Reasonable RVC's for Captive Rail Movements

Reasonable RVC’s for Captive Rail Movements

When looking at what a reasonable margin is for a railroad to make above its cost on captive rail movements you normally get a different answer from a shipper than from a railroad. A shipper logically wants to have a lower rate so it would want the Revenue to Variable Cost Ratio (RVC) for a move to be lower. The railroad benefits from higher rates, so it would normally want a higher RVC. It is therefore interesting to look at how a more neutral party looks at what a reasonable RVC is for captive rail movements.

The Surface Transportation Board (STB) regulates railroads, and it annually puts out two RVC values for captive movements on each Class I Railroad. These RVC values show:

  • RVC>180% 
    • RVC>180% provides the average RVC value each Class 1 railroad is getting from its rates for all of its captive movement (all moves with RVCs above 180%).
  • Revenue Shortfall Allocation Markup Ratio (RSAM)
    • RSAM represents the average RVC a railroad would need on all captive traffic (traffic with RVCs above 180%) to be revenue adequate.

The RVC>180% value provides the average markup above cost a railroad is obtaining on captive movements, while the RSAM value shows the average markup it needs to be revenue adequate.

It is interesting to look at these RVC values for the most current year available (currently 2021), but the historical change in these values is even more interesting.

Historical RSAM and RVC>180% Values for CSXT

The following table shows that between 2018 and 2021 CSXT’s RSAM value decreased 64.5% (243.5% – 179.0%). These yearly RSAM results are quite revealing as to the profitability of railroad movements. The RSAM values show that in order for CSXT to be revenue adequate in 2018, it needed an average RVC of 243.5% on all its captive movements (all moves with RVCs above 180%). The RSAM value decreased each year and by 2021 the average RVC CSXT needed on captive moves to be revenue adequate was only 179%. This 179% RVC RSAM value is less than the 180% Jurisdictional Threshold for captive movements.

The 179% RSAM value in 2021 is a significant indicator of the large increase in railroad profitability that has resulted from the rates and RVCs for CSXT captive movements over the 2018 to 2021 time period. In 2021, approximately 49% of CSX revenue came from movements with RVC’s above 180%.

Reasonable RVC's for Captive Rail Movements

In 2021 there is close to a 100-point difference between the average RVC CSXT is obtaining from its rates on captive movements and the RVC the STB shows that it needs on captive movements to be revenue adequate. It would likely be difficult for a shipper to negotiate rates for captive moves with RVCs below 180%. However, this type of data from a third party like the STB, impacts a shipper’s views on what is reasonable and the rates that are needed for captive movements.

This analysis is not meant to be critical of CSXT. CSXT’s values are simply being referenced for demonstration purposes. The values of other railroads are similar to those of CSXT. As an example, of the four major US railroads, only one has a 2021 RSAM value above the STB’s 180% Jurisdictional Threshold.

Click here to connect with Escalation Consultants’ for a historical summary of RSAM data for all Class I railroads.