What is the common practice in setting line haul rate if two or more railroads participate in the shipment? Do railroads discuss the rates, or set two rates independently and charge shipper the sum of two? Does the shipper need to negotiate and sign contracts with both railroads?
For decades the vast majority of interline moves took place under interline rates which were published in tariffs. Interline here means involving two or more carriers. The shipper and consignee agreed among themselves who would pay the freight. A bill of lading was issued at origin. If freight was prepaid, then shipper paid the freight, if collect then consignee paid the freight. The carrier that collected the freight charges paid the other participants. The divisions, that is who gets how much, had been worked out in rate bureau meetings and were often given as a percentage of the total.
The Staggers Act made collective rate making illegal by removing the protection previously provided from anti-trust statutes. Now divisions have to be individually negotiated among the involved carriers. Some traffic still moves on tariff rates, which are much like list price. Divisions have long since been nergotiated among the carriers based on origin, destination, and interchange point.
If a customer wants a rate to a new destination, the carriers need to establish a rate and route. This may be as simple as adding a new origin or destination to an existing rate authority (tariff, letter quote, or contract).
A customer may propose a “special deal” to the carriers. That is they want a rate reduction. The shipper or consignee will take their proposal to one of the railroads. If the market manager is interested, he will contact his compatriot on the other railroad and ask “What is your revenue requirement” for this commodity over that interchange based on this deal, meaning whatever committment the customer is willing to make to induce the railroad to make him a lower rate. If they agree to do something other than the standard division, they are making more work for both revenue accounting departments, so I suspect nonstandard divisions are rare. In either case the rate will almost certainly be a joint interline rare as a matter of mutual convience.
There is a process whereby
Mac:
Thanks for that description. I am an old “traffic guy” for an LTL carrier in the 1980s. In 1990 I moved on another industry and never looked back, but I still have a little “Rate Bureau DNA” in my blood.
I worked for what would be considered a “shortline” when compared to the rail industry. My employer was a local LTL carrier from Chicago to Northern Indiana and I negotiated and maintained rates and division of revenue splits with almost all the regional and national LTL carriers (CF, Roadway, Yellow, Holland, etc). Further, I was on the General Rate Committee of a regional Tariff Bureau (Central States). It was an interesting system of pricing and revenue divisions, to say the least.
Now, a few questions, if you do not mind…
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What percentage of carload business today, would you guestimate, moves on tariff rates vs contract rates?
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From what I read from your comments, there is no avenue to legally split tariff rates between two carriers…is that correct? That would be due to anti-trust issues. So, if that is the case, would tariff moves be only single line (or in the case of shortline, contract for origin/destination)? In other words, lets say there is a grain movement from North Platte, Nebraska to Pittsburgh, Pa over Chicago (UP/NS). If that moves by tariff (no negotiated rates) then would there be two rates and two bills? (UP to Chicago and NS from Chicago to Pittsburgh).
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If there were a contract rate between NP and Pittsburgh, then there would be a single rate and billing with one carrier billing and collecting and then making a settlement to the other carrier…correct?
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Does each contract rate then require a separate revenue split agreement between carriers, or are those generally grouped by common origin/destination points? ie…group all origins in Western Nebraska together and
In my years in Revenue Accounting at CPRS, I worked extensively with the Interline Settlement System (I.S.S.) on a variety of traffic. While I enjoyed working with the system, there were several instances when a participating carrier in a joint-line movement would not agree with what the originating road was stating wrt rates and divisions which could delay the settlement of such shipments by weeks or months and would oftentimes wind up in claims. Another interesting thing are the ubiquitous Rule 11.5 shipments where you have a “parent” and “child” roads.
[quote user=“MP173”]
Mac:
Thanks for that description. I am an old “traffic guy” for an LTL carrier in the 1980s. In 1990 I moved on another industry and never looked back, but I still have a little “Rate Bureau DNA” in my blood.
I worked for what would be considered a “shortline” when compared to the rail industry. My employer was a local LTL carrier from Chicago to Northern Indiana and I negotiated and maintained rates and division of revenue splits with almost all the regional and national LTL carriers (CF, Roadway, Yellow, Holland, etc). Further, I was on the General Rate Committee of a regional Tariff Bureau (Central States). It was an interesting system of pricing and revenue divisions, to say the least.
Now, a few questions, if you do not mind…
-
What percentage of carload business today, would you guestimate, moves on tariff rates vs contract rates?
