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University Microfilms International 300 North Zeeb Road Ann Arbor, Michigan 46106 USA St. John's Road, Tyler's Green High Wycombe, Bucks, England HP10 6HR I I 78-10,095 PATRICK, John Michael, 1944AN EGCNGMIC ANALYSIS CF IMPROVING THE VIABILITY OF RAIL LINES: A MICHIGAN CASE STUDY. Michigan State University, Ph.D., 1977 Econanics, general University Microfilms International # Ann Arbor, Michigan 46106 AN ECONOMIC ANALYSIS OF IMPROVING THE VIABILITY OF RAIL LINES: A MICHIGAN CASE STUDY By John Michael P a trick A DISSERTATION Submitted to Michigan S tate U n iversity 1n p a r tia l f u lf illm e n t o f the requirements fo r the degree o f DOCTOR OF PHILOSOPHY Department o f A g ric u ltu ra l Economics 1977 ABSTRACT AN ECONOMIC ANALYSIS OF IMPROVING THE VIABILITY OF RAIL LINES: A MICHIGAN CASE STUDY By John Michael P a tric k In recent y e a rs , the status o f Michigan's r a i l system has become a major concern fo r Michigan tra n s p o rta tio n o f f i c i a l s . In 1973, nearly h a lf o f the Michigan Lower Peninsula r a i l system (2,2 00 m iles) was operated by two bankrupted ra ilro a d s — the Ann Arbor and the Penn C e n tra l. In a d d itio n , another 300 m iles o f r a i l lin e was pending s e rv ice abandonment p e titio n s before the In te rs ta te Commerce Commission. The general goal o f th is research e f f o r t has been to id e n tify in it ia t iv e s th a t Michigan tra n s p o rta tio n o f f i c i a l s can consider fo r Improving the long-term v i a b i l it y o f three regional Michigan r a i l lin e s : the Ann A rbor, the Michigan Northern (fo rm e rly p a rt o f the Penn C e n tr a l), and the C.O .-Northw est. s p e c ific research tasks were undertaken: To achieve th is goal, three (1 ) Id e n tific a tio n o f fac to rs th a t a f fe c t the v i a b i l i t y o f r a i l lin e s in general; (2 ) Determination o f the fin a n c ia l and operating status o f the Ann Arobr, the Michigan Northern, and the C.O .-Northw est, follow ed by evaluation o f o p p ortun ities fo r Improving the v i a b i l i t y o f the three Michigan r a i l lin e s ; and (3 ) S p e c ific a tio n o f programs and p o lic ie s th a t Michigan tran sp o rtatio n o f f i c ia ls can consider fo r improving the v i a b i l i t y o f the three Michigan r a i l lin e s . John Michael Patrick Over the years, regulation has re s tric te d the a b ilit y o f r a i l ­ roads to remain competitive through ra te and p lant size adjustments 1n response to changing market conditions and demand fo r transporta­ tion services. Consequently, many railroads have adopted operating procedures th a t minimize th e ir costs in the movement o f fr e ig h t. In terms o f r a il service q u a lity , the operating procedures favor large volume r a i l users and heavy-denslty r a il lin e s . For the lig h t- density r a il lin e composed p rim a rily o f small-volume r a i l users, the ra ilro a d s ' operating procedures often re s u lt in a vicious c ir c le of poor service, decline in demand fo r r a il se rv ice, loss o f t r a f f i c , ris in g u n it-co sts, cost-saving p ractices, poor service, e t c ., th at sp irals re le n tle s s ly towards the point th at the remaining t r a f f i c cannot cover the ra ilro a d 's cost o f operation and complete abandon­ ment o f service takes place. The Ann Arbor, Michigan Northern, and C.O.-Northwest are presently caught-up 1n the vicious c irc le o f d e te rio ra tin g r a i l service. The future v ia b ilit y o f the three Michigan r a i l lines depends upon reversing th is downward s p ir a l, improving the q u a lity o f r a il service, increasing ra ilro a d operating revenues and/or decreasing ra ilro a d operating costs. Under e x istin g federal and state r a il reorganization le g is la tio n , Michigan transportation o f fic ia ls have the authority and resources to (1 ) encourage a lte rn a ­ tiv e ra ilro a d and r a il user behavior, and (2) make changes in the configuration o f Michigan's r a il system th a t are lik e ly to lead to improvements in the v ia b ilit y o f the three Michigan r a il lin e s . John Michael Patrick Recommendations o ffered to Michigan transportation o f f ic ia ls fo r th e ir consideration as a re s u lt o f th is research include: (1 ) estab­ lis h in g r a i l user associations on the three Michigan lines to a rtic u ­ la te and bargain e ffe c tiv e ly w ith railroads fo r improved r a i l service; (2) discontinuing r a il service on portions of the Michigan Northern and lin kin g the Michigan Northern and C.O.-Northwest in to a regional r a il subsystem; (3) establishing a transportation au th ority to a rtic u la te the option demand held by many individuals and communities fo r av ailab le r a i l service in the fu tu re ; and (4) establishing a r a il service contract and evaluation committee to promote improved r a il service q u a lity * increased use o f r a i l service, and the adoption of c o s t-e ffe c tiv e measures in the production and consumption of r a il service. ACKNOWLEDGMENTS I would lik e to thank several persons who have contributed to th is research e f f o r t . The thesis guidance committee was composed o f Professors James D. S h a ffe r, Chairman, A. A llan Schmid, Lester V. Manderscheid, and Stanley Thompson. Professors S h affer and Thompson provided valuable guidance and support throughout the course o f th is study. The Michigan Department o f S tate Highways and Transportation provided valuable support fo r the data c o lle c tio n and processing phase o f th is research e f f o r t . Three Michigan Department o f Highways and Transportation o f f i c ia ls were o f p a r tic u la r help in th is regard; they are Thomas Trimbach, former Manager o f the R ailroad Planning S ection , Roger Brower, Transportation Planner, Railroad Planning S ectio n , and Richard Esch, Manager, Statewide Transportation Analysis and Research Section. I also wish to thank n\y mother and fa th e r fo r t h e ir many hours o f assistance 1n coding and ta b u la tin g data and Ann B anfield fo r typing the o rig in a l d r a ft o f th is study. Special thanks go to n\y w ife , Mary, who s e t aside valuable time from her own graduate studies to type the f in a l d r a f t , Bernie Ferres fo r her e d ito r ia l assistance, and Janet Lang fo r her expressed in te re s t and support during the course o f th is research e f f o r t . I am also g ra te fu l fo r the fin a n c ia l assistance provided by the Michigan A g ric u ltu ra l Experiment S ta tio n , the Department o f ii 111 A g ric u ltu ra l Economics, Michigan S tate U n iv e rs ity , and the Economic Research S ervice, U.S. Department o f A g ric u ltu re . F in a lly , 1 would e s p e c ia lly lik e to thank Professor James D. S h affer fo r Increasing the relevance o f rny economic tra in in g by challenging me to in te g ra te p rin c ip le s o f in d iv id u a l and group behavior w ith tr a d itio n a l economic theory. TABLE OF CONTENTS Chapter Pa9e LIST OF TABLES.................................................................................... LIST OF FIGURES ........................................................................ I. x x v ii THE PROBLEM, SCOPE OF THE RESEARCH EFFORT, AND ANALYTICAL FRAMEWORK .................................................................... 1 The Problem ................................................................ Decline in the U.S. Railroad Industry . . . ........................ Causes ........................................................................................ 1 2 Federal Legislation and the Northeast and Midwest Railroad Problem................................................................ 3 Michigan's Rail System.................................................................... 5 Scope of the Research E ffo r t................................................ Research Objectives. . . . ............................................... Research Procedures............................................................... 6 10 11 Analytical Framework....................................................................... IPB Framework - General Form ........................................... In s titu tio n s ....................................................................... Behavior............................................................................... Performance....................................................................... In s titu tio n s and Physical and Technical Characteristics of Goods and Services........................... High Exclusion Cost Goods and Services. . . . Goods and Services with Lumpy and In d iv is ib le Cost Structures....................................... Investment Coordination ............................................... Option Demand and Contingent Claims ....................... Sumnary............................................................................... A lternative Modes of Behavior and Performance. . E x it, Voice, and Loyalty............................................... Improved Performance....................................................... Willingness to Use Voice............................................... E xit: Not Too Easy or Too A ttrac tiv e . . . . Sunmary............................................................................... 1v 12 12 12 12 15 16 16 18 18 19 19 20 20 21 24 25 27 Chapter II. Page Logic o f C o lle c tiv e Action .......................................... Individual Behavior and C o lle c tiv e 27 Goods and S e r v ic e s ................................ Group S ize , Organization Costs and S elective Incentives ............................. . . . . S ele ctive Incentives: A Few Examples . . . . 27 Provision o f Rail Service in the IBPFramework . In s titu tio n a l Variables .......................................... Behavioral Variables: Techniques, SOPs, 33 arid Coordinating Agreements............... 34 Perform ance................................................ 31 31 SOME FACTORS INFLUENCING THE VIABILITY OF RAILROAD OPERATIONS ................................................................... Demand fo r Transportation Services and Regulation . . Derived Demand ................................................................... Railroads: The Early Years.......................................... Regulation o f R ailroads.................................................. Changing Market and Demand fo r Freight Transportation................................................................... Regulation o f Intermodal Competition ..................... Rail Service Q uality as Rail Users View I t . . . Trade-O ff between Transportation Costs, Inventory Costs, and Customer Sales ..................... Summary................................................................................... 28 30 35 36 36 39 41 44 46 48 53 57 Factors Influencing the V ia b ilit y o f Rail Operations and The Q uality o f Rail S ervice..................... Railroad Cost-Output Relationships ......................... 57 58 Fluctuating Revenues, Cash-Flow Problems, and Branch Line Operations...................................................... 60 Some S trategies fo r Retaining and Improving Branch Line S e r v ic e ................................................................... P rivate and P u b lic /P riv a te E ffo rts to Retain and Improve Rail S ervice.............................................. Public Ownership and Operation, Public Ownership and P rivate Operation o f Branch Lines Short Line R a ilr o a d s ...................................................... Branch Line R a tio n a liz a tio n .......................................... Summary................................................................................... v 67 69 73 79 89 91 Page Chapter In tr a - and Inter-R ailroad Operating Procedures, In te rlin in g o f Rail Shipments, and Rail Service Q u a lit y ........................................................................ In te rlin in g : An Example ............................................ C lassification Yards .................................................... Railroad Cooperation and Competition .................... 91 92 96 96 Rail User Size, Routing, and RailService Quality . . The Importance of Routing............................................ 98 99 Rail Users' Association, Q uality o f Rail Service, and Branch Line V i a b i l i t y .................................................. Rail Users' Associations: What I t Can Do. . . . Rail Users' Associations and the In te rs ta te Commerce Commission .................................................... Organizational Costs .................................................... Summary................................................................................ III. 100 101 103 108 110 THE CURRENT FINANCIAL AND OPERATING STATUS OF THE ANN ARBOR, MICHIGAN NORTHERN, AND C.O.NORTHWEST RAIL LINES................................................................ 114 Information and Data Constraints........................................ 115 The 118 118 Ann Arbor Rail L i n e ...................................................... Background........................................................................ Importance of the Ann Arbor Car Ferry and Bridge T r a ff ic ........................................................ D istribution o f O riginating and Terminating Freight Shipments........................................................ Analysis o f O riginating and Terminating Freight Shipments In 1973 ....................................... Analysis o f Rail Service Operating Revenues and Expenses fo r Originating and Terminating Freight Shipments in 1973 ....................................... Michigan Northern Rail L i n e ................................................ Background........................................................................ Analysis o f Originating and Terminating Freight Shipments in 1973 ....................................... Analysis o f Rail Service Operating Revenues and Expenses fo r Originating and Terminating Freight Shipments.......................................................... C.O.-Northwest Rail Line Background........................................................................ Analysis o f O riginating and Terminating Freight Shipments In 1973 . ................................... vi 120 125 128 134 141 141 142 148 151 152 Chapter IV . Page Analysis o f Rail Service Operating Revenues and Expenses fo r O riginating and Terminating Freight Shipments ................................. Summary. ........................... * ................................. 157 159 PRESENT AND FUTURE OPPORTUNITIES FOR INCREASING RAIL USE LEVELS ON THE ANN ARIOR, MICHIGAN NORTHERN, AND C.O.-NORTHWEST RAIL LINES ......................... 161 Opportunities fo r Increasing the Present Level o f Rail Use on the Ann Arbor and Michigan Northern * Rail Lines........................ Demand fo r Rail Service and Rail Service Q u a li t y ...................................................................... Demand fo r Rail Service by Rail Users on the Ann Arbor and Michigan Northern Rail Lines. Interview Procedure ......................... . . . . . . . . . . 161 161 164 165 Discussion o f Interview Results . . ............................. 168 Rail User C la s s ific a tio n by O rigination and Termination o f Freight Shipments............. 169 Rail Users' S e n s itiv ity to Rail Service Q u a lity . 170 Dimensions o f Rail Service Q uality ......................... 172 D istrib u tio n o f Freight Shipments by S tatio ns. . 177 Commodity Types and S e n s itiv ity to Dimensions o f Rail Service Q u a lity ................. 183 Summary.......................................................................... 194 Impact o f Improved Rail Service on the Financial Position o f the Ann Arbor and Michigan Northern Lines ............................................. 195 Routing and Pooling o f Rail Shipments............. 199 R ehabilitation o f the Ann Arbor and Michigan Northern Lines ............................................. 203 Summary.......................................................................... 207 Future Opportunities fo r Increasing Rail Use Levels on the Ann Arbor, Michigan Northern, and 208 C.O.-Northwest...................................................................... Population and Employment Changes a t the County Level..................................................... 209 Michigan Railroads Losing Freight to Trucks. . . 219 In d u s trial Development Potential ............................. 221 Summary.......................................................................... 224 vi 1 Chapter V. Pa9© THE FINANCIAL CONSEQUENCES OF ORGANIZING THE ANN ARBOR, MICHIGAN NORTHERN, AND C.O.-NORTHWEST RAIL LINES INTO A REGIONAL RAIL SUBSYSTEM......................... 226 Sequential R ail Link A n a ly s is .............................................. Light Density Lines and Unused Railroad C a p a c ity ........................................................... Sequential Rail Link Analysis: An Example . . . V I. 227 227 228 Evaluation o f Line Segmentation and A lte rn a tiv e Regional Rail Subsystems........................................................... Data Used............................................................................... Unused Tra1n-U nit Capacity .......................................... Michigan Northern Line Segment A n alysis................. C.O.-Northwest Line Segment Analysis ..................... Analysis o f A lte rn a tiv e Line Combinations. . . . A lte rn a tiv e Regional Rail Subsystems ..................... 232 232 232 234 239 243 244 Summary................................................................................................ 258 IMPROVING THE VIABILITY OF SELECTED MICHIGAN RAIL LINES: SUMMARY RECOMMENDATIONS, AND FURTHER RESEARCH............................................................................................ 259 Summary............................................................................................ Major Factors and Key Relationships A ffectin g Railroad O perations............................ Changing Demand fo r Transportation Services . Intermodal Competition fo r Manufactures . . . Railroad Cooperation and Competition....... Railroad Costs, Revenues, and CashFlow Problems..................................................... Railroad and Rail User Behavior and Counter-Behavior ...................................................... S trategies fo r Retaining and Improving Branch Line S ervice........................................ Rail User Size and R ail Service Q uality . . . Rail Users' Association, Q uality o f Service and Branch Line V i a b i l i t y ........... Some Concluding P o in ts.................................... 261 261 261 263 264 265 266 267 268 269 270 Ann Arbor, Michigan Northern, and C .O .Northwest R ail Operations.................................... 271 Financial Operation Status o f the Ann Arbor, Michigan Northern, and C .O .Northwest Rail Lines .............................................. Opportunities fo r Increasing Rail Use Levels on the Ann Arbor and Michigan Northern R ail Lines........................................ 272 v iii 271 Chapter Pa9® Some Concluding P o in ts............................................... 277 Recommendations ............................................................................ Recommendation O n e ............................................................ Recommendation T w o ............................................................ Recommendation Three ........................................................ Recommendation Four............................................................ Recommendation F iv e ............................................................. Recommendation S i x ............................................................ Recommendation Seven ........................................................ 278 278 282 284 286 286 286 287 Further Research............................................................................ 1. Evaluation o f A lte rn a tiv e In s titu tio n s . . . 2. In v e s tig a te O pportunities fo r Developing O ff-L in e T r a f f i c ...................................... 3. Demand A n aly sis........................................................... 288 288 APPENDIX A......................................................................................... 293 APPENDIX B......................................................................................... 302 APPENDIX C......................................................................................... 317 BIBLIOGRAPHY..................................................................................... 327 1x 290 290 LIST OF TABLES Table 2-1 2-2 2-3 3-1 3-2 3-3 3-4 3-5 3-6 3-7 3-8 Page MANUFACTURES INTERCITY FREIGHT TONNAGE: MODAL SHARE OF TRAFFIC FOR SELECTED COMMODITIES, 1967, 1970. . ................................................................... 49 TRAFFIC DATA FOR COMPARABLE CLASS I - BRANCH LINE AND CLASS I I - SHORT LINE RAILROAD OPERATIONS, 1972................................................................... 83 SUMMARY AND COMPARISON OF ECONOMIC INDICATORS FOR CLASS I - BRANCH AND CLASS I I - SHORT LINE RAILROAD OPERATIONS, 1972........................................ 84 ANN ARBOR CARFERRY TO/FROM KEWANUEE AND MANITOWAC: 1972, 1973, 1974 (CARLOADS)........................ 121 SELECTED ANN ARBOR RAILROAD REVENUES, COSTS, AND PROFIT FIGURES, 1972, 1973, 1974............................ 122 ANN ARBOR RAILROAD ORIGINATING AND TERMINATING TRAFFIC, 1972, 1973, 1974 ........................ 124 ANN ARBOR RAIL LINE (FRANKFORT TO TOLEDO, OWOSSO TO SAGINAW), 1973................................................... 129 ANN ARBOR RAIL LINE: DISTRIBUTION OF CARLOADS BY ORIGIN ANDTERMINATION, 1973 .................................... 130 ANN ARBOR RAIL LINE: DISTRIBUTION OF TRAFFIC BY MAJOR COMMODITY GROUPS, 1973 .................................... 131 ANN ARBOR RAIL LINE: DISTRIBUTION OF 1973 CARLOADS ORIGINATING ON THE ANN ARBOR AND TERMINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION............................................................................... 133 ANN ARBOR RAIL LINE: DISTRIBUTION OF 1973 CARLOADS TERMINATING ON THE ANN ARBOR AND ORIGINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION............................................................................... 133 x Table 3-9 3-10 3-11 3-12 3-13 3-14 3-15 3-16 3-17 3-18 3-19 3-20 3-21 Page ANN ARBOR RAIL LINE (FRANKFORT TO TOLEDO, OWOSSO TO SAGINAW), 1973 FINANCIAL STATUS ............... 138 MICHIGAN NORTHERN RAIL LINE (GRAND RAPIDS TO MACKINAW CITY, WALTON JCT. TO TRAVERSE CITY), 1973............................................................................................ 143 MICHIGAN NORTHERN RAIL LINE, DISTRIBUTION OF CARLOADS BY ORIGIN AND TERMINATION, 1973.................... 144 MICHIGAN NORTHERN RAIL LINE, DISTRIBUTION OF 1973 TRAFFIC BY MAJOR COMMODITY GROUP ........................ 145 MICHIGAN NORTHERN RAIL LINE, DISTRIBUTION OF 1973 CARLOADS ORIGINATING ON THE MICHIGAN NORTHERN AND TERMINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION........................................................ 146 MICHIGAN NORTHERN RAIL LINE, DISTRIBUTION OF 1973 CARLOADS TERMINATING ON THE MICHIGAN NORTHERN AND ORIGINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION........................................................ 147 MICHIGAN NORTHERN RAIL LINE (GRAND RAPIDS TO MACKINAW CITY, WALTONJCT. TO TRAVERSE CITY), 1973 FINANCIAL STATUS...... ..................................................... 150 C.O.-NORTHWEST RAIL LINE: COMMODITIES, CARLOADS, TONS, AND GROSS REVENUES, 1973........................................ 153 C.O.-NORTHWEST RAIL LINE, DISTRIBUTION OF TRAFFIC BY MAJOR COMMODITY GROUPS ................................ 154 C.O.-NORTHWEST RAIL LINE, DISTRIBUTION OF CARLOADS BY ORIGIN AND TERMINATION, 1973.................... 155 C.O.-NORTHWEST RAIL LINE, DISTRIBUTION OF CARLOADS ORIGINATING ON THE C.O.-NORTHWEST AND TERMINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION................................................................ 156 C.O.-NORTHWEST RAIL LINE, DISTRIBUTION OF CARLOADS TERMINATING ON THE C.O.-NORTHWEST AND ORIGINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION, 1973 .................................................... 157 C.O.-NORTHWEST RAIL LINE (MANISTEE TO PETOSKEY), 1973 FINANCIAL STATUS ........................................................ 158 x1 Table 3-22 4-1 4-2 4-3 4-4 4-5 4-6 4-7 4-8 4-9 4-10 4-11 Page ANN ARBOR, MICHIGAN NORTHERN, C.O.-NORTHWEST RAIL LINES, FINANCIAL INDICATORS, 1973.......................... 160 CLASSIFICATION OF ANN ARBOR AND MICHIGAN NORTHERN RAIL USERS BY ORIGINATION AND TERMINATION OF CARLOADS ...................................................... 169 CLASSIFICATION OF ANN ARBOR AND MICHIGAN NORTHERN RAIL USERS BY WILLINGNESS TO INCREASE THEIR USE OF RAIL SERVICE.................................................. 170 CLASSIFICATION OF ANN ARBOR AND MICHIGAN NORTHERN RAIL USERS BY ORIGINATION AND TERMINATION OF CARLOADS AND RESPONSIVENESS TO IMPROVEMENTS IN RAIL SERVICE QUALITY.............................. 171 ANN ARBOR RAIL USERS' TERMINATING CARLOADS, NEEDED AREAS OF RAIL SERVICE IMPROVEMENT...................... 173 ANN ARBOR RAIL USERS' ORIGINATING CARLOADS, NEEDED AREAS OF RAIL SERVICE IMPROVEMENT....................... 173 MICHIGAN NORTHERN RAIL USERS' TERMINATING CARLOADS, NEEDED AREAS OF RAIL SERVICE IMPROVEMENT............................................................................... 174 MICHIGAN NORTHERN RAIL USERS' ORIGINATING CARLOADS, NEEDED AREAS OF RAIL SERVICE IMPROVEMENT............................................................................... 175 CARLOADS, TONS, CARRIER GROSS REVENUE FOR ANN ARBOR AND MICHIGAN NORTHERN RAIL LINES UNDER PRESENT RAIL SERVICE QUALITY AND IMPROVED RAIL SERVICE QUALITY............................................................... 176 ANN ARBOR RAIL LINE: 1976 CARLOADS, TONS, GROSS REVENUES BY LINE SEGMENT (PRESENTRAIL SERVICE) . . 179 ANN ARBOR RAIL LINE: INCREASES IN 1976 CARLOADS, TONS, GROSS REVENUES, BY LINE SEGMENT (IMPROVED SERVICE).................................................................. 180 MICHIGAN NORTHERN RAIL LINE: 1976 CARLOADS, TONS, GROSS REVENUES BY LINE SEGMENT (PRESENT RAIL SERVICE)................................................................................... 181 x1t Table 4-12 4-13 4-14 4-15 4-16 4-17 4-18 4-19 4-20 4-21 4-22 4-23 Page MICHIGAN NORTHERN RAIL LINE: INCREASES IN 1976 CARLOADS, TONS, GROSS REVENUES, BY LINE SEGMENT (IMPROVED RAIL SERVICE) ...................................................... 182 ANN ARBOR RAIL LINE, SHIPPER RESONSE TO IMPROVEMENTS IN RAIL SERVICE QUALITY— INCREASES IN CARLOADS, TONS, GROSS REVENUES, BY COMMODITY, AND KEY RAIL SERVICE QUALITY ELEMENTS.......................... 184 MICHIGAN NORTHERN RAILROAD: SHIPPER RESPONSE TO IMPROVEMENTS IN RAIL SERVICE QUALITY— INCREASES IN CARLOADS, TONS, GROSS REVENUES, BY COMMODITY AND KEY RAILSERVICE QUALITY ELEMENTS.......................... 185 ANN ARBOR RAIL LINE: GRAIN SHIPMENTS 1976, IMPACT OF CAR SHORTAGE........................................................... 187 GRAIN SHIPMENTS BY MICHIGAN ELEVATORS, BY MODE, 1973................................................................................................ 189 GRAIN SHIPMENTS BY MICHIGAN ELEVATORS FOR RAIL, BUT DIVERTED TO TRUCKS FOR LACK OF RAIL CARS, 1973................................................................................................ 190 COMPARISON OF ANN ARBOR AND MICHIGAN NORTHERN FREIGHT SHIPMENT DATA FOR 1973 AND 1976: CARLOADS, TONS, OPERATING REVENUE, EXPENSES, NET OPERATING INCOME............................................................... 196 ANN ARBOR AND MICHIGAN NORTHERN RAIL LINES: DO SHIPPERS SPECIFY THE ROUTING OF THEIR SHIPMENTS?.................................................................................... 200 ANN ARBOR AND MICHIGAN NORTHERN RAIL LINES: HAVE RAIL USERS ENGAGED IN POOLING OF SHIPMENTS? . 201 ANN ARBOR AND MICHIGAN NORTHERN RAIL LINES: WOULD YOU POOL SHIPMENTS OR ENGAGE IN OTHER COOPERATIVE EFFORTS IN THE FUTURE?................................. 203 ANN ARBOR AND MICHIGAN NORTHERN RAIL LINES: IS REHABILITATION OF YOUR LINE NEEDED FOR IMPROVING RAIL SERVICE? ...................................................... 206 FINANCIAL STATUS OF ANN ARBOR AND MICHIGAN NORTHERN UNDER CONDITIONS OF IMPROVED RAIL SERVICE........................................................................................ 208 xi 11 , Page POPULATION'CHANGE, SELECTED MICHIGAN COUNTIES, 1960 AND 1972 ........................................................................ 212 NON-AGRICULTURAL EMPLOYMENT DISTRIBUTION IN EMMET, CHARLEVOIX, ANTRIM, KALKASKA, GRAND TRAVERSE, WEXFORD, MANISTEE, MISSAUKEE, LEELANAU, AND BENZIE COUNTIES, MICHIGAN, 1959-1972................. 213 NON-AGRICULTURAL EMPLOYMENT DISTRIBUTION IN OSCEOLA, MECOSTA, MONTCALM, AND KENT COUNTIES, MICHIGAN, 1959-1972 ........................................................... 215 NON-AGRICULTURAL EMPLOYMENT DISTRIBUTION IN CLARE, ISABELLA, GRATIOT, SHIAWASSEE, LIVINGSTON, WASHTENAW, AND MONROE COUNTIES, MICHIGAN, 1959-1972 ........................................................... 216 MICHIGAN: PERCENT DISTRIBUTION OF OUTBOUND COMMODITIES, BY MEANS OF TRANSPORTATION, 1967 AND 1972 ........................................................................ 220 COMMERCIAL TRUCK TRAFFIC ON ALL-WEATHER MICHIGAN ROADS THAT PARALLEL PORTIONS OF THE ANN ARBOR, MICHIGAN NORTHERN, AND C .O .NORTHWEST RAIL LINES, 1970 AND 1975 .......................... 222 BREAK EVEN POINTS FOR ANN ARBOR, MICHIGAN NORTHERN AND C.O.-NORTHWEST RAIL OPERATIONS IN 1976 WITH IMPROVED RAIL SERVICE. . . . . . .. . 235 MICHIGAN NORTHERN RAIL LINE SEGMENT ANALYSIS: REVENUES AND COSTS, NET OPERATING COSTS, WITH IMPROVED RAIL SERVICE ....................................................... 237 C.O.-NORTHWEST RAIL LINE SEGMENT ANALYSIS: 1973 CARLOADS, OPERATING REVENUES AND COSTS, NET OPERATING INCOME........................................................... 241 SYSTEM A: TOLEDO-FRANKFORT, OWOSSO-SAGINAW; CADILLAC-TRAVERSE CITY-PETOSKEY; MANISTEEPETOSKEY..................................................................................... 246 SYSTEM B: TOLEDO-FRANKFORT; OWOSSO-SAGINAW; CADILLAC-TRAVERSE CITY; GRAWN-BATES; CHARLEVOIX-PETOSKEY ........................................................... 248 xlv Table 5-6 Page SYSTEM C: TOLEDO-FRANKFORT, OWOSSO-SAGINAW; CADILLAC-PETOSKEY-CHARLEVOIX; THOMPSONVILLEBATES........................................................................................ 250 SYSTEM D: TOLEDO-FRANKFORT, OWOSSO-SAGINAW; THOMPSONVILLE-PETOSKEY........................................................ 252 SYSTEM E: TOLEDO-FRANKFORT, OWOSSO-SAGINAW; CADILLAC-TRAVERSE CITY-PETOSKEY-CHARLEVOIX................ 254 COMPARISON OF THE FINANCIAL STATUS OF ALTERNATIVE REGIONAL RAIL SYSTEMS, MICHIGAN NORTHERN AND C.O.-NORTHWEST COMBINED............................ 256 COMPARISON OF THE FINANCIAL STATUS OF ALTERNATIVE REGIONAL RAIL SYSTEMS, ANN ARBOR, MICHIGAN NORTHERN, AND C.O.-NORTHWEST COMBINED.................................................................................... 257 B-l ANN ARBOR RAIL USERS SURVEY............................................. 302 B-2 MICHIGAN NORTHERN RAIL USERS SURVEY .............................. 