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Reducing rates on captive rail movements blog

Reducing Rates on Captive Rail Movements – Part 2

Information on Your Railroad that Helps Reduce Rates on Captive Rail Moves

Most shippers agree there are certain things they must know about the railroads with which they do business. Shippers tend to agree they need to know what is happening with costs and rates at their railroads. Even if this type of information does not result in any type of benefit to their rates or services, it is simply required knowledge for a professional in rail transportation. Shippers have found the following railroad data to be very valuable in negotiations.

The Cost of Specific Movements

Shippers need to know the margin railroads make on their movements. This data can be valuable in answering the following types of questions.

  • How low could a rate go if a shipper had competitive alternatives?
  • What is the profitability of individual movements for a railroad?
  • How much combined profit do all of a shipper’s movements provide to individual railroads? (How important are you to a railroad?)
  • How much profit will a railroad lose if you take certain movements away and how much profit will it gain if you add movements?
  • How will the railroad’s costs change if you change the parameters of your movement?
  • And, frequently most important:
    • What the railroads RVC’s for your major movements are in relation to benchmark RVC’s for your commodities.

How Much of a Shipper’s Commodity is Carried by a Railroad

Do you represent 80% of the shipments of a commodity on a railroad, or only 1% of all its shipments? You need to know whether you are the railroad’s only opportunity for carrying a commodity to certain markets. If that is the case, you need to partner with the railroad to penetrate certain areas and that needs to set the tone for negotiations. If a shipper is captive to a railroad but is the only opportunity for that railroad to obtain market share in a region, then it makes no sense for the railroad to give the shipper monopoly level rates. Shippers need to point these opportunities out to their railroads and demonstrate that rate increases are not beneficial to either of their volume and profit objectives.

The Political Impact You Can Have on a Railroad

One of the best and least frequently used methods of increasing negotiation leverage with railroads is political pressure. Railroads frequently interact with state and local officials in areas where shipper’s offices are located. Understanding what a railroad needs from local officials and how your company can help or hurt the railroad’s efforts is a good source of leverage, which frequently goes unused.

On the national level, involvement with congressional representatives in Washington, as well as with the STB can make a shipper much more important to a railroad. The government regulates railroads, and the greater a shipper’s input and access to politicians and regulators, the greater its potential leverage with a railroad.

Escalation Consultants has developed political leverage for many shippers and what we have found is that there is a right way and wrong way to address rail issues with politicians. In addition, all politicians are not equal in the eyes of railroads, but if you do this properly you become more important to a railroad. To give an example, after generating political pressure we had a meeting with the railroad. In the meeting our client was told that it was not the largest shipper of its commodity on the railroads system, but it was now the most important shipper of the commodity. The takeaway from this example is that if you have the ear of someone that is important to a railroad, then you become more important to that railroad.

Click here to read: Reducing Rates on Captive Rail Movements – Part 1

 

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Improving Rail Rates on Captive Movements

A Regulatory Perspective: Improving Rail Rates on Captive Movements

Improving Rail Rates on Captive Movements

Large increases in railroad’s profitability are improving shipper’s leverage in rate negotiations on captive movements. This is happening because high levels of railroad profit are factored into the RSAM[1] data that the STB uses to determine the outcome of a 3-Benchmark Rate Challenge. Higher railroad profits result in the RSAM data improving the ability for a shipper to win a 3-Benchmark Rate Challenge. This strengthens negotiation leverage on captive movements. 

As an example, based upon the latest RSAM data, a rail shipper’s captive rates could be similar to competitor. However, they would be considered more than 25% above competitors’ rates in a 3-Benchmark Rate Challenge. This will be a big deal for many rail shippers.  

This blog is not intended to make you an expert on the calculation of the STB RSAM data or on everything that goes into a 3-Benchmark Rate Challenger. The intent of this blog is to provide: 

  1. A general understanding of how the 3-Benchmarks are calculated; 
  1. The impact high railroad profits can have on a shipper’s chance of success in a rate challenge; and, 
  1. The potential change in a shipper’s negotiation leverage on captive rail movements is due to the large increase in railroad profitability.  

