profit = margin x volume. (The term used at this firm for the sales price of an item - the cost of the item is “Gross Margin”. No such thing as “Profit Margin”)
So to determine the “profitablity” of any line of business two things must be considered. 1) The markup, or margin and 2) the volume.
Intermodal has lower markups than some other commodity groups, becuase it is in a more competiive situation, but it also has larger volumes. Which is why it is “profitable”.
Long haul bulk chemicals, which are less vulnerable to motor competition, can be marked up more, but they don’t move in the volumes that IM does.
And remember profitablity does not equal the “margin” or markup. Profitability is margin times volume.
I make a tremendous amount of money on unit mail trains from New York to Chicago (Railroad Tycoon). I also make quite a bit on unit uranium trains too.
Mark - I agree about captive being very subjective. That is one of the reasons it becomes political very quickly. As an example Tom DeLay announced at a candidates gathering in his district that the San Jacinto Rail build in would be reolved by the parties or he would take
legislative action to end “monopoly pricing”. Tom is not exactly William Jennings Bryan but if he says the Bayport shippers are captive then beleve me they are captive.
kevarc Maybee you could convince Tom he is a Cajun and should run for Congress from LA.
Mark - I never saw profitablility comparisons between commodities using internal rates of return. The comparisons would be annual contribution to overhead (revenue less long run varible cost) or a profit margin (revenue/long run varible cost). The equipment people wanted to talk about contribution per car day. If we wanted to build a plastic storage yard or some other capital item then we would get a rate of return.
This was in a world of presumed excess capcity. That world is gone with the wind. If UPS comes calling with some new transcon traffic you had better be careful about your marginal cost!
Bob, I don’t know, why any politician would want to claim to be from LA.
Chemicals was one the reasons the UP fought so hard to get the MP and the SP. Between the 2 of them, they are the sole shipper for most of the chem plants in LA and TX. In LA, west of the Mississippi River they are the ONLY RR, except for some areas in Lake Charles, that serve most of the plants. In Lake Charles they have the KCS and some limited BNSF. BNSF got the old SP Sunset route from UP after the takeover, but I not sure of thier service rights in Lake Charles. They are already a player in the Beaumont, TX, Chemical plants from the old ATSF days…
some may question my definition of a commodity but I think the most profitable commodity for railroads is reliability – that’s what customers are most likely to pay for.
The only point I was trying to make was that the profitability of a line of business such as Intermodal, Chemicals, Grain, etc. is determined by more than the mark up, or margin. Volume is in the equation.
If you can sell one tank car load, and mark it up by $1,000, and 10 trailer loads, each marked up by $100 - at the end of the day each line of business has the same profitability.
People sometimes bad rap intermodal because its margins aren’t as high as commodities such as chemicals. But margins are only part of the equation - that’s all I was trying to say.
Two kinds of these. The regular moves are put out for bid - and the low bidder gets the business. I priced some of these, and they tend to be “low bids”.
Moving entire units to ports of embarkation or to the National Training Center at Ft. Irwin, CA may be different. But as has been said, it’s not a significant amount of business. (BTW, the Canadian Forces have used Ft. Irwin for training. I think both Canadian platoons trained there one year.)
Between the 2 of them, they are the sole shipper for most of the chem plants in LA and TX.
I do not agree with your statement. As an example if you look at the map with the Trains artlcle on chemicals there are only three local UP stations shown-
Bayport, Freeport and Chocolate Bayou. The BNSF will soon have access to Bayport. All of the other plants have access to more than one railroad.
The New Orleans/Baton Rouge corridor on the west side of the river is local on the UP. All of the big chemical plants in the Lake Charles, Orange,Port Arthur and Beaumont area are open to at least two railroads.
New Orleans to Lake Charles - 99.9%UP. About the only exceptions are a few facilities served by the L&D and interchanged to either BNSF or UP in Lafayette, LA.
Lake Charles - Most of the facilties are served by UP. A few have access to BNSF or KCS. And there is some switching agreements, but the lion’s share goes to UP.
TX–LA - (Sabine River Area) Again you have the same set-up as Lake Charles, except KCS gets more of the pie here.
Beaumont - BNSF or UP, UP gets close to 80% of the business here.
Beaumont-Houston - Again this is almost exclusively UP. BNSF gets some, but not much.
Houston - their have been many articles in Trains, in the current issue and a past issues dealing with TX.
Texas Gulf coast west of Houston to Brownsville - 100% UP.
And that is just the chemical plants. Coal fired power plants have even less access to competitive rail access. It is in the neighbor hood of 90% captive to a single RR.
If you can sell one tank car load, and mark it up by $1,000, and 10 trailer loads, each marked up by $100 - at the end of the day each line of business has the same profitability. - yes, but you still are using 10 cars and the attendant incremental costs.
Those “incremental” costs, including the cars, have already been considered and covered. In the example cited the intermodal business equals the chemical business in profitability.
If it were my “choice”, I’d “fool” with both and put the money in the shareholders pockets - that’s what the railroad is for.
If I had to make a choice, I’d rather have the 10 trailers than the one tank car - given our scenario of equal profitablity.
It’s not good to concentrate on a few large customers - that gives them more power over you. Each one represents a significant chunk of your income - a significant chunk that you don’t want to loose. The 10 trailer shipments represent a more diverse customer base making the loss of any one customer less significant.
Given the need to “choose”, I’d go with the diverse customer base in the trailers.
Kevin The “facts” you sight are just plan
wrong. I say this because in earning my living for 22 years I had to know this information in detail as we negotiated contrats with the plastic and petroluem shippers on the SP and UP.
Please point out where I am wrong? I live here and from my days with LDEQ, I have been in most of them. And I have relatives working in others and for the railroads. I get my information first hand, not from a book.
grain is our #1 ag export, but the majority of corn and bean exports move into export position by barge. generally HRW wheat will move to export by rail, however, even spring and soft wheats move to export by barge as well as rail.
regarding “captive” grain shippers, the rail road may have some leverage with these customers, but the carrier must allow the grain to move to market at a “to arrive” price which allows the grain to find end user purchasers. if the freight charges prohibit grain movement being competitively priced upon arrival at terminal market, then the grain will be stored rather than shipped and the traffic will be lost to the carrier…