310 C-l ANN ARBOR RAILWAY: 1973 INBOUND AND OUTBOUND CARLOADS, BY COMMODITY BY REGION........................... . . 318 ANN ARBOR RAILWAY: 1973 INBOUND CARLOADS, BY COMMODITY BY REGION............................................................ 319 ANN ARBOR RAILWAY: 1973 OUTBOUND CARLOADS, BY COMMODITY BY REGION............................................................ 320 MICHIGAN NORTHERN RAIL LINE: 1973 INBOUNDOUTBOUND COMBINED CARLOADS, BY COMMODITY BY REGION........................................................................................ 321 MICHIGAN NORTHERN RAIL LINE: 1973 INBOUND CARLOADS, BY COMMODITY BY REGION.................................... 322 MICHIGAN NORTHERN RAIL LINE: 1973 OUTBOUND CARLOADS, BY COMMODITY BY REGION.................................... 323 C.O.-NORTHWEST RAIL LINE: 1973 INBOUNDOUTBOUND COMBINED CARLOADS, BY COMMODITY BY REGION........................................................................................ 324 C.O.-NORTHWEST RAIL LINE: 1973 INBOUND CARLOADS, BY COMMODITY BY REGION........................................................ 325 5-7 5-8 5-9 5-10 C-2 C-3 C-4 C-5 C-6 C-7 C-8 xv Table C-9 Page C.O.-NORTHWEST RAIL LINE: 1973 OUTBOUND CARLOADS, BY COMMODITY BY REGION......................................................... xvi 326 LIST OF FIGURES Fi gure Page 1-1 MICHIGAN'S RAILROAD NETWORK............................................... 9 2-1 RELATIONSHIP BETWEEN TRANSPORTATION COSTS, INVENTORY COSTS, AND TOTAL COST..................................... 55 RELATIONSHIP BETWEEN PHYSICAL DISTRIBUTION COSTS AND COSTS OF CONSUMER SERVICE............................. 57 TRENDS IN THE NET OPERATING INCOME, FIXED COSTS, CASH-FLOWS: CLASS I RAILROADS, 1960-1970. . 62 2-4 HYPOTHETICAL CARLOAD SHIPMENT ........................................... 93 4-1 21-COUNTY AREA SERVED BY THE ANN ARBOR, MICHIGAN NORTHERN, AND C.O.-NORTHWEST RAIL LINES. . 210 LINE SEGMENT ANALYSIS: HYPOTHETICAL SITUATIONS, RAILROAD 1 ................................................................................... 229 LINE SEGMENT ANALYSIS: HYPOTHETICAL SITUATIONS, RAILROADS I AND I I .................................................................. 231 MICHIGAN NORTHERN RAIL LINE: CADILLAC-TRAVERSE CITY-PETOSKEY ........................................................................... 240 5-4 C.O.-NORTHWEST RAIL LINE: GRAWN-PETOSKEY....................... 242 5-5 SYSTEM A: TOLEDO-FRANKFORT, OWOSSO-SAGINAW; CADILLAC-TRAVERSE CITY-PETOSKEY; MANISTEEPETOSKEY....................................................................................... 245 SYSTEM B: TOLEDO-FRANKFORT, OWOSSO-SAGINAW; CADILLAC-TRAVERSE CITY-PETOSKEY; GRAWN-BATES, CHARLEVOIX-PETOSKEY .............................................................. 247 SYSTEM C: TOLEDO-FRANKFORT, OWOSSO-SAGINAW; CADILLAC-PETOSKEY-CHARLEVOIX; THOMPSONVILLE-BATES . 249 2-2 2-3 5-1 5-2 5-3 5-6 5-7 x v il Page Fi gure 5-8 5-9 SYSTEM D: TOLEDO-FRANKFORT, OWOSSO-SAGINAW; THOMPSONVILLE-PETOSKEY........................................................... 251 SYSTEM E: TOLEDO-FRANKFORT, OWOSSO-SAGINAW; CADILLAC-TRAVERSE CITY-PETOSKEY-CHARLEVOIX................. 253 xvi 1 i CHAPTER ONE THE PROBLEM, SCOPE OF THE RESEARCH EFFORT, AND ANALYTICAL FRAMEWORK The Problem Decline in the U.S. Railroad Industry Railroads played a key ro le in the rapid expansion and develop­ ment o f the United States during the 19th and early 20th centuries. Over the past 50 years, however, the U.S. railro ad industry has experienced economic decline, stagnation and bankruptcy o f major and minor roads; the recent Penn Central collapse being exemplary of the 111 health o f much o f the ra ilro a d industry today. At the time o f its bankruptcy in June, 1970, the Penn Central employed 90,000 people, operated some 20,000 miles o f track in 16 states, the D is tr ic t o f Columbia, and two Canadian provinces. Its te r rito r y included 55 percent o f the nation's manufacturing plants and 60 percent o f its manufacturing employees. An integral part of the nation's transportation system, Penn Central handled more than 20 percent o f a ll the fre ig h t cars loaded in the U.S.; over 80 percent of its t r a f f ic interchanged with other ra ilro a d s .1 Review o f a few In te rc ity fre ig h t s ta tis tic s illu s tra te s the decline o f U.S. railroads v is -a -v is other transportation modes. U n ite d States Railway Association, Preliminary System Plan, Volume 1, February 26, 1975, p. 1. 1 2 In 1947, railroads accounted fo r 65 percent o f the in te rc ity fre ig h t ton-mlles 1n the U.S.; by 1973, the ra ilro ad s' share had dropped to 38 percent. During the same period, trucks Increased th e ir share o f to ta l In te rc ity fre ig h t ton-mlles from 10 percent to 23 percent; o il pipelines increased th e ir share from 10 percent to 22 percent; 1nland waterways increased th e ir share from 14 percent to 16 percent. 2 When changes in the composition o f the in te rc ity fre ig h t market are accounted fo r, we find that the ra ilro ad s' re la tiv e position has deteriorated more than the in te rc ity fre ig h t ton-mile figures suggest. In 1940, railroads earned 55 percent o f the in te rc ity fre ig h t revenues; by 1973, th e ir share had fa lle n to 23 percent. An indication o f the U.S. ra ilro a d industry's ill- h e a lt h is it s chronically poor and declining rate of return on investment in trans­ portation property; rate o f return on investments fo r the U.S. r a i l ­ road industry was 3.44 percent in 1947 and 2.95 percent in 1972. For railroads in the Eastern D is tr ic t, including Northeast and Midwest railro ad s, the rate o f return on investment was 3.02 percent in 1947 and 0.44 percent in 1972. 3 Causes. ills . No single cause can be attrib u ted to the ra ilro a d s ' Many complex and in te rre la te d factors have contributed to 2 Task Force on Railroad Productivity, Improving Railroad P roductivity, A Report to the National Commission on Productivity and the Counci 1 of Economic Advisors, Washington, D .C ., 1973, p. 3. 3Ib id ., pp. 31-32, 91. 3 the current s itu a tio n . Among the more Important factors are: 1. rapid development o f competing technologies since the 1920's, including the automobile, tru c k , barge, p ip e lin e , and a irp la n e . 2. massive public support fo r competing tran sp o rtatio n modes through the provision o f public funds fo r construction and maintenance o f ground f a c i l i t i e s and r1ghts-of-w ay. 3. basic changes in underlying market conditions. Including s h ifts in population centers, location o f industry and t r a f f i c flow s. 4. the in a b ilit y o f the ra ilro a d industry to ad just to changing market.conditions because o f fix e d f a c i l i t i e s , and a regulatory clim ate th a t constrains management's f l e x i b i l i t y and options to adjust through p rice changes, mergers, and abandonment o f obsolete p roperties and lin e . 5. r e s tr ic tiv e work rules th a t create serious b a rrie rs e f f ic ie n t use o f labor in the ra ilro a d Industry. 6. in s u ffic ie n t in te rn a l funds to maintain and upgrade r a i l ­ road f a c i l i t i e s , re s u ltin g in the adoption o f deferred maintenance practices th a t in tu rn , lead to the fu rth e r weakening o f marginal lin e s and operations involved. 7. in a b ilit y o f the ra ilro a d s to cooperate e ffe c tiv e ly in p la n t and equipment u t il i z a t i o n , and the in te r lin in g o f f re i ght*. 8. operating procedures th a t re s u lt In u n re lia b le r a il service, leading to the loss o f t r a f f i c to more re lia b le modes, p a rtic u la r ly trucks. to Federal L eg islation and the Northeast and Midwest R ailroad Problem The bankruptcy o f the Penn Central and seven other railroads in the Northeast and Midwest in the e a rly 1970's spawned major federal le g is la tio n aimed a t making fundamental changes in the con­ fig u ra tio n and operation o f the U.S. ra ilro a d system. With growing conviction th at ordinary reorganization procedures were inadequate to assure a viab le r a i l system in the Northeast and Midwest, Congress passed the Regional Rail Reorganization Act o f 1973 (RRR A c t), and la te r amended i t w ith the Railroad R e v ita liz a ­ tio n and Regulatory Reform Act o f 1976 (RRRR A c t). The basic 4 le g is la tiv e goal was the r a tio n a liz a tio n and reorgan izatio n o f the several bankrupt ra ilro a d s In to a fin a n c ia lly s e lf-s u s ta in in g regional r a i l system. To achieve th is g o a l. Congress d irec ted the U.S. Department o f Transportation to Id e n tify those r a i l pro perties "essen tial fo r the preservation o f tran sp o rtatio n services 1n the N ortheast." F u rth e r, Congress created the United States Railway Association (USRA) and charged 1 t w ith reviewing the Department o f Transportation findings and developing a "Final System P lan ." R ail p ro perties Included in the "Final System Plan" would be operated by a q u a s i-p riv a te , fo r -p r o f1 t corp o ratio n, c a lle d Consolidated R ail Corporation (C o n R all), another e n tity created as p a rt o f the RRR A ct. For those lin e s found to be "nonessentlal" to the organization o f a v ia b le Northeast-Mldwest regional r a i l system, the RRR and RRRR Acts established a fiv e -y e a r r a i l fr e ig h t assistance program. The purpose o f the program is to a ffo rd states and lo c a lit ie s time to evaluate t h e ir p a r tic u la r s itu a tio n s and f a c i l i t a t e necessary adjustments. A fte r the fiv e -y e a r assistance p erio d , states and lo c a lit ie s are to assume f u l l fin a n c ia l re s p o n s ib ility fo r fu rth e r necessary adjustments. 4 ^The RRRR Act o f 1976 provides fo r a fiv e -y e a r fe d e ra l-s ta te matching r a i l fr e ig h t assistance program w ith the fed eral share being 100 percent the f i r s t y e a r, 90 percent the second, 80 percent the t h ir d , and 70 percent fo r each o f the fo u rth and f i f t h years. To be e lig ib le to receive fed eral assistance funds, a s ta te must subnr.1t an acceptable s ta te ra ilro a d plan to USRA, and give evidence o f fin a n c ia l a b i l i t y to pay th e ir share o f the assistance program. (10 percent the second y e a r, 20 percent the th ir d y e a r, and 30 percent the fo u rth and f i f t h y e a rs .) 5 In addition to the short-term r a il fre ig h t assistance program, the RRR and RRRR Acts provide fin ancial help fo r the re h a b ilita ­ tio n , modernization, and acquisition o f ra ilro a d plant and f a c i li t i e s . Government assistance 1s also pledged to meet labor adjustment costs. The Acts also provide fo r a degree o f rate-making f l e x i b i l i t y not previously available to railroads. Michigan's Rail System In 1973, to tal railroad mileage 1n Michigan stood a t approxi­ mately 6,000 miles; 4,700 miles 1n the Lower Peninsula and 1,300 miles in the Upper Peninsula. In the Lower Peninsula, 2,200 miles o f the to ta l 4,700 miles were operated by solvent railro a d s . An additional 2,200 miles were operated by two bankrupted ra ilro a d s— the Ann Arbor and the Penn C entral. The fin a l 300 m iles, though operated by solvent railroads, were pending service abandonment petitions before the In te rs ta te Commerce Commission (ICC). Under the provisions o f the RRR and RRRR Acts, 1,000 miles o f the 2,200 miles o f Michigan bankrupted r a il lin e was included in ConRail, Of the remaining 1,200 miles o f bankrupted lin e , state transportation o ffic ia ls decided to continue service on 1,000 miles with funds from the fed eral-sta te r a il fre ig h t assistance program, discontinuing service on the remaining 200 m iles. The right-of-ways and track were placed In a r a il "land bank" pending fu rth e r study fo r alte rn a tiv e uses. Michigan o ffic ia ls have Indicated the s ta te 's Intention to take advantage of the fiv e -y e a r federal r a il fre ig h t assistance program to 6 "more adequately" evaluate It s present r a i l system 1n lig h t o f Michigan's long-term, state-w ide transportation system goals. The fin a n c ia l magnitude o f Michigan's r a il "problem" 1s conveyed, 1n p a rt, by a recent R.L. Banks and Associates study completed fo r the Michigan Department o f State Highways and Transportation. 5 Banks and Associates examined a v a ila b le operating revenue and cost Information fo r the 1,200 miles o f Michigan r a i l lin e l e f t out o f the ConRail system. Their conclusions concerning the fin an cial condition o f the lines 1n question are sobering, 1 f not shocking a t f i r s t blush. For example, Banks estimated subsidies between $10 to $11 m illio n would be necessary in 1976 to operate the 1,200 c miles o f Michigan r a il lin e l e f t out o f the ConRail system. Based on Banks' lin e segmentation, subsidies per carload needed to break­ even ranged from a high o f $1,084 to a low o f $31 with an average subsidy per carload o f $330. 7 Continuing service on much o f the 1,200 miles o f lin e would not seem ju s t ifie d based on present t r a f f i c le v e ls . In ad d itio n , trends 5R.L. Banks and Associates, In c ., Michigan Segmented Line Analyses: T r a ffic , Revenue, Cost, and Community Impact, Agreement No. 76-1503, Washington, D .C ., October 20, 1976. S ubsidies would be required to pay operating costs beyond those covered by operating revenues, an 8 .3 percent return on investment and 10 percent o f re h a b ilita tio n costs necessary to get the lines up to minimum (Class I ) federal operating standards. 7The fin a n c ia l condition o f a "lin e " w ill depend upon how 1t 1s defined, th at is how i t is segmented. Had Banks segmented the 1,200 miles d iffe r e n tly , his conclusions might have been d iffe re n t. The lin e segmentation used by Banks fo r his study was given to him by Michigan transportation o f f ic ia ls . 7 in population growth, consumption p attern s , and levels o f economic a c t iv ity in areas served by many o f the r a i l lin es 1n question, do not in d ic a te things w ill get b e tte r in the fu tu re . Nevertheless, there is considerable agreement, and some supporting evidence, th a t increases In t r a f f i c levels on some o f the lin es 1n question can be re a lize d 1 f the q u a lity and frequency o f r a i l service is Improved and increased. F urther, i t is f e l t th a t changes in present ra ilro a d operating procedures, including the combining o f several lin e s in to a regional r a i l system, can lead to b e tte r p la n t and equipment u t i l i z a ­ tio n , increased labor p ro d u c tiv ity , and lower operating costs. Scope o f The Research E ffo r t The loss o f r a i l service on any lin e may have Im portant economic consequences fo r businesses and communities th a t use I t ; th e re fo re , the loss o f r a i l service deserves c a re fu l co n sideratio n . Of p a r tic u la r concern are those lin e s th a t p re s e n tly , o r in the fu tu re , may co n trib u te to regional economic development a c t i v i t ie s . Three regional r a i l lin e s o f p a r tic u la r concern to Michigan tra n s p o rta tio n o f f i c ia ls are the Ann Arbor, the Michigan Northern (form erly p a rt o f Penn C e n tra l), and a branch o f the Chesapeake and Ohio system. Two o f the lin e s , the Ann Arbor and the Michigan Northern, are p resen tly being operated under the fe d e r a l-s ta te subsidy program. The th ird l in e , the branch o f the Chesapeake and Ohio, although p resen tly re ce ivin g s e rv ic e , is under p e titio n fo r abandonment w ith the In te rs ta te Commerce Commission. Q The Ann Arbor ra ilro a d runs northwest from Toledo, Ohio, across Michigan to F ra n k fo rt. From F ra n k fo rt, the ra ilr o a d operates car fe r r ie s to the ports o f Kewaunee and Manitowoc, Wisconsin. The Michigan Northern ra ilro a d runs north from Grand Rapids to Mackinaw C ity and includes the lin e between Walton J e t. and Traverse C ity . The th ir d lin e is p a rt o f the Chesapeake and Ohio system in the northwestern corner o f the lower peninsula. I t runs northeast from M anistee, through Traverse C ity to Petoskey, and w il l be re fe rre d as C. & 0 . - Northwest h e re a fte r. (See Figure 1 -1 ) ^ In te rs ta te Convnerce Docket No. AB-18 (Sub-No. 1 9 ). 8 Ti i w ■ ■■ ANN ARBOR RR •tu n MICHIGAN NORTHERN RR m Cfiv, C.O.-NORTHWEST RR / FIGURE 1-1 MICHIGAN'S RAILROAD NETWORK 10 Michigan o f fic ia ls have expressed special In te re s t 1n these lin e s . Even though the Ann Arbor Is bankrupt and Incapable o f reorganization, according to It s tru s te e , Michigan o ffic ia ls feel otherwise. Q In a recent le t t e r to the Federal Railway Adm inistration, Governor M illik e n stated th at: The Ann Arbor ra ilro a d is a key element o f (Michigan's) system plan. (We) intend to use the Ann Arbor ra ilro a d as the backbone o f the sta te supported system, with addi­ tions to the key c a rrie r portions o f the Penn Central connecting a t Owosso and C a d illa c , and possible future addi­ tions o f Chessie system lines a t Alma and Tompsonvilie. The fa c t th a t Michigan has purchased portions o f the Ann Arbor lin e between Toledo, Ohio and Frankfort from the Ann Arbor Trustees during the past year supports the Governor's p o sitio n . Both the Michigan Northern and C.O.-Northwest are regarded as necessary fo r development o f natural resources and in d u s tria l expansion in the northwestern portion o f Michigan's lower peninsula. The general goal o f th is research e f f o r t is to id e n tify i n i t i a ­ tive s th a t Michigan transportation planners and o ffic ia ls can consider fo r improving the long-term fin a n c ia l v ia b ilit y o f the Ann Arbor, the Michigan Northern, and the C.O.-Northwest ra ilro a d s . Research Objectives The s p e c ific objectives o f th is research e f f o r t are th ree fo ld . 1. Id e n tify factors that a ffe c t the fin a n c ia l v ia b ilit y of r a i l lin e s , in general. 2. Determine the present fin a n c ia l and operating status o f three Michigan r a il lin e s —the Ann Arbor, the Michigan Q Report to Mr. John N. Chase, J r . , Trustee Ann Arbor Railroad, A p ril 1, 1974. Report submitted by Peat, Marwick, M itch ell and Co., Washington, D.C. 11 Northern, and the C. & 0 . - Northwest. Analyze oppor­ tu n itie s fo r Improving the fin a n c ia l v ia b ilit y o f these lin e s . 3. Suggest programs and p o licies th a t Michigan transporta­ tion planners and o f fic ia ls might consider fo r improving the fin a n c ia l v ia b ilit y o f the Ann Arbor, Michigan Northern, and C. & 0 . - Northwest r a i l lin e s . Research Procedure The procedure fo r accomplishing the research objectives begins with a presentation and discussion, in th is chapter, o f the a n a ly tic al framework employed. Id e n tific a tio n and analysis o f major factors a ffe c tin g the v ia b ilit y o f r a il operations and r a il lin e s , in general, is the subject o f Chapter Two. Factors considered include changing demand fo r transportation services, re g u latio n , in te r modal competition, the interdependent nature o f mainline and branch lin e operations, and in tr a - and in te r -r a ilr o a d p o licies and procedures used in the provision o f r a il services. Analysis o f opportunities fo r improving the v ia b ilit y o f the Ann Arbor, the Michigan Northern, and the C. & 0. - Northwest lines is the subject o f Chapters Three and Four. r a il Opportunities fo r increasing the demand fo r r a i l service on the three Michigan lin e s , in the present and the fu tu re , is the focus o f Chapter Three. Financial analysis o f a lte rn a tiv e configurations o f the three Michigan r a il lin es in to a regional r a i l subsystem 1s the topic o f Chapter Four. A summary o f the research findings and suggested p olicies and programs fo r improving the v i a b ilit y o f the three Michigan r a il lines is presented in Chapters Five and S ix. A n a ly tic a l Framework An in s titu tio n s , behavior, and performance (IBP) framework o f analysis Is used 1n th is research e f f o r t . For purposes o f c l a r i f i ­ catio n , the a n a ly tic a l framework is f i r s t presented in it s general form. This 1s followed by a b r ie f discussion o f (1 ) the re la tio n ­ ship between In s titu tio n s and physical and technological charac­ t e r is t ic s o f goods and services and it s impact on behavior and per­ formance; and (2 ) the e ffe c t o f a lte rn a tiv e modes o f behavior on performance. F in a lly , the IBP framework is discussed in the context o f the provision o f r a i l service. IBP Framework - General Form In s titu tio n s . In s titu tio n s are the rules and regulations adopted by p a rtic ip a n ts in a system to stru ctu re th e ir re la tio n s h ip s . In s titu tio n s estab lish the s tru c tu re o f opportunity sets (range o f choices) definin g the bounds o f in d ivid u al and group a c tio n . The stru ctu re o f opportunity sets represent a system o f human in t e r ­ action and interdependence. groups are both dependent p a rtic ip a n ts . The choices made by in d ivid u als and and independent o f the choices o f other They a ffe c t the range o f choices a v a ila b le to others. System's performance is the c o lle c tiv e outcome o f in d ivid u als and groups choosing between a lte rn a tiv e courses o f action w ith in th e ir opportunity se ts . In s titu tio n s estab lish sets o f re in fo rc e ­ ment contingencies (rewards and sanctions) to e l i c i t and guide In d ivid u al and group behavior. Behavior. Behavior is the choices in d ivid u als and groups make w ith in th e ir opportunity sets. The fa c t th a t 12 In d ivid u als and 13 groups have a choice between a lte r n a tiv e courses o f action In d icates th a t more than one c o lle c tiv e outcome ( I . e . , system's performance) 1s possible. P red ictin g and modifying the outcome o f a lte rn a tiv e in s titu tio n s requires understanding o f the forces th a t in fluen ce choice-making by the in d iv id u a ls and groups in the system. U ncertainty and lim ite d and group decision-making. inform ation ch a rac terize in d iv id u a l U ncertainty e x is ts because man's know­ ledge o f the re a l s ta te o f a f f a ir s is lim ite d by his a b i l i t y to (1 ) acquire and (2 ) as sim ilate in fo rm atio n . Man has f i n i t e mental capacity fo r organizing and a s s im ila tin g inform ation. man cannot know Consequently, a l l possible outcomes o f his choices. U ncertainty is made g re a te r, secondly, by the costs o f acquiring in fo rm atio n . An in d iv id u a l o r group attem pting to reduce u ncertain ty w il l a c tiv e ly seek in fo rm atio n , but the process involves re a l and d ir e c t costs. A v a ila b le resources and expected n et b en efits w il l determine how much inform ation an in d iv id u a l or group w il l o b ta in . Therefore, in most cases, the amount o f inform ation f t is ra tio n a l fo r an in d iv id u a l o r group to acquire is even less than the amount they are capable o f absorbing. Given u ncertain ty and lim ite d in fo rm atio n , in d iv id u a ls and groups employ decision ru le s — techniques and standard operating procedures (SOPs)— to achieve t h e ir o b je c tiv e s . Techniques are employed by in d iv id u a ls , and SOPs by groups, to carry out d a ily a c t i v i t i e s , respond to problems and handle new s itu a tio n s . In a d d itio n , where the success o f an in d iv id u a l o r group to achieve it s o b jectives depends on the actions o f o th e rs , e ffo r ts w i l l be made to 14 establish coordinating mechanisms fo r sharing Information and making and carrying out decisions. Techniques, SOPs, and coordinating mechanisms are learned modes o f behavior maintained, modified, or discarded on the basis o f how well they serve Individuals and groups 1n pursuit o f th e ir objectives. Outside forces, due to a change 1n the environment, can reduce the effectiveness o f existing techniques, SOPs and coordinating mechanisms, signaling a need fo r th e ir m odification. environmental conditions, the Or, given a v a ila b ility o f new Information can lead to the adoption o f new techniques, SOPs and coordinating mechanisms. In general, two thresholds characterize the use and modification o f techniques, SOPs and coordinating mechanisms--a perceptional threshold and a reaction threshold. Because Individuals and groups are lim ited 1n time, energy and a b ilit y to analyze and In te rp re t new situ atio n s, prevailing techniques, SOPs and coordinating mecahnisms w ill continue 1n use, even though they may no longer be appropriate ( I . e . , the prevailing techniques, SOPs and coordinating mechanisms are no longer the most e f fic ie n t means fo r achlevelng a specified set o f objectives, or they may produce undesirable outcomes). Eventually, however, a perceptional threshold Is reached when the appropriateness o f techniques, SOPs, and coordinating mechanisms are questioned. Modification and change do not occur, however, u n til a reaction threshold Is reached. The period o f time separating the two thresholds 1s a function o f the perceptions o f costs and benefits associated with change. Not u n til the perceived 15 ben efits from adopting new techniques, SOPs and coordinating mechanisms are g re a te r than the perceived costs o f staying w ith the p re v a ilin g techniques (SOPs and coordinating mechanisms) w il l In d i­ viduals and groups move from perceptional thresholds to reaction thresholds and change becomes possible. In many s itu a tio n s awareness o f the p o te n tia l net ben efits o f change may not be enough to bring about change. This 1s p a r tic u la r ly tru e where change 1n the behavior o f two o r more in d ivid u als or groups is required In some systematic way. The f a ilu r e o f one in d ivid u al o r group to a lt e r I t s behavior can deny a ll In d iv id u a ls and groups the b en efits o f change. In such s itu a tio n s , special incentives may be needed to encourage the appropriate behavior. This may mean m odification o f the e x is tin g In s titu tio n s ( i . e . , ru le s , regulations and sets o f reinforcement contigencies) or the creation o f new in s titu tio n s . Performance. System performance is the flow o f consequences from the stru ctu re o f in s titu tio n s . performance o b jec tiv es . In d ivid u als and groups have Whether these o bjectives are achieved depends upon the stru c tu re o f in s titu tio n s th a t determine the stru c tu re o f opportunity sets and incen tive systems th a t motivate in d ivid u al and group behavior. By system performance we mean dynamic in te ra c tio n 1n which performance in period one feeds back and shapes performance in period two. In a d d itio n , w ith in the system (s tru c tu re o f in s t it u ­ tio n ) a number o f subsystems may e x is t. The performance o f the la rg e r system is determined, 1n p a r t, by the performance o f the subsystems, and vice versa. 16 In s titu tio n s and Physical and Technical C h a ra c te ris tic s o f Goods and Services 1 P red ictin g the consequences o f a lte r n a tiv e opportunity sets requires an understanding o f the s p e c ific v a rie ty o f human I n t e r ­ dependence raised by p a r tic u la r goods, s e rv ic e s , or s itu a tio n s . Various physical and technological c h a ra c te ris tic s o f goods and services a ffe c t interdependence. High Exclusion Cost Goods and S ervices. Many goods and se rv ices , once produced, can be consumed by a l l whether they c o n trib u te to t h e ir production costs or n o t. In such s itu a tio n s , i f the costs o f producing the good o r service must be paid fo r by consumers on a voluntary b asis, production might not take p la ce . As more and more consumers p re fe r a " fre e rid e " ra th e r than pay th e ir share, the g re a te r the burden th a t f a l l s on the few who are w illin g to pay, and the payments o f a few may not be enough to j u s t if y committing resources to production o f the good or s e rv ic e . Production and maintenance o f high exclusion cost goods and services occurs in three s itu a tio n s : (1 ) where a sense o f community and in d iv id u a l expectation prevents consumers from being "fre e rid e rs " ; (2 ) where consumers turn to government to c o lle c t taxes and purchase the good o r service because sense o f community 1s not strong enough to prevent "fre e rid e r" behavior; (3 ) where a group A. Alan Schmid, The Economics o f Property, Power and Public Choice: Consequences oT~Inst1tut1onal A lte rn a tiv e s , Unpublished M anuscript, Department o f A g ric u ltu ra l Economics, Michigan S tate U n iv e rs ity , 1974. 17 o f consumers, w illin g to share the production costs o f the good or service but unable to organize th e ir contribution due to high organization costs, turn to government to bear the i n i t i a l organizational costs. A number o f variations o f the high exclusion cost good or service e x is t. the One variation related to th is research e ff o r t is individual consumption (p riv a te ) good or service th a t also possesses characteristics o f a collective-consumption (public) good or s e rv ice.11 For example, consider a good or service that possesses a number o f ch arac teris tic s, including d iffe re n t levels o f q u a lity . The i n i t i a l purchase o f the good or service is lim ited to those who pay a users fee. Those who do not pay cannot consume the good or service—hence the good or service can be con­ sidered p riv a te . However, fo r those who do purchase the good or service, the q u ality o f the good or service is consumed by a l l . Changes in the q u a lity o f the good or service become part o f the good or service and are consumed equally by a l l —hence the p rivate good or service Is also, in p a rt, a public (collective-consumption) good or service. Efforts to improve the q u a lity o f an in d iv id u a l- c o lle c tiv e consumption good or service may face problems s im ila r to those involved 1n the production o f high exclusion cost goods and services. 11 For discussion on this point see: Burton A. Weisbrod, "Collective-Consumption Services o f Individual-Consumption Goods," Quarterly Journal o f Economics, LXXVIII (August 1964), 471-477. 