Calculating the 3-Benchmarks 

The following benchmarks are used in a 3-Benchmark Rate Challenge. The STB calculates the values for Benchmarks 1 and 2. Shippers and railroads each calculate the 3rd Benchmark

Benchmark 1 – RSAM (Revenue Shortfall Allocation Mark-up Ratio) 

  • RSAM represents the average Revenue to Variable Cost Ratio (RVC) a railroad would need to generate from its rates on all captive traffic (traffic with RVC’s above 180%) to be revenue adequate. 

Benchmark 2 – RVC>180% 

  • RVC>180% represents the average RVC a railroad obtains from the rates for all of its captive traffic (traffic with RVC’s above 180%

Benchmark 3 – RVC-Comp 

  • RVC-Comp is the average RVC for movement rates that are comparable to the rate for the contested movement.[2]  

Importance of Recent Change in RSAM Values on Shippers Chance of Success in a Rate Challenge  

The latest RSAM data substantially improves a shipper’s ability to win a 3-Benchmark Rate Challenge. This is because the recent increases in railroad profitability put significant downward pressure on railroads’ RSAM values and significant upward pressure on its RVC  > 180% value. Thus, your rates could be comparable to competitors, but be considered 25% above these rates in a 3-Benchmark Rate Challenge

 

To be clear, shippers don’t necessarily need to initiate a 3-Benchmark Rate Challenge at the STB. However, shippers do need to understand that a railroad now has more to lose by not listening to a shipper’s concerns about rates and service on moves where there is a lack of rail competition. 

Schedule a quick discovery call to learn how to best navigate these recent increases in railroad profitability & changes in RSAM Values.


[1] RSAM is Revenue Shortfall Allocation Markup Ratio calculated each year by the STB.

[2] Comparable movement rates must have RVC’s above 180%.

RCC Blog - Why Some Rail Shippers Get Lower Rates

Why Some Rail Shippers Get Lower Rates

Rail shippers that are smarter about their movements get better rates for their traffic.  

Escalation Consultants, Inc. is in a unique position to see this, as many shippers use our databases to get better rates for their rail movements. The fact is: shippers who know more about their traffic do better in negotiating rates with their railroads.  

Shippers least cost leverage for obtaining better rates from railroads starts with benchmarking and costing rates for their movements.  

The following are examples of how rail shippers have used Escalation Consultants’ market intelligence database to their advantage:      

 1. A Captive shipper showed the railroad the impact its current rate structure has on reduced volumes into major markets. Market intelligence showed the rates needed to protect this business.  

Result – Shipper’s rates were reduced more than 10% to pertinent markets.  


2. A railroad proposed a large rate increase on captive movements. The railroad was shown that its rates were already in the upper profitability quartile for moves in certain markets. Additionally, the railroad was shown that its proposed rate increases are higher than the average increase they are receiving from all movements of this commodity.

Result Railroad pulled back its rate increases, reduced rates on priority movements and signed a multi-year contract. 


3. A shipper performed an analysis of the profit structure for a company’s movements on its primary railroad. The analysis showed that the railroad was pricing its movements above competitors on both captive and competitive traffic. Rate Benchmark Analysis showed the rate structure needed to maintain and increase volumes in problem markets. 

Result – Rates were reduced in significant problem markets and the railroad increased the strike price for fuel surcharges without increasing the rates for movements.


4. The rates and the rail carriers’ profits on all movements from an important market area were analyzed. This determined the market price for the commodity and the impact of increased volumes and lower rates on railroads profit.

Result – Win/win opportunities associated with lower rates were put in place to the benefit of both the shipper and rail carrier. 


5. Rail rates for all coal movements originating in the PRB and terminating in a specific state were determined.  The range of rates being obtained by plants with and without competitive options was used to support the rates that were and were not reasonable for plants.

Result – Shipper obtained rates in line with its competitor’s plants.


6.The shipper determined competitors’ rates into markets to find out where its rail rates were putting it at a competitive disadvantage in markets.  

Result – Rates were reduced in primary markets to keep the shipper competitive.


7. Shipper determined the railroad’s cost and profit for movements and how its rates stacked up to others in major markets.   

