Now What?

Conrail wants to hook up with CSX. Norfolk Southern wants to buy Conrail. Union Pacific buys Chicago Northwestern and Southern Pacific. Burlington Northern and Santa FE combine to create what Wall Street Calls a "powerhouse." Canadian Pacific spins off its lines east of Montreal. Another 4,000 miles of branchline come on the market. And you, The Shortline Manager, expect to gain from all this movement. Don't you?

The ability to maximize the gain and minimize the pain in the midst of Merger Mania is surely the topic of the day. To do that, you need options.

Take the Conrail issue, for example. There are 18 shortlines served by CSX and Conrail. If that merger works, 18 shortlines will lose a competitive lever. What are their options to offset that loss? Here's another: we know the rail map will be re-drawn to preserve competition and lines will be sold off in the process -- a growth opportunity for the shortlines close to or contiguous with these segments. But will they be able to afford to buy them? No cash, no options. How do you grow the war-chest when your margins are thin to begin with?

Let's begin by reviewing some basics. The four drivers of shortline profitability are, in order of impact, growing the revenue base, cutting the operating ratio, making the right capex choices, and managing the assets. As shortliners continue to explore these issues, another factor is coming up repeatedly: customer value drivers.

Customer value drivers are those things that you do to increase the value of your service to your customers. By now, even the bean counters realize you can't win market share and build the revenue base on price alone -- your role in the logistical process has to mean that the total expense for moving a widget from a bin at A to a silo at B is less than the competition's. It's in this area of adding value that you distinguish yourself from the competition. And minimize the effects of thing you can't control.

The four customer value drivers are customer knowledge or how much you know about how the customer's business works, a service delivery system designed around the customer's logistical process, the ability to renew and replace equipment and personnel to stay ahead of the other two, and a customer service system that makes your offering hassle-free. Let's take a look at each driver and an example of how a shortline used it to improve profitability.

1. Customer knowledge. Morristown & Erie brought on line the newest and biggest Toys "R" Us distribution center a little more than a year ago. The business was inbound light-loading boxcars of toys and related items. Revenues were modest, and car hire was high due to slow turns. After a year of experience working together, both railroad and customer began to see ways to take additional cost out of the rail delivery system. Working together, they revamped the place and pull process, coordinated schedules with the vendors and connecting class Is, and even fine-tuned the warehouse floor to minimize car dwell time. As a result, demurrage has been eliminated, car cycle time is down to 30 hours interchange to interchange, car hire is down, and business is up. Profits, too.

2. Service Delivery System. Central Railroad of Indiana was losing share at a barge transload on the Ohio River outside Cincinnati. We asked the facility manager what was causing this downturn in loading and his answer was direct and to the point: "The freight service you're providing isn't what we're buying." In other words, the shortline's service delivery system didn't deliver. With the help of the plant operating personnel who had to use the service and the railroad operating personnel who had to deliver the service, we came up with a coordinated scheduling system that cut demurrage, cut train crew dwell time waiting to place and pull, cut car hire, and increased rail profits from that user.

3. Renew and Replace. Locomotive failures and bad track add to costs for everything from fuel to car hire to labor. Reliability drops and shippers defect. In other words, at the same time the operating ratio is heading for the stars cash revenue is heading for the pits. On one line, locomotive failures and derailments had gotten to the point the customers were talking about picking up stakes and moving. Fortunately, about this time a re-railing program was under way as was a locomotive rehabilitation program. The net result was that the day a major customer came visiting with murder in his heart he saw several miles of "new" CWR, more modern power, a freshly painted depot, and happy people. The talk of leaving stopped cold.

4. Customer Service: My good friend Tom Collard of the Southern Railroad of New Jersey (SRNJ) writes that teaming up with an under-utilized seaport and a steamship operator to put steel coil in ships at lower net cost than truck to a bigger port. "Rail rates, says Collard, "are actually a bit higher than truck, however you can get only two of the 18,000 lb. rolls on 40,000 lb. capacity truck, so you're paying for 4,000 lb. of air per truckload."

It wasn't an easy move to assemble, either. The manufacturer really didn't want rail and he didn't want Collard's port. There were three railroads and five yards in the route. They needed Conrail's high-performance specially equipped boxcars. And there was a tremendous amount of hand-holding required to put all the pieces together. An added value was the efficient use of space and equipment. Space constraints at the port left little room for 56 truckloads per vessel to queue up waiting to unload. Off-loading the trucks into a storage area pending loading on shipboard was out of the question. As is, the handful of railcars are tucked quietly away at the small port and taken quietly away by SRNJ personnel when made empty.

It's worked so well, Collard says, that the port and steamship line are looking for new business that can be railed in and out. Customer service begets revenue, and the increased revenue has contributed to a much needed rehab of the track at the port.

Closing the loop, the four customer value drivers feed owner value drivers in quite a direct manner. The M&E's customer knowledge added to revenues by increasing car utilization, doubling the number of cars that could be unloaded at once. CIND cut the costs of service to the customer and lopped some points off its OR. The Bad Track Road renewed and replaced -- spent capex wisely. And SRNJ used exceptional customer service to take the hassle out of the plant-to-ship move.

It all means more money in the till at the end of the day. And options when the time comes.

• Railway Age Index
• Blanchard Company Home Page