-
From what I read from your comments, there is no avenue to legally split tariff rates between two carriers…is that correct? That would be due to anti-trust issues. So, if that is the case, would tariff moves be only single line (or in the case of shortline, contract for origin/destination)? In other words, lets say there is a grain movement from North Platte, Nebraska to Pittsburgh, Pa over Chicago (UP/NS). If that moves by tariff (no negotiated rates) then would there be two rates and two bills? (UP to Chicago and NS from Chicago to Pittsburgh).
-
If there were a contract rate between NP and Pittsburgh, then there would be a single rate and billing with one carrier billing and collecting and then making a settlement to the other carrier…correct?
-
Does each contract rate then require a separate revenue split agreement between carriers, or are those generally grouped by common origin/destination points? ie…group all o
Mac, thank you for the detailed explanation.
Just to clarify, the main difference in rate setting pre- and post- Staggers Act is that now carriers can only discuss rates for joint service, but not for the markets they compete on. Am I right?
Another thing that is not very clear to me (due to my poor knowledge of rate setting), and also relates to what Los Angeles Rams Guy wrote. You keep talking about revenue split/devision negotiations. But is it really a devision negotiation, or more like both carriers set their rates and the resulting rate that shipper pays is just the sum?
As to the question of tarrif vs contract rates, according to GAO, “most freight ships under contract”. They mention it here https://www.gao.gov/products/GAO-17-166
Daria,
Further yours of 11:11 today.
Paragraph 1 is correct.
Paragraph 2. Percentage divisions were the standard pre Staggers. Yes, rates can be constructed on a combination basis and the revenue division could be a bit different than the otherwise applicable percentage. If it is a through rate, the revenue must be divided among the participating carriers.
If it is Rule 11 rate, then there is no through bill of lading, waybill and freight bill. Here the division issue goes away but need two bills of ladings, two waybills and two freight bills. The vast majority of interline rail traffic moves on a through bill of lading.
The important issue is whether or not a thru bill of lading. If it is thru bill, then carriers need to divide the revenue. Whether they do that based on agreed standard percentage or specific percentage is up to the parties. Deviation from the standard percentage introduces complications, which is always a bad thing. I suspect each carrier has internal guidelines about deviations.
Mac
[quote user=“PNWRMNM”]
For decades the vast majority of interline moves took place under interline rates which were published in tariffs. Interline here means involving two or more carriers. The shipper and consignee agreed among themselves who would pay the freight. A bill of lading was issued at origin. If freight was prepaid, then shipper paid the freight, if collect then consignee paid the freight. The carrier that collected the freight charges paid the other participants. The divisions, that is who gets how much, had been worked out in rate bureau meetings and were often given as a percentage of the total.
The Staggers Act made collective rate making illegal by removing the protection previously provided from anti-trust statutes. Now divisions have to be individually negotiated among the involved carriers. Some traffic still moves on tariff rates, which are much like list price. Divisions have long since been nergotiated among the carriers based on origin, destination, and interchange point.
If a customer wants a rate to a new destination, the carriers need to establish a rate and route. This may be as simple as adding a new origin or destination to an existing rate authority (tariff, letter quote, or contract).
A customer may propose a “special deal” to the carriers. That is they want a rate reduction. The shipper or consignee will take their proposal to one of the railroads. If the market manager is interested, he will contact his compatriot on the other railroad and ask “What is your revenue requirement” for this commodity over that interchange based on this deal, meaning whatever committment the customer is willing to make to induce the railroad to make him a lower rate. If they agree to do something other than the standard division, they are making more work for both revenue accounting departments, so I suspect nonstandard divisions are rare. In either case the rate will almost certainly be a joint interline rare as a matter of mutual conv
A typical pattern (although definitely not the only one) for establishment of a single-factor interline rate is that a customer deals directly with only one of the carriers in the route. That carrier then reaches out to the other carriers in the route for their revenue requirements. The resulting rate quoted to the shipper may be the sum of the quoting carrier’s desired revenues plus the revenune requirements of the other carriers in the route, or there may be inter-carrier negotiation after that. In either event, the “split” will repesent an agreement by the carriers participating in the rate. Sometimes, there are standing agreements between interline carriers allowing one to quote interline rates on certain kinds of traffic subject to the other carrier’s standing revenue requirements.
Wow, what a great discussion. A bit nerdy, but informative.
My next question is on the Rule 11 shipments…does the combination of the two (or more) rates compare favorably to a thru/joint rate? There is probably no way to determine that, but here is my basis for the question.