18 Goods and Services w ith Lumpy and In d iv is ib le Cost Structures. The production o f some goods and services Involve large I n i t i a l Investments before the f i r s t units can be produced* with the costs o f producing subsequent units declining over a broad range o f output. The cost to the consumer 1s a function o f the demand o f other consumers. The la rg e r the number o f consumers, the lower the per u n it cost to each consumer, as the firm can spread It s large fixed costs over more units o f output. Consumers recognizing th is , and being uncertain as to the behavior o f others, may decide to withhold th e ir purchases in hopes others w ill purchase f i r s t , thereby lowering the cost to them. If a l l or the m ajority o f consumers take th is a ttitu d e , the per u n it costs w ill remain high and the firm may eventually go out o f business. S im ila r to the case o f the high exclusion cost good or service, some mechanism is needed to a r tic u la te individual demand fo r the good or service. Investment Coordination. The problems o f uncertainty and fixed assets go beyond the individual firm when coordination o f invest­ ments in a number o f Interdependent production steps are required to produce a good or service. In such s itu a tio n s , a sequence o f investments, each representing a sizeable investment and minimum operating level to be e f f ic ie n t are involved. Interdependence between production units as w ell as consumers are involved; the decisions o f one firm impact on the decisions o f other firm s, and eventually are f e l t by the consumers in terms o f goods and services a v a ila b le . o f price and q u a lity In a lik e manner, the decisions 19 o f consumers to be "free rid ers" or not, to coordinate th e ir demand, e t c ., w ill a ffe c t the price and q u a lity o f goods and services produced. Option Demand and Conti gent Claims. Many consumers would lik e the option to consume certain goods or services in the fu tu re , whether they do or not. Consumers may value the option-demand goods and services as a hedge against u n like ly and unexpected changes in the environment. The production o f option-demand goods and services can create problems fo r producers. Firms may be unw illing to undertake investments today based on uncertain knowledge o f future demand. The firm needs some guarantee o f a minimum level o f compensation or return to ju s t if y its investment in the production and maintenance o f option-demand goods and services. Markets in "contingent claims" (option-demand) fo r the rig h t to consume a good or service in the fu tu re , under specified condi­ tio n s, do e x is t; insurance is one common example o f th is . For option-demand goods and services th at are also high exclusion cost goods and services, markets fo r th a t p a rtic u la r contingent claim may not e x is t. An a lte rn a tiv e may be fo r government to purchase the option-demand good or service and provide i t fre e o f d ire c t charge to a ll members of the c o lle c tiv e group. Tax payments to the governmental u n it would be substituted fo r d ire c t payment to the producer. Summary. Predicting the consequences o f a lte rn a tiv e in s titu ­ tions ( I . e . , a change in ru le s , regulations and reinforcement con­ tingencies) requires an understanding o f the factors and forces th at 20 a ffe c t human Interdependence and behavior. Human interdependence and behavior vary with d iffe re n t goods, services, and s itu a tio n s . Also, when an in d iv id u a l's or group's action (behavior) depends on the actions o f others, inform ation and perceptions play a key ro le in determining performance. A lte rn a tiv e Modes o f Behavior and Performance System's performance is the c o lle c tiv e outcome o f in d ivid u als and groups choosing between a lte rn a tiv e courses o f action (behavior) w ith in t h e ir opportunity sets. This implies th a t d iffe r e n t outcomes (performance) can be achieved by encouraging the adoption o f a l t e r ­ native in d ivid u al and group behavior. Recent works by A lb ert 0. Hirschman * 2 and Mancur Olson ^ in the area o f in d ivid u al (firm ) and group (org an izatio n ) behavior and performance are relevan t to th is discussion. E x it, Voice, and L oyalty. and organizations experience to tim e. According to Hirschman, a l l firm s d e te rio ra tio n in performance from time That i s , they experience absolute or comparative d e te r io ­ ra tio n in the q u a lity o f the product or service they provide. Recuperation (improved performance) usually occurs w ith management responding to customer-member e x it or voice or some combination o f 12A lb e rt 0. Hirschman, E x it, Voice and Loyalty: Response to Decline in Firms, Organizations and S ta te s , [Harvard U n iversity Press, 1£70). Mancur Olson, The Logic o f C o lle c tiv e Action: Public Goods and the Theory o f Groups, (Harvard U n iversity Press, 1965). 21 the two. E x it occurs when the customers stop buying the firm 's product (s e rv ic e ) o r members leave the o rg a n iza tio n . E x it re s u lts In a drop 1n revenues, d eclin e 1n membership, and management 1s Impelled to fin d ways to c o rre c t I t s f a u lt s . Voice occurs when customers-members express t h e ir d is s a tis fa c tio n d ir e c tly to manage­ ment, through general p ro te s t or p o lit ic a l a c tio n . Management responds once again, In the search fo r ways to c o rre c t I t s f a u lt s , and recapture lo s t revenue or membership. Hirschman notes th a t in our economy, few s itu a tio n s w il l e x is t where recuperation (o r improvement) o f firm performance can be achieved through the use o f e x it or voice alo n e. In stead , he argues, success w il l most l ik e l y come through the a r t f u l balancing o f the two, and, th a t the degree o f recuperation (Improved performance) and speed w ith which i t occurs w il l depend on the In te ra c tio n o f some e x it-v o ic e combination and the re ac tio n functio n o f management. Improved Performance. Hirschman makes two im portant observa­ tions regarding o p p o rtu n ities fo r improved performance v is -a -v is the in te ra c tio n between customer-member e x it and/or voice and management's reaction fu n c tio n . 1. Management's reactio n fu n ctio n can be v is u a lize d as a discontinuous th re e -v a lu e fu n c tio n . No management re ­ action occurs fo r small decreases 1n revenue o r Increases in p ro te s t; f u l l recovery 1n performance occurs fo r interm ediate s iz e decreases 1n revenue or Increases 1n p ro te s t; and, no recovery occurs 1 f la rg e decreases in revenue o r Increases 1n p ro te s t occur. Too larg e a 22 drop 1n revenues may bankrupt the firm before I t can respond; or too much protest may be so harassing that the firm w ill not be able to respond. Hirschman1s management reaction function can be described in terms o f perception and reaction thresholds. To improve performance, a "minimum" level o f revenue loss and/or protest 1s needed before the firm perceives something is wrong; an "optimum" level o f revenue loss and/or protest 1s needed to encourage the firm to react in a p o s titlv e way—improving performance. But, "too large" o f a drop in revenues and/or protest can cause the firm to react in a negative way— the firm may go out of business or adopt behavior th at causes performance to d eteriorate even more. What constitutes "minimum", "optimum" and "too large" w ill vary with firms and situ atio n s. 2. Customers (members) may reso rt to e x it 1n response to the deterioration in the q u a lity o f a good or service. The firm (organization) may not be sensitive to e x i t , in which case performance w ill not be improved. On the other hand, had the customers (members) protested ( voice) the decline in the q u a lity o f the good or service Improved performance may have resulted. Conse­ quently, the choice o f mechanisms ( e x i t , voice, or some combination) 1s ju s t as important to achieve improved performance as is the strength with which they are employed. The following example, discussed by Hirschman, may provide some insight Into how the concepts o f e x it and voice might be related to th is research e ffo r t and the Importance behavior plays in e ffo rts to improve performance. . 23 In a recent book, I tr ie d to explain why the Nigerian railways had performed so poorly in the face o f competi­ tio n from trucks, even fo r such long-haul, bulky cargo as peanuts...Specif1c economic, s o c io -p o litic a l, and organizational reasons could be found fo r the exceptional a b ilit y o f the trucks to get the b e tte r o f the railroads in the Nigerian environment; but having done so I s t i l l had to account fo r the prolonged incapacity o f the ra ilro a d adm inistration to co rrect some o f it s more glaring 1neff1ciences, in sp ite o f active competition, and proposed the follow ing explanation: The presence o f a ready a lte rn a tiv e to r a i l transport makes i t le s s , rather than more, lik e ly th a t the weak­ nesses o f the railways w ill be fought ra th e r than indulged. With truck and bus transportation a v a ila b le , a d eterio ­ ra tio n in r a il service 1s not nearly so serious a matter as i f the railways held a monopoly fo r long-distance transport— i t can be liv e d w ith fo r a long time without arousing strong public pressures fo r the basic and p o lit ic a lly d i f f i c u l t or even explosive reforms in adm inistration and management th a t would be required. This may be the reason public e n terp rise , not only in N igeria but in many other countries, has strangely been a t it s weakest in sectors such as transportation and education where i t is subjected to competition: instead o f stim ulating improved or top per­ formance, the presence o f a ready and sa tisfac to ry substi­ tu te fo r the services public enterprise o ffe rs merely deprives i t o f a precious feedback mechanism th a t operates a t it s best when the customers are securely locked in . For the management o f the public e n terp rise , always f a i r l y confident th at i t w ill not be l e t down by the national treasury., may be less sen sitive to the loss o f revenue due to the switch o f customers to a competing mode than to the protests o f an aroused public th a t has a v ita l stake in the service, has no a lte rn a tiv e , and w ill therefore "raise h e ll" . In N ig eria , then, I had encountered a s itu a tio n where the combination o f e x it and voice was p a rtic u la rly noxious fo r any recovery: e x it did not have it s usual a tte n tio n focusing e ffe c t because the loss o f revenue was not a matter o f the utmost g rav ity fo r management, while voice did not work as long as the most aroused and therefore the p o te n tia lly most vocal customers were the f i r s t ones to abandon the railroads fo r the trucks. I t is p a rtic u la rly th is la s t phenomenon th a t must be looked a t more clo sely, fo r I f i t has any g e n e ra lity , then the chances th a t voice w ill ever act in conjuction with e x it would be poor and voice would ^ A lb e r t 0 . Hirschman, Development Projects Observed, (The Brookings In s titu tio n , 1967), pp. 146-147. 24 be an e ffe c tiv e recuperation mechanism only in conditions o f f u ll monopoly when the customers are securely locked In . 15 W illingness to Use V o ice. The decision to e x it o r not w ill often depend on the prospects f o r the e ffe c tiv e use o f v o ic e . I f customer-members b e lie v e th a t voicebe postponed. w il l be e f f e c t iv e , e x it may The decision not to e x it in the face o f a c le a r ly b e tte r buy (o r o rg a n iza tio n ) w i l l be made by customers (members) based on expected complaints and pro tests o f o th e rs , and the lik e lih o o d o f success. The e f f o r t customers-members make to put t h e ir case before management w i l l be in proportion to the advantage to be gained from a favorab le outcome m u ltip lie d by the p ro b a b ility o f in flu en cin g management decisions. The p ro b a b ility o f in flu e n c in g management decisions w i l l depend, in la rg e p a r t, on the bargaining power customers-members have v is -a -v is firm s -o rg a n iza tio n s . In g en eral, the la rg e r the percent o f to ta l firm sales a customer (o r group o f customers) represen t, the g re a te r t h e ir bargaining power; and the more lik e ly the firm w il l be responsive to t h e ir protests and th rea ts o f e x i t . Sm aller customers (in terms o f to ta l sa les ) may be able to improve s u b s ta n tia lly t h e ir bargaining p o s itio n through c o lle c tiv e a c tio n . In d ivid u al and c o lle c tiv e use o f voice e n ta ils a number o f costs, however, th a t must be weighed ag ain st the expected b e n e fits o f vo ice. Customers must consider the opportunity cost o f voice (forgoing the e x it o p tio n ). 15 They must also bear the d ir e c t costs A lb e rt 0 . Hirschman, E x it, Voice, and L o yalty: Response to Decline in Firms, O rganizations and S ta te s , Op. C i t . , pp. 44-45. 25 o f money and time (transaction costs) spent tryin g to change the firm 's behavior. Although c o lle c tiv e action may re s u lt in lower Individual transaction costs and increased bargaining power, In d i­ viduals may f a l l to organize because o f high I n i t i a l organizational costs. Hirschman argues, however, th at once voice is recognized as a useful mechanism fo r improving and maintaining firm (organization) performance, in s titu tio n s can be designed in such a-way th at the cost o f individual and c o lle c tiv e action would be decreased. A major advantage o f voice over e x it is the information conveyed to the firm . While e x it o f customers is evidence to the firm th at i t 1s doing something wrong, i t doesn't (necessarily) indicate what i t is doing wrong. Voice, on the other hand, can be used to communicate to the firm what is wrongs e .g ., in what ways product or service q u a lity has d eteriorated . Firms, in tu rn , may communicate to customers changes 1n customer behavior that would f a c ilit a t e im­ provement in the q u a lity o f E x it: the products and services they produce. Not Too Easy or Too A ttra c tiv e . According to Hirschman, the w illingness to develop and use voice is reduced by the oppor­ tu n ity fo r e x i t . But the a b ilit y to use voice with e ffe c t 1s increased by the potential fo r e x i t . Consequently, there should be a p o s s ib ility fo r e x it , but i t should not be too easy o r too a ttr a c tiv e . This may sound lik e a co n trad iction , but i t is a very Important p o in t. We w ill attempt to develop this point in the follow ing paragraphs. For any In d iv id u a l, a q u a lity change in a product or service can be translated in to an equivalent price change. But th is 26 equivalence w ill normally vary from Individual to individual due to the d iffe re n t values placed on product and service q u a lity . Some Individuals may stop purchasing the good or service Immediately 1f q u a lity d eterio rates , provided an acceptable competing product or service 1s a v a ila b le , even i f i t is a t a much higher p ric e . Their e x it reduces the chances th at voice w i l 1 be used in the fu tu re . . . . t h e consumers who drop out when q u a lity declines are not necessarily the marginal consumers who would drop out i f price increased, but may be intramarginal consumers with considerable consumer surplus; o r, put more simply, the consumer who is rather in s en sitive to price increases is often lik e ly to be highly sen sitive to q u a lity declines. At the same tim e, consumers with a high consumer surplus are, fo r th a t very reason, those who have most to lose through a d eterio ratio n o f the product's q u a lity . There­ fo re , they are the ones who are most lik e ly to make a fuss in case o f d eterioration u n til such time as they do e x it . lb To prevent d eterio ratio n in product and service q u a lity from becoming cumlative, Hirschman argues: S pecific in s titu tio n a l b arriers to e x it can often be ju s tifie d on the grounds th at they serve to stim ulate voice in d e te rio ra tin g , y e t recuperable organizations which would be prematurely destroyed through fre e e x it . 17 In ad d itio n , lo y a lty can provide the needed balance between e x it and voice « Loyalty, according to Hirschman, can "hold e x it a t bay" while i t "activates voice". The importance o f lo y a lty is th at i t can n eu tralize w ith in certain lim its the tendency o f the most quality-conscious customers to e x it f i r s t . lfi A lb ert 0. Hirschman. E x it, Voice, and Loyalty, Op. C 1 t., p. 49. 17Ib id ., p. 79. 27 L o y a lty ...h e lp s to redress the balance by ra is in g the cost to e x it . I t thereby pushes men in to the a l t e r ­ n a tiv e , c r e a tiv ity -re q u irin g course o f action from which they normally re c o il and perform a function s im ila r to 18 the underestimate o f the prospective tas k's d if f i c u l t i e s . Summary. Hirschman*s work Illu s tr a t e s the importance a lte rn a tiv e behavior can have on performance. th at Improving performance in many situ ation s w il l require m odification o f e x is tin g in s titu tio n s or the creation o f new in s titu tio n s to encourage and reward a lte rn a tiv e behavior. Logic o f C o lle c tiv e Action Ind ividu al Behavior and C o lle c tiv e Goods and Services. Often­ times ind ividu als can achieve th e ir o bjectives through in d iv id u a l, unorganized action . Frequently, however, in d ivid u als share ce rta in common in te re sts th a t can only be provided through some type o f organized, c o lle c tiv e ac tio n . Many common in te re s t goods or services, however, possess c h a ra c te ris tic s th a t make them d i f f i c u l t to provide through volunteer forms o f c o lle c tiv e ac tio n . Olson, fo r example, observes th a t i t is not always tru e th a t ind ividu als w ith common in te re s ts w il l attempt to fu rth e r those In te re s ts through group a c tio n . . . . I t does not fo llo w , because a l l the ind ividu als 1n the group would gain i f they achieved t h e ir group o b jective th a t they would a c t to achieve th a t o b je c tiv e even i f they were a l l ra tio n a l and s e lf-in te r e s te d . Indeed, unless the number o f ind ividu als in a group is q u ite sm all, or unless 18 A lb e rt 0. Hirschman, E x it, Voice and L o y alty, Op. C it . p. 80. 28 th ere 1s coercion o r some o th er special device to make In d iv id u a ls a c t 1n t h e ir common in te r e s t , r a tio n a l, s e l f in te re s te d in d iv id u a ls w il l not a c t to achieve t h e ir common or group in te r e s ts . 19 A r a tio n a l, s e lf-in te r e s te d in d iv id u a l is expected to adopt behavior th a t w i l l maximize his w e lfa re subject to the constraints o f his opportunity s e t; an in d iv id u a l is ac tin g r a tio n a lly when he seeks to acquire b en efits and avoid costs. In the case o f a high exclusion cost good or s e rv ic e , ra tio n a l in d iv id u a l behavior would suggest the good o r service may not be produced i f c o lle c tiv e action is req u ired . Even though a larg e number o f in d iv id u a ls may have a common in te r e s t in obtain ing the c o lle c tiv e good o r s e rv ic e , they do not have a common in te r e s t in paying the cost o f providing the good or s e rv ic e . Each in d iv id u a l would p re fe r th a t the others pay the e n tir e co st, since i t would be d i f f i c u l t to exclude him from any b en efits whether he paid his share o f the cost o r n o t. Group S iz e , O rganization Costs and S e le c tiv e In c e n tiv e s . Whether the c o lle c tiv e good or service is provided or not w ill depend upon the number o f in d iv id u a ls involved and/or the presence o f special in c en tiv es . I f a few in d iv id u a ls stand to receive a large share o f the b e n e fits , they may decide to bear the e n tire cost o f pro­ viding the c o lle c tiv e good or s e rv ic e . A group agreement fo r sharing costs is not needed. I f , however, the b en efits are w idely dispersed over a large number o f in d iv id u a ls , the c o lle c tiv e good o r service w il l not be ^M an cu r Olson, The Logic Of C o lle c tiv e A ctio n , Op. C 1 t., pp. 1 -2 . 29 obtained without some group agreement fo r sharing costs. In such s itu a tio n s , Individuals may lack the Incentive to cooperate because they feel th e ir contributions, re la tiv e to the to ta l needed, would not make much d ifferen ce. They also know th at 1 f the c o lle c tiv e good or service is provided, they b en efit without bearing th e ir portion o f the cost. This type o f behavior may lead to the non­ provision o f the c o lle c tiv e good or service. The larger the group, moreover, the greater the costs o f organization and obtaining agreement. Where there is no pre­ e x is tin g organization, certain minimum costs must be borne to establish an organization. For example, there are the costs involved in providing inform ation, communication and decision-making. There are also costs o f s ta ffin g and maintaining the operations o f the organization on a day-to-day basis. These costs make the f i r s t u n it o f the c o lle c tiv e good or service quite expensive in re la tio n to subsequent u n its. And according to Olson: ...However Immense the benefits o f the c o lle c tiv e good, the higher the absolute to ta l costs o f getting any amount o f th a t good, the less lik e ly i t is th at even a minimal amount o f th a t good could be obtained without coercion or separate, outside incentives. 20 Incentives to encourage individuals to contribute to the costs o f obtaining the c o lle c tiv e good or service must be "selective" 1 f they are to be e ffe c tiv e ; they must allow those who do not belong to the organization or otherwise contribute to the c o lle c tiv e good to be treated d iffe re n tly from those th a t do. According to Olson, these "selective incentives" can be e ith e r negative or p o s itive in 2 0 Mancur Olson, The Logic o f C o llective Action, Op. C i t . , pp. 47-8. 30 th a t they coerce by punishment those who f a i l to bear an allo cated share o f the costs o f group a c tio n , or they can be p o s itiv e 21 ments o ffered to those who a c t in the group in te re s t. induce- "S elective incentives" can be social in nature as w ell as economic. fa c to rs . Friendship, respect and prestige can be strong m otivating Oftentimes social incentives can s u b s titu te fo r economic in cen tives, or they can compliment economic in c en tiv es . Olson notes th a t in general, social pressure and social incentives operate best in small groups, where members can have fa c e -to -fa c e contact with one another. One way to o p e ra tio n a lize social incentives in the large group context is to d ivide the group in to a number o f sm aller federated groups. Through the use o f economic incentives ( e . g . , provision o f services) the federated organization could encourage the "fed eral" groups to use t h e ir social incentives to get in d ivid u al members to contribute to the c o lle c tiv e in te re s ts o f the whole group. S elective Incentives: A Few Examples. Olson argues th a t the common c h a ra c te ris tic which distinguishes a l l o f the large economic groups w ith s ig n ific a n t lobbying a c t iv it ie s fo r c o lle c tiv e goods is th a t they are organized fo r some other purpose. For example, the provision o f p riv a te or noncollective products, or social and re c re creational benefits are used as a source o f p o s itiv e inducement to a t t r a c t and to maintain membership. 1. American Medical Association obtains it s membership p a rtly through the use o f subtle coercion, and p a rtly by providing 21 Mancur Olson, The Logic o f C o lle c tiv e A ction, Op. C it.» p. 51. 31 n o n co llective b e n e fits . Members b e n e fit from mal­ p rac tice defense, and technical inform ation through medical jou rn als and conventions. 2. Trade Associations d is tr ib u te s t a t is t i c s , provide c r e d it references on customers, help c o lle c t b i l l s , and provide technical research and advisory serv ices . 3. Farmer Cooperatives provide members w ith technical assistance market in fo rm atio n , marketing and farm supply serv ices , c r e d it, and various types o f insurance. The a b i l i t y o f some organizations and groups to a t t r a c t and maintain members requires le g is la t io n . For example, the Wagner Act made organizing a union w ith compulsory membership much e a s ie r. A lso, many s ta te le g is la tu re s have required by law th a t every p ra c tic in g lawyer must be a member o f the s ta te bar a s so c ia tio n . Summary. Many goods and services re q u ire c o lle c tiv e action i f they are to be provided. Special incentives may be needed to encourage group-oriented behavior. Provision o f R ail Service in the IBP Framework The fo llow ing is a b r ie f o u tlin e o f the IBP variab les involved in the provision o f r a i l s e rv ic e . The various re la tio n s h ip s between these variables and subsequent consequences on the v i a b i l i t y o f selected Michigan r a i l lin e s is the subject o f the fo llo w in g chapters. In s titu tio n a l V a ria b le s . Federal le g is la tio n lis t e d below has defined what ra ilro a d s can do, can not do, and must do when tendering r a i l se rv ic e . 32 1. Granger Laws, la te 1800's, 2. Act to Regulate Commerce, 1887, 3. establishment o f In te rs ta te Commerce Commission, 1887, 4. Transportation Act o f 1920, 5. Railway Labor Act o f 1926, 6. Emergency Transportation Act o f 1933, 7. Transportation Act o f 1940, 8. Transportation Act of 1958, 9. Department of Transportation Act o f 10. Regional Rail Reorganization Act o f 1973, and 11. Railroad R evitalizatio n and Regulatory Reform Act o f 1976. 1966, The rules and regulations provided by the above le g is la tio n are broad and fa r ranging with respect to railro ad behavior. Included are rules and regulations pertaining to: 1. rate-making by ra ilro a d s , in d iv id u a lly and jo in tly ; 2. establishment o f routes, in d ivid u ally and jo in tly ; 3. division o f revenues by railroads p artic ip atin g in jo in t movement o f t r a f f ic ; 4. jo in t use o f equipment and f a c i li t i e s , including cars, trucks, terminal and c la s s ific a tio n yards; 5. new r a il lin e constructions; 6 . r a il service abandonments; 7. railro ad consolidations and mergers; 8. settlement of labor disputes; 9. minimum safety standards fo r track, grade crossings, signal equipment, over-passes, and ro llin g stock; 10. records and accounting procedures; and 11. intermodal operations. In addition to federal rules and regulations pertaining to in te rs ta te railro ad fre ig h t movements, most states have specific laws and regulations governing In tra s ta te railro ad operations. 33 Behavioral Variables: Agreements. Techniques, SOPs and Coordinating Within the allowable range o f action established by federal and state laws (ru les ) and regulations, r a i 1roads' management and operators have developed a set o f techniques, SOPs, and co­ ordinating agreements fo r providing r a il service; these procedures and agreements govern in tra -ra ilro a d and in te r-ra ilr o a d behavior as well as r a ilr o a d -r a il user relation sh ips. The following presents a b r ie f o u tlin e o f the major procedures and agreements; the l i s t is not meant to be exhaustive. 1. rate bureaus fo r settin g through ra te s , jo in t rates and determination o f revenue divisions between railroads involved in the movement o f fre ig h t over the lin es o f two or more railro a d s ; 2. agreements, including ca r-s ervice , per-diem and demurrage ru les, to improve the u tiliz a tio n o f rfillin g stock and other equipment; 3. reciprocal switching and interchange agreements to move fre ig h t through terminal and c la s s ific a tio n yards and between intermediate yards. 4. negotiated labor contracts specifying wage le v e ls , work rules and se n io rity p rivileg es ; 5. established through routes, in -t r a n s it and s to p -o ff p rivileg es ; 6. arrangements with r a i l users fo r special handling, construction o f spurs, sidings, loading-unloading f a c i l i t i e s , storage f a c i li t i e s and use o f intermodal ( MPiggyback"-TOFC, COFC) services; 7. procedures fo r handling damage claim s, tracing cars, routing cars, and s o lic itin g new business; 8. maintenance, re h a b ilita tio n , and modernization programs and p o lic ie s , v is -a -v is plant f a c i l i t i e s , r o llin g stock and other equipment; 9. p olicies determining tra in -u n it size (locomotive power, cars per traim ) and frequency o f service; and 10. methods o f response to d is s a tis fie d r a i l users. 34 Performance. Performance consequences in the context o f r a il road operations can be considered a t three le v e ls — the ra ilro a d s , the r a i l users, and the community. Railroads are concerned w ith maintaining s u ffic ie n t revenue Tevels to cover th e ir costs, plus earning a reasonable ra te o f return on t h e ir investment. Rail Users are concerned w ith receiving r e lia b le , economical r a i 1 service. Rail service is a fa c to r o f production to the r a i l user (fir m ); the e ffe c tiv e cost o f r a i l service w ill a ffe c t the firm 's position in the marketplace. Communities can be considered a t two le v e ls : The local rail-u sT ng community and the la rg e r, less w e ll-d e fin e d com­ munity o f regional and sta te r a i l in te re s ts . Local com­ munities are concerned about receiving r e lia b le , economical r a i l service because i t a ffe c ts employment, business a c t i­ v it y , and p o ten tial growth o p p o rtu n itie s. Regional and state communities o f in te re s t are concerned about r e lia b le , economical r a i l service as i t a ffe c ts fu tu re opportunities to develop natural resources, expand and d iv e rs ify economic a c tiv it y and promote desired settlem ent p attern s. Major factors determining the performance consequences o f ra ilro a d operations v is -a -v is ra ilr o a d , r a i l user, and community in te re s ts are ra ilro a d operating revenues and costs. Railroad operating revenues and costs are determined by supply and demand forces including: 1. tr a in -u n it operating capactiy and frequency o f service; 2. maintenance, r e h a b ilita tio n , and modernization o f r a i l ­ road properties— tra c k , roadbeds, switches, signal equipment, other s tru c tu res , and r o llin g stock; 3. r a i l fre ig h t rates; 4. r a i l service q u a lity — tr a n s it tim e, variance in tr a n s it tim e, r a i l user contact with ra ilro a d personnel, a v a il­ a b ilit y o f cars and other equipment, e tc ; and 5. fre ig h t rates and .q u a lity o f service provided by competing modes o f tra n s p o rta tio n . CHAPTER TWO SOME FACTORS INFLUENCING THE VIABILITY OF RAILROAD OPERATIONS The v i a b i l it y o f a ra ilro a d and the lin es i t serves depends upon the revenues and costs generated by the provision o f r a i l service; in tu rn , ra ilro a d revenues and costs are determined by forces shaping the supply and demand o f r a i l services. Transportation service is a fa c to r o f production to the firm . The demand fo r r a i l service v is -a -v is other transportation modes w ill be based upon the comparative ra te and service c h a ra c te ris tic s o f the a v a ila b le modes. A number o f factors determine the ra te and service ch a ra c te ris tic s o f the d iffe r e n t modes o f tra n s p o rta tio n , including technology, re g u la tio n , and the ex ten t o f in t r a - and in t e r modal competition and cooperation. The ra te and service c h a ra c te ris tic s o f r a i l s e rv ic e , in p a r t i­ c u la r, depend, upon coordination and cooperation among ra ilro a d s . In t r a - and in te r -r a ilr o a d procedures and p o lic ie s a ffe c t ra ilro a d operating costs as w ell as r a i l service c h a ra c te ris tic s . Also, the v i a b i l it y o f many branch lin es depends upon the performance o f the in te r lin e c a rrie rs as much as they do on the performance o f the o rig in a tin g or term inating branch lin e c a r r ie r . F in a lly , ra ilro a d behavior in the short run designed to reduce the pressures o f a d e te rio ra tin g fin a n c ia l s itu a tio n often trig g e r r a i l user counter-behavior th a t leads the to the abandonment o f 35 36 r a i l s e rv ic e . On many r a i l lin e s , an a lte rn a tiv e s tru c tu re o f Incentives could discourage such s e lf-d e fe a tin g r a ilr o a d - r a il user behavior, and, instead, promote the adoption o f new behavior th a t would Improve the v i a b i l i t y o f r a i l operations. The purpose o f th is chapter is to consider the above points in g re a te r d e t a il. In s ig h t in to the dynamics o f major facto rs d e te r­ mining the v i a b i l i t y o f r a i l operations w il l serve as a basis fo r evaluating the circumstances o f Michigan r a i l lin e s , and fo r making recommendations fo r improvements. Demand fo r Transportation Services and Regulation Derived Demand. Demand fo r fr e ig h t tran sp o rtatio n service is a derived demand and can be considered in the same way as demand fo r any other fa c to r o f production. In gen eral, the demand fo r a fa c to r o f production w il l be less e la s tic (s e n s itiv e to p ric e changes): (1 ) the less e la s tic the demand fo r the commodity using the fa c to r; (2 ) the less important the p ric e o f the fa c to r in the cost o f producing the commodity; (3 ) the less fa c to r s u b s titu tio n is possible in the production process; and (4 ) the less w illin g o ther fa c to ry owners are to match reductions in the cost o f a given fa c to r. The demand fo r general tran sp o rtatio n services is probably q u ite in e la s tic in the sh o rt run. Once the firm 's lo c atio n a l d eci­ sion has been made, i t s tran sp o rtatio n needs are more or less fix e d . In the long run, however, locations become f le x ib le and the firm 37 could a l t e r I t s o v e ra ll dependence on tran sp o rtatio n s e rv ic e s . Also, tra n s p o rta tio n accounts fo r a small percentage o f the flnal-g oo d s p ric e fo r most commodities. 22 Although the o v e ra ll e la s t ic it y o f demand fo r tra n s p o rta tio n 1s probably low, cross e la s t ic it ie s between modes are probably high. The demand fo r a given transport mode w i l l depend on the ra te and service c h a ra c te ris tic s (speed, r e l i a b i l i t y , shipment s iz e , e t c . ) o ffe re d by th a t mode and a l l competing modes. The nature o f demand w i l l be influenced by the type o f commodity being shipped. Since commodities possess d iffe r e n t c h a ra c te ris tic s , they are often s e n s itiv e to d if f e r e n t aspects o f transport costs. For example, a p a r tic u la r commodity's e l a s t ic it y o f demand w ith respect to p ric e and service c h a ra c te ris tic s w il l vary according to the value, d e n s ity , volume, f r a g i l i t y , o r p e r is h a b ility o f the commodity. Friedlaender presents a good discussion o f th is p o in t: Density should p rim a rily a ffe c t the shipment costs per ton. Since the u n it o f supply is the truck o r box car instead o f the ton, the g reater the d en sity, the g re a te r the possible load per veh icle m ile; hence, the lower the cost per ve h ic le m ile . This im plies th a t dense commodities 22 Friedlaender re p o rts , fo r most commodities, tra n s p o rta tio n accounts fo r no more than 2 percent o f the final-g oo d s p r ic e . Trans­ p o rta tio n costs are the highest in ferrous mining (9.1 percent o f the flnal-goods p r ic e ), chemical and f e r t i l i z e r mineral mining (6 .4 per­ cent o f the final-goods p r ic e ), lumber and wood products (5 .1 percent o f the final-goods p rin c e ), stone and clay products (6 .0 percent o f the final-g oo d s p r ic e ), and primary iro n and ste e l products (5 .3 percent o f the flnal-goods p r ic e ). Ann F. F ried laen d er, The Dilemma o f F reig h t Transport R egulation, (The Brookings In s t it u t io n , 1969), p. 52^ 38 should have a re la tiv e ly lower percentage o f transport costs embodied in th e ir final-goods p rice. Thus, the e la s tic ity o f demand with respect to rates should be rather low fo r dense commodities. This is not true with respect to other determinants o f demand, however. Since a given transport vehicle (barge, box car, or truck) can transport a large tonnage of a dense commodity, the value o f the shipment w ill be greater than that fo r a less dense commodity. This w ill increase inventory costs associated with a shipment. Hence fo r dense commodities, the e la s tic ity o f demand with respect to speed, minimum shipment volume, and r e l ia b i l it y should be rather high. Value affects transport demand in a fashion s im ila r to density. Since high-value commodities usually have a low percentage of transport costs in th e ir final-goods p rice, th e ir e la s tic ity with respect to rates should be f a ir ly low. S im ila rly , because any given shipment w ill incur higher inventory costs as thevalue o f the commodity ris e s , high-value goods should have a re la tiv e ly high e la s tic ity with respect to speed, minimum shipment volume, and r e l ia b i l it y . Volume refers to quantity shipped per u n it o f time. Therefore, the larger the volume to be shipped the more sensitive should shippers be to rate d iffe re n tia ls and the greater should be the e la s tic ity o f demand with repsect to rates. Large-volume shippers would probably not be very sensitive to other elements of transport demand. Since a large volume implies a re la tiv e ly constant through­ put, speed or r e lia b ilit y should not a ffe c t the transport demand o f high-volume shippers very much. F ra g ility should make a commodity sensitive to such factors as speed and r e l ia b i l it y . Moreover, since the minimum shipment size w ill determine the amount of loss in case of accident, fra g ile commodities should be sensitive to minimum shipment size . I t is lik e ly th at fra g ile commo­ d itie s w ill be more sensitive to these characteristics than rate d iffe re n tia ls . To recap itu late, low-value, average-density commodities with a large annual shipment should be sensitive to rates and not p a rtic u la rly sensitive to the inventory costs associated with speed, minimum shipment size , and r e l ia b i l it y . High-value, dense or fra g ile commodities should be re la tiv e ly insensitive to rates, but sensitive to the factors affecting Inventory cost. 23 23 Ann A. Friedlaender, The Dilemma o f Freight Transport Regulation, Op. C i t . , pp. 54-55. 39 Assuming a competitive market fo r transportation services, and given knowledge o f firm s ' transportation service requirements and the technical c a p ib ill tie s o f the d iffe re n t c a rr ie rs , one would expect fr e ig h t t r a f f i c to be allo c ate d between the d iffe r e n t modes according to r e la tiv e cost; c a rrie rs would be expected to carry fr e ig h t t r a f f i c fo r which they have lower to ta l marginal costs. However, to the extent th a t regulation o f transportation service p ricin g e x is ts , the d is trib u tio n on the basis o f fre ig h t t r a f f i c w ill not occur o f the lowest to ta l marginal cost. In a d d itio n , to the exten t th a t regulation a ffe c ts , d ire c tly or in d ir e c tly , the character o f transportation services, the d is trib u tio n o f fre ig h t tr a ffic among the competing modes w ill also be a ffe c te d . In the follow ing paragraphs, an e f f o r t w il l be made to analyze the dual effe c ts o f a changing in te r c ity fre ig h t market and a regu­ la te d transpo rtatio n industry on the present and fu tu re v ia b ilit y o f ra ilro a d operations. A d e ta ile d analysis o f the impact o f regu­ la tio n on economic e ffic ie n c y in the transportation industry is beyond the scope o f th is research e f f o r t . The reader is re ferre d to the work done by Friedlaender, Meyer, and others fo r em pirical investig atio n s o f th is question. R ailroads: The Early Years. 04, From the f i r s t days o f the Republic, transpo rtatio n has been aided and promoted a t various governmental 24 Ann F. Friedlaender, The Dilemma o f Freight Transportation Regulation, (The Brookings In s titu tio n , 1969); John R. Meyer, e t . a ! . , The Economics o f Competition in the Transportation In d u s trie s , "(harvard U n iversity Press, 1959); Robert A. Nelson and W illiam R. G reiner, "The Relevance o f the Common C a rrie r UnderModern Economic Conditions", in Transportation Economics, (Columbia U n iversity Press, 1965), pp. 351-7 T . 40 le v e ls 1n our s o c ie ty . Improved tran sp o rtatio n systems were esse n tia l to developing the n a tio n 's physical resources and p h y s ic a lly s e ttlin g the co n tin en t. I t was recognized th a t even in a country committed to p riv a te e n te rp ris e , governmental assistance was needed to create an environment conducive to economic development. Social and economic development goals and economic c h a ra c te ris tic s o f e s ta b lis h in g and operating tran sp o rtatio n systems led to public p o lic ie s th a t gave ra ilro a d s broad powers. p o licy 25 Public lan d-g rant and fre e en try led to a f lu r r y o f r a il-b u ild in g a c t iv it y in the mid- and la te 1800's. operated in the U.S. was 30,626. In 1860, to ta l miles o f railw ay Forty years la t e r (1900) i t was 192,556 m ile s , a 529 percent increase. Total miles o f railw ay operated in the U.S. reached it s peak o f 260,440 miles in 1930, a 35 percent increase over the same fig u re fo r 1900. Early r a i l lin e construction was lo c al in character w ith lin e s seldom connecting— hardly what could be c a lle d a system. Public support fo r the promotion o f ra ilro a d s began to wane in the years fo llo w in g the 1860's, however. reasons fo r th is : There were several p o l i t i c a l , social and economic. 27 Excesses in 25 Railroads were given condemnation powers fo r obtaining r ig h t of-way; the cost o f piecing together rig h ts -o f-w ay through in d ivid u al land parcel purchases would have been p ro h ib itiv e . 26 Roy J . Sampson and M artin T. F a rr is , Domestic T ran sp o rtatio n : P ra c tic e , Theory, and P o lic y . (New York: Houghton M if flin e Co., 1966), 27 For elab o ratio n o f these views see: Frank N o rris , The Octopus, (New York: Doubleday and Company, In c ., Bantum Books, 1958); Cornelius C o tte r, Government and P riv ate Enterprise (New York: H o lt, Rinehart & Winston, i9 6 0 ); G abriel Kalko, Railroads~~and Regulation , (Princeton U n iv e rs ity Press, 1965); Solum Justus Buck. The Granger Movement, 1870-1880 (Harvard U n iversity Press, 1913). 41 ra ilro a d promotion and construction were common. Railroads frequently b u ilt duplicating lines In th e ir e ffo rts to tap lu crative areas; this resulted 1n substantial excess plant capactly. Exploitation of Individual r a il users and communities was corwnon as railroads sought to adjust. Given th e ir high fixed costs, and low variable cost struc­ tu re , railroads engaged in drastic rate competition fo r t r a f f ic and revenues. The resu lt was v o la tile prices and uncertain service fo r r a il users and "ruinous competition" fo r the railro a d s . An alte rn a­ tiv e fo r many railroads was collusion and discrimination against shippers or areas that had few options—predominantly farmers and farming communities. Agrarian discontent towards the railro ad reached a peak in the early 1870's with the passage o f Granger Laws. A number o f mid- western states passed laws forbidding rate discrimination and esta­ blished maximum rates. But because these were state laws, they were not applicable to the in te rs ta te business o f the railro ad s. Conse­ quently, the railroads (through th e ir control over route, service, and price dimensions o f in te rs ta te movements) maintained control over the economic fate o f communities, states, and regions. Regulation o f Railroads. The In te rs ta te Commerce Act o f 1887 was enacted by Congress in order to extend the provisions o f the state Granger Laws to in te rs ta te commerce. was tw o-fold. The lawmakers' in te n t F irs t of a l l , the lawmakers sought to curb the mono­ poly power railroads held over small ag ricultural shippers and western communities. To achieve th is , the In te rs ta te Commerce Act required th at railro ad s' rates be ju s t and reasonable (Section 1 ), by e x p lic itly prohibiting personal discrimination (Section 2 ) , 42 undue preference between persons, lo c a litie s and types o f t r a f f ic (Section 3 ), and by p ro h ib itin g the practice o f charging more fo r a short haul than a long haul over a common lin e (Section 4 ). Secondly, the federal government wanted to insure re la tiv e ly low fre ig h t rates from the west to encourage the continued s e ttle ­ ment and development o f th a t region. At the same time, the r a i l ­ roads had to be able to charge rates high enough to stay in business. The mechanism fo r achieving these dual goals was the im p lic it le g a li­ zation o f the most prevalent type o f price discrim ination used by the railroads a t th a t time— the p ractice o f value o f service p ric in g . The value o f service p ricin g structure is based upon the fa c t th a t d iffe re n t commodities have d iffe re n t price e la s tic it ie s o f demand fo r transportation services. During the la te 1800's and e a rly 1900's, bulk commodities (a g ric u ltu ra l products and raw m aterials) were subject to considerable competitive pressure because o f water competition, a lte rn a tiv e sources o f supply, and the high proportion o f fre ig h t costs in the final-goods p ric e , which insured th a t an increase would be re fle c te d in i t . Thus, these commodities had a high e la s t ic ity o f demand fo r r a i l services; any ra te change would lead to a more than proportional change in t r a f f ic (in the opposite d irectio n o f the price change). Consequently, to capture as much o f th is t r a f f i c as possible, railroads maintained low rates on these commodities. What the railroads lo s t through low prices 1n a g ric u ltu ra l products and raw m aterials they made up with high prices on manu­ factured goods. At the turn o f the century, railro ad s had l i t t l e 43 competition fo r high valued manufactured goods and an In e la s tic demand fo r r a i l services, meaning any ra te change would lead to less than a proportional change in t r a f f i c . Railroads, in e f f e c t , charged the manufacturers what the " t r a f f i c would bear". This form o f commodity p rice discrim ination encouraged the development o f the west and also maximized the ra ilro a d s ' p r o fits . During the same period, the ICC adopted an o rien tatio n towards branch abandonment th a t resulted in railro ad s providing service even where i t was u np ro fitable to do so. The Commission's o rie n ta tio n in branch lin e abandonment cases stressed the p o tential harm to local shipper, community and area economies. This o rie n ta tio n in e v ita b ly led to the p rin c ip le th a t states: ...m a rg in a l or money-losing services should not be abandoned, but ra th e r cross-subsidized by p ro fita b le services as long as the subsidy is lessftthan the to ta l loss to the community losing service. The p rin cip les o f v a lu e -o f-s e rv ic e p ricing and lin e cross­ subsidization were established in the la te 19th and e a rly 20th cen tu ries. Existing technology and market conditions gave railroads a v ir tu a l transportation monopoly. Since then, population s h ifts , changing economic a c t iv ity in form and place, plus the development 28 For fu rth e r discussion on cross-subsidization, see: Ernest W. W illiam s, J r . , e d ., The Future o f American Transportation, (P re n tic e -H a ll, In c ., 1971). 44 o f o ther modes o f transport-m otor c a r r ie r , barges, p ip elin es and a ir c a r r ie r s , have rendered these p rin c ip le s less e ffe c tiv e and often harmful to the fin a n c ia l health o f ra ilro a d s . Many ra ilro a d s have responded by adopting behavior th a t leads to u n re lia b le r a i l service and subsequent declines in the demand fo r r a i l s e rv ic e . Changing Market and Demand fo r F reig h t T ran spo rtatio n . As the U.S. economy has matured, changes in the lo c atio n o f population, economic a c t i v i t y , technology, and consumption patterns have reduced the r e la tiv e importance o f heavy m aterials in the economy. Since th is is the type o f m aterials ra ilro a d s are best suited to move, the ra ilr o a d industry is p a rtic ip a tin g in what is in h e re n tly growth market. 29 a slow Commodities th a t t r a d it io n a lly move by r a i l are expanding in output less ra p id ly than o th ers. For example, c o a l, iro n o re , lumber, and grains are expanding less ra p id ly than such su b stitu te s as petroleum and n atu ral gas, p la s tic s , and meat, re s p e c tiv e ly . 31 30 non-ferrous m etals, These commodities tend to move by n o n -ra il modes. In co n trast to bulk commodities, t r a f f i c in manufacturers is growing. Rising per cap ita income i s , in p a r t, responsible fo r th is 29 Task Force on Railroad P ro d u c tiv ity , Improving Railroad P ro d u c tiv ity , A Report to the National Commission on P ro d u c tiv ity and Council o f Economic Advisors, Washington, D .C ., 1973. 30 The cu rren t energy s itu a tio n and government plans to encourage the s u b s titu tio n o f coal fo r petroleum and natural gas should favo r ra ilro a d s . 31 Task Force on R ail P ro d u c tiv ity , Op. C it.» pp. 13-16. 45 growth; as per capita income rises there is a s h ift in consumer expenditures toward more highly fabricated products. The production o f manufactured goods requires the passing-through o f a number o f fabrication or production stages. Increasing specialization in the manufacturers industry means that a manufactured good w i l l , most lik e ly , be involved in a number o f in te rp la n t shipments before i t is fin a lly completed and reac|y to market. Although the railroads have alreacfy lo s t much t r a f f ic in manufactures to trucks, this t r a f f ic s t i l l accounts fo r 25 percent to 40 percent of ra ilro a d tonmiles (depending on one's d e fin itio n ) and a s t i l l larger proportion o f revenues and p ro fits . 32 Railroads have lo s t manufactures t r a f f ic to trucks because they have not provided the standard o f fre ig h t service firms need and are w illin g to pay fo r. la te r in this chapter. The reasons fo r th is w ill be discussed The value o f manufactures per u nit o f weight is , in general, greater than that fo r non-manufactured goods because of greater amounts o f labor and cap ital inputs used in th e ir pro­ duction. As the amount o f working capital tied-up in manufactured goods ris e s , there is a strong tendency fo r firms to opt fo r speedier, more re lia b le delivery as a way to control carrying costs. Increasingly, products are competing in the market place on the basis o f q u a lity o f service. Consequently, the demand fo r fre ig h t transportation has become more se rv ic e -e la s tic and less p ric e -e la s tic . 32Task Force on Rail Productivity, Op. C i t . , p. 21. * 46 Population s h ifts have also affected the demand fo r r a il fre ig h t service and the v ia b ilit y o f many r a il lin e s . The rural population o f the U.S. has declined as a percentage of the pop­ ulation (from 85 percent In 1850 to 60 percent 1n 1900; 36 percent In 1950; and 25 percent today). As the population Jias migrated to the c it ie s , the flow o f manufactures to rural areas has diminished or been diverted to truck. In the past, railroads would move a g ric u ltu ral products and raw materials from rural areas to manu­ facturing points and handle manufactures as back haul on th e ir return t r ip . Today, however, the decline in bulk commodity consump­ tio n , together with the loss o f manufactures to truck, has rendered much o f the rural r a il network superfluous and expensive to operate. Regulation o f Intermodal Competition. Congressional desire to insure low fre ig h t rates on ag ricu ltu ral and bulk commodities led to the passage of the Motor Carriage Act o f 1935; th is Act gives the ICC regulatory power over carriers operating fo r-h ire in in te rs ta te commerce (with a few exceptions). Motor carriers engaged in the in te rs ta te transportation o f "unmanufactured ag ricu ltu ral products" were exempt, as were private n o t-fo r-h ire c a rrie rs . Barge and other water carriers were brought under ICC regulation with the passage o f the Transportation Act o f 1940. Within the scope o f its regulatory powers, the ICC has sought to lim it competition between modes. The prevailing b e lie f was that fin a n c ia lly strong railroads were necessary to maintain the 3 3 Source: S ta tis tic a l Abstracts o f the U.S. (1976), rural population defined as th at outside o f SMSA. 47 tra d itio n a l rate stru ctu re, and th a t this was not possible 1 f large segments o f the transportation Industry ( i . e . , trucks and barges) were undermining th e ir competitive position. According to Friedlaender, the ICC regulation o f rates has placed railroads a t a competitive disadvantage, p a rtic u la rly In the manufactures market. (Following World War I I ) the railroads have consistently pushed fo r reduced rates to compete more e ffe c tiv e ly with the water and motor c a rrie rs . The ICC has been apparently inconsistent in granting these. On the one had, i t has recognized th a t lower rates on bulk commodities are desirable and nas thus permitted the railroads to cut rates down to out-of-pocket costs to meet barge competition. On the other hand, i t has generally been unw illing to grant rate reductions on high-value goods. Because o f th is , 1 t has often been accused o f preventing railroads from exp lo itin g th e ir true compe­ t i t i v e p ositio n. I f truck and ra ilro a d rates are kept a t comparable le v e ls , the t r a f f i c w ill usually go by the trucks, which o ffe r b e tte r service a t the same cost. Thus in its unwillingness to permit ra te reductions, the ICC has prevented the railroads from exercising th e ir only means o f competition. 35 I t would appear that one e ffe c t o f ICC rate-making p olicies and practices has been to dull price competition between r a il and motor c a rrie rs fo r t r a f f ic in manufacturers, promoting competition on the basis o f service d iffe re n tia ls rather than ra te d iffe r e n tia ls . S ta tis tic a l analysis o f commodity data from the 1963 Census o f Transportation supports this contention. 34 Results from one study For elaboration on this point see: Ann F. Friedlaender, Op. C i t . , C 1 t., Chapter 2; Robert A. Nelson and W illiam R. Greiner, Op. C i t . , pp. 351-74; Earnest W. W illiam s, J r . , The Regulation o f Rail-Motor Competition, (Harper and Bros., 1958). 35Ann F. Friedlander, Op. C i t . , p. 24. 48 show th a t tran sp o rtatio n demand o f manufactured goods was more s e n s itiv e to r e la tiv e Inventory costs (a function o f r a i l service 36 q u a lity ) than to ra te s . Although a v a ila b le data is incomplete and imprecise due to it s general n atu re, in d ica tio n s are th a t the ra ilro a d s are not fa rin g w e ll In the competition fo r in t e r c it y manufactures t r a f f i c . Over the three year period from 1967 to 1970, ra ilro a d s lo s t t r a f f i c in s ix major manufactures groups and gained in two (see Table 2 - 1 ) . Trucks were the primary b e n e fic ia ry although w ater c a rrie rs made large gains in the movement o f lumber. R ail Service Q u ality as R a il Users View I t . The argument has been made th a t demand fo r fr e ig h t tra n s p o rta tio n has become more s e rv ic e -e la s tic and less p r ic e - e la s t ic . The purpose o f th is section is to c la r i f y what co n stitu tes " r a il service q u a lity " from the firm s ' perspective and how th is perspective a ffe c ts t h e ir choice o f tra n s p o rta tio n modes. Public testimony given by r a i l users a t a recent ICC hearing is suggestive o f the r a i l users' view o f r a i l service q u a lity : Ranking high on many r a i l customers' 11st o f concerns is the m atter o f r a i l service r e l i a b i l i t y . . . i n e f f i c i e n t , un­ r e lia b le , e r r a t ic , haphazard r a i l service leads to poor car u t iliz a t io n (and demmurage charges against the s h ip p e r). . .Numerous complaints o f poor r a i l service were la id to "reduction in service schedules, in c o n sis ten t t r a n s it tim e, u n re lia b le and d e fic ie n t switching service and bunching o f cars. In the words o f a shipper: ...w e are w illin g to pay complete and compensatory demurrage 36 Ann F. F reid laen d er, Op. C i t . , p. 60. 49 TABLE 2-1 MANUFACTURERS INTERCITY FREIGHT TONNAGE Modal Share o f T ra ffic fo r Selected Commodities: 1967,1970 Prlvalte and For-H1rii Trucks {Pen:ent) 1970 1967 Water Carriers {Percent) 1967 Commodities Railroads {Percent) 1970 1967 Food and Drugs* 56.1 33.4 40.9 62.8 2.8 3.6 9.1 6.7 79.6 92.4 0.3 0.1 Lumber 53.5 46.9 41.4 18.5 5.0 34.5 Paper Products 55.5 56.6 42.8 39.1 1.4 4.1 Chemicals 52.4 43.1 35.8 44.0 11.3 12.7 Stone, Clay, Glass 35.7 36.0 62.2 62.3 1.8 1.6 Fabricated Metal Products 23.0 22.9 74.4 74.8 1.7 0.8 Motor Vehicles & Equipment 57.6 32.5 41.8 65.6 0.1 1.6 Textiles Source: Table constructed from data reported 1n Alexander L. Morton* "Intermodal Competition fo r In te rc ity Transport of Manufacturers," Land Economics. Vol. 48, November 1972, p. 361. United States Railway Association, Preliminary System Plan. February 1976, p. 121. *The percentage figures fo r this group are not completely comparable since the 1967 figures represent fre ig h t movement of food only, drugs are not Included. 50 ra te s , but we don't think we should pay anything when the detention 1s caused by Inconsistent service. We are already paying enough... 37 Surveys o f shippers ind icate th at p r o fit maximization does not simply imply the minimization o f costs, I . e . , the selection o f the le a s t cost mode. While cost 1s consis­ te n tly one o f the most Important factors in mode s e lec tio n , so also are tr a n s it time and tra n s it time r e l i a b i l i t y . . . w hile the fre ig h t ra te w ill have importance to the fre ig h t budgetary department, the mode tr a n s it time w ill help to determine necessary inventory and storage requirements, and the mode r e l i a b i l i t y w ill be important in reducing inventory costs through lowering o f the size o f safety stocks needed to protect the firm against a stock out. By using a more r e lia b le mode, a firm should be able to lower warehousing costs since less v a r ia b ilit y would be expected in the d is trib u tio n lin e from factory or d is trib u to r to the r e t a il sto re . Quicker modal service would also reduce the need fo r warehousing capacity, i t could improve the a b ilit y o f the firm to market th e ir product and service th e ir customers as w e ll. 38 In terms o f service c h a ra c te ris tic s , the highest pay­ o f f (to the c a rr ie r) is lik e ly to come from increases in r e l i a b i l i t y , which influence shipper mode choice behavior 3g considerably more than the reduction o f in -tr a n s it time. In a recent survey, 323 major eastern shippers were asked to check the factors th a t caused them to s h if t from r a il to truck. 40 37 Based on public testimony given a t ICC I and S Docket No. 8577: Demurrage Rule Changes Nationwide, reported in Don P. Ainsworth, "Im plications o f Inconsistent Railroad Service", Canadian Trans­ portation Research Forum, (May 1972), 489. 3 8 Ib id ., 143. 39 Peter L. Watson, e t . al^. "Factors Influencing Shipping Modal Choice fo r In te rc ity Freight: A Disaggregate Approach," Canadian Research Forum, 1974, p. 139. ^°United Research, In c ., The Freight Potential o f the New York. New Haven and Hartford Railroad 1965-1970, reported in Douglas U. Woods, e t . a l . , "Competition between k a il and Truck in In te rc ity FreighO Transportation, " Op. C i t . , p. 268. 51 The percentage d is trib u tio n o f responses was: (1 ) Faster T ran s it Time, 24.7 percent; (2 ) Dependable T ra n s it Time, 12.5 percent; (3 ) Convenient Frequency, 12.5 percent; (4) Equipment A vailab le when needed, 12.1 percent; (5) Minimum Weights, 9 .0 percent; ( 6 ) Lower Rates, 8 .7 percent; (7) S pecialized Equipment, 6 .5 percent; ( 8 ) Equipment Conditions, 4.1 percent; (9) Proper Car Handling, 3 .6 percent; (10) T r a ffic S o lic ita tio n , 2.7 percent; (11) Delay N o tific a tio n 2.2 percent; and, (12) B e tter B ill Procedure, 1.4 percent. In 1975, the U.S. Department o f Transporation conducted a survey o f 198 randomly selected manufacturing establishments (in SMSAs) employing 100 or more in d iv id u a ls . 4 1 As p art o f the survey, p lan t t r a f f i c managers were asked to evaluate the q u a lity o f service extended to th e ir plants by r a i l and motor c a rrie rs . Four s p e c ific measures o f transport service were used to te s t c a rr ie r performance: (1) on-time pickup, (2) on-time d e liv e ry , (3 ) loss and damage, and (4) equipment a v a ila b ilit y . Survey results indicated the follow ing: 1. On-Time Pickup Motor Rail 2. On-Time Delivery Motor Rail 41 C a rrie r - 89 percent o f time - 81 percent o f time C a rrie r - 84 percent o f time - 70 percent o f time U.S. Department o f Transportation, O ffic e o f Transportation Planning Analysis, In d u s tria l Shipper Survey— Plant Level. Washington, D .C ., 1975. 52 3. Loss and Damage (W ithout) Motor C a rrie r - 94 percent Rail - 89 percent 4. Equipment Aval 1a b i1i t y (W ithin a reasonable time period) Motor C a rrie r - 90 percent R ail - 63 percent On the question o f p o in t-to -p o in t d e liv e ry performance between r a i l and motor c a r r ie r s , two d is tin c tio n s were made. Motor c a rrie rs were separated on the basis o f f o r - h ir e and p riv a te s ta tu s ; and motor and r a i l c a rrie rs were seperated on the basis o f truckload (carlo ad ) and les s-th an -tru c klo ad (T0FC/C0FC). The re s u lts are provided below: Percent o f Shipments On-Time Truckload (Carload) Less than Truckload (T0FC/C0FC) Motor C a rrie r For-H ire Pri vate 89 96 82 97 R ail 65 70 . .............. The studies c ite d above d efin e r a i l serv ice q u a lity p rim a rily in terms o f r e l i a b i l i t y ( e . g . , r e l i a b i l i t y o f t r a n s it time and ontime pickup and d e liv e r y ). A v a ila b le r a i l cars on a tim ely basis and shipment loss and damage are also c ite d as im portant dimensions 42 o f r a i l service q u a lity . 