Can someone explain operating ratios for railroads for me a little better? I thought that I understood an operating ratio of say 80% to mean that out of $100 of business, $80 went to cover cost, the other $20 went to the bottom line. However, re-reading an article about the Erie-Lackawanna in the March 2005 issue of Trains, I’m not sure. In 1970, the E-L had an operating ratio of 80.9%, but lost $10,890,000. [%-)]. Anyone want to take a stab at explaning?
Thanks
The operating ratio is revenue divided by operating cost. That leaves out a lot of costs. The interest on all the money we borrowed to run the railroad is not an operating cost.
Someone more familar with railroad account could give the big items that are not in operating cost. If you want to dive into this deeply her is the link to NS 10-k http://www.nscorp.com/nscorphtml/ar04/pdf/10K.pdf
An operating ratio of 80% in the 1970’s is one that left a lot of room for improvement. That meant 80 cents of every dollar was spent to operate the railroad, 20 cents was left to cover other expenses such as debt service, capital outlays, etc.
The definition of what is included in operating expenses has been changed since that time to include more expenses.
Can anyone share what some of those other expenses are?
Thanks
Murphy,
The big one is interest. Most of that is interest on “bonded” debt. Just to make up an example, imagine a 1,000 mile long railroad with $100,000 per mile bonded debt, or $100,000,000 total with an average interest of 5%. The have $5,000,000 in interest, which as a “fixed cost” that they have to cover. That does not include sinking fund payments or retirement of principal. Those items, as I recall are not expenses at all, but would show up on the cash flow statement. Debt retirement is highly variable depending on the nature of the bonds, but it takes cash and if you run out of cash you are insolvent and headed for bankruptcy court.
You can look at any railroad’s current and recent financials on the internet but if you want some guidance about what the numbers mean go to a big city library or a University Library and look at Moody’s Transportation. You may get better details in the older ones. I really can not say since I have not done it for a long time. Moodys was all about rating the debt of issuers, and of course they started with railroads becuase railroads were the second entity to sell bonds to the public. Government of course was the first.
Mac