Tag Archive for: Captive Rail Rates

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Rail Cost Control Blog Article 11

The Cost of Being Captive to a Railroad

Traffic that’s captive to one major railroad is priced significantly higher than traffic where railroads must compete for movements. The difference between Captive Traffic and Competitive Traffic rail rates is very large.

Captive Traffic rates are, on average, 107% greater than Competitive Traffic rates.  

Table 1 demonstrates this rate difference. It illustrates profitability for both captive and competitive movements on the six largest Class I railroads. The table contains the average Revenue to Variable Cost Ratios (RVC) for captive and competitive traffic on each railroad. RVC’s in the table are calculated from the cost and revenue data provided by the Surface Transportation Board (STB) for captive and competitive moves on each railroad. 

Rail Rates for Captive vs Competitive Rail Movements

An RVC measures railroad profitability for movements. It is calculated by dividing the rate for a move by the railroad’s long term Variable Cost (Cost) for the move. Table 1 shows that the 185.9% RVC for Union Pacific (UP) is the highest average RVC. An RVC of 185.9% means that rates are on average 85.9% greater than UP’s Cost for moving its traffic.  

The breakdown of UP RVC’s is 248.9% for Captive Traffic and 135.4% for Competitive Traffic. This makes captive rates for UP 83.8% greater than competitive rates ((2.489 – 1.354) ÷ 1.354). The average increase in captive rates on all six railroads is 107.2%.  

The largest increases in captive rates over competitive rates are on CSXT 142.9%, CN (US) 140.8% and NS 103.6%.   

To convert RVC’s in Table 1 to rates, assume that the railroad’s average variable cost of moving captive and competitive carloads is $2,000. Table 2 shows that the average dollar per car increase for all railroads is $2,616.  

The average $2,616 captive rate increase, by itself, is greater than the total rate of $2,478 for railroad’s Competitive Traffic. 

Average Dollar Per Car Increase: Captive vs Competitive Rail Rates

The most significant captive rate increases, as compared to competitive rates, were observed on CSXT ($3,205) and CN (US) ($3,228). These are by far the largest dollar increase in captive rates. 

In order to obtain large rate reductions, shippers must make railroads compete for more of their traffic. There are several ways to accomplish this. With this in mind, Escalation Consultants’ next blog will address: Five Ways to Make Railroads Compete for Your Captive Traffic. 

Note – The US railroad industry is regulated by the STB. An RVC of 180% represents the Jurisdictional Threshold for rail movements. This is because the STB has no authority over rates with RVC’s below 180%. Moves with RVC’s above 180% have high levels of profit and are therefore considered captive by the STB. Rail moves with RVC’s below 180% have lower profit levels, and therefore, considered competitive.  

 

Rail Cost Control (“RCC”) is a program developed by Escalation Consultants, Inc. to help shippers reduce rail expenses by managing costs and empowering negotiations. Furthermore, 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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Escalation Consultants has been serving railroad customers since 1979.

The Rail Cost Control Program is an Escalation Consultants Inc. product. For the last 40 years Escalation Consultants has assisted companies in reducing the delivered cost of their products. We are normally involved with large and small rail shippers in reducing rail expenses on more than a billion dollars in rail spend annually.

Escalation Consultants has spent decades developing tools that automatically seek out and quantify opportunities for reducing rail expenses. The RCC contains these tools and they allow you to look at your movements differently in order to create more cost-effective negotiations with railroads.

To learn about Escalation Consultants Inc, more visit www.EscalationConsultants.com

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