42 Modal se lec tio n studies conducted in o ther countries confirm the Importance shippers attach to t r a n s it tim e, variance in t r a n s it tim e, a v a ila b ilit y o f equipment and loss and damage. See: B.T. Bayl i s s , Demand fo r F reig h t Transport— P ra c tic a l Results o f Studies on Market operations, P a ris: European Conference o f M in iste rs o f 53 Unreliable r a il tra n s it time can create a number o f problems fo r r a il users. Inconsistent tra n s it time can re s u lt 1n lo s t sales or production slow downs due to stock-outs, lower revenues, higher costs, and declining p ro fits . The firm can also experience short­ term material handling problems. Since most firm s, p a rtic u la rly smaller ones, do not maintain specialized shipping and receiving crews, la te (o r e a rly ) fre ig h t shipments may cause the firm to incur additional costs, e ith e r through payment o f overtime rates or through the hiring o f additional help. Trade-Off between Transportation Costs, Inventory Costs, and Customer Sales. Physical d is trib u tio n a c tiv itie s constitute a major p art o f the firm 's production cost; transportation costs (fre ig h t rates) are but one part o f the firm 's to ta l physical d is t r i­ bution costs. Purchasing, inventory control, production scheduling, warehousing, internal materials handling, packaging, and other functions are also part o f the firm 's physical d is trib u tio n . a c tiv itie s ; and th e ir costs are determined p a r tia lly by the r e l ia b i l it y o f transportation services the firm uses. The firm 's inventory costs, fo r example, are affected by tra n s it time r e l i a b i l i t y . The greater the variance in tra n s it time on a p a rtic u la r shipment, the greater the chances the firm w ill run out of inventory. In order to reduce the p ro b a b ility o f stock-out and subsequent production slow-downs or lo s t sales, or both, the firm must carry larger inventories. Transport, 1973); H.M. Kolsen, The Economics o f Control o f Road-Rail Competition: A C ritic a l Study oT Theory and Practices in the United States of/ftnerfca. Great B rita in , and A u s tra lia , (Sydney: Sydney University Press, 1968J. 54 Larger Inventories may re s u lt In higher costs to a firm 1n a number o f ways. tying-up To begin w ith , additional inventory requires more working c a p ita l. In addition, the firm may fin d i t necessary to invest in more warehouse space. Also, as inventory levels increase, the firm w ill experience changes in costs fo r Insurance, product obsolescence, product d e te rio ra tio n , and state and local inventory taxes. Today, more firms are adopting a to ta l cost approach towards physical d is trib u tio n management; many firms are re a liz in g th at minimizing d ire c t transportation costs is not necessarily minimize physical d is trib u tio n costs. the way to Instead there is a growing awareness o f the possible tra d e -o ffs between the d iffe re n t physical d is trib u tio n functions. Many firm s, fo r example, are finding th at a higher priced mode o f transportation can be ju s t if ie d because i t reduces other physical d is trib u tio n costs, p a rtic u la rly inventory Gosts, more than the increase in d ire c t transportation costs. In ad d itio n , some firms are finding th at the speed and dependability o f premium transportation service more than pays fo r i t s e l f through b e tte r customer service and increased business volume. The relatio n sh ip between transportation costs, inventory costs, and to ta l cost is illu s tr a te d in Figure 2 -1 . 43 The relation sh ip For a f u ll e r discussion o f physical d is trib u tio n management see: Ronald H. B allou, Business Loqistics Management, (P ren ticeH a ll, In c ., 1973); and Ray J. Sampson and Martin T. f a r r i s , Domestic Transportation: P ractice, Theory and Policy (Houqhton Mi'ffTTn TTompany," T9F6). L 55 COST OF TRANSPORTATION SERVICE (F r e ig h t R ates) COST ($) TOTAL COST INVENTORY COST (In c lu d e s Storage plus I n - T r a n s it ) TRUCK RAIL AIR GREATER SPEED AND RELIABILITY > TRANSPORTATION SERVICE FIGURE 2-1 RELATIONSHIP BETWEEN TRANSPORTATION COSTS, INVENTORY COSTS, AND TOTAL COST between physical d is trib u tio n costs and the costs o f customer service are illu s tr a te d Figure 2 -2 . Consider f i r s t Figure 2 -1 . Con­ sid er a midwestern r e t a i l e r th a t must choose between a v a ila b le trans­ port modes to d e liv e r a recent commodity purchase from a west coast manufacturer. Suppose th a t r a i l , tru c k , and a i r are the transport modes he has to choose from. Suppose also th a t the q u a lity o f transport service (speed and r e l i a b i l i t y ) and it s cost are posi­ tiv e ly re la te d : the more q u a lity desired, the higher the tra n s­ portation cost. Each m o d e --ra il, truck and a i r —has unique p rice and service c h a ra c te ris tic s . The firm might i n i t i a l l y choose r a i l because o f it s low transportation cost, but when the inventory costs o f r a i l are considered the firm finds the e ffe c tiv e p rice (to ta l cost) o f r a i l service to be f a i r l y high. A ir fr e ig h t, on the other hand, would reduce Inventory costs s u b s ta n tia lly ; but a i r fr e ig h t rates are high, again the e ffe c tiv e p rice 1s high. Consequently, in 56 th is example, truck o ffe rs the best balance between inventory end tra n s p o rta tio n costs ( I . e . , lowest to ta l c o s t). I t should be noted th a t trucks are not always the le a s t cost mode as Figure 2-1 suggests. The le a s t cost mode w i l l vary w ith commodity and the par­ t ic u la r tra n s p o rta tio n needs o f the firm . In a d d itio n , the shape o f the to ta l cost curve Is determined by the shape o f the tra n s p o rta tio n cost curve and the inventory cost curve. The tra n s p o rta tio n cost curve r e f le c t s , more o r le s s , the regulated ra te s tru c tu re o f the tra n s p o rta tio n in d u s try . The inventory cost curve r e fle c ts the technology and operating procedures o f the various modes. New technology or new operating procedures adopted by one o f the tra n s ­ p o rt modes w il l a l t e r the shape o f the inventory cost curve and th a t mode's e ffe c tiv e p ric e (t o t a l cost) r e la t iv e to the o ther c a r r ie r s . Also, changes in the regulated ra te s tru c tu re w i l l a l t e r the shape o f the tran sp o rtatio n cost curve and the r e la tiv e p o s itio n o f the various tra n s p o rta tio n modes. Figure 2-2 illu s t r a t e s the firm 's cost tra d e -o ffs in s e ttin g customer service le v e ls . As the customer receives a higher le v e l o f s e rv ic e , fewer o f them are lo s t due to o u t-o f-s to c k s itu a tio n s , and slow, u n re lia b le s e rv ic e . To say i t another way, the cost due to lo s t sales decreases w ith improved customer s e rv ic e . Counter­ balancing lo s t-s a le s is the cost o f m aintaining the le v e l o f s e rv ic e . Improved service usually means more must be paid fo r tra n s p o rta tio n , order processing, inventory management, and so on. 57 COST TRANSPORTATION ORDER PROCESSING, INVENTORY MAINTENANCE COSTS ($) TOTAL COST LOST SALES 0 10056 IMPROVED CUSTOMER SERVICE ► FIGURE 2-2 RELATIONSHIP BETWEEN PHYSICAL DISTRIBUTION COSTS AND COSTS OF CONSUMER SERVICE Summary. The composition o f the in te rc ity fre ig h t market is shifing rapidly from low-valued raw and bulky materials to high­ valued manufactures. With this change, the demand fo r fre ig h t transportation has become more s e rv ic e -e la s tic and less p rice e la s tic . I f railroads are to increase th e ir share o f the in te r ­ c ity fre ig h t market in manufactures, they w ill have to improve the r e lia b ilit y o f the service they provide. The next section o f this chapter considers some o f the forces that a ffe c t the a b ilit y of railroads to Improve r a il service q u a lity . Factors Influencing the V ia b ility o f Rail Operations and The Quality o f Rail Service The purpose o f this section 1s to examine some key c a r r ie r -r a il user economic and organizational relationships th at determine r a il service q u a lity , and contribute to the v ia b ilit y o f r a il operations. 58 Railroad Cost-Output Relationships. e n ta ils costs. Every production operation And i t is common fo r economists to analyze production costs by c la ss ify in g them in to two categories: fixed and v a ria b le . The fixed costs are those which are not re lated to output in a d ire c t fashion; they remain independent o f output throughout a given range o f output changes. Variable costs, on the other hand, re la te d ire c tly to output in a manner determined by the technical input-output re la tio n s h ip . Railroad fixed costs can be divided into three groups—owner­ ship, maintenance, and adm inistrative costs. Ownership costs include in te re s t and taxes paid on investments— land, tra c k , building , r o llin g stock (locomotives, fre ig h t c a rs ), and other equipment. Maintenance costs p ertain to tra c k , roadbed, grade crossings, signal equipment, bridges, tunnels, b uildings, e tc . F in a lly , adm inistrative costs include management and o ffic e personal, s a la rie s , and frin ge b en efits, e tc . Railroad variable costs can also be considered in three categories— locomotive, crew, and other. Variable locomotive costs include fuel and operating maintenance, crew costs are p rim a rily wages and frin g e b en efits. And, other variable costs include operating maintenance o f way costs, car rentals (per diem on "foreign" c a rs ), and car and tra in inspections. The d is tin c tio n between fixed and variable is usually made on the basis o f time. The long-run is a period o f time s u ffic ie n t to enable the producer to make basic changes in the p la n t. In the case o f ra ilro a d s , the long-run usually refers to the time required to 59 a lt e r the productive capacity o f p la n t ( i . e . , construction o f new lin e s and complementary f a c i l i t i e s and equipment. R ailroads, in general, have high fix e d costs. To provide service to one r a i l user o r many requires a large Investment in i physical f a c i l i t i e s which must be provided and maintained, often w ithout reference to the lev el o f day-to-day operations. In te re s t on investment and maintenance of tra ck s, roadbeds, grade crossings, bridges, tunnels, b u ild in g s , and other physical f a c i l i t i e s continues w ith l i t t l e period. regard to the number o f tra in s operated in a given In ad d itio n , the t r a in -u n it ( i . e . , locomotive u n it and crew) represents a fix e d cost to the ra ilro a d , although its period o f f i x i t y is less than th a t associated w ith the physical p la n t ( I . e . , track and s tru c tu re s ). For example, the productive capacity represented by a p a r t i­ cu lar tr a in -u n it may be ICO fr e ig h t cars; tr a in -u n it costs are b a s ic a lly fix e d over the relevan t range o f output ( 1 - 1 0 0 ca rs ). Consequently, the incremental costs o f handling an additional car, up to the point t r a in -u n it capacity is r e la tiv e ly sm all; a ls o , the savings in operating costs from handling one less car are minimal. Railroad productive capacity can, th e re fo re , be discussed a t two le v e ls . F ir s t , there is the productive capacity o f the physical p la n t; th a t i s , the number o f tra in -u n its th a t can u t il i z e track and complementary equipment and f a c i l i t i e s w ith in a given time period. And secondly, the productive capacity o f a p a rtic u la r tra1n -u n 1t. Unused ra ilro a d productive capacity can e x is t a t both le v e ls , sim ultaneously, or independently o f one another. 60 Because o f I t s large fix e d costs in physical f a c i l i t i e s , a ra ilro a d w il l have an In c e n tiv e to continue any operations even though fix e d costs may not be e n t ir e ly covered. This is true because ceasing to operate w il l mean only a modest reduction 1 n operating cost and a complete loss o f income Under such circumstances, the ra ilro a d has no from such operations. income w ith which to cover fix e d costs. In s itu a tio n s where unused t r a in - u n it capacity e x is ts , a r a i l ­ road may fe e l i t can lower i t s to ta l costs by reducing the number o f tr a in -u n its i t has in operation and by a lte r in g t h e ir service schedule. The outcome o f such adjustments, however, can only be determined a f t e r consideration has been given to th e ir impact on the demand fo r r a i l s e rv ic e . Changes in e x is tin g t r a in - u n it operating procedures, fo r example, w il l a ffe c t fr e ig h t shipment t r a n s it time as w ell as pick-up and d e liv e ry dates; these factors influen ce the demand fo r r a i l s e rv ice. F lu ctu atin g Revenues, Cash-Flow Problems, and Branch Line O p e ra tio n s ^ Due to t h e ir larg e fix e d cost component, ra ilro a d costs do not vary much over broad ranges o f change in t r a f f i c le v e ls ; ra ilro a d revenues, in c o n tra s t, do vary w ith changes in t r a f f i c le v e ls . One consequence o f th is is th a t flu c tu a tio n s in the economy o ften create Branch lin e s , 1n co n trast to main lin e s ("tru nk" lin e s ) p rim a rily o rig in a te and term inate fr e ig h t shipments. Although branch lin es handle some "bridge" ( in t e r lin e ) t r a f f i c , t h e ir primary function is " lo c a l" . Branch lin e s are lik e fin g ers reaching out from the core o f the r a i l system's m ainlines. They perform a gath erin g, dispersing function fo r the m ainlines th a t connect major production and consump­ tio n areas in the country. 61 cash-flow problems fo r railroads. illu s tra te s fo r Class I railroads Figure 2-3 on the following page the tendency fo r fixed costs to remain f a ir ly stable, even though net operating revenues fluctuate widely. I t is common practice in the industry fo r railroads to postpone costs 1 n the short-run to s ta b iliz e th e ir cash-flow position when revenues fluctuate widely. Deferring maintenance and re h a b ilita tio n o f track, roadbeds, other structures, and equipment in the lean years and playing catch-up in the good years is a procedure used by many railroads to s ta b iliz e th e ir cash-flow. Net railway operating in com e...reflects the maintenance policies o f the railroad industry. There is persuasive evidence that maintenance levels in the railro ad industry are varied over the business cycle to coincide b etter with a v a ila b ility o f internal funds and . . . t o improve s ta b ility o f earnings. 46 In general, railroads must re ly upon in te rn a lly generated funds fo r maintenance and modernization o f track, roadbed, and other structures. External funds are used to invest in ro llin g stock-- locomotives and fre ig h t cars. The U.S. railroad industry is dominated by approximately 70 large "trunk lin e " systems. Most o f these carriers are designated by the In te rs ta te Commerce Commission as Class I railroads, i . e . , those having gross operating revenues o f $ 1 0 m illio n or more annually (averaged over three years). Although Class I railroads make up only about one-third o f the to ta l, they are the most important part o f the industry, accounting fo r over 99 percent o f the industry's ton-m iles. Class I railroads range in size from over 10,000 miles to under 100 m iles, with the average between 2,000 to 5,000 miles. ^ Improving Railroad Producti v i t y , Op. C i t . , p. 94. 62 NET OPERATING INCOME 180 “ 170 - 160 - 150 - 140 - 130 - 120 - •■■■■■■ FIXED COSTS CASH FLOW / 110 - 100 90 ^ _ 1960 61 SOURCE: 62 63 64 65 66 67 68 69 70 THE PENN CENTRAL AND OTHER RAILROADS, A REPORT TO THE SENATE COMMITTEE ON COMMERCE, DECEMBER 1972, PP. 4 33 -4 3 4. FIGURE 2-3 TRENDS IN NET OPERATING INCOME, FIXED COSTS, CASH-FLOWS - CLASS I RAILROADS 1960 - 1970 The climb in fixe d charges owes to a combination o f fac to rs— higher in te re s t rates plus increased debt. "The fa c t th a t gross cap ital expenditures have been on the ris e does not necessarily Imply th a t real net investment is increasing. Real cap ital stock o f railroads evaluated in constant d o llars has been roughly the same from 1947 to 1972". ( Improving Railroad P ro d u c tiv ity, Op. C it, 63 From the standpoint o f leg al se c u rity fo r lenders, i t is often much ea sie r to obtain funds fo r some types o f investment than others. A locomotive o r fr e ig h t car is portable and 1 n the event o f d e fa u lt on required payments, r o llin g stock can be tra n s ferre d to another ra ilro a d . This is not the case w ith investment in tra c k , term inals and yards, or even in computer o r teleconrmunication f a c i l i t i e s . While such fixe d investments might add g re a tly to ra ilro a d operating e ffic ie n c y , they tend to be under-financed except fo r ra ilro a d s which can generate the necessary ca p ita l in te r n a lly . 47 For ra ilro a d s experiencing fin a n c ia l d i f f i c u l t i e s , main lin e operations, in most cases, take p r io r it y over branch lin e operations; deferred maintenance and re h a b ilita tio n occurs f i r s t on branch lin e s . Only i f the ra ilro a d 's fin a n c ia l problems continue w il l the cost- saving practices be used on main lin e s , too. While these cost- saving practices may improve the r a ilr o a d 's fin a n c ia l position in the s h o rt-ru n , th e ir long-run consequences can be q u ite the opposite. Postponing re h a b ilita tio n and maintenance o f branch lin e f a c i l i t i e s often resu lts in substandard track and equipment conditio n s ; th is leads to higher operating costs and a loss o f revenues as demand fo r r a i l service f a l l s o f f . Substandard track and equip­ ment re su lts in slow tr a n s it tim e, derailm ents, shipment damages, and generally u n re lia b le r a i l s e rv ic e . Reducing tr a in speed due to poor track conditions means higher labor and fuel costs. Faced w ith higher operating costs, the next step fo r many ra ilro a d s is to reduce the frequency o f service o ffe re d . The number o f t r a in - units ir. operation are reduced, say from fiv e per week to two per week, thereby reducing operating costs. 47The Penn Central and Other R ailroads, Op. C i t . , p. 252. 64 From the (branch lin e ) r a i l user's point o f view, the re su lt o f such ra ilro a d behavior 1 s a s ig n ific a n t decline in r a il service q u a lity . Rail service has become unreliable and the firm may give serious consideration to using another mode o f transportation. Should the firm s h if t , say to truck service, 48 the ra ilro a d would experience a reduction in revenues with almost no reduction 1 n costs due to its cost structure (o f high fixed costs and re la tiv e ly small variable costs). The decrease in revenues may encourage the ra ilro a d to pursue additional cost-saving behavior ( e .g ., reducing the frequency o f tra in service even more or cutting over­ head costs by reducing the number o f fre ig h t agents on the lin e . The branch lin e becomes enmeshed in a vicious c irc le o f poor service, declining t r a f f ic , ris in g u n it costs, cost-saving practices, poor 48 When a firm makes the decision to s h ift from r a il service to truck service, i t may have to physically a lte r its plant f a c i li t y and even it s production procedures. The firm may have to invest in loading and unloading docks and specialized equip­ ment fo r handling truck shipments. And, plant f a c ilit ie s may have to be modified to handle smaller inventories. The firm may also change its markets. To the extent a firm invests in new equipment and f a c i li t i e s , the more d if f ic u lt i t w ill be fo r the ra ilro a d to get its business back. Such investments represent fixed Inputs (assets); and th e ir economic value to the firm w ill be realized over a number of production periods. The firm can only ju s t if y , economically, reverting to r a il service i f the expected benefits (lower trans­ portation costs, access to new markets, e tc .) outweigh the costs. 65 service, e t c ., th at s p ira ls re le n tle s s ly toward the point th at the remaining t r a f f i c cannot cover the ra ilro a d 's cost o f operation and complete abandonment o f service takes place. This sequence o f r a il ro a d /ra il user behavior and counterbehavior can have an a ffe c t on the w elfare o f local and regional economics as well as a ffe c tin g the ra ilro a d and r a il users. Consider the follow ing example: Assume a Class I ra ilro a d has recently purchased 200 covered hopper cars to compete fo r the substantial increase in grain t r a f f ic moving to the g u lf ports; expectations are fo r a strong and growing grain export market, as Russia, China, and developing countries are not expected to produce enough to meet th e ir growing domestic demands. Assume also th at the U.S. economy has ju s t experienced a downturn and the ra ilro a d is faced with cash-flow problems. In order to meet the payments on it s recently purchased f le e t o f covered hoppers, the ra ilro a d decides to forego scheduled maintenance and re h a b ilita tio n on a number o f branch lin e s . This improves it s fin an cial position somewhat, although i t causes a number of branch lin e firms to complain o f poor r a il service. A few even decide to s h ift over to trucks. Included in these costs are any losses the firm would sustain by s h iftin g specialized equipment and f a c i l i t i e s , designed fo r truck service, from th e ir present use to th e ir next best use (a lte r n a tiv e ). The a lte rn a tiv e uses a v ailab le must provide the firm with returns equal to or gheater than those they are now earning in th e ir present use to ju s t if y s h iftin g them on economic grounds. Other costs would Include necessary investments required to use r a i l service again—sidings, spurs, unloading-loading f a c i l i ­ tie s , e tc . Also, to be Included, are any costs associated with modifications in p lant f a c i li t i e s and production processes. 66 A few years l a t e r , national a tte n tio n focuses on the energy c r is is . The ris in g cost o f o il sig nals a p o te n tia lly strong demand fo r other energy sources in the fu tu re (coal In p a r t ic u la r ) . The ra ilro a d decides to in v es t in a new f l e e t o f r a i l cars to move co a l. To finance the purchase the ra ilr o a d postpones, once ag ain , needed maintenance and r e h a b ilita tio n o f i t s branch lin e s . A fte r four years o f n eg le ct, the branch lin e s are in t e r r ib le condition and more and more firm s are abandoning r a i l service fo r o th er modes. The loss o f r a i l users on one branch has reduced operating revenues to the p o in t th a t the ra ilro a d cannot cover i t s operating costs, l e t alone i t s fix e d costs. The ra ilr o a d p e titio n s the ICC to abandon service on the l in e . Ir o n ic a lly , the lin e serves an area w ith la rg e coal deposits. With r e lia b le r a i l serv ice i t would be economical to mine. The ra ilro a d has the r a i l cars to move coal but not the finances to r e h a b ilita te and modernize the l in e . Consequently, the coal is not mined, the regional economy does not b e n e fit, nor does the ra ilr o a d . Rather than lose r a i l service e n t ir e ly , a few r a i l users attempted to work out a j o i n t financin g agreement w ith the ra ilro a d fo r r e h a b ilita tin g the branch l in e . An agreement was never reached, however, because the i n i t i a t i n g r a i l users were unable to convince the other r a i l users on the lin e to co n tribu te to the r e h a b ilita tio n p ro je c t. Many o f the r a i l users were h e s ita n t to co n trib u te w ithout guarantees th a t the o ther r a i l users on the lin e would co n trib u te a ls o . A few r a i l users took the a t t it u d e , why con tribu te when you can enjoy the b e n e fits , whether you pay your share o r not? 67 To summarize* Class I ra ilro a d s o fte n turn to cost-saving p ractices ( e . g . , d e fe rrin g maintenance and r e h a b ilita tio n o f branch lin e tra c k and f a c i l i t i e s , and reducing frequency o f s e rv ic e ) to improve t h e ir cash-flow p o s itio n s . c o n trib u te to poor r a i l s e rv ic e . These p ra c tic e s , however, And a sequence o f r a i lr o a d - r a i l user behavior and counter behavior fo llo w s , o ften leading to complete abandonment o f r a i l s e rv ic e on the branch l in e . The absence o f mechanisms to f a c i l i t a t e c o lle c tiv e r a i l user action fre q u e n tly prevents ra ilro a d s and r a i l users from undertaking a c t iv it ie s th a t would be o f mutual b e n e fit. Some S tra te g ie s f o r R etaining and Improving Branch Line Service Over the past two o r th ree decades, a combination o f fa c to rs have rendered thousands o f branch lin e m iles uneconomical to operate, and the v i a b i l i t y o f many more branch lin e s is in doubt. Many branch lin e s were o r ig in a lly constructed to tap areas ric h in n atu ral resources ( e . g . , m in e ra ls , tim b e r, and a g r ic u ltu r a l products); as the resources o f these areas have been d ep leted , many ra ilro a d s have found i t uneconomical to continue to o p erate. In a d d itio n , population s h ifts from ru ra l to urban areas, changing consumption p a tte rn s , and the r is e o f intermodal co m p etition , p a r tic u la r ly tru c k , have combined to reduce the demand fo r r a i l fr e ig h t s e rv ice by 60 to 70 percent in many ru ra l area s. AO ^ A lso, a d e c lin e in demand ^Im p ro vin g R ailro ad P ro d u c tiv ity , Op. C i t . 68 fo r r a il fre ig h t service has occurred on many branches because of poor service. On some branch lin e s , r a il users have provided railroads with operating subsidies to retain service and have, on occasion, also helped finance branch lin e re h a b ilita tio n and modernization projects. On other branch lin e s , government acting alone or In cooperation with r a il users and the ra ilro a d has financed operating subsidies and re h a b ilita tio n projects. Why is government assistance requireG on some branch lines and not others? In other words, why c a n 't the r a il users and railroads be re lie d upon to work out agreements for retaining and improving r a il service? answer. The character o f r a il service provides p art o f the We recall that certain goods and services of a pure individual consumption (p riv a te ) variety also possess characteristics o f a pure collective-consumption (public) good or service. Since i t may be d if f ic u lt to exclude non-contributors from consuming the collective-consumption aspect o f such a good or service, individuals frequently have the incentive to be "free rid e rs ". Where a sense o f community does not e x is t to prevent free rid e r behavior, some type o f adm inistrative action (government) or special incentive may be needed to a rtic u la te demand. Under a d iffe re n t set o f circumstances high organizational costs may prevent a group c f consumers from e ffe c tiv e ly expressing th e ir demand fo r the collective-consumption good or service. Government can f a c ilit a t e a rtic u la tio n o f consumer demand in such situations by 69 bearing the i n i t i a l organizational costs. F in a lly , government may act to express option-demand fo r the taxpayers rig h t to consume the good or service a t some future date. Rail service can be considered a p riva te good with c o lle c tiv e consumption service a ttrib u te s . The q u a lity o f r a il service on a branch lin e , fo r example, is consumed by a ll r a i l users. When the ra ilro a d defers maintenance on the lin e and tr a n s it time becomes u n re lia b le , a ll r a il users s u ffe r; lik ew ise , when investments in the lin e are undertaken and service improves a ll r a il users b e n e fit. Consequently, when the ra ilro a d seeks fin a n c ia l help ( e . g ., loans) from the users to modernize the lin e , the users might decide i t is to th e ir advantage not to volunteer th e ir help since they cannot be excluded from the benefits anyway. The same s itu a tio n is lik e ly to p revail where a subsidy is needed to re ta in service. That is , once someone bears the necessary costs to re ta in r a il service on the lin e , the service becomes av ailab le to any user w illin g to pay a small fee (fr e ig h t charge). In th is section a few s tra te g ie s , p riv a te and p u b lic, fo r re ta in in g , and in some cases improving, branch lin e r a i l service w ill be b r ie fly considered. Private and P u blic/P rivate E ffo rts to Retain and Improve Rail Service. Examples o f two programs, one p riva te and the other a jo in t p u b lic -p riv ate e f f o r t , to re ta in and to Improve r a i l service are b r ie fly described below. Iowa. Both programs occurred recently 1n 70 (1 ) In the e a rly 1970's a group o f farmers b u ilt a major grain e le v a to r on a branch lin e . The condition o f the branch lin e did not perm it the use o f the new "jumbo" grain hopper cars, however. Also, sh o rtly a fte r the new ele va to r was completed, the ra ilro a d cut back the frequency o f r a i l service on the lin e . The n et e ffe c t was to put the farmers a t a competitive disadvantage in marketing th e ir grain v is -a -v is elevators on main lin e s . Subsequently, the group o f shippers negotiated w ith the branch lin e c a rr ie r to rehab­ i l i t a t e the lin e v ir tu a lly to main lin e standards and to increase the frequency o f service. Under agreement w ith the ra ilr o a d , the shippers (through th e ir farmers' cooperative) raised the money to reb u ild the lin e and loaned i t to the ra ilro a d fre e o f in te r e s t. In re tu rn , the ra ilro a d would c re d it the cooperative fo r every carload o f fre ig h t o rigin ated or terminated on the lin e . from $10 to $50, averaging $40 per carload. The cred its ranged The cred its were based on the revenue received by the ra ilro a d fo r each carload handled. the end o f the year, the cooperative received a check fo r the to ta l o f the ye ar's accumulated c re d its . ra ilro a d repaid it s loan. This refund was the way the The loan period was established fo r 1 0 years. (2 ) Iowa has recently In it ia t e d a ra ilro a d r e h a b ilita tio n 51 program to upgrade selected branch lin e s 1n the S ta te . The ®^This example 1s taken from: Edwin P. Patton and C. John Langley, J r . , Handbook fo r Preservation o f Local Railroad Service, U.S. Department o f tra n s p o rta tio n , July 1976, pp. 25-27. 51 For a f u ll e r description o f the program see: The Council o f State Governments. Rai1road Rehabi11t a t i on: A Program to Upgrade Selected Branch Lines In Iowa, (Lexington, Kentucky, 1976). At 71 program Involves a three-way commitment between the ra ilro a d s , the shippers and the s ta te . The program is o u tlin e d below. The Iowa L eg is latu re created a ra ilro a d assistance fund, sp ecifying th a t "moneys 1 n th is fund s h a ll be expended fo r providing assistance to ra ilro a d s f o r upgrading ra ilro a d roadbeds, tra c k , track s tru c tu re s , and o ther appurtenances o f ra ilro a d rig h t-o f-w a y o f 52 ra ilro a d branch lin e s ." The enabling le g is la tio n also required ra ilro a d s b e n e fittin g from the program ( i . e . , increase in revenues due to the improved condition o f the branches) to maintain a fund fo r improving branch lin e s in Iowa. S tate funds were made a v a ila b le fo r r e h a b ilita tio n o f only those branch lin e s fo r which both the shippers and ra ilro a d s were w illin g to p a rtic ip a te f in a n c ia lly . The S tate would co n trib u te approximately o n e -th ird o f the p ro je c t costs w ith the shippers and ra ilro a d s paying the remainder. The actual work was to be done by the ra ilro a d s . The program is s im ila r to the grain e le v a to r example described e a r lie r in th a t the funds made a v a ila b le to the ra ilro a d are tre a te d as a loan. Funds advanced by shippers are repaid by the ra ilro a d according to a formula based upon the number o f carloads shipped and/or the revenues produced. Shipper contribu tio n s have varied in t h e ir form. On several branch lin e s , the o v e ra ll shipper fin a n c ia l requirement has been met by a la rg e grain e le v a to r. There have been instances where c e rta in sm aller r a i l users have not contributed a t a l l . Although the R a i l r o a d R e h a b ilita tio n : A Program to Upgrade Selected Branch Lines in Iowa, dp. C i t . , pp. 4 -5 . 