Greyhounds or Mr North: A question
If Al Perlman had run Penn Central after the merger could he have pulled it off. With or without Blevens (the CFO or treasurer I think) money support?
Try to remember he started the Rio Grande to out hustle UP. And he was starting to do that at the New York Central.
Thx IGN
Precedent is as important in court decisions as in regulatory decisions. Dismissing it out of hand would leave the door open for capricious decisions.
The various regulatory bodies at both the state and federal level came into existence because there was a general desire for it. Also, there is still a strong undercurrent of distrust for Big Business so the issue of regulation is not going to go away.
Ken: I really don’t know what would be exactly the best method to allocate fixed costs. But to “cover” them means to allocate them into the pricing of services so that the revenue stream in toto will cover those costs. If you only price a service with a margin above the variable (operating) costs, you will either not cover the fixed costs if they are high, as in a railroad, or you will end up with no profit. What you will end up doing by default is allocating that share of the fixed costs to some other service you offer, sort of a loss leader. There’s no getting away from it. Perhaps the rationale for the ICC decision was that the PRR was operating a service below the true cost to eliminate competition, and once that was done, would have priced it at whatever they wanted? That sort of thing has happened in many modalities (retailing comes to mind), but it is uniquely grievous when unlike retailing, especially grocery stores, the limited competition is eliminated.
If you research this farther, you will find that Penn Central forced Perlman and his associates out. The reasons involved were complex to say the least, but it seems that there were a number of utterly incompetent managers in Penn Central whose real motivation was to set up the golden handshake/nest egg for themselves. By attempting to run the railroad the way it probably should have been run, he was screwing up their plans, so they forced him out. Trains ran a highly detailed article a couple years back on Alfred Perlman.
Some loved him; some did not–but he did know how to run a railroad.
My uncle was a high ranking employee within Melon Bank and at least moderately active within the Pittsburgh society circles. He and my aunt contended that a lot of dirty behind the scenes money grabbing went on at Penn Central during the late 1960’s, as various managers were motivated to line their own pockets at the expense of the railroad. Prior to her death, my aunt had said the truth of the alleged financial misdeeds may never fully see the light of day–but that’s really all I know.
John
In my industry-lumber & building materials- there’s a little bit of seat of the pants intuition involved. We know our fixed costs, and we can figure out our variable costs. From those. we can price to cover our costs, and make some money. We’re also quite succesful in knowing where the competition is, and how much we can mark up our products and services. From long years of experience, we can tell if something is, or isn’t going to make money in the long run. I’d trust my own skills, and my owner’s intuition and tremendous memory more than I would trust any specific formula worked out by accountants.
I imagine there’s some of this same thing going on in most every industry. How do they price things to make a profit in your industry schlimm?
My original question was what if Al Perlman had run the combined Penn Central,
Could he have made it work? Try to remember some of the talent he would have had. Jim Hagen(I think) Mike Flanery, Jim McClellan to name a few.
Thx IGN
Quite different in healthcare, as so much is determined by insurance. In academia it’s a different world. But years ago in retail, it was a running battle for us buyers with the cost accountants, who always wanted to be sure we were allocating overhead, and like most folks in that field, when it is a big operation, they had specific formulae. Hardly anyone outside the accounting division much likes accountants, but they are an essential ingredient in any successful operation. One of the biggest reasons start up businesses fail is they underprice (hardly ever overprice) their services or products by seat of the pants calculations, aka, intuition, hunches, business acumen or plain guessing.
Loving addresses the Perlman issue in The Men Who Loved Trains, which I referenced earlier. It has been approximately a year since I read the book, but I believe he concluded that Perlman would have had a dramatic impact on the combined Central/PRR, but in any case regional economics as well as two extremely different corporate cultures were working against the merger. Making the Central and Pennsy merger work would have been a daunting task.
Perlman, if I remember correctly, wanted to merge the Central with the C&O, which he believed would be a better fit. &
[quote user=“greyhounds”]
schlimm:
Thanks for the explanation. I am no cost accountant, but I seem to recall that fixed costs (overhead) have to be allocated to the price of goods or services in some way or else a company loses money if it only covers the variable costs. Fully allocated costing is one such method, which I do recall is often disliked by the sales departments and can create some internal tension with the accounting department of a company.
No, fixed costs (overhead) doesn’t have to be allocated. It has to be covered, but it can’t rationally be allocated in diverse output enterprises such as a railroad (Or a McDonalds). People can, and have, come up with formulas for such allocations. But just because there is a formula that produces a number doesn’t mean the number is meaningful. Again, in railroading and other lines of trade, overhead cost has to be covered but it can’t be rationally allocated to specific units of sale.
Pricing is much more complex than crunching a bunch of numbers. In the subject situation the railroads involved couldn’t set the price. The price was being set by competition. In this case a truck-barge movement of ingots. The maximum rail price that would get the business was above the rail variable cost but below the contrived fully allocated rail cost. So should the railroads want business at a maximum price that is above variable but below fully allocated cost?