During my LTL days we would infrequently handle a shipment to a point in which we had no carrier which could handle the shipment to the destination, hence there would be 3 LTL carriers involved. This would involve a “combination of rates” in which there would be a thru rate from the origin carrier to the point of interchange to the 3rd carrier, then a local rate would apply.
Those “combination of rates” were always much higher than the thru rate. My guess is the Rule 11 rates would be higher, but that is just an assumption on my behalf.
The reasoning would be that the rail rates would include building in both an origin pickup (switch) and destination delivery (switch). When constructing transportation rates, the origin and destination final miles are very expensive…whether in rail or trucking. Lots of time consuming services at both ends. The Rule 11 shipments would eliminate two of those final mile services as there would be interchange…which would probably include an entire train or at least a large block.
Transportation buyers always complain about price…but that is their job.
Ed
Read Falcon 48’s post of 11:57 today about creation of Rule 11, which I certainly did not know. It looks like another example of a saying I heard once from a wise railroad marketing man “Customers always want their unfair advantage.”
In the case of two or more class 1 carriers I will not hazard a guess as to comparison of Rule 11 vs thru rates holding everything else constant.
In the untrustworthy shortline case the rate will be higher, unless the connecting class 1 chooses to absorb all or part of the shortline charges. My sense is that in most cases the class 1 will not. Given the small volume of traffic generally involved with untrustworthy short lines, the class 1 probably does not much care whether it participates in the traffic or not.
I don’t want to overgeneralize, but I would think that, in most cases where one or more Class I carriers in a interline route made a “Rule 11” rate for its (or their) part of the route, the total rate would probably be cheaper than a joint through rate. It would certainly be cheaper than the joint through “tariff” rate - otherwise, why would the shipper use it? But it lik
The railroad I worked for cared very much about short line interchange traffic. Maybe the volume of any one short line wasn’t that great. But the volume of all short line originated and terminated traffic added up to about 20% of revenue. Little bits of traffic add up to a lot of trafic
The real solution to “untrustworthy short lines” was a “handling carrier” arrangement, which you described in one of your earlier notes. In this kind of arrangement, the Class I makes the rates the shipper pays to and from points on the short line as if they were points on the Class I’s own railroad (typically, the short line will not even appear in the rate documents the shipper sees) and collects the rates from the shipper. The Class I then pays the short line an agreed charge for every car the short line handles. Many short lines (not just “untrustworthy” ones) actually prefer this kind of arrangement, since it saves them a lot of back office work and makes it easier for shippers.
I realize that after my last few posts on this thread, either no one’s watching it anymore or the few left reading it are brain dead. But let me make one more observation on the off chance that there’s somone looking at it who’s still conscious.
Believe it or not, there was an underlying objective (really!!) to the seemingly byzantine way railroads structured interline pricing and settlement in the olden days before the Staggers Act, contract rates, etc., and much of what seems unnecessarily complicated today still reflects that objective.
The objective was simply this. A shipper making an interline shipment should only have to pay one freight bill and that bill should include all charges applicable to the shipment. The shipper shouldn’t have to pay separate bills from each carrier that participated in the movement. Rather, all of the charges for the shipment should be folded into one freight bill presented by one carrier, and the participating railroads then would split the revenues among themselves without involving the shipper.
This objective is very obvious from the way the line haul interline rates were usually structured and billed – typically a single factor interline rate billed and collected by one carrier, and then split among the participating carriers based on established divisions. And even when the rate for an interline shipment was some form of combination rate, the total rate would typically still be collected by one carrier and then split among the carriers, either “as made” (i.e., each carrier got the full amount of its individual rate) or by established divisions. And this treatment wasn’t limited to just the line haul rates. Suppose, for e
Falcon48 and Mac-
Thank you for taking the time to share your knowledge and experience with the rest of us. I have been reading this thread and trying hard to wrap my head around the details. To me it is quite interesting.
I view learning about things like this as being an opportunity to use the recreational side of my brain to learn things that I really don’t need to learn, but find interesting. It’s kind of like all the rather useless things I know about WWI battleships and WWII warplanes.
Nah - you’re good.
I think Byzantine is a good descriptor, though.
The inner workings of some of the “alphabet route” routings (some of which were done intentially) must have been, shall we say, interesting.
What’s useless about WWI battleships? Doesn’t everyone need to know about the HMS Audacious?
Or understand the metaphor of the WWII adventures of the HMS Audacious.
Very interesting discussion. Can anyone enlighten me on how 2 mainline railroads – let’s say class I’s – determine the division of the joint line rate? I assume there are rules of thumb. Are the divisions typically distance-based?