72 n o n p a rtfc lp a tin g shippers b e n e fit from Improved r a i l s e rv ic e , they do not re ce ive any o f the payback allow ance. Many shippers formed “r a i l improvement corporations" and borrowed money from the Farmers' Home A d m in istratio n (FHA), which was then used by the shippers to pay t h e i r c o n trib u tio n . The FHA repayment schedule was tie d to the payments by the r a ilr o a d to the shippers. The repayment schedule to the S tate o f Iowa is s lig h t ly more complex. ^3 . . . I f r a i l t r a f f i c does not increase in the fiv e -y e a r p eriod a f t e r r a i l lin e improvement, no s ta te funds are repaid by the r a ilr o a d . Payback procedures are implemented when t r a f f i c in c re as es . I f the S ta te 's c o n trib u tio n is o n e -th ird o f the t o ta l cost o f branch lin e re p a id , ra ilro a d s rebate to the S ta te on the same basis as shippers, th a t i s , u su ally a f l a t $25 per c a r. However, th is money is not returned to the S tate but held by the r a ilr o a d in a sp ecial account f o r fu tu re branch lin e p ro je cts agreed upon by the r a ilr o a d and the S ta te . . . . I f the S ta te 's c o n trib u tio n is more than o n e -th ird o f the re p a ir c o s t, the f i r s t o n e -th ird ( o f to ta l p ro je c t cost) rebate w i l l be held in ra ilr o a d accounts as noted above. The funds which are in excess o f the o n e -th ird c o n trib u tio n w i l l be rebated by the ra ilro a d s (to the S ta te ) f o r fu tu re branch lin e p ro je c ts . I t is in te re s tin g to note in these two examples th a t r a i l users, f o r the most p a r t, made fin a n c ia l co n trib u tio n s to the rehab­ i l i t a t i o n o f t h e ir lin e s through some type o f o rg a n iza tio n — farm ers' cooperative o r " r a il improvement co rp o ratio n s". Although the o r ig in a l source documents f o r these two examples were not c le a r on the m o tivatin g fa c to rs f o r group a c tio n , two reasonable explana­ tio n s can be suggested: ( 1 ) to reduce in d iv id u a l tra n s ac tio n costs 53 R a ilro a d R e h a b ilita tio n : A Program to Upgrade Selected Branch Tines In Iowa, Op. C i t . , pp. 13-14. 73 ( e .g ., Information and bargaining costs) with ra ilro a d s , state o f fic ia ls and others, r a i l users turned to group action; and ( 2 ) with sta te contributions to re h a b ilita tio n o f the lin e contin­ gent on a minimum r a il user contribution, group action was necessary to ra ise the r a i l users* share. Public Ownership and Operation, Public Ownership and Private Operation o f Branch Lines. Some states and m u nicipalities have purchased branch lin e properties about to be abandoned to preserve the right-of-w ay fu tu re . and re tain the option fo r r a il service in the A fte r purchase has been made, the governmental u n it e ith e r becomes the operator or leases the ra ilro a d properties to an indepen­ dent ra ilro a d . The independent ra ilro a d provides r a i l service in accordance with terms set out in the lease. Although the specifics o f such arrangements d if f e r from case to case, they seem to have two common objectives: (1 ) s ta b iliz in g the ra ilro a d 's cash flow position to minimize the amount o f deferred maintenance; and ( 2 ) im­ proving the general q u a lity o f r a i l service. The C ity o f P rin e v ille Railway is an example o f public owner­ ship and public operation o f a branch lin e . I t is a ra ilro a d that has been developed by and 1 s wholly owned and operated by a muni54 c ip a lity . According to John Due: The experience with the (C ity o f P rin e v ille ) railw ay is an ex ce lle n t Illu s tr a tio n o f the a b ilit y o f a government to undertake and sustain a long-range investment p ro ject which 54 John F. Due, "The C ity o f P rin e v ille Railway—A Case Study 1n Government Enterprise", Quarterly Review o f Economics and Business, V ol. 5 (W inter, 1965), 63^5T 74 Is o f great sig n ifican ce fo r economic development o f an area, y e t with prospective returns too uncertain and too remote 1 n the fu tu re fo r p riv a te en terp rise to be w illin g to make the Investment. 55 In the e a rly 1900's, P r in e v ille was a major commercial center in central Oregon. Nevertheless, community e ffo rts to persuade the (nearest) ra ilro a d 20 miles away to provide a branch lin e to P rin ev i l l e fa ile d . lim ite d . The ra ilro a d f e l t the t r a f f i c prospects were f a r too The residents f e l t th a t the community's economic survival depended upon i t . A fte r much d e lib e ra tio n the comnunity decided to construct the branch lin e themselves. P rio r to the depression, t r a f f i c density was lig h t and inbound t r a f f i c f e l l as motor c a rrie rs increased th e ir share o f merchandise fo r local stores ( t r a f f i c they p a rtic u la r ly were w e ll-s u ite d f o r ) . During the depression years the c ity was forced to d e fa u lt on the bond in te re s t and was barely able to meet operating d e f ic it s . Maintenance o f the track and roadbed was cut back sharply. The ra ilro a d began to turn around fin a n c ia lly in the la te 1930's and e a rly 1940's w ith the growth o f the industry in the area. ...T h e problems were not a ll over, however. The road was ill-p re p a re d to handle the increased (lumber) tra ffic ...m a in te n a n c e o f track and equipment had been so long neglected th a t, despite the acq u isitio n o f three more locomotives, 1 t was v ir t u a lly impossible to keep the t r a f f i c moving. The road was tie d up fo r days a t a time by de­ railm ents. . .56 55 John F. Due, "The C ity o f P rin e v ille Railway—A Case Study in Government E n terp rise", Op. C i t . , p. 181. 56I b i d . , p. 66. 75 The lumber In d u s try , re q u irin g a cheap, r e lia b le mode o f tra n s ­ p o rta tio n , encouraged the C ity o f P r in e v ille to modernize branch lin e operations. The c it y d id ; the lin e was r e b u ilt w ith heavier r a i l and b a lla s t and obsolete steam engines were replaced w ith modern diesel locomotives. ...B y 1965 the ra ilro a d was in f ir s t - c la s s physical co n dition , w ith w ell-m ain tain ed tra c k , modern equipment, w e ll-tr a in e d personnel, two-way ra d io communication and— from a l l in d ic a tio n s — hig hly e f f i c i e n t o peratio ns. A ll debt had been paid o f f . . . 57 A few observations can be made regarding the C ity o f P r in e v ille Railway experience. One f a i r l y obvious, although very im portant, p o in t is th a t there is no s u b s titu te f o r t r a f f i c . A r a ilr o a d , branch lin e , o r main lin e cannot operate p r o fita b ly w ithout t r a f f i c irre s p e c tiv e o f how modernized and e f f i c i e n t i t s operations a re . Secondly, government, w ith access to a v a rie ty o f fin a n c ia l Instruments (ta x in g and bond-issuing powers), can sustain a f a lt e r in g branch lin e operation in the s h o rt-ru n i f prospects f o r the longrun look good. Government can also s u b sid ize , in p a rt or whole, a branch lin e operation deemed im portant to long-run economic development needs o f the community and area; o r fo r so cial reasons, such as m aintaining a p a r tic u la r settlem ent p a tte rn . The w illin g n ess o f residents o f (th e C ity o f) P r in e v ille to support temporary r a ilr o a d d e fic its by tax atio n was a d ecisive fa c to r 1 n keeping the e n te rp ris e in operation on the basis o f long-range in te re s ts o f the community. ®^John F. Due, "The C ity o f P r in e v ille Railway— A Case Study 1n Government E n te rp ris e ", Op. C i t . , p. 6 6 . 76 ...T h e c ity was correct in its expectations th at u l t i ­ mately the undertaking would be j u s t if i e d . . .The enterprise has, in the la s t two decades, been o f great help to the m unicipality in allowing higher levels of municipal a c tiv itie s and lower levels o f taxes than would other­ wise have been possible, both o f which should stim ulate economic growth o f the a r e a ... 58 One fin a l point, shippers are sensitive to the q u a lity o f r a il service, independent o f the type o f ownership o f the ra ilro a d pro­ viding r a il service. Due asked the question: Do shippers use the ra ilro a d to a greater extent than they would i f i t were not municipally owned, e ith e r as a matter o f p rin c ip le in terms of community pride or to increase the p ro fits o f and thus aid the c ity fin a n c ia lly ? 59 Due found the general answer to th is question to be negative. For most o f the t r a f f ic handled by r a i l (lumber, wood chips, potatoes), the a ttitu d e o f shippers was that truck transport is not feasib le in terms of cost and a v a ila b ility o f service. But greater use o f trucks would occur i f r a il service did not remain sa tisfac to ry. The Vermont Railway is an example o f public ownership and private operation o f a branch lin e . The Vermont Railway is operated by a private ra ilro a d company under contract with Vermont. the State o f The State owns the ra ilro a d properties; the ra ilro a d is 130 miles long, running nearly the e n tire length of Vermont. The Vermont Railway was formerly part o f the Rutland Railroad that 58 John F. Due, “The City o f P rin e v ille Railway—A Case Study in Government Enterprise", Op. C i t . , p. 81. 59I b id ., p. 79. 77 abandoned operations 1n 1961. In response to state-w ide concern over the loss o f r a i l service, the Vermont le g is la tu re authorized the sta te to purchase the lin e . The State o f Vermont, in turn, leased the lin e to a newly formed short lin e — the Vermont Railway. 60 The decision to have the State o f Vermont buy the ra ilro a d was founded on the b e lie f th a t the ca p ita l requirements (Vermont paid 2 . 6 m illio n d ollars fo r the lin e ) would be beyond the means o f a short lin e ra ilro a d . Vermont wanted to re ta in r a il service, but i t also did not want to burden state government with added adm inistrative re s p o n s ib litie s . The decision was to lease the properties to a p rivate ra ilro a d company. A s lid in g scale o f lease payments was arranged to enable the sta te to share in the p ro fits earned on its investment. The lease covers a 10-year period with renewal options fo r three 61 successive 10-year periods fo r the Vermont Railway. As a rental fee , the Vermont Railway agreed to pay 7 percent o f th e ir railway operating revenues fo r the f i r s t seven years. During the next three years (o f the 1 0 -year lease period) agreed to pay a s lid in g scale o f rental fees (7 percent, 9 percent, 11 percent, 13 percent) based on the level o f railw ay operating revenues. For a more complete h is to ric a l description see: Robert Roberts, "Small Railroad Thinks B ig ," Modern R ailroad, June 1969, p. 61; and R.L. Banks and Associates, Short Line Techniques to Improve Financial V ia b ilit y o f Light Density Lines—Ma.ior Railroads, Op. C i t . , pp. 20-30. ®Whe lease contract is included as an appendix in R.L. Banks and Associates, Short Line Techniques to Improve Financial V ia b ility o f Light Dens 1ty~Tlnes—Major Railroads, Op. C it. The contract obligates the Vermont Railway to maintain the physical p la n t in good operating condition. And, the ra ilro a d must maintain a minimum service schedule specified in the c o n trac t. In re tu rn , the s ta te agrees not to c o lle c t property tax from the r a i l ­ road; and the ra ilro a d can keep any rents earned from the sublease o f ra ilro a d properties involved in the promotion o f in d u s tria l develop­ ment in the area served by the ra ilr o a d . The S tate is under o b lig a ­ tio n to maintain a ll highways a t ra ilro a d grade crossings as w ell as bridges th a t carry t r a f f i c over the ra ilro a d . The S tate w il l r e ­ imburse the Vermont Railway fo r in s ta lla t io n , but not maintenance or re p a ir, o f a l l signal equipment and warning devices a t grade crossings. In contrast to normal branch lin e operations, the Vermont R a il­ way is re lie ve d o f a portion o f it s fixe d costs, i . e . , ownership costs and taxes. Although the Vermont Railway must pay a ren tal fe e , i t is considerably less than what they would have to pay in ownership costs (in te r e s t and p rin c ip a l) and taxes i f they owned the ra ilro a d p ro p e rties . The Vermont Railway also benefits by the s ta te assuming p a rt o f the costs associated w ith in s ta lla tio n o f signal equipment and maintenance o f grade crossings. Normally, these costs are the sole re s p o n s ib ility o f the ra ilr o a d . The State o f Vermont benefits from th is arrangement, als o . In bearing these costs, the S tate insures th a t the condition o f the r a ilr o a d 's physical p lan t w il l not d e te rio ra te , leading to a decline in r a i l service q u a lity and demand fo r r a i l services, and subsequently the need fo r la rg e r operating subsidies. 79 Short Line R ailro a d s. Many people argue th a t where a Class I ra ilro a d cannot operate a branch lin e p r o fita b ly , a short lin e ra ilro a d may be able to do so. There are a v a rie ty o f d e fin itio n s as to what con stitutes a "short lin e " r a ilr o a d ; they range from the In te rs ta te Commerce Commission's d e fin itio n o f Class I I ra ilro a d s — " fu ll-s e r v ic e common c a rr ie rs by r a i l which have operating revenues o f less than $ 1 0 , 0 0 0 , 0 0 0 per y e a r"— to the widely used layman d e fin itio n o f "any ra ilro a d less than 1 0 0 miles in len g th ." A recent study, by R .L. Banks and Associates, comparing methods o f operation and o ther fin a n c ia l c h a ra c te ris tic s o f short lin e ra ilro a d s to th e ir Class I branch lin e counterparts concluded th a t the short lin e operations possess many advantages and few disadvantages v is -a -v is t h e ir Class I branch lin e counterparts; cp th is gives short lin e ra ilro a d s a d e fin ite economic edge. The short lin e operating advantages discussed in the Banks study include: 6 3 (a ) a b i li t y to u t i l i z e lab o r more e f f e c t iv e ly , (b) a b i li t y to pay p re v a ilin g lo c al wage sc ale , (c ) reduction o f overhead expenses and in e r t ia o f a large o rg a n iza tio n , (d) closer re la tio n s w ith shippers and communities, and (e ) lo cal management team. 62 R.L. Banks and Associates, In c ., Short Line Techniques to Improve Financial V ia b ilit y o f L ig h t Density Lines—Major R ailroads, Op. C it . 63I b i d . , p. 112. 80 According to the study, short lines experience operating disadvantages v is -a -v is th e ir Class I branch lin e counterparts in the areas of: (a) access to fre ig h t cars, (b) maintenance o f equipment (locomotives and fre ig h t cars) and maintenance o f way (tra c k , roadbed, switches, and other structures), (c) s k ille d operators, trained auditors, and data processing f a c i li t i e s . On the whole, however, the study concluded that short lines are able to operate branch lines a t lower to ta l cost than are th e ir Class I railro ad counterparts. F irs t o f a l l , the non-union status o f most short lines often leads to higher labor pro du ctivity, as workers can be employed in a variety o f jobs. Class I branch lin e crew duties, fo r example, are lim ited to those specified in the labor contracts, and almost without exception, they are re stric ted to tra in and engine crew services. Crew members are paid fo r a minimum number of working hours per day (usually 8 hours). When they fin ish with th e ir as­ signed duties, they are not required (or allowed by union contract) to do any additional work—even though sections of track are 1 n need o f repair or cars need switching from spurs and sidings to branch lin e s . Furthermore, any task performed on the branch lin e beyond the normal te r rito r y o f the p a rtic u la r crew on duty, even though i t may f a ll w ithin the realm o f tra in and engine crew service, cannot be accomplished without an extra day's pay. Short lin e crews, in contrast, frequently perform other jobs lim ited only by the time available to perform the work. I f a short lin e is providing service every other day, on o ff days tra in crew members often help with repairs on equipment, track, roadbeds, and 81 so on. Short lin e management personnel frequently re lie v e tra in crews when they cannot bring the tra in in to the terminal w ith in the fe d e ra lly specified crew operating time lim its . short lines are able to pay local wage ra tes . In ad d itio n , many In general, fle x ib le work rules and payment o f wages in lin e with local wage rates allow short lin es to operate a t lower to ta l costs than th e ir Class I counterparts. Many short lin es are also able to reduce th e ir fixe d costs through contracting fo r various services. For example, contracting with a Class I ra ilro a d fo r locomotive, r o llin g stock, and maintenance o f way services reduces necessary fixed costs associated with owner­ ship o f equipment and to o ls. Likewise, contracting fo r legal services, fin an cial au d its, and data processing reduces the short lin e 's overhead costs. F in a lly , the Banks stucjy suggested th a t generally superior short lin e employee attitu des contribute to the o verall high level o f labor productivity enjoyed by short lin e operations. Factors believed to contribute to superior short lin e employee a ttitu d e s include the follow ing: 1. Most short lin e employees have been born and reared in rural areas. They tend to share the expectations and values held by those th at provide r a i l service as well as the community a t large. 2. Because short lin e employees generally have a wide variety o f duties to perform they tend to p a rtic ip a te inform ally in management decisions. Employees are encouraged to fin d ways to improve the overall operations o f the ra ilro a d . 3. Local management can respond quickly to correct operating d eficien cies. Management's commitment to Improving ra ilro a d performance enhances the employee's sense o f job security and consequently th e ir attitu d e s toward th e ir jobs. 82 The Banks study was based on f i e l d investig atio ns o f s ix short lin e ra ilro a d s and s ix corresponding branch lin e s o f Class I r a i l ­ roads. The f ie ld investig atio ns included actual observations o f short lin e and branch lin e operations, discussions with o ffic e rs and employees, and examination o f accounting and operating data fo r the respective operations. Tables 2-2 and 2-3 on the follow ing pages summarize the study re s u lts . The tables compare and contrast economic and operating c h a ra c te ris tic s fo r the s ix short lin es and six Class I branch lin e s . Table 2-2 presents basic data (geographic lo c a tio n , number o f shippers, commodities, carloads, revenues, e t c .) fo r the Class I branch ( lis t e d f i r s t in the p a irin g ) and short lin e ra ilro a d (lis te d second in the p a irin g ) operations studied. Table 2-3 provides a comparison o f selected economic indicators fo r the two groups o f lin e s . The economic Ind icato rs were constructed by taking the simple group averages fo r the s ix Class I branch and six Class I I short lin e ra ilro a d s . To the exten t large differences e x is t between lin e s w ith in each group, the (average) numbers tend to become less meaningful. Comparison o f economic ind icato rs suggests th a t the short lines enjoy an economic advantage. Even though on the average the short lin e s require more man hours to move cars over the lin e and to maintain tra c k , roadbed, switches and other stru c tu res , th e ir costs per hour are considerably less (see Table 2 -3 ). One needs to be careful about g eneralizing from these re s u lts , however. As Banks in d ic a te s , the lin es studied represent only a small TABLE 2-2 TRAFFIC DATA FOR COMPARABLE CLASS I - BRANCH LINE AND CLASS I I - SHORT LINE RAILROAD OPERATIONS, 1972 RAILROAD NUMBER OF ROAD SHIPPERS MILES CARLOAOS PRINCIPLE COWODITIES FREIGHT REVENUE INBOUND OUTBOUND MAINE CENTRAL RR-CALAIS BR. (MAINE 30 158 10,104 N.A. VERMONT RAILWAY (VERMONT) 75 129 9,668 1,125,146 MONTPELIER A BARRE RAILWAY (VERfflOT) 25 14 1,833 174,233 STONE, BEER. WINE STONE PRODUCTS 40 22 3,647 N.A. LUMBER. NEWSPRINT, FEED, ROOFING MATERIAL PAPER PRODUCTS PENN CENTRAL RR-MECHANICSBURG BR. (OHIO) 5 17 1,676 N.A. FEED, FERTILIZER GRAIN CADIZ RAILROAD (KENTUCKY) 7 TO 1,909 FEED, FERTILIZER, BUILDING MATERIALS AUTO PARTS UNION PACIFIC RR-KT. HOOD (OREGON) 15 21 3,465 FERTILIZER FRESH FRUIT, LUNBER PRODUCTS CITY OF PRINEVILLE RR (OREGON) 12 18 9,400 FEED, FERTILIZER. FUEL LUMBER PRODUCTS SOUTHERN PACIFIC RR-SANTA FAULA BR. (CALIF) GO 28 4,010 N.A. LUMBER, SAND FRESH FRUIT SAN LOUIS CENTRAL RAILWAY (COLORADO) 25 16 746 51,813 FERTILIZER, COAL POTATOES, LETTUCE LAURIKBURY & SOUTHERN RAILWAY (N.C.) 24 28 7,832 353,659 CHEMICAL, FERTILIZER COTTON, LUMBER, WOOD PRODUCTS SEABOARD COASTLINE RR-ALOMA SUB. (FLA.) 16 28 7,232 LUMBER, SAND, GRAVEL, FERTILIZER METAL PRODUCTS, WOOD PRODUCTS BOSTON & HAINE RR-ASHUELOT BR (N.H.) 105,456 N.A. 678,640 N.A. PULPHOOD, FUEL BLUEBERRIES LUMBER, FEED, FERTILIZER PAPER CHEMICALS BAGGED LIMESTONE N.A. - NOT AVAILABLE SOURCE: TABLE CONSTRUCTED FROM INFORMATION PROVIDED IN SHORT LINE TECHNIQUES TO IMPROVE FINANCIAL VIABILITY OF LIGHT DENSITY LINES—MAJOR RAILROADS, A REPORT TO THE FEDERAL RAILROAD ADMINISTRATION, R.L. BANKS AND ASSOCIATES, INC.. WASHINGTON, D.C., MAY 1974. 84 TABLE 2-3 SUMMARY AND COMPARISON OF ECONOMIC INDICATORS FOR CLASS I BRANCH - AND CLASS I I - SHORT LINE RAILROAD OPERATIONS, 1972 ECONOMIC INDICATORS SIMPLE AVERAGE OF SIX STUDIED LINES BRANCH SHORT MILES OF ROAD CARLOADS 46 36 5,036 5,231 N.A. 5414,825.00 FREIGHT REVENUE TRAIN AND ENGINE CREU KAN HOURS PER CARLOAD 2.77 3.21 TRAIN AND ENGINE CREW MAN HOURS PER REVENUE CAR-MILE 0.16 0.29 MAINTENANCE OF MAY KAN HOURS PER MILE OF ROAD 469 592 TRAIN AND ENGINE CREU WAGES, ROAD AND YARD PER CARLOAD S21.98 $11.50 TRAIN AND ENGINE CREW WAGES, ROAD AND YARD PER REVENUE (AR-MIIE) $ 1.28 5 1.01 MAINTENANCE OF HAY MAGES PER MILE OF ROAD 52,084.00 $1,814.00 MAINTENANCE OF WAY EXPENSES PER MILE OF ROAD $3,242.00 53,178.00 MAINTENANCE OF UAY EXPENSES PER REVENUE CAR-MILE $ 5 1.40 1.40 TRAIN AND ENGINE CREW AVERAGE WAGE PER MAN HOUR $ 7.22 2 / $ 3.64 MAINTENANCE OF UAY AVERAGE HOURLY WAGE $ 4.38 2 / 5 3.00 N.A. - NOT AVAILABLE 2 / INCLUDES ARBITARIES AND PENALTY PAYMENTS SOURCE: TABLE CONSTRUCTED FROM INFORMATION PROVIDED IN SHORT LINE TECHNIQUES TO IMPROVE FINANCIAL VIABILITY OF LIGHT DENSITY LINES--HAJ0R RAILROADS. A ftEFORTTO THE FEKftAL RAILROAD ADMINISTRATION. R.C.’ BANKS AND A550CIATE5,T NC” WASHINGTON.T.C. MAY 1974. 85 fra c tio n o f a l l U.S. branch and short lin e s . "While the (study) lin es assessed may be In d ic a tiv e o f other lin e s they are not necessarily ty p ic a l." 64 Even though short lin e s , In many cases, may enjoy cost advan­ tages over th e ir branch lin e counterparts, there 1 s no guarantee th a t the short lin e w il l succeed. Short lin es must have a reasonable le v e l o f t r a f f i c to su rvive, ju s t lik e any other ra ilro a d . lin es are ju s t as secure as the industry they serve. Short When a big shipper closes an obsolete p la n t or a mining company abandons a played-out mine, the short lin e often has no a lte rn a tiv e but to shut down as w e ll. Those short lin es th a t survive and prosper do so because they have d iv e r s ifie d t h e ir operations. They have a ttra c te d o f f - l i n e business o r have provided special services to shippers— such as consolidation, storage, and breakdown services. Three b r ie f examples w ill help i ll u s t r a t e the broad range o f a c tiv it ie s and services provided by short lin e ra ilro a d s . (1) The Vermont Railway, discussed e a r l i e r , has found a p r o f it g E able d iv e r s ific a tio n —piggyback operations. The ra ilro a d owns 300 piggyback t r a ile r s and leases an ad d itio nal 5,000. To develop a s o lid o f f - l i n e industry demand fo r i t s piggyback (TOFC— T r a ile r On Flatbed Car) operations, the Vermont Railway promoted the formation 64 R.L. Banks and Associates, In c ., Short Line Techniques to Imrove Financial V ia b ilit y o f L ig ht Density Lines—Major Railroads, p. C itV , p. 1 1 2 . S 65Robert Roberts, "Small Railroad Thinks B ig," Modern R ailroads. (June, 1969), 61. 86 o f a TOFC shipper asso ciatio n. The association provides pick-up and d e liv e ry truck service between the TOFC ramp and the member's place o f business. paid o f f . The Vermont Railw ay's piggyback operations have In 1972, Vermont's net ra ilw ay operating income, excluding i t s piggyback operations, was a negative $106,478. On the other hand, i t s n et income from piggyback operations was $239,598, g ivin g the Vermont Railway p o s itiv e earnings fo r the y e a r. (2 ) fifi Providing services to r a i l users beyond the normal pick-up and d e liv e ry o f r a i l cars can turn a marginal short lin e ra ilro a d in to a sound fin a n c ia l venture. For example, in 1958 the Stockton Terminal and Eastern Railroad (ST&E) handled 3,119 carloads. 1970, the ra ilro a d was handling 16,744 carloads annually. By The reason— ST&E established a food consolidation warehouse on it s l i n e . 6^ C a lifo rn ia n , Hawaiian and P a c ific Northwest canners benefited immediately from the consolidation o f services o ffe re d by the ST&E (lo c ate d in Stockton, C a lifo r n ia ) . P revio usly, to accomodate eastern buyers, western d is trib u to rs had to use hig h-p riced trans­ p o rta tio n (tru c k and a i r fr e ig h t) f o r many small shipments o f a p a r tic u la r item . No one (eastern ) sto re could use a carload o f canned salmon, fo r example. By e s ta b lis h in g a consolidation p o in t on the ST&E, a canner could ship in-volume to Stockton where the products could be consolidated w ith o th er products and shipped g £ R.L. Banks and Associates, In c ., Short Line Techniques to Improve Financial V ia b ilit y o f L ig h t Density Lines—Major Railro~ads» Op. C 1 t. , p. Z&. ^ R o b e rt Roberts, "Short Line is Key Link 1n Food D is trib u tio n Chain," Modern Railroads ( A p r il, 19 72 ), 70. 87 east a t low cost in carload amounts. This method eliminated costly warehousing fo r canners 2,000 to 3,000 miles away from th e ir eastern markets and kept western canners competitive 1 n the midwest and the east. 6 8 (3) roads. Car supply can be a sp ecific problem fo r short lin e r a i l ­ Short lin e s , fo r the most p a rt, depend on th e ir Class I connecting carriers to provide them with r a il cars. Consequently, many short lines have d iffic u lty in providing firms r a il cars when they would lik e them; and, fa ilu re to provide firms with clean r a il cars on a timely and re lia b le basis can mean the permanent loss o f th e ir business. To solve th e ir car supply problem, many short lines have e ith e r purchased or leased r a il cars. For a few short lines th e ir investments have p a id -o ff; not only have they been able to a ttra c t new business by being able to provide r a il cars when they were needed, they also have benefited from substantial car rentals {per diem) paid by other railro ad s. The San Luis Central Railroad (SLC) in Colorado illu s tra te s this point. The primary function of the SLC is to transport potatoes, and to a lesser extent le ttu c e , twelve miles from th e ir production area to the interchange point with the Denver and Rio Grande Western Railroad (D&RGW). The SLC depended upon D&RGW fo r its supply o f refrigerated r a il cars. The D&RGW provided small 30- foot ice re frig e ra to r cars, fo r the most p a rt. 6 9 The fre ig h t 68Robert Roberts, "Short Line is Key Link in Food Distribution Chain," Op. C i t . , 70. 6 9 R.L. Banks and Associates, In c ., Short Line Techniques to Improve Financial V ia b ility o f Light Density Lines, Op. C i t . , pp. 78-86. 88 rates on the smaller cars were not competitive with the truck rates, so most o f the farmers in the area were shipping by truck. SLC began to compete e ffe c tiv e ly with trucks in 1972. SLC purchased 302 ex-REA Express re frig e ra to r cars, larg er than the 30foot ice re frig e ra to r cars. The la rg e r cars allowed SLC and its connecting carrie rs to publish reduced (truck competitive) rates to major markets. Producers in the region responded to SLC's lower rates by increasing th e ir use o f r a il service. While in 1971 SLC carried only 8 percent o f the potatoes exported from the area, th e ir market share was 15 percent in 1972 and was 25 percent in 1973. At the same time SLC was earning higher revenues through increased carloadings, i t also was earning substantial car rental (per diem) fees from railroads handling th e ir cars. In 1972, SLC had a net railw ay operating income o f $140,021 (up from a negative $11,136 in 1971). By owning its own cars SLC was able to provide it s shippers a sure car supply a t favorable rates; i t also reduced SLC's c a r-h ire expenses by about $1,000. But more im portantly, SLC earned $185,790 in car rentals from the o f f - lin e movement o f t r a f f ic i t originated in it s own cars. 7 0 Although our discussion o f short lin e railroads has been b r ie f , i t illu s tra te s a number o f points regarding the future v ia b ilit y o f many branch lin e s . 71 7 0 R.L. Banks and Associates, In c ., Short Line Techniques to Improve Financial B ia b ility o f Light DensTty Lines— Ma.ior Railroads, pp. C i t . , pp. 84-85. 7V o r an excellen t discussion o f what to consider when s e ttin g ­ up a short lin e ra ilro a d see: Edwin P. Patton and C. John Langley, J r . , Handbook fo r Preservation o f Local Railroad Service, U.S. . Department o f Transportation, (J u ly , 1976). 89 1. Changes 1n In tr a -r a ilr o a d operating procedures, such as the adoption o f fle x ib le work ru le s , can lead to lower ra ilro a d operating costs and improved r a i l se rv ice. 2. Branch lin e railroads need to be f le x ib le and Inno­ v a tiv e in th e ir approach to providing r a i l se rv ice. 3. There is no magic formula fo r success. Even with f le x ib le work rules and innovative management, the absence o f minimal levels o f t r a f f i c w ill doom any ra ilro a d operation to f a ilu r e . Branch Line R a tio n a liz a tio n . served by one or more branch lin e s . Many ru ra l areas today are Due to factors discussed e a r lie r in th is chapter, the demand fo r r a i l service in many ru ral areas has declined s u b s ta n tia lly in the la s t two or three decades; i t has also become more irre g u la r as those s t i l l using r a i l service use i t less frequ en tly and often on short n o tic e . For a large number o f branch lin e railro ad s the decline in demand fo r r a i l service and i t s irre g u la r nature has meant inadequate revenues to cover th e ir operating costs, much less th e ir fix e d costs. This has led many branch lin e ra ilro a d s to adopt cost-saving procedures ( i . e . , deferred maintenance, less frequent s e rv ic e , and so on) th a t eventually re s u lt in poor r a i l service and in the loss o f business. As a r e s u lt, many states are faced w ith a s itu a tio n today where the productive base o f its ru ral r a i l system— the physical p la n t— is in need o f major r e h a b ilita tio n and modernization. I f firms on the Also, r a i l users, communities, and public o f f ic ia ls desiring a procedure to help them decide whether to invest or d is ln v est in a branch lin e should see: Marc A. Johnson, Community Evaluation o f Railroad Branch Lines: P rinciples and Procedures, Report No. 38, Center fo r Rural Manpower and Public A ffa ir s , Department o f A g ri­ c u ltu ra l Economics, Michigan S tate U n iv e rs ity , A p ril 1975. 