Of course they would want such business. They would be better off with the business as it would make some contribution to covering their fixed costs. When the government regulators rulled that they could not pric
I imagine that the insurance companies would have everything penciled down to the gnats…rear end. I believe that most business success includes a healthy dose of intuition. But it comes with a long history of experience to get that intuition. With the long history of railroads in our country, I’d have to believe success includes a lot of intuition. Academia seems to have a whole different formula for measuring success.
I guess the company I work for is a little better off than most start ups. This is ourth year in business.
If by intuition, you really mean creativity, i.e. divergent thinking, then I’d say yes, that is a key to success. But to ignore the contributions of good cost accounting is to lay the groundwork for financial suicide.
The one thing that gets conveniently overlooked by today’s railroad scholars is the lack of pricing power that railroads had during the pre-Staggers era of ICC regulation. No matter what the cost basis of the carriers the final arbiter of all interstate rates was the ICC, where the carriers were basically viewed as the ‘over dog bully’ and decisions rarely favored the carriers, Despite all the signs of impending failure from the carriers in the Northeast - the real wake up call didn’t occur until Penn-Central filed for bankruptcy and even with that bankruptcy it took several years to get to Staggers, which gave the carriers to opportunity to set prices and service to correspond with demand. Even after Staggers it took the carriers nearly two decades to understand what operating as a minimally regulated industry was all about - educating leaders whose entire careers had been in a highly regulated environment in operating in a deregulated world was not a easy transition.
The calls for re-regulation of the Carriers is coming from monopoly industries who, in the past, could get the carriers to ask ‘how high’ when the monopoly industries commanded ‘jump’. The monopoly industries find having to negotiate transportation with a ‘equal’ as being against everything they hold dear. Those who are crying loudest about being captive to a single carrier, have for years been the sole supplier of their own end products to their customer base.
Do you mean the average electric power company?
Thx IGN
PS to the above. One thing I could never understand is this: Why the electric power companies have not tried to get railroads to electrify. It would entwine the two together like nothing else would.
I know this is kind of off topic.
Thx IGN
I pretty much agree with what you’ve said. Having said that, I’ll point out very important differences between electric power supply and railroading. (“Boxcars aren’t kilowatts” as some wise men once said.)
First, a question. While you’ve got all these allocation models, what do you do with unused capacity? Do you just let it sit idle if you can’t sell it for the average modeled cost? Or do you sell the off peak capacity at a price below the average cost if that’s all that’s possible? That’s really what we’re talking about. The Pennsylvania Railroad could handle additional business, such as the ingots, without adding capacity. They wanted to sell the unused capacity for what they could get in a competitive situation. Doesn’t your power company do the same?
As I said, people can develop all kinds of formulas to allocate overhe
Well, that’s understandable. You can’t know what exactly would be the best method to allocate fixed costs. There is no “Best” method for allocating fixed costs because there is no good method for allocating fixed costs. As I said previously, fixed costs “can’t rationally be allocated in diverse output enterprises, such as a railroad…”
Now Sam1 did a good job justifying fixed cost allocation for electric power. Not for specific sales, but for lines of business. You can get close, with a lot of estimates, for lines of business (but not specific sales) in a single output enterprise, such as electric power. But when you’re in a diverse output enterprise, such as a railroad, which hauls anything and everything from anywhere to everywhere, you can’t get close.
OK, let me use a greatly simplified example to show how a railroad selling its service at belo
Fine and good, except for two things that your marketing guys overlooked: 1. You apparently did not include a contribution for that line to the overhead of the central administration. Every line, division, etc. has to contribute to that. 2. If the coal company finds out (and they will) that they are paying (in your example) $300 more per load than the ethanol company does, you are going to have to deal with an enraged primary customer. And that will change the entire picture.
How wil it change the picture? What will the enraged coal shipper do as a consequence of learing the cost of shipping ethanol? Will they end the use of rail and shift to a different and cheaper form of transportation?
Who knows, but you may have to cut their rate and that will lower your overall margin. It is fundamentally difficult (and frankly wrong) to charge different rates to different customers for the same thing or service and not expect a problem. Then you have to manage that situation. Over time, it creates a lot of ill will, distrust and resentment with customers. Historically the rails created a lot of ill will with their customers for a variety of reasons, just one (among many) why the rails % share of freight traffic by measures other than ton miles declined.
Actually, that was considered for a while, back in the 1950’s and 1960’s. As I recall from the article referenced below (and others), the Bonneville Power Administration in the US Pacific NorthWest’s Columbia River region proposed a special discount ‘bulk rate’ to the railroads for electrification, and the Tennessee Valley Authority may have done likewise, as well as others. In South Eastern Pennsylvania, the Philadelphia Electric Company (“PECo”) fed power to both the PRR and Reading RRs, and had its transmission lines mounted on top of the catenary poles/ towers on some routes, so that would have been a slight extension of that natural co-location and logic.
“The When and If of Wires - future electrification projects”
by Pinkepank, Jerry A., Trains, July 1970, p. 38
See also the post by Michael Sol on 10-07-2005, 9th paragraph, about 2/3 of the way down Page 6 of 9 of this previous thread here on “Main Line Electrifications” at: http://cs.trains.com/TRCCS/forums/t/46331.aspx?PageIndex=6
But there were (and may still be) some major obstacles: