Operating Ratio

The current generation of railroad management and investors are only interested in customers that they can charge the highest rates and do the least amount of work to get it.  They are not interested in growth, ONLY maximizing profits, and inflating that all important operating ratio.  My favorite example is if you make ten dollars and only spent a dollar making it, your operating ratio would be 10, pretty impressive.   Of course all you would have is $10.00, but at least you could go to Wall Street and brag about your OR.

Make no mistake - Precision Scheduled Railroading (or Pretty Sad Railroading, depending on your point of view) is all about stockholder value and the operating ratio. Wall Street loves low Operating Ratio numbers. The customers be ****ed.

I have read about a dozen white papers about PSR, published by various industry "experts" and railroad company officers. The word "customer" did not appear even once in any of them. What does that tell you?

The railroads are not interested in growing their customer base. All they are focused on right now is making the most money they can on their existing customer base. But that customer base is slowly dwindling because customer service has gotten so bad. And that, my friends, is a recipe for certain failure.

I give it a few more years before they wake up and realize that they really do need customers. 

And what happens if, say "Big Brown" does the math and says its OR would drop if they started to truck all of their containers.  The railroad OR would then skyrocket......

Rich; I especially agree with your last comment that the railroads will eventually shift back to business growth. “Great ideas” in business always seem to have a life cycle - they flare into existence, burn brightly for awhile, then fade away.

Railroads such as CN - which pioneered this psr nonsense - have pivoted back to growth.  JJ Ruest, CN’s CEO, has even stated something to the effect he’d rather have revenue growth with an OR of around 65 than static or declining revenue with an OR under 60.  CP under Keith Creel seems to be looking at achieving volume growth as well.

On the other side of the spectrum; we have the late great UP which now seems bent on destroying their franchise with ever higher rates on a declining traffic base while Messrs. Fritz and Vena work overtime gutting the property and destroying whatever employee morale still exists.

Curt

Rich, Unfortunately  that is most companies thinking now days. In the past RR companies have made some bad decision with the so called "flavor of the day" scheme.  Somebody will come up with something "new" catch phrase and thinking. The RR's will continue to survive as they have for all these years. They will regret some decisions and at times do something right. I was a 3rd generation railroader, I ended a streak of 97 years of railroading in my family. Heard and seen a lot of changes, both good and bad, come along. Common sense is about as scarce in the RR industry today as it is in todays life. Hopefully it will make a return before too much longer. They have to find that fine line between keeping the investors happy and continue to grow again.

@Dominic Mazoch posted:

Seems the big thing for the railroads are the super low operating ratios.  Maybe if the railroads and the stockholders need to ask a question.  And the question is:  SHOULD THE RAILROADS CHARGE A LOWER CHARGE FOR TRANSPORTATION SO THEY CAN GROW THE NUMBER OF CUSTOMERS.  OR ARE CUSTOMERS THE VERY THING THE RAILROADS ATE TRYING TO AVOID.

I would ask a different question:  Should railroads voluntarily provide timely and reliable service to all customers, at reasonable rates, or should the Surface Transportation Board re-regulate railroads and force them to provide timely and reliable service to all customers at reasonable rates?

It can happen if certain railroads continue to treat their customers with lack of respect.

In the business I've worked with and for I've seen two alarming trends in dealing with profit.  I've worked in and with a number of industries that are dealing with low profit issues.  The first method of dealing with low profits or high costs is to close manufacturing plants.  Unfortunately the decision of which plants to close and which to keep open is typically based on which plants have the lowest operating costs rather than on which plants produce the best product.  The net result becomes cyclical - customers don't want to buy low quality product so they buy less of it.  Profits go down and the industry again makes the decision on which plants to close.

Similarly, I've seen too many businesses that try to boost sagging profits by cutting costs, often at the expense of good, long term employees (who have higher salaries) and of equipment that's more expensive to operate (but also produces a superior product).  The difference gained by lower cost is not profit, it is simply money not spent.  The real solution to sagging sales is to sell more.  Sometimes you trim your margins to do it and hope to make it up in volume but increased sales is the way to go, not reduced costs.

I have said in my kinder moments that Hunter Harrison is the Chainsaw Al Dunlap of the railroad industry.  How can someone discuss "value" of a company and not consider things like the potential revenue base, the production capacity or having a pool of skilled employees on staff?

Some of PSR makes sense.  If several different kinds of freight need the same speed to get from point A to B, then mixing them together with set departure times makes sense.  I think the FEC uses the policy....

 But what if a customer wants, say, a ATSF SUPER C, or 199?  And is willing to pay for it.  Ate you going to leave good money on the table?

And guess is very few railroaders today lived through the PC and early CR era.

@Number 90 posted:

I would ask a different question:  Should railroads voluntarily provide timely and reliable service to all customers, at reasonable rates, or should the Surface Transportation Board re-regulate railroads and force them to provide timely and reliable service to all customers at reasonable rates?

It can happen if certain railroads continue to treat their customers with lack of respect.

Good questions.  Considering an important event in November...........Things can change....

I seems to me that most railroad customers are dependent on the railroads to get their products to market.  Railroads in general transport heavy or bulky items over medium to long distances.  Items like coal, grain, rock, plastic pellets, etc. can't easily be switched to other transportation modes.

Intermodal containers could go to trucks but it would take hundreds (thousands?) of trucks to equal one train load.  Some products, such as grain, can go by barge if the farming area is near a river.  Other products such as automobiles could also go by truck but again it would take hundreds of trucks to equal a trainload.  

This leaves both railroaders and their customers in a bad place.  Customers might be able to switch railroads but many cannot because their loading facilities are far from a competing railroad.  Railroaders don't have any new products to grow the business with.  Coal is going away as power plants convert to natural gas and oil will go to pipelines.  The nation can only grow and export so much grain.  

This leaves railroad management with only one option to improve or maintain profits - cut costs and raise rates.  Railroad customers have only one option also - pass on rising transportation costs to their customers.  

When people write about increasing the railroad customer base, I am wondering what products / customers are they suggesting that the railroads try to change from an existing mode (truck, air, barge, or pipeline) to the railroads?  Switching existing traffic from one railroad to another does not increase the total customer base.  

Maybe the railroads could get back the once huge fruit and vegetable traffic from the west to the east.  Unfortunately, most of the infrastructure to support this traffic has been torn down.  

NH Joe