, but making a premium product and charging a premium price will. Fed Ex isn't cheap, but it's reliable.
Having the car at the dock on time every time and at a premium rate works and it's more profitable. Murray Glantz, an independent food distribution consultant with ties to just about everybody who's anybody, tells me a nickel a hundred-weight difference in freight rate carries a lot less weight than car costs with shippers like the fries guys.
Run the numbers. A corn starch manufacturer near Chicago leases 100-ton pressure-differential covered hoppers for something like $750 a month. Two transloads in the NYC area are pitching this business and the rates per hundred-weight are within ten percent of each other. The carrier with the higher rate (A) will get the car owner three turns a month; the railroad with the lower rate (B) two turns a month.
In a year's time one car will carry 3,600 tons of corn starch to A's destination or 2,400 tons to the destination on B. The lease cost per ton is $2.50 on A ($9,000 annual lease cost per car divided by 36 hundred-ton loads) against $3.75 on B. A's per-ton lease cost is two thirds of B's, so A should get the nod. And that's what Murray is talking about. Improved cycle time wins.
However, the railroads aren't winning any prizes in this regard. The Big Six class 1s operating in North America own 634,000 of the total 1.2 million freight cars Moody's 1999 Rail Industry Outlook estimates to be in service. The 1999 AAR Fact Book says that the rails moved 25 mm revenue carloads of freight in 1998. That means on average each of the 1.2 mm cars carried 20.8 loads per year, one load started very 18 days.
It also means it takes 634,000 railroad-owned freight cars to generate half the 25 mm total carloads a year, the other half moving in private cars. Thus 12.5 mm carloads divided by 634,000 cars is 20 loads a car - still one load every 18 days. But if each car were reloaded every 16 days it could make 23 trips a year and the rails could move 12.5 mm carloads with 543,000 individual cars, a savings of 91,000 cars or $4.6 billion in capital or lease-purchase expense at $50,000 per car.
Or say the fleet remained the same but the market said with faster turns there'd be more business. Now with a 16-day cycle time the 634,000-car fleet generates 14.6 million revenue carloads, an increase of 16.8 percent. And since the Big Six averaged $1100 per revenue carload in 1999, we're talking nearly $3 billion more revenue at relatively small incremental cost just for turning cars faster.