90 branch lines are going to use r a il service and remain competitive, they must be able to take advantage o f the la te s t technology— larger fre ig h t cars and the preferential volume fre ig h t rates that accom­ pany them. This means branch lines with heavier gauge r a il and in some cases larger loading and unloading f a c ilit ie s , are required to make economical use of the larger cars. Where investment in reh ab ilitatio n and modernization o f two or three branch lines in a given area cannot be ju s tifie d , i t maybe ju s tifie d fo r one. Consolidation of t r a f f ic from two or three lines on one lin e may allow the branch lin e railroad to re alize the scale economies inherent in its operation; the consolidation of t r a f f ic lowers the railro a d 's operating costs, financial position, improves its and makes i t unnecessary to adoptcost-saving procedures that led to poor ra il service. The ratio n alizatio n or re-configuration o f branch lines in an area does not necessarily mean former r a il users w ill lose service. I t does mean that adjustments w ill have to be made, however. A number of complementary changes with ratio n alizatio n may in fac t re su lt in improved transportation service fo r many firm s. The establishment of r a il sub-terminals, fo r example, with pick-up and delivery truck service may make i t possible fo r firms located 15 to 20 miles away to use r a il service. Firms that formerly re lie d upon truck service would now have access to ra il service and perhaps new markets for th e ir products and th e ir purchases. Few studies o f the consequences o f alte rn ative branch lin e ra tio n alizatio n plans have been made. This 1s due, 1n p a rt, to the lin e by lin e abandonment procedure followed by the ICC. With the 91 passage o f the RRR and RRRR Acts, however, reorganization o f branch lin e systems on a regional basis 1 s lik e ly to occur. Summary. In this section, a b r ie f review o f a few strategies used to retain and to Improve r a il service have been considered. Increasing the v ia b ility of a branch lin e requires increasing the level o f demand (and revenues) fo r r a il service, as well as decreasing costs. As we have indicated in th is section and others, the demand fo r r a il service is sensitive to the q u a ility or r e lia ­ b i l i t y o f r a il service. Thus fa r we have considered the behavior of the branch lin e railro ad and its a ffe c t on r a il service q u a ility ; we have not considered the behavior of the off-branch railroads th at is also a determinant in the q u a lity o f service the branch lin e r a il user receives. In the next section o f this chapter, consider­ ation is given to the behavior of in te rlin e carriers (off-branch railroads) and the r e lia b ilit y of r a i l service. In tra - and Inter-R ailroad Operating Procedures, In te rlin in g o f Rail Shipments, and Rail Service Quality The purpose o f this section is to examine how procedures established by railroads fo r interchange and movement o f fre ig h t shipments over th e ir lines affects the q u a lity o f r a il service branch lin e firms receive. We begin by defining a few terms. “In tra -ra ilro a d operating procedures" refers to individual railroad policies on tra in length, service schedules, "blocking" ( I . e . , group­ ing cars fo r a common d es tin atio n ), car and equipment supply, handling o f damage claims, monitoring fre ig h t shipments while in tr a n s it, and maintenance and re h a b ilita tio n o f tra ck , switches, signal equipment and other structures. " In te r-ra ilro a d operating procedures" re fe r 92 to agreements ra ilro a d s have established fo r the interchange and movement o f in t e r lin e t r a f f i c ( e . g . , j o in t rates and ro u te s ), including agreements on j o i n t f a c i l i t i e s and equipment use. In te r lin in g occurs when fr e ig h t shipments must pass over the lin es o f two or more ra ilro a d s before reaching th e ir fin a l d e s ti­ n ation . The behavior o f in t e r lin e c a rrie rs has d ire c t bearing on shipment tr a n s it time and variance in tr a n s it time as w ell as fre ig h t car u t iliz a t io n . In te r lin in g : An Example. The follow ing description fo r the movement o f a ty p ic a l fre ig h t shipment is provided to f a c i l i t a t e discussion o f the factors th a t determine tr a n s it tim e, variance in tr a n s it tim e, and so on. 72 Figure 2-4 id e n tifie s the important events associated w ith movement o f a carload shipment between its points o f o rig in and d es tin atio n . Assume a firm located on a Michigan branch lin e places an order fo r a carload o f a ce rta in commodity with a west coast manu­ fa c tu re r. Railroad re s p o n s ib ility fo r the shipment begins when the manufacturer n o tifie s the o rig in a tin g ra ilro a d th a t the car is ready to be picked-up (p u lle d ). Sometime la t e r , a local switch engine p ulls the car and brings i t to a ra ilro a d c la s s ific a tio n yard where i t is assembled in to a group or "block 11 o f cars having the same immediate destination (interm ediate c la s s ific a tio n y a rd ). 72 This example is based on a s im ila r one provided by C.D. Martland and J.M. Sussman, "Rail Service Time R e lia b ilit y —An Analysis o f Operating Data," Canadian Transportation Research Forum (May, 1972), 527-528. 93 T rip Segment Event RELEASE ______________________ INDUSTRY SIDING PULL_________________________ DEPART FIRST YARD ___________ ARRIVE INTERMEDIATE YARD_____ DEPART INTERMEDIATE YARD_____ LOCAL SWITCH RUN ORIGIN YARD o is LINE HAUL INTERMEDIATE YARD p ARRIVE INTERCHANGE___________ DEPART INTERCHANGE (DELIVERY) DEPART INTERCHANGE___________ ARRIVE INTERMEDIATE YARD_____ DEPART INTERMEDIATE YARD_____ C£ CO —J o 15 < 23 ORIGIN YARD LINE HAUL INTERMEDIATE YARD ARRIVE FINAL YARD ___________ DEPART FINAL YARD o DESTINATION YARD .h2 o a 05 OC DESTINATION YARD LOCAL SWITCH RUN PLACEMENT BRANCH LINE FIRM'S SIDING- FIGURE 2 -4 HYPOTHETICAL CARLOAD SHIPMENT o CO o a. St o :i TOTAL HAUL - FROM CONSIGNOR TO CONSIGNEE ARRIVE AT FIRST YARD _______ 94 Once blocked with other cars, the shipment then proceeds to its destination in a series o f lin e haul trip s between c la s s ific a tio n yard and interchanges. When i t arrives a t the destination yard, the branch lin e railro ad contacts the firm which is to receive the shipment (consignee) fo r delivery instructions. The consignee may ask th at the car be delivered immediately or that i t be held in the yard at his expense u n til he is ready to receive i t . As th is hypothetical example suggests, the nature o f railroad operations causes a shipment (car) to encounter numerous opportu­ n itie s fo r delay as i t moves from its point o f o rigin to fin a l destination. Sussman notes: . . . A t each yard, cars moving to common intermediate or fin a l destinations are consolidated into "blocks," placed in a tra in consisting o f one or more blocks, and handled together to another yard which may be twenty or more than a thousand miles d istan t. Whenever a car is set o f f from a tra in or the tra in reaches it s destination, the car is reswitched and consolidated with other t r a f f ic into a new block and a new tr a in . This procedure 1s repeated u n til the car reaches its fin a l d e s tin a tio n ....T h is process o f switching and consolidation necessarily results in longer tra n s it time than would be required fo r the d ire c t movement (such as by u nit t r a in ) . Equally as impor­ ta n t, this procedure is u n reliab le. That i s , each time a car is switched, the potential fo r a missed connection at that yard e x ists . 73 According to Sussman, 74 missed connections are the cause o f large variations in tra n s it time. 70 Car delays o f 12 to 24 hours Joseph M. Sussman, "Research Needs and P rio ritie s in Rail Service R e lia b ility ," Railroad Research Study Background Papers, Transportation Research Board, (Ju ly, 1975), p. 220. 74Ib id . 95 (the time u n til the next appropriate outbound tr a in ) are cormion with missed connections. Among the causes fo r missed connections are outbound tra in can cellatio ns, tra in length/weight constraints, and la te a rriv a l o f an inbound car. The la te a r riv a l o f an inbound car 1s p a rtic u la rly an Important fa c to r. . . . i f a car arrives la te by some "threshold" tim e, its connection with the outbound is often missed. Of course, the outbound could be held fo r the car allowing the con­ nection to be made despite the lateness o f the a r r iv a l. However, th is may w ell lead to fu rth e r problems. . . . ( i t has been shown th a t the primary cause o f la te a rriv a ls a t a yard is la te departure from the preceding yard. Hence, holding tra in s to allow p a rtic u la r connections to be made may well lead to inbound lateness a t succeeding 7g yards and the p o s s ib ility o f other missed connections. Based on a case study o f Southern Railway, Sussman and Marti and concluded th at potential fo r improvement in r a i l service existed through operating strategies th a t would e ith e r avoid intermediate yarding of cars ( i . e . , run-through tra in s ) or improve the p ro b a b ility o f making connections when yardings were necessary.77 They found th a t v a r ia b ility in to ta l tr a n s it time fo r a car increased with the number o f intermediate (c la s s ific a tio n ) yards i t had to pass through. 75 K. Belovarac and J.T . Kneafsey, Determinants o f Line Haul R e lia b ility , (Studies in Railroad Operations and Economics),"Vol. 3 . M.T7TT," Report R72-40, 1972. 76Joseph M. Sussman, "Research Needs and P rio ritie s in Rail Service R e lia b ilit y ," Op. C i t . , p. 222. 77 Joseph M. Sussman and Carl D. Marti and, Improvi ng Rai1road R e lia b ility : A Case Study o f Southern Railway, (S tu d ie s in Railroad Operations and Economics), Vol. 5, M . I . f . , Report R74-20, 1974. 96 C las sifica tio n Yards. C la s s ific a tio n yards are a cause o f un­ re lia b le r a i l service 1n two respects; they contribute to (1) un­ re lia b le tra n s it time (discussed above), and (2) low rates o f equip­ ment u t iliz a t io n , p a rtic u la rly fre ig h t cars. A recent Federal Railroad Administration (FRA) study o f carloading cycles found the 70 average r a i l car (in it s sample ) spent 62 percent o f its load- to-load cycle in c la s s ific a tio n yards, 24 percent under shipper co n tro l, and 14 percent in - t r a n s it . Railroad Cooperation and Competition. The q u a lity o f r a il service th at branch lin e firms receive depends upon the performance o f in te r lin e carrie rs as well as the branch lin e ra ilro a d . R e li­ a b ilit y o f tr a n s it time, fo r example, is determined by how well in te rlin e ra ilro a d operating procedures d o v e ta il. many students 79 On th is p o in t, o f the U.S. r a i l industry argue th a t ra ilro a d operating p olicies do not dovetail well a t a l l ; and, th at the current structure o f the r a il industry promotes disincentives rather than incentives fo r coordination and cooperation. Morton notes 78 The Federal Railroad Administration study was based on a 15,000 car national sample. For fu rth e r d e ta ils see: Reebie Associates, Toward and E ffe c tiv e Demurrage System. Final Report to the Federal Railroad Adm inistration, Ju ly, 1972. 79 Alexander L. Morton, "Balkanization in the Railroad Industry," Canadian Transportation Research Forum, October 1974, 14-17; Task Force on k a il road P ro d u c tiv ity , Improving Railroad P ro d uctivity, Op. C i t . , pp. 240-245. 80 Alexander L. Morton, Op. C i t . , pp. 14-15. 97 ...o n e -h a lf o f a l l r a i l shipments, accounting fo r seventy percent o f revenue to n -m iles, tra v e l over two or more ra ilro a d s to reach th e ir d es tin atio n . This In te r lin e t r a f f i c , crucial to the w elfare o f v ir tu a lly every r a i l ­ road, creates a high le v e l o f interdependence w ith in the industry and demands a high degree o f cooperation and coordination among r a i l c a r r ie r s .. .the large volume o f in t e r ­ lin e t r a f f i c might be thought s u ffic ie n t to stim ulate whatever cooperation and coordination is necessary. In fa c t, however, ra ilro a d s do not share common m otivations. ...T h e s itu a tio n is v a s tly complicated by the fa c t th a t ra ilro a d s also compete intensely with one another. They compete both to o rig in a te t r a f f i c and to share in in t e r ­ lin e t r a f f i c exchanged a t r a i l junction points. This competition undermines the cooperation and coordination which t h e ir Interdependence re q u ire s .. .Because o f the high degree o f interdependence there are many opportunities fo r one ra ilro a d to promote it s w elfare a t the expense o f other ra ilro a d s and the system as a whole ( I . e . , the suboptim ization problem). The suboptimization th a t Morton re fers to occurs when each ra ilro a d attempts to minimize it s own costs v ia i t s control over tra in schedules and operating p o lic ie s ( e . g ., blocking, tra in length/weight co n strain ts, th ro u g h -train s , tr a in can cellatio n s, and so o n). According to the Task Force on Railroad P ro d u ctivity: (sin ce) in d ivid u al lin e s receive the same d ivision (proportion o f revenues) regardless o f the time they take in completing t h e ir portion o f the movement...The p r o f it motive impels in d ivid u al lin es to perform t h e ir p a rt o f the movement in whatever way minimizes the cost to them­ selves, w ith only s lig h t regard fo r the e ffe c t on the q u a lity o f service to the s h ip p e r.. .Not only does th is suboptimizing behavior o f in d ivid u al lin es degrade ser­ vice q u a lity , i t in fla te s costs. Ind ividu al c a rrie rs minimize cost to themselves w ith only s lig h t regard tog. any higher costs Imposed on the connecting c a rrie rs . The long-run consequences o f such ra ilro a d behavior is the d e te rio ra tio n in the q u a lity o f r a i l service o ffered and higher 81Task Force on Railroad P ro d u c tiv ity , Op. C i t . , p. 241 98 ra ilro a d operating costs; facto rs which determine the v i a b i l i t y o f ra ilro a d operations. Rail User S ize . Routing, and Rail Service Q u ality Large volume r a i l users tend to have fewer problems w ith slow and u n re lia b le r a i l service than do the sm aller r a i l users. are two reasons fo r th is : There ( 1 ) large volume r a i l users tend to use r a i l service on a f a i r l y constant and p red icta b le b a s is , and ( 2 ) larg e volume r a i l users often represent a su b stan tial portion o f the ra ilro a d s ' operating revenue. As noted e a r lie r in th is s e ctio n , ra ilro a d s have adopted operating procedures (c a r c la s s ific a tio n , b locking, scheduling, ro u tin g , handling, interchanging, and so on) designed to reduce t h e ir p e r-u n it (to n -m ile ) costs fo r handling shipments— in t e r lin e and lo c a l. The f a i r l y constant and p red icta b le demand o f large volume r a i l users allows the ra ilro a d s to plan t h e ir service a c t iv it ie s so as to achieve economies o f scale equipment use. in handling and in In co n tra s t, small volume r a i l users w ith in freq u en t demand fo r r a i l service can be a source o f expense to the ra ilro a d s . To accomodate the service desires o f sm all, in freq u en t r a i l users (e .g . fa s te r tr a n s it tim e, increased frequency o f s e rv ic e ), o fte n ­ times requires th a t ra ilro a d s operate tr a in -u n its s u b s ta n tia lly below t h e ir capacity; th is re s u lts in high p e r-u n it operating costs. Railroads avoid such s itu a tio n s whenever possible. 99 The Importance o f Routing. By tra d itio n and law, user has the rig h t to route his shipments. 82 a r a il Large volume r a il users, 1 n contrast to small volume r a il users, can use th e ir routing rights as a bargaining tool 1 n obtaining more favorable services or rates from railro ad s. "A c a rrie r who knows th a t a substantial volume o f business can be diverted from his own lines to a riv a l c a rrie r 1 s lik e ly to lis te n to the r a il users' views or grievances with considerable respect." 83 Even though the bargaining power o f a small volume may be minimal, r a il user he may s t i l l derive considerable economic benefit by specifying the routing o f his shipments; the service and r e l ia b i l it y features o f certain railroads may be generally b etter than others. I f the r a il user decides not to exercise his legal rig h t to route his shipment, the railroads must move the shipment over the lowest-priced route. From the r a il user's perspective, the lowest-priced route may turn' out to be quite expensive when such factors as Inventory costs are considered. Given a choice, the r a il user might prefer a longer, higher priced ( i . e . higher fre ig h t charge) route i f i t means reducing tra n s it time by two or three days. To a small r a il user, however, the cost o f gathering and analyzing information on the service characteristics o f d iffe re n t 82 Rail users are given the legal rig h t to route th e ir shipments under Part I o f the In te rs ta te Commerce Act. 83 Roy J. Sampson and Martin T. F a rris , Domestic Transportation: Practice, Theory and Policy, (Boston: Houghton M ifflin Co., 1966), p. 405. 100 railroads and a lte rn a tiv e routes may be p ro h ib itiv e . For example, between New York C ity and El Paso, Texas, r a il t a r if f s show 240 d iffe re n t routings. 84 According to Sampson: ...T h e re may be as many as two m illio n d iffe re n t kinds o f commodities subject to transportation (regu lation ) in the United S tates, and every one o f these items con­ ceivably is subject to transportation between any two o f thousands o f o rig in and destination points. Further, in moving from o rig in to d estin ation , an exceedingly large number o f a lte rn a tiv e routes may be u se d ...th ere are more than 4,700,000 possible r a il routes between D allas, Texas and D e tro it, Michigan. 85 Given the complexity o f evaluating a lte rn a tiv e carrie rs and routes, many large r a il using firms employ t r a f f ic managers. They are sp ecialists in the area o f rates and routes, and are very knowledgeable about service features o f d iffe re n t ra ilro a d s . Although i t may not be economical fo r a small r a i l user to h ire a t r a f f ic manager, i t may be economical fo r a group o f r a i l users to do so. Some o f the benefits small r a il users may be able to capture through group action ( e .g ., r a i l users association) w ill be discussed in the next section o f th is chapter. Rail Users1 Association. Q uality o f Rail Service, and Branch Line V ia b ility In th is section a general argument w ill be made fo r the establishment o f r a i l users' associations on branch lin e s . Rail 84 Thomas Coneybeer, "Rail Car Routing Policies and Practices," Transportation Journal, (Summer 1976), 29-38. 85 Roy J. Sampson, Domestic Transportation: P ractice. Theory and P olicy, Op. C i t . , p. 155^ Although there are more than 4,700,000 possible r a il routes between Dallas and D e tro it, there are only a few hundred fo r which t a r if f s presently e x is t. 101 users' asso ciatio ns, i t w ill be argued, may be able to ( 1 ) improve the q u a lity o f r a i l service received by it s members, and ( 2 ) work w ith the branch lin e ra ilro a d to increase the fin a n c ia l v i a b i l i t y o f the lin e . B r ie f review w i l l be given to the legal constraints placed on r a i l users' associations by the In te rs ta te Commerce Commission. And, consideration w il l also be given to some p o te n tia l problems in organizing a r a i l users' asso ciatio n. R ail Users' Association: What I t Can Do. A r a i l users' associ­ atio n can co n trib u te to the increased v i a b i l it y o f t h e ir branch lin e by ( 1 ) m aintaining close communications w ith the branch lin e ra ilro a d over problems o f mutual concern ( e . g . , frequency o f t r a in s e rv ic e , provision o f fr e ig h t cars, maintenance and r e h a b ili­ ta tio n o f track and other s tru c tu re s , and so on); and ( 2 ) by entering in to agreements w ith the branch lin e ra ilro a d fo r the provision o f sh o rt-term revenue supplement payments, r e h a b ilita tio n loans, and j o i n t fin an cin g o f r a i l sidings and loading/unloading f a c i l i t i e s . The importance o f the r a i l users' association is th a t i t can m obilize the e ffo r ts o f a large number, i f not a l l , o f the r a i l users on the lin e . In most cases th is is c r i t i c a l , fo r the actions o f one o r a few r a i l users on a branch lin e are usually not enough to achieve the changes th a t are needed to improve the q u a lity o f r a i l service and increase the fin a n c ia l v i a b i l i t y o f the branch lin e . To reduce in d iv id u a l member transaction costs in dealing with the branch lin e ra ilro a d s and vice versa, the .r a il users' association would h ire a t r a f f i c manager and perhaps a small s t a f f . Besides representing the association members in dealings w ith the branch 102 lin e r a ilr o a d , the t r a f f i c manager would provide members w ith in f o r ­ mation on a lte rn a tiv e ra te s , ro u tes, and in t e r lin e ra ilro a d s . The t r a f f i c manager would also represent association members in n egotia­ tions w ith in t e r lin e ra ilro a d s on the s p e c ific a tio n o f rates and service le v e ls on d iff e r e n t shipments. In co n trast to the small branch lin e firm ( r a i l u s e r), the a b i l i t y o f the r a i l users' associa­ tio n to route the shipments o f many r a i l users over the lin e s o f i t s choice should improve it s members' bargaining positio n w ith the ra ilro a d s s u b s ta n tia lly . The value o f a t r a f f i c manager to one firm is illu s t r a t e d in the fo llow ing example. , What le v e l o f service can you r e a l i s t i c a ll y expect to get from a ra ilro a d ? G eo rg ia -P ac ific found th a t h irin g a veteran ra ilro a d man to monitor it s shipments brought out the best in the ra ilro a d s . 8 6 When Georgia P a c ific h ired t h e ir t r a f f i c manager, i t was shipping it s products by r a i l (50 percent), and truck (50 p erc en t); two years la t e r the r a tio was 90:10 in favor o f r a i l . According to the newly hired t r a f f i c manager: I f y o u 're going to get s e rv ic e , you have to fin d out what service you need and how the ra ilro a d is going to provide i t . Once service is estab lish ed , see to i t they (th e ra ilro a d s ) provide i t . And i f they d o n 't, you always have le v e ra g e .. .you can take business away from them and force them to pay a tte n tio n . You ju s t c a n 't look a t the shippers' problems, you have to look a t the ra ilro a d s ' problems, to o ...W h at I do 1 s set up a p attern o f how the car should be h a n d le d ... not the best o f a l l possible schedules, but what is the most reasonable way those cars should be handled. 86 "Speaking o f S e rv ic e ," Transportation and D is trib u tio n Management, (October 1973), 21"; — 103 A fte r we establish th a t, we monitor the cars to see that th ey're handled th a t way. And when th ey're not handled th at way, we t e l l the ra ilro a d s . I am ( t r a f f i c manager) convinced I f you communicate with the railroads there are many problems you can work out to the sa tis fa c tio n o f the ra ilro a d and the s h ip p e r ...I personally think a lo t o f industries are missing a good bet by not having a position s im ila r to mine, somebody who understands the ra ilro a d business, understands transpor­ ta tio n and a t the same time can work fo r the in te re sts o f the shippers. 87 This example illu s tr a te s how a r a il users' association, through its t r a f f ic manager, can combine voice and e x it to improve the q u a lity o f r a il service. The t r a f f i c manager a rtic u la te s ( voice) the service preferences o f the association's members, a t the same time he indicates the members w ill take th e ir business to another ra ilro a d or s h if t to trucks ( e x it) i f they are not s a tis fie d with the service provided. Rail Users' Associations and the In te rs ta te Commerce Commission. The content o f bargained agreements between r a il users' associations and railroads is subject to the approval o f the In te rs ta te Commerce Commission (IC C ). To examine this p o in t, consideration w ill f i r s t be given to the ICC's d e fin itio n o f a r a i l users' (shippers') association. Following th is , aspects o f r a i l service th at the ICC permits r a il users' associations and railroads to bargain over w ill be considered. According to the In te rs ta te Commerce Conmislon, a true shippers' cooperative ( r a i l users' association) is a le g a lly 87Speaking o f Service", Op. C i t . , 21-22. 104 unregulated organization (e ith e r Incorporated or unincorporated) composed o f shippers who are "desirous o f p a rtic ip a tio n 1 n mutual n o n -p ro fit pool car or pool truck a c tiv itie s and securing fo r themselves the benefits o f carload, truckload and other Qp volume ra te s ." This exemption 1s provided by Section 402 (c )(1 ) o f the In te rs ta te Commerce Act as follow s: The provisions o f th is p a rt shall not be construed to apply ( 1 ) to the operations o f a shipper, or a group or association o f shippers, 1 n consolidating or d is trib u tin g fre ig h t fo r themselves or fo r members th ereo f, on a non­ p r o f it basis, fo r the purpose o f securing the benefits o f a carload, truckload, or other volume ra te s , or ( 2 ) to the operations o f a warehouseman or other shippers' agent, in consolidating or d is trib u tin g pool cars, whose services and re s p o n s ib ilitie s to shippers in connection with such opera­ tions are confined to the terminal area in which such opera­ tions are performed. Techn ically, a r a il users' association can perform the same functions as a fre ig h t forwarder, but not be subject to the rate regulations o f the In te rs ta te Comnerce Commission. Freight fo r ­ warders are considered in d ire c t modes o f transpo rtatio n , competing with d ire c t modes fo r t r a f f i c . Since fre ig h t forwarders perform transportation services fo r -h ir e , they are regulated as common c a rrie rs in ways s im ila r ( i . e . e n try , rates and service) to r a i l ­ roads, motor c a rrie rs , p ip e lin e s , and domestic water carrie rs under the In te rs ta te Comnerce Act. 88 According to Sampson: A tlanta Shippers Association, I n c . , — Investigations o f Opera tlons (F F -C -7), 322 I.C .C . 273-300, cite d in B ill C. Smith, "What Constitutes a Bona Fide Shippers' Cooperative", Transportation Journal, (Winter 1969). 105 The primary functio n o f forwarders is the consolida­ tio n o f small shipments o f several or numerous shippers in to la rg e shipments which move a t lower ra te s . The forw arder s e lls his tra n s p o rta tio n services d ir e c tly to a shipper. Then, in tu rn , he buys lin e -h a u l services from the basic modes (in e f f e c t , to use an analogy, he subcontracts a p a rt o f the movement). His operating ex­ penses and p r o fits are covered by the spread between rates on small shipments and rates on larg e shipments. The shipper pays no more (o r perhaps le s s ) than he otherwise would have to pay on a s m a ll-lo t movement. In a d d itio n , he is re lie v e d o f the chores o f dealing d ir e c tly w ith the basic o r primary c a rrie rs and may receive b e tte r pickup and d e liv e ry s e rv ices , a fa s te r lin e -h a u l movement and even other services re la te d to d is tr ib u tio n . What then distinguishes a r a i l users' cooperative or associatio n from a fr e ig h t forwarder? According to Smith, 90 the In t e r ­ s ta te Commerce Commission has adopted the fo llow ing guidelines fo r determining whether or not a r a i l users’ association is operated le g a lly : 1. The association must serve i t s own members and only those members. That is a bona fid e cooperative must be d is tin g u ish ab le from a " fo r h ire c a rrie r" and must stand a lo o f to temptations to serve non-members. 2. The association must serve on a n o n p ro fit basis. 3. The association must be c o n tro lle d by the members who assume the ris k o f business. Although the Commission has not c le a r ly stated what is meant by r is k : ... t h e y imply th a t a member o f a shippers' co­ o p e ra tiv e must assume some ris k and th is would prescribe 89 Roy J . Sampson and M artin T . F a r r is , Domestic T ran sp o rtatio n : P ra c tlc e r Theory^and P o lic v . Op. C i t . , pp. 71-72. ^ B l l l C. Smith, "What C onstitutes a Bona Fide Shippers' C ooperative," Op. C i t . , 23-24. 106 that s u ffic ie n t fees should be charged to constitute such a ris k , in re la tio n to the scope of operation anticipated, and to serve as a deterrent to membership being construed to be open to the general public fo r a token fee. Membership fees are often used by r a il users' associations fo r employing a small managerial and c le ric a l s t a f f to provide various services to its members, including t r a f f ic management services. The In te rs ta te Commerce Commission permits r a il users and carriers to establish agreed rates, sometimes referred to as lo y alty-in cen tive ra tes , fo r certain fre ig h t movements. agreed rates, a r a il Linder user enters into a formal agreement with a railro a d or a group o f railroads to ship a certain volume,over a specified period o f time, by the p a rtic u la r ra ilro a d or group o f ra ilro a d s . In return, the r a il user pays less than the standard published rate or receives a refund from the ra ilro a d fo r differences between the standard rate a t the end o f the named period of time. Under such agreements, the r a il user normally is not under an absolute obligation to use the services o f the given ra ilro a d or group o f railroads; but i f he fa ils to live-up to the agreed volume, the r a il user must pay the standard rate of a ll his shipments. 92 In general, the In te rs ta te Commerce Commission does not favor agreed rates because i t is f e l t that this may be a form of ^ B i l l C. Smith, "What Constitutes a Bona Fide Shippers' Cooperative," Op. C i t . , 23-24. 92 Roy J, Sampson and Martin T. F a rris , Domestic Transportation: Practice, Theory and Policy, Op. C i t . , p. 175. 107 discrim ination between r a i l users who may be able to negotiate favorable agreements and sm aller r a il users who do not have as much bargaining power. The railroads have argued th at such agree­ ments, in addition to reducing the r a i l users' costs, allow them to do b e tte r planning fo r u tiliz a tio n o f th e ir equipment and provide b etter service a t lower ra ilro a d cost. Accepting the ra ilro a d s ' argument on occassion, the In te rs ta te Commerce Commission has authorized agreed rates based on s p e c ific guaranteed amounts o f aggregate tonnage to be transported with a specified time period. 93 The primary commodities moving under agreed rates today are such high volume, low -unit value commodities as coal, g rain , m inerals, ores, chemicals, pulp, and so fo rth . The In te rs ta te Commerce Commission has prohibited agreed rates based on a guaranteed percentage o f the to ta l t r a f f ic o f a r a il user between two o r more origins and destinations over a specified period o f time. In ad d itio n , the Commission ra re ly approves contracts c a llin g fo r s p e c ific service levels (tr a n s it time guarantees, fo r example) or t a r i f f s and rates which contain such minimum service level agreements. 94 The Commission's ra tio n a le is th at i f such service arrangements are not availab le to a ll r a i l users, they discrim inate between r a il usersj th is is e x p lic itly prohibited by the In te rs ta te Commerce Act. 93 Although Kennthe R. DeJarnett, "Regulatory Policy jjind Decision Relating to Rail Contract Rates," Transportation Journal, (W inter, 1973), 23. 