Out city has a packing plant.(pee-yew) Because of that, a lot of local cardboard box companies get daily boxcars full of paper products. Wisconsin Central boxcars are a common sight in town. At the BNSF railyard, there is a siding with a ramp, that is used to load bales of recycled cardboard into boxcars for shipment out. Presuming, that these boxcars are headed back to the same paper mills from where they came (?), wouldn’t this be a relitively low-value, no hurry, type of load, that would be somewhat expensive to ship by rail?
Most carload shipments don’t have any backhaul. When you can find one, it’s like gold. Since the car would normally be returning empty, and the whole cycle paid for by the loaded trip, any extra $$ you get nearly all falls to the bottom line. The only costs to be covered would be those that the extra tonnage causes - fuel, wear and tear, and perhaps an extra train or two some day every so many years.
Wouldn’t the cost of having to switch the boxcars into and out of the siding pretty much eliminate any money to be made on the move?
Don: I don’t understand your comment about the extra train… can you explain?
Let me take a crack at this. While the wheat industry has been my main consulting interest for a number of years, I’ve done some financial and consulting work in the pulp & paper industry and, as a result, I was recently appointed to sit on an advisory panel to North America’s largest company in the pulp and paper industry, controlling 20% of the market.
Attended a meeting last month where this was discussed in some detail. The raw wood market is increasingly constricted and expensive. Recycled containers are an important source of “raw” materials these days, represent between 10 and 20% of the linerboard mill capacity, and because the linerboard mills are big and far flung, rail tends to be the preferred means of recovering the box waste.
As Don points out, the boxcars bringing in scrap from the box plants to the big linerboard mills leave the linerboard mills with rolls of linerboard for the box plants all over the nation. Completes the cycle nicely.
“Our” company, for instance, has six big linerboard mills – these are big, Billion dollar plants – serving something like 165 company-owned box plants spread out everywhere, plus any number of independent box plants for whom we are a key supplier of linerboard. From both the paper company and the railroad perspective, anything that completes the hau
So would this qualify as an example where the rate charged to the shipper might be less than 100% R/VC but still wouldn’t be considered as being cross-subsidized because the alternative is to dead-head the car back at 0% R/VC?
The backhaul rate covers the variable costs. Generally the scrap paper is originating at a location that can load 6-8 boxcars a day minimum, and the cars will move as a block to one destination (a paper mill), so switching costs on a per car basis are low.
The “extra train” means that to meet the service committment for the scrap paper the railroad on occasion has an additional train start that would not have occurred had the cars returned empty to the origin point.
S. Hadid
Are you saying, that the extra day or so, that the boxcar takes to get switched to the siding,loaded, and switched back into an outbound train, verses going straight back to the paper mill ? I guess I could see where a day or so per boxcar,times a couple hundred boxcars could add up over time.
What oltmannd means is this:
You have a cost for the empty, no-backhaul move. You have a different, somewhat higher cost for the backhaul move. The cost you calculate for the backhaul move presumes that you will never incur a train start as a result of changing from an empty, no-backhaul move to a backhaul move. (Train starts being expensive). Normally that works out; the cars loaded with scrap paper move in a regular train. Sometimes it doesn’t because there’s an unexpected event somewhere, e.g., the switch engine derails on a curve with wide gauge or some other trivial event that causes the boxcars to miss their connection with the regular train. Because these scrap paper moves are heavy loads (generally moving in 100-ton boxcars) and generally are in large blocks, now you have two days worth in your yard along with all the other regular tonnage and you end up having to call a second section of your regular train. You usually wouldn’t have had this happen had these cars been empties because they’re so much lighter and won’t as readily push the regular train overtonnage, and because they have fewer events (such as being switched to the paper recycler spur) so there is fewer things to go wrong.
Railroad operation is made up of lots of little interconnected events each of which by themselves is very simple but they combine in extremely complex and unpredictable ways. Ideally every day is the same day, just like the one before, and that’s the way you build an operating plan. You also know from experience that stuff happens. Many of these things that happen are quite little but can have amazing ripple effects. You do your best to build into the operating plan room for contingencies, and do the same with your physical plant. Most of the time, if you have a good plan and a physical plant that’s not tightly stressed by condition or capacity, you can adapt to the unforseen little events every day,
Does scheduled railroading, as practiced by CN and NS have a bif advantage in overcoming the things listed above?
All of the Class I railroads practice scheduled railroading and if CN and NS do something different than the rest it is opaque to me. CN possibly could be more successful at it but CN also has a very simple network and less traffic relative to the capacity of its fixed plant than the rest.