Result – Rates in several primary markets were reduced to minimize the shipper’s competitive disadvantage in these markets. 


The common theme in these examples, is that the shipper was able to gather information on its markets.

This data allows shippers to clearly demonstrate a problem to the railroad and quantify the rate that provided an equitable solution. The point to be taken is that shippers who are well prepared for negotiations have better negotiations. They also get better rates than shippers that do not completely understand their markets. Rate benchmarking and the costing of rail movements provides ammunition that helps protect rail shippers from excessive rates charged by railroads. These resources are important to help counteract the monopoly or duopoly power railroads have over their customer’s traffic.

When railroads have monopoly power over movements it is up to the shipper to determine if the railroad is abusing this power. Thus, putting the shipper’s business at a competitive disadvantage.

Railroads are sensitive to hurting a companies’ ability to compete in markets. Therefore, benchmarking your rates against competitors is a productive exercise in preparing for rate negotiations. This can be the most productive and least costly option shippers have for obtaining competitive rates for their traffic. 

Uncovering, and quantifying rate problems is a major function of effective transportation departments! Many transportation professionals have found that determining reasonable rates for traffic is the first step in obtaining better rates.

Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program to help shippers reduce rail expenses by managing costs and empowering negotiations. For more information about RCC and other related articles, visit the RCC Blog.

 

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US Rail Station Captivity Map

Making Your Moves More Important to Railroads

The Rail Station Captivity Map

A basic rule to follow in getting more attention to your issues from railroads:

If you have the ear of people that are important to your railroads, then you make your moves more important to railroads.

Politicians have a big influence on railroads and can have a very positive impact on shipper’s rail negotiations. Politicians are also easy to access as they want to talk to shippers for self-serving reasons. Obtaining political support for your position in rail negotiations costs very little to pursue and can yield a positive return. The Rail Station Captivity Map was developed by Escalation Consultants to support discussions with politicians on railroad issues.

The Rail Station Captivity Map shows that 78.4% of all rail stations in the United States are captive to one Class I Railroad.

Figure A is color coded to show the percentage of all rail stations by state, that are captive to a single Class I railroad. Rail stations are captive if they don’t have either direct or indirect access, through a short line, to more than one Class I Railroad.

Making your movements more important to your railroads, USA

 

The number of states in each captivity range are shown below.

Breakdown of Rail Station Captivity in the US

# of States
% of Stations Captive to One Major Railroad
10 90% – 100%
18 80% – 89%
13 70% – 79%
5 60% – 69%
3 50% – 59%
0 25% – 49%
0 1% – 24%
Note: Hawaii is not included.

Railroads are always concerned about politicians, as they can have a significant impact on how railroads are allowed to operate. Unfortunately for railroad customers, it is frequently difficult to get the attention of politicians on rail rate issues. This is because the problems shippers experience with railroads are complex and not easy to explain.

It is easier to get a politician’s attention with an easy-to-understand picture, highlighting the importance of rail to specific areas they represent. Figure B shows this as it contains the rail station captivity by County for the state of Minnesota. Rail Station Captivity Maps are available, by county and Congressional District, for all states in the United States.

Making your movements more important to your railroads MN.

Escalation Consultants is making state maps available for rail shippers. Simply contact Escalation Consultants to request the Rail Station Captivity Map for your states of interest.  

The State Rail Station Captivity Maps are effective at getting the attention you need to help resolve problems. When shippers want to make movements more important to railroads, getting the attention of Congressmen and Senators is a good way of accomplishing this. Please note: all politicians do not have the same amount of sway over railroads. In addition, there is a right way and a wrong way to deal with politicians. This needs to be understood, and allowed for, in your discussions with politicians.

Rail Station Captivity Maps, for a specific area, are an excellent way of showing railroads and politicians why production will not increase, and capital investment will not be made at an existing location that is captive to one Class I railroad. Captivity maps illustrate areas that will have difficulty in achieving economic development from companies that rely on rail freight.

Shippers need to be able to show that railroads’ monopoly power over captive movements at a facility creates problems for both politicians and railroads.

Rail Station Captivity Maps are proof of the expression: “A picture is worth a thousand words.” Shippers are encouraged to use these maps to increase their leverage in rail negotiations.

 

Rail Cost Control (“RCC”) is a program developed by Escalation Consultants, Inc. to help shippers reduce rail expenses by managing costs and empowering negotiations. For more information about RCC and other related articles, visit the RCC Blog.”

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railroad car on sunny day at industrial plant

8 Ways to Improve Your Captive Rail Rates

Many rail shippers believe that if they are captive to a railroad at a location, they have little leverage to negotiate better rates.

The graph below shows why this isn’t a good way to look at your rail traffic. The graph contains rail rates for Iron or Steel Strip (STCC 33123) going into the captive rail market of Nashville, TN.

The question to answer with this graph is:

Why Are Rates So Different At a Destination Market Like Nashville, TN that Is Completely Captive To CSXT?


Improving captive rail rates graph

 

The graph shows that some rates are below $2,800, while other rates going the same distance, are above $7,000. The question is: If Nashville is a captive market, then why aren’t all rail rates above $7,000?

There are many reasons why rates for specific movements vary, but the big picture answer is very simple, Effective Strategic Planning. Shippers that make railroads look at their traffic differently get better rates from their railroads.

Strategic Planning causes captive moves to have different rate levels. Significant downward pressure on rail rates can be generated when the following issues are addressed by shippers in strategic planning.

Eight Ways to Get Better Rail Rates at Captive Locations

  1. Railroads need to compete for your business when you have multiple plants that produce the same product.
    • Even when a location is captive to a railroad, a shipper can use geographic competition to obtain lower rates from railroads.
  2. Large shippers that bundle all their rail traffic in an RFP can get better rates at captive locations.
    • In order for a railroad to get more of a shipper’s competitive traffic it must reduce its rates on captive traffic. More traffic is always better than less traffic in rail rate negotiations. RFP’s that take advantage of a shippers entire book of potential business increase negotiation leverage.
  3. Forward storage of products at captive locations.
    • To avoid bottle necks at captive locations, explore forward storage options at sites with rail competition, then truck to captive locations. You don’t have to bypass railroads at captive locations forever. Railroads get the message.
  4. Take freight costs out of the system with commodity swaps.
    • Commodity swaps work best when you have a competitor serve your customer when it’s facility is closer to the customer and you serve a competitor’s customer that is closer to your plant. The greater your rail expenses, the greater the benefit from commodity swaps. Commodity swaps can be a short-term action as a railroad gets the message pretty quickly.
  5. High rates create the economic incentive to invest capital to increase your logistics options.
    • The railroad needs to make it uneconomical for a shipper to take traffic off its system. If its rates are too high then other logistic and capital investment options become more attractive. A railroad must reduce cost to make these options less attractive.
  6. Railroads need to compete against trucking on short and mid distance moves.
    • Large rail rate increases allow trucks to compete with rail for longer distance moves. The cost of trucking and transloading needs to become the ceiling price for short and mid distance moves.
  7. Political pressure!
    • One of the best and easiest sources of leverage to create is political pressure. Politicians want to talk to you as your company is a great source for tax revenue, political contributions, and you employ many voters. Politicians can be a great benefit because if you have the ear of someone that is important to the railroad, then you become more important to the railroad. There is a right way and a wrong way to address politicians and all politicians are not equal which should be considered in your strategic planning.
  8. Foreign Imports: 
    • It doesn’t matter if a railroads moves are captive, if imports are reducing your domestic production. The shipper and railroads have the same goal with imports – STOP THE BLEEDING. Additional information on this topic will be contained in an upcoming Blog Article, on 2/10/2021.

 

For the last forty years, Escalation Consultants, Inc. has conducted the most highly recommended Rail Negotiation Seminar for shippers, and we have seen the results of changing how railroads view a shipper’s traffic.

Our Rail Cost Control program and consulting services are used extensively by shippers to reduce the rate structure for their movements.

Rail Cost Control (“RCC”) is a program developed by Escalation Consultants, Inc. to help shippers reduce rail expenses by managing costs and empowering negotiations. For more information about RCC and other related articles, visit the RCC Blog.

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