Scheduled railroading as I think you’re interpreting it – reliable operations – requires either an immense investment in plant capacity, equipment on standby, and people waiting ready to leap into action (and immense rates to pay for it), or highly restricted origin-destination pairs and highly limited service offerings. By highly restricted, I mean taking the hundreds of thousands of rail-served stations in the Open-And-Prepay and whittling it down to about 200 stations in North America. By limited service offerings, that means one-size-fits-all, go when we say to go, go only where we go, take it or leave it type of service, like what Southwest Airlines has. You can have price, reliability, or flexibility, and most railroad shippers choose low price and high flexibility. For some reason many railfans, and many shipper organizations, think that railroads can provide something for nothing, and deliver low price, high reliability, and high flexibility, all at once. If they want FedEx service, they should expect to pay FedEx prices.
S. Hadid
Railroads don’t seem to be providing anything for nothing …
FedEx
Profit margin: 5.86%
Operating Margin: 9.70%
BNSF
Profit margin: 12.27%
Operating margin: 23.03%
NS
Profit margin: 15.6%
Operating margin: 27.15%
Pretty good margins for “low priced” services.
Perhaps this begs the question, “low priced” compared to what?
Costs of providing the service?
The answer, compared to FedEx, is clearly “no.”
Even ExxonMobil, the “price gouger”:
Profit margin: 11.46%
Operating margin: 18.48%
At what profit level would a service be considered “premium priced”?
As a point of comparison UPS will take a one pound brick tommorrow and move it from Houston to LA for $66.06/lb. The will promise to have it to your customer in LA by 8:30 AM on Tuesday. The BNSF will also move your brick for Houston to LA but for the equivilant of $0.03 per lb. The BNSF estimates they can move your brick in 7-10 days and want you to accumulate it with an additional 150,000 lbs of bricks or so to get that nice low rate. Its your choice for a 99.95% difference in the price.
Since neither provides the particular service of the other, the analogy is stretched beyond its elastic limits. Seeking the reducto ad absurdum leads you to compare service: UPS for $66, or BNSF would also haul the brick if you rent the carload rate for about $1200 and be slower at it (92 hours).
Yes, I’d pick UPS, too.
And just to show that anyone can use numbers to manipulate an argument -
Here are the latest year Return on Asset figures for a few companies:
NS 5.06%
BNSF 5.17%
FedEx 8.38%
Exxon 9.07%
Looks like the railroads come in dead last.
Do you mean to tell me that you recommend routings to shippers based on a comparison of the margins of the competing carriers?
If not, what is the relevance of your post to the idea that shippers will complain that they should get improved service and lower charges.
You can call the UPS/railroad comparison absurd if you want, but the point is that there is some who think that the railroad should supply something close to the velocity of a UPS shipment for the 3 cent a pound charge.
As the posters well know, return on assets is a poor measure for companies that rely on debt to spur their return on equity. Isn’t that what the stockholders look to? Isn’t that the key criterion for investment capital? It is, frankly, disingenuous to suggest otherwise.
Year 2003.
The BNSF charged its highest rates to a select and distinguished group of shippers. And offered them dead last in terms of service … letting them incur bank charges and storage costs while they sent the cars to “competitive” destinations … that paid far less for the service.
Odd that “velocity of service” went to the group that paid the least for that service. And the group that did not receive the service paid the handsome, profitable premiums that made the companies among the most profitable of American companies. They don’t get lower charges and improved service. They get higher charges and the worst service.
Absurd?
You bet.
Nothing manipulative about it.
Who do you think these companies work for?
The bank? Or the shareholder?
These numbers are just about what an informed investor would expect for companies with profitable equity ratios. Particularly with railroads that are depreciating assets over as long as 50 years … totally unlike any other company. Given railroading’s unique paper depreciation of assets over long periods of time, please explain why you think railroads might not be atypical of the companies you use for comparison. Think there might be a difference?
Please identify a company that you believe issues a dividend based on return on assets rather than profitability based on revenue.
As some posters should know, return on assets provides a much more complete investment picture than return on equity by itself, particularly for companies that rely heavily on debt or have large investments in sunk costs.
A “complete investment picture” is very nice to know. Profit still actually comes from revenue and pays the dividends and provides cash flow for infrastructure needs.
It is true railroads almost always trail other industries on return on assets. That’s because the depreciation schedule for a billion dollar rail investment depreciates out at an entirely different set of rates than the same amount of investment made by an oil company. Throw in ACR or MACR and the book “assets” represent fundamentally different depreciation schedules.
The longest single depreciation period under IRS regulations is railroad property:
“50-year property includes any improvements necessary to construct or improve a roadbed or right-of-way for railroad track that qualifies as a railroad grading or tunnel bore under section 168(e)(4).”
No other industry has an asset class with a depreciation period that long. Accordingly, railroad “assets” are carried longer per dollar of investment.
Railroads will always show a lower return on that particular metric because of that.
But, that’s the difference – different paper rates of depreciation. Is one bad or the other better? No, they are just different, and an investor looking at railroads has to understand that difference in attempting to compare a railroad to a different kind of
Yikes![:O]. We went from cardboard recycling to captives shippers/big mean railroads, just like that? What’s next? A full-scale anti-railroad, captive-shipper,cross-subsidy,open-access,recycled cardboard extravaganza? [oX)]