108 formal agreements on minimum service levels may be d i f f i c u l t to fin d in w r itin g , they are very much a p a rt o f r a ilr o a d /r a il user re la tio n s . John Lloyd, President o f the Missouri P a c ific R a il­ road, had th is to say about one o f its la rg e s t r a i l users—General Motors: “They d o n 't come on our lin es to get f i r e engine service. ^ Lloyd indicated th a t i f Missouri P a c ific cannot guarantee General Motors th at a r a i l car w ill be alongside it s Kansas C ity assembly p lan t every second morning out o f Chicago, General Motors w ill take it s business to another ra ilro a d th at can. This b r ie f consideration o f In te rs ta te Commerce Commission policy toward r a i l service agreements between r a i l users' associations and ra ilro a d s indicates some o f the legal constraints on branch lin e r a i l user e ffo rts to improve r a i l service q u a lity through group a c tio n . O rganizational Costs. Even though in d ivid u al r a i l users may b e n e fit from r a i l user group a c tio n , there is no guarantee th a t group action w ill occur, i . e . , a r a i l users' association w ill be formed. In previous sections o f th is chapter, discussion was devoted to the problem th a t i n i t i a l organizational costs ( e .g ., communication, inform ation processing, decision-making, s ta ffin g , and so on) pose fo r group ac tio n . In situ atio n s where the number o f p o te n tia l group p a r t i­ cipants is la rg e , the amount o f time and money any one p a rtic ip a n t 9 5 "R ailroading's Rising S ta r," Forbes, (A p ril 1, 1976), 30. 109 1 s w illin g to devote to organizing the group may be small r e la t iv e to the to ta l e f f o r t re q u ire d . And, when the perceived b en efits a p o te n tia l p a rtic ip a n t expects to receive from group action are less than the costs he would have to bear to make group action possible, the less l ik e l y he w i l l be to co n trib u te a t a l l . This a ttitu d e may be rein fo rced by the knowledge th a t nonco n tribu tio n to i n i t i a l o rg an iza tio n al costs w il l not necessarily preclude him from la t e r membership in the group. In the case o f a r a i l users' as so c ia tio n , the la rg e r it s membership, the g rea ter i t s p o te n tia l bargaining power w ith ra ilro a d s in the determ ination o f rates and o ther c h a ra c te ris tic s o f r a i l s e rv ic e . On branch lin e s where the formation o f a r a i l users' association is l ik e l y to co n trib u te to the fin a n c ia l v i a b i l i t y o f the l in e , arguments fo r government to bear the i n i t i a l organi­ zatio n a l costs can be made. I f discontinuing r a i l service on a branch is lik e ly to have broad economic consequences, government action may be j u s t if i e d . * 110 Summary The purpose o f th is chapter has been to consider some o f the Important factors that influence the character of railro ad operations. P a rticu la r attention has been given to dynamics of r a i 1ro ad -ra i1 user behavior and its impact on the v ia b ility o f branch lin e s . The following points serve to highlight the major relationships discussed in this chapter. 1. The v ia b ility o f a branch lin e depends p rin c ip a lly on the relationship between the ra ilro a d 's long-run oper­ ating revenues and costs. Although the railroad may adopt cost-saving strategies in the short-run to improve its financial position, these strategies may a ffe c t long-run revenues and costs negatively. A ra ilro a d may continue to operate in the long-run even though it s costs exceed revenues i f its losses are covered by a subsidy. The subsidy may come from a r a il user, government, or a r a il user-government combination. Unprofitable branch lin e r a il operations can also be continued through cross-subsidization by p ro fita b le operations elsewhere in the r a il system. 2. A ra ilro a d 's operating revenues and costs are a function o f the demand fo r its service. Demand fo r r a i l service, in turn, is a function o f the price and service charac­ te ris tic s of available r a il service, given the price and service characteristics o f other transportation modes (fo r example, truck, barge, p ip elin e , and a i r ) . The price (fre ig h t rates) and service characteristics o f r a il service are determined by regulation, tech­ nology, in te r-ra ilro a d cooperation and competition, .in tr a - and in te r-ra llro a d operating procedures, and r a i 1 ro ad -ra i 1 user re la tio n s . 3. In tra - and in te r-ra ilro a d operating procedures and policies play a major role in determining the q u ality o f r a il service. From the r a il users' perspective, key elements o f r a il service q u ality include tra n s it time, variance in tra n s it time, car and equipment supply, shipment damage and loss, and communication with ra ilro a d personnel responsible fo r service. In tra - and Ill in te r -r a ilr o a d operating procedures and p o lic ie s determining the q u a lity o f r a i l service include tr a in -u n it size (length and weight r e s tr ic tio n s ), service schedules, car and equipment supply, mainten­ ance and re h a b ilita tio n o f tra c k , switches, signal equipment and other stru c tu res , "blocking", ro u tin g , car rental rules ("per diem "), and many more. 4. Rail service q u a lity is important to r a i l users because i t affe c ts th e ir production costs. U n reliable tr a n s it tim e, fo r example, a ffe c ts the firm 's inventory costs. The g reater the variance in tr a n s it time on a p a rtic u la r shipment, the greater the chances the firm ( r a i l user) w ill run out o f inventory. To reduce the p ro b a b ility o f stock-out and subsequent production slow downs or lo s t sales, or both, the firm must carry la rg e r inven­ to rie s . Larger inventories may re s u lt in higher costs to the firm in a number o f ways. To begin w ith , addi­ tion al inventory requires tying-up more working c a p ita l. In ad d itio n , the firm may fin d i t necessary to invest in more warehouse space. F in a lly , as inventory levels increase, the firm may experience changes in cost fo r insurance, product obsolescence, product d e te rio ra tio n and s ta te and local inventory taxes. 5. U nreliable r a i l service causes the e ffe c tiv e price (cost) o f r a i l service to ris e v is -a -v is other tra n s­ portation modes. As the costs o f r a i l service increase, many firms fin d i t more economical to s h i f t to truck or other modes. Due to it s large fix e d costs, the ra ilro a d w ill experience a pro po rtion ately la rg e r drop in revenues than costs when firms s h if t to other modes. The loss o f firms ( r a i l users) on a p a rtic u la r lin e may place the ra ilro a d in a cost-revenue squeeze. The ra ilro a d may adopt short-run cost-saving s tra te g ie s , such as d eferrin g maintenance and r e h a b ili­ ta tio n projects on track and re la te d stru c tu res , and/or reducing the frequency o f r a i l service on the lin e . The net e ffe c t o f these cost-saving procedures, however, may turn out to be s e lf defeating in the long-run. 6. The e ffe c t o f deferring maintenance and re h a b ilita tio n o f track and re la te d structures can be tw o -fo ld . The general e ffe c t o f such p o lic ie s is substandard track and structures th a t re s u lt 1 n poor r a i l service and high operating costs. Substandard track leads to slower, less r e lia b le tr a n s it tim e, an increase in derailm ents, and shipment damage. Operating costs w il l ris e as i t may require two tra in crews to complete a run th a t was previously handled by one tr a in crew. Locomotive operating and maintenance costs w il l lik e ly increase, as w ill d a ily track maintenance and re p a ir costs. 112 The decline 1n r a i l service r e l i a b i l i t y may cause firms to abandon r a i l service fo r another mode. In a d d itio n , railro a d s th a t attempt to reduce t h e ir costs by providing service less freq u en tly ( e . g . , twice a week, ra th e r than d a ily ) may fin d t h e ir loss in reve­ nues to be g reater than th e ir cost-savings. Many r a i l users may fe e l th a t more frequent service is needed and w ill s h if t to another mode accordingly. 7. Large volume r a i l users tend to get b e tte r service from railro a d s (branch lin e and in t e r lin e ) than do small r a i l users. Large volume r a i l users, in contrast to small r a i l users, tend to have a f a i r l y constant and predictable demand fo r r a i l s e rv ice. This improves the ra ilro a d 's a b ilit y to plan service a c tiv itie s so as to achieve economies o f scale in handling and equipment use. Large volume r a il users usually represent a substantial portion o f the ra ilro a d 's operating revenue, consequently the ra ilro a d has an in cen tive to provide the type o f service the (la rg e ) r a i l user desires. The r a i l user's rig h t to choose the routing o f his t r a f f i c improves his bargaining position w ith ra ilro a d s when i t comes to establishing and m aintaining d esirable service standards. 8. Branch lin e r a il users, cooperating through a r a il users' association, may be able to achieve many o f th e ir commonly shared transportation needs, th a t are d i f f i c u l t to secure by in d ividu al action alone. A r a i l users' association may be able to work e ffe c tiv e ly w ith th e ir branch lin e ra ilro a d to re ta in and improve r a i l service; th is may be done, fo r example, by h a ltin g the vicious c ir c le o f poor s e rv ice, declining revenues, ris in g costs, ra ilro a d cost-saving e ffo r t s , poor se rv ice, and so fo rth . The association may also be able to bargain e ffe c tiv e ly w ith in te r lin e railroads fo r improved service by o ffe rin g to route it s members' shipments over th e ir lin e s . 9. High i n i t i a l organizational costs, plus the d if f i c u l t y o f excluding non-contributors from some o f the b e n e fits , may fru s tra te r a il user e ffo rts to organize a r a i l users' association. In such cases, r a i l users may turn to government fo r help in becoming organized. 10. Many ru ra l areas today are served by more than one branch lin e . The decline in demand fo r r a il service in many o f these areas raises serious questions about the v i a b i l it y o f continued r a i l operations. Retaining r a i l service may require ra tio n a liz a tio n 'a n d re ­ configuration o f branch lin e systems on a regional basis. 113 11. On branch lin e s where cu rren t r a i l shipment levels do not j u s t if y continued r a i l o peratio n s, government may preserve the option fo r fu tu re use o f r a i l service by providing operating su b sidies. The option to make use o f r a i l service in the fu tu re may be valued by com­ munities fo r the added f l e x i b i l i t y i t provides on questions concerning fu tu re economic development a c t iv it ie s and human settlem ent p attern s ; i t may also be valued as a hedge against ris in g fu e l and energy costs. The understanding th a t th is chapter has provided o f the forces and processes th a t determine branch lin e v i a b i l i t y w il l be drawn upon In the analysis o f the operations o f selected Michigan r a i l lin e s . I t is also a n tic ip a te d th a t the in sig h ts th a t th is chapter have provided in to the dynamic r a i 1 ro a d -ra i 1 user re la tio n s h ip s w i l l aid in making program and p o lic y recommendations fo r improving the v i a b i l i t y o f the Michigan r a i l lin e s stu d ied. CHAPTER THREE THE CURRENT FINANCIAL AND OPERATING STATUS OF THE ANN ARBOR, MICHIGAN NOERTHERN, AND THE C.O.-NORTHWEST RAIL LINES In 1973, to ta l railro ad mileage in Michigan stood a t approxi­ mately 6,000 miles—4,700 miles in the Lower Peninsula and 1,300 mles in the Upper Peninsula. In the Lower Peninsula, 2,200 miles o f the to ta l 4,700 miles o f r a il lin e were operated by two bankrupt railroads— the Ann Arbor and the Penn Central. In addition, approxi­ mately 300 miles o f r a il were pending service abandonment p e titio n before the In te rs ta te Commerce Commission. The remaining 2,200 miles of Lower Peninsula r a il lin e was operated by solvent railroads. Under the provisions o f the RRR and rrrr Acts, 1,000 miles of 2,200 miles o f Michigan bankrupted lin e were included in ConRail. Of the remaining 1,200 miles o f bankrupted lin e , state transporta­ tion o ffic ia ls decided to continue service on 1 , 0 0 0 miles with funds from the fe d eral-sta te r a il fre ig h t assistance program. The loss o f r a il service to an area may have important economic and social consequences fo r businesses and communities th at depend upon i t . Three regional r a il lines of p a rtic u la r concern to Michigan transportation o ffic ia ls are the Ann Arbor, the Michigan Northern (formerly part o f Penn Central, and a branch o f the Chesapeake Ohio (C.O.) system. Two o f the lin e s , the Ann Arbor and the Michi­ gan Northern are presently being operated under the fed eral-state 114 115 subsidy program. The th ird lin e , the branch o f the Chesapeake and Ohio (h ere afte r referred to as C.O.-Northwest), is under p e titio n fo r abandonment with the In te rs ta te Commerce Commission. The purpose o f th is chapter is to establish the current finan ­ c ia l and operating status o f these three Michigan lin e s . This information w ill provide the necessary background needed to analyze opportunities (in Chapters Four and Five) fo r improving the fin an ­ c ia l v ia b ilit y o f the three lin e s . The procedure followed in th is chapter is as follow s. F ir s t, b r ie f consideration is given to availab le data and information on the three Michigan r a il lin es and the lim ita tio n s th is has placed on e ffo rts to achieve the research o bjectives. This discussion is followed by analysis o f the fin a n c ia l and operating status o f the three lin es separately. The, chapter concludes with a b r ie f compar­ ison o f selected fin a n c ia l and operating characteristics o f the three lin e s . Information and Data Constraints Most research e ffo rts are constrained, to one degree or another, by the a v a ila b ility o f information and data on the researcher's access to i t . a problem and This research e f f o r t , also , has been hampered by a number o f information and data problems. The value o f Information on the present fin an cial status o f ra ilro a d operations o f a p a rtic u la r r a i l lin e is increased i f i t can be placed 1n h is to ric a l perspective. For example, a person concerned about the fu tu re o f a p a rtic u la r r a i l lin e may want to know how present ra ilro a d revenue and cost figures compare with 116 past revenue and cost fig u re s . What are the trends? Has the fin a n c ia l position o f the lin e improved r e la tiv e to la s t y e a r, to ten years ago? Has the mix in fr e ig h t shipments, o rig in a tin g or term inating on the lin e , changed in the past few years? I f so, which commodities and how has th is affe cte d the r a ilr o a d 's revenues and costs? In sh o rt, a researcher needs f a i r l y d e ta ile d tim e- series data on a ra ilro a d 's revenues, costs, commodity mixes, and the lik e in order to analyze and in te rp re t the sig n ifica n c e o f a ra ilr o a d 's present fin a n c ia l p o s itio n . F a ilu re to understand the ra ilr o a d 's present position in a h is to ric a l perspective may lead to poor policy and program recommendations. U nfortunately, fo r the purposes o f th is research e f f o r t , timeseries data on the three Michigan lin es are not a v a ila b le . Although , the In te rs ta te Commerce Commission publishes data and s ta tis tic s on U.S. ra ilro a d s , they are too aggregated and incomplete to be u se fu l. For example, the In te rs ta te Commerce Commission groups railro ad s together by regions (ra ilro a d ra te t e r r it o r ie s ) and publishes a one percent sample o f the ra ilro a d s ' fre ig h t movements on a regional basis. Consequently, to the exten t th a t railro ad s d if f e r in the type o f fr e ig h t ( i . e . , commodities, s iz e , tons, and value) they handle, the aggregate ICC figures do not r e f le c t what is happening on an ind ividu al ra ilro a d basis. Furthermore, the aggregate figures are o f no help to researchers wanting to focus on a p a rtic u la r branch lin e o f a large ra ilr o a d . The one percent Waybill sample may be a source o f trouble a ls o , even i f i t was a v a ila b le on an in d ivid u al ra ilro a d (and branch lin e ) basis; depending upon how the 117 one percent sample is drawn, s e a s o n a lltly o f fr e ig h t shipments may not be r e fle c te d , thereby in creasin g the p o s s ib ility o f d is to r tio n . This research e f f o r t focuses on the operations o f In d iv id u a l ra ilro a d s and on p a r t ic u la r r a i l lin e s . Commerce Commission data is o f l i t t l e Consequently, the In te r s ta te value and w i l l not be used. The Michigan P u blic S ervice Commission has had 96 responsi­ b i l i t y f o r en fo rcin g r a ilr o a d o p eratin g s a fe ty standards in the s ta te . In the course o f t h e ir work, they have evaluated the condi­ tio n o f tra c k and r a ilr o a d s tru c tu re s in Michigan; they have made estim ates o f the amount o f r e h a b ilita t io n required to upgrade the f a c i l i t i e s to d if f e r e n t minimum s a fe ty standard le v e ls . The P u b lic S ervice Commission estim ates are used in the an alysis o f the th ree Michigan lin e s . The Commission, however, does not c o lle c t tim e -s e rie s data on Michigan r a ilr o a d operations such as commodities, to n s, revenues, and co s ts . T h e re fo re , due to the absence o f tim e -s e rie s d a ta , crosss e c tio n a l info rm ation from a number o f sources w i l l be used to e s ta b lis h the c u rre n t fin a n c ia l sta tu s o f the th ree Michigan lin e s . The 1973 (100 percen t) W aybill records fo r the Ann A rbor, Michigan N orthern, and C.O .-Northw est r a ilr o a d operations are used to estim ate the commodity m ix, ca rlo ad s, tons, and c a r r ie r gross revenues fo r the th re e lin e s . Sources o f info rm ation on ra ilr o a d costs vary and w i l l be discussed f o r each r a i l lin e se p ara tely l a t e r in th is ch a p te r. Qg The r e s p o n s ib ility fo r e n fo rcin g r a ilr o a d o perating s a fe ty standards has been moved to the Michigan Department o f S ta te Highways and T ra n s p o rta tio n . 118 The Ann Arbor Rail Line Background. The Ann Arbor ra ilro a d runs northwest, 292 miles from Toledo, Ohio across Michigan to Frankfort. From Frankfort, the ra ilro a d operates car fe rrie s to the ports o f Kewaunee and Manitowoc, Wisconsin. From its beginning, in 1892, the fin ancial health o f the Ann Arbor ra ilro a d has been tie d to its cross-lake fe rry service and the revenue earned from bridge t r a f f ic routed over i t . In the 1950's and early 1960's, the Ann Arbor and its fe rry service provided a valuable Chicago bypass route to eastern and western bound r a il shipments. In recent testimony before the In te rs ta te Comnerce Commission, Burlington-Northern ra ilro a d o ffic ia ls indicated that the Kewaunee-Frankfort fe rry connection provided savings o f three to fiv e days in tra n s it time on fre ig h t shipments which would otherwise move through the congested Chicago c la s s ific a tio n yards. 97 The Ann Arbor began to have financial trouble in the mid-1960's as westbound automobile movements began deserting the cross-lake fe rry fo r a l l - r a i l routings via Chicago. In addition, Penn Central 98 operating problems in the la te 1960's caused many east coast firms to opt fo r other eastern ra ilro a d s . The eastern railroads routed .the western-bound shipments through Chicago, Peoria, and ^Reported in An Evaluation of the United States Railway Associtio n Preliminary System Plan as I t Pertains to the Ann Arbor Railroad, A Report done fo r the Michigan Department o f State Highways and Transportation by Vincent M. Malanaphy and Associates, In c ., (A p ril, 10 1975), p. 11. 98 The Pennsylvania Central and New York railroads merged in 1968 to form the Penn Central ra ilro a d . 119 S t. Louis, rath er than interchanging w ith the Ann Arbor. gave them the long-haul and higher revenues. This 99 The p r o f it a b ilit y o f the Ann Arbor Railroad company took a turn fo r the worse in the la te 1960's. According to one re p o rt, the company's net income plunged from a p o sitive $204,000 in 1962 to a negative $756,000 in 1966. ^0 0 For the same period, the Ann Arbor ra ilro a d 's net operating income f e l l from a p o sitive $404,000 (in 1962) to a negative $288,000 (in 1966). By 1973, the Ann Arbor Railroad company's net income had declined to a negative $4,312,000. On October 15, 1973, the Ann Arbor Railroad company applied fo r reorganization under Section 77 o f the In te rs ta te Commerce Act. When a study conducted by the court appointed trustee concluded th at the Ann Arbor ra ilro a d was not reorganizable, the judge recommended th a t the Ann Arbor be included in the ConRail system. I t was not included and Michigan has taken over re p s o n s ib ility fo r the Ann Arbor to insure continued r a il service. Although the Ann Arbor's ra ilro a d operations continue without much v is ib le change, i t has been broken into several pieces on the basis o f ownership. Presently, the state o f Michigan owns the portion o f the Ann Arbor lin e between Toledo and Ann Arbor— the Saline branch and the portion o f lin e between Ashley and C ad illac. 99 George W. H itto n , "Great Lakes Car F erries: Species," Trains, (January, 1975), 47-48. An Endangered ^°°An Evaluation o f the United States Railway Association Pre­ lim inary System Plan as I t Pertains to the Ann Arbor frail road, Op. C it . Reasons fo r the f a l l in Income were not given. 120 The S tate 1s leasing the C ad illac to Fran kfo rt and Durand to Ann Arbor portions o f the lin e from the Ann Arbor tru ste e; the remaining portion o f the lin e from Durand to Ashley Is being leased from the Grand Trunk Western R ailroad. F in a lly , the s ta te o f Michigan 1s leasing the Owosso to Saginaw branch from the Penn Central tru s te e s . Rail service on the Ann Arbor 1s being provided by subsidy under the fe d e ra l-s ta te fr e ig h t assistance program. Importance o f the Ann Arbor Car Ferry and Bridge T r a f f i c . In 1973, the Ann Arbor ra ilr o a d 's operating (gross) revenues were approximately $10.5 m illio n . Of t h is , $6.5 m illio n was a ttrib u te d to bridge t r a f f i c and $4.0 m illio n to fr e ig h t shipments th a t e ith e r o rig in ated or terminated a t statio n s on the Ann Arbor lin e . The $6.5 m illio n in bridge t r a f f i c can be broken down in to bridge t r a f f i c using the car fe r ry ($5.1 m illio n ) and bridge t r a f f i c using the car fe r ry ($ 1 .4 m illio n ) . not The importance o f the car fe r ry to the Ann Arbor ra ilro a d is evident: I t is responsible fo r nearly 50 percent o f the r a ilr o a d 's operating revenue. As was noted e a r lie r in th is chapter, car fe rry t r a f f i c has been d eclining since the m ld-1960's. Between 1972 and 1973 car fe rry t r a f f i c dropped 2 2 percent a fte r the crank sh aft on one o f the two car fe r r ie s broke and service between Frankfort and Manitowoc was discontinued. The impact th a t the loss o f fe rry service over the Frankfort-,Manitowoc route has had on Ann Arbor operations is p a r t ia lly illu s t r a te d in Tables 3-1 and 3-2 on the follow ing pages. 121 TABLE 3-1 ANN ARBOR CARFERRY TO/FROM KEWANUEE AND MANITOWAC, 1972, 1973, 1974 CARLOADS PORT MANITOWOC KEWAUNEE YEAR LOAD STATUS 1972 LOADED EMPTY 18312 9636 14894 8115 33206 17751 TOTAL 27948 23009 5095T LOADED EMPTY 26424 13245 0 0 26424 13245 TOTAL 39660 0 30559 LOADED EMPTY 25520 14528 0 0 25520 14528 t Ot Al 40048 0 40048 1 07^ 19/3 1974 Source: TOTAL Table constructed from data provided in Analysis o f R ailroad Operating Ferry and Lighterage O perations. United States Railway A ssociation, A .T. Kearney, In c ., 1975. TABLE 3-2 SELECTED ANN ARBOR RAILROAD REVENUES, COSTS, AND PROFITS FIGURES, 1972, 1973, 1974 YEAR OPERATING REVENUES OPERATING EXPENSES NET EQUIPMENT AND JOINT FACILITY RENTS - - TAXES-PAYROLL AND OTHER NET RAILROAD OPERATING INCOME DOLLARS ................ 1972 11,002,965 10,239,935 (1,044,973) 822,825 (1,104,768) 1973 10,542,199 10,318,553 (1,185,899) 904,719 (1,866,972) 1974 9,477,000 10,492,000 (1,162,000) 1,082,000 (3,259,000) 31.0 (195) PERCENT CHANGE (14) 19721974 2.5 1 1 .0 (NEGATIVE) Source: Moody's Transportation Manual, 1975. 123 In 1972, the Ann Arbor car fe rrie s moved a to ta l o f 50,957 r a il cars across Lake Michigan. About 65 percent, or 33,206 cars, were loaded while the remaining 17,751 (35 percent) o f the cars were moved empty. With service terminated to Manitowoc in 1973, to ta l carloadings fo r the year f e l l to 39,666 (a decline o f 11,291 cars and a 22 percent decrease over 1972). The d is trib u tio n o f cars between loaded and empty remained comparable to 1972—67 percent loaded and 33 percent empty. Consequently, discontinuing fe rry service between Frankfort and Manitowoc resulted in the Ann Arbor losing 7,400 revenue producing carloads (65 percent o f 11,291) fo r 1973. The fin an cial im plications o f th is lo s t t r a f f i c is p a r tia lly re fle c te d in Table 3-2. Operating revenues fo r the Ann Arbor ra ilro a d f e l l $460,766 between 1972 and 1973. The loss would have been higher i f o r ig i­ nating and terminating carloads on the lin e in 1973 had not increased by 2,830 over the 1972 levels (see Table 3 -3 ). Ann Arbor ra ilro a d operating revenues f e l l by $1,065,199 from i 1973 to 1974. During the same period, o rig in a tin g and terminating t r a f f i c on the lin e declined by nearly 2,700 carloads. And although car fe rry t r a f f i c increased in 1974 by 394, when the loaded to unloaded ra tio is examined we fin d th a t the number o f loaded (revenue-producing) carloads a c tu a lly dropped by 1,283. Not a l l Ann Arbor bridge t r a f f i c is cross-lake fe rry t r a f f i c . In the e a rly 1970's, fo r example, the Ann Arbor was moving four to fiv e 100-car u n it tra in s o f coal a week between Toledo and Owosso. The cars were switched a t Owosso to Penn Central fo r d elivery to TABLE 3-3 ANN ARBOR RAILROAD ORIGINATING AND TERMINATING TRAFFIC 1972, 1973, 1974 CARLOADS YEARS RAIL STATIONS 1969 1970 1971 1972 1973 1974 3,937 3,635 3,104 3,504 4,463 5,521 Owosso-Toledo 16,441 19,566 18,456 21,079 22,950 19,199 Total 20,378 23,201 21,506 24,583 27,413 24,720 80.7 84.3 85.6 85.7 83.7 77.7 Frankfort-Owosso Percent T ra ffic Owosso-Toldeo Source: Table constructed from data presented in V.M. Malanaphy and Associates, Inc. An Evaluation o f the United States Railway Association Preliminary Plan As i t Pertains to the Ann Arbor Railroad, 1975. 125 Saginaw. The bankruptcy o f the Ann Arbor and the Penn Central and the uncertainty o f future r a il service has caused the coal t r a f f ic to be re-routed over lines o f solvent ca rrie rs . The coal t r a f f ic represented about 2 2 , 0 0 0 to 26,000 revenue-producing carloads to the Ann Arbor. Michigan transportation o ffic ia ls believe that chances are not good fo r the Ann Arbor to recapture this t r a f f ic . I t is beyond the scope of th is research e ffo r t to analyze, in d e ta il, the car ferry and bridge t r a f f ic aspects of the Ann Arbor railroad operations. This b rie f analysis, however, has attempted to indicate the importance of the cross-lake fe rry operations and bridge t r a f f ic to the financial health of the Ann Arbor ra ilro a d . For example, in 1973, fe rry and bridge t r a f f ic was responsible for about 62 percent o f the Ann Arbor railro ad 's gross operating revenues. C learly, policy aimed a t increasing the v ia b ility o f the Ann Arbor w ill have to give careful consideration to these two aspects o f the railroad operation. Distribution o f Originating and Terminating Freight Shipments. Rail fre ig h t shipments originating or terminating on the Ann Arbor lin e are also an important source o f railroad operating revenue. In 1973, originating and terminating shipments on the lin e account fo r nearly 40 percent ($4 m illio n ) o f the Ann Arbor's gross operating revenues. Originating and terminating r a il shipments, however, are not evenly dispersed over the Ann Arbor lin e . A s ig n ifica n t portion of this t r a f f ic occurs between Owosso and Toledo (see Table 3 -3 ). Over a six year period, 1969 to 1974, 83 percent o f the originating 126 and terminating shipments on the Ann Arbor lin e occurred between these two s ta tio n s , which is 37 percent o f the miles fo r the lin e as a whole. The concentration o f t r a f f i c on the southern end has fin a n c ia l im plications fo r the operation o f the Ann Arbor. A recent study o f the fin a n c ia l and operating condition o f the Ann Arbor found th a t (excluding car fe rry t r a f f i c ) only those stations from Owosso south to Toledo generated enough t r a f f ic and revenues to cover the ra ilro a d 's costs in providing service. 101 The growth o f t r a f f i c north o f Owosso in 1973 and 1974 (see Table 3-3) is due to the development o f sand deposits a t Yuma. The importance o f the sand t r a f f i c to the northern two-thirds of the Ann Arbor can be noted in the follow ing changes. In 1973, 3,068 cars (excluding the sand t r a f f i c ) were e ith e r originated or terminated on the Ann Arbor lin e north o f Owosso. The number f e l l to 2,510 in 1974--a decrease in t r a f f i c o f 18 percent. For the same period, the number o f sand carloads increased by 116 percent— from 1,395 cars in 1973 to 3,011 cars in 1974. The sand t r a f f ic represented 31 percent o f the to ta l t r a f f i c on the Ann Arbor, north o f Owosso, in 1973 and 54 percent in 1974. ^ Reorganization Study o f the Ann Arbor R ailroad, A Report to Mr. John N. ChaseT J r . , Trustee, Ann Arbor Railroad Company, by Peat, Marwick, M itch ell and Co., Washington, D .C ., (A p ril 1, 1974. 127 Many people argue th a t sand is one o f the few r a i l using commo­ d itie s north o f Owosso th a t has growth p o te n tia l. Results from a r a i l users survey, conducted as p a rt o f th is research e f f o r t and discussed 1n Chapter Four, In d ica te th at sand is a commodity w ith growth p o te n tia l, but not the only one. A recent repo rt predicts the growth in sand t r a f f i c on the Ann Arbor w ill be s ig n ific a n t in the next few years. ...Testim ony before the R ail Service Planning O ffic e indicates th a t th is t r a f f i c (sand) should reach 1 0 , 0 0 0 cars per year in the near fu tu re . The sand presently moves to a (Ford Motor Company) casting p la n t a t Cleveland, Ohio and is being considered fo r use a t a p la n t in the D e tro it area. Other markets fo r sand are apparently being developed and negotiations fo r the return movement o f spent sand in the same cars th a t move the sharp sand down to Cleveland appear promising. Another sand p la n t has been constructed a t Harlan, Michigan (ju s t north o f Yuma) and 1s scheduled to go In to operation th is year (1 9 7 5 ). The sand deposits on thte Ann Arbor are the f i r s t inland deposits o f th is magnitude developed to date. Most sand o f th is type has been mined from dunes along the shores o f Lake Michigan and there is a movement by environmental groups to put an end to th is p ra c tic e . This could lead to fu rth e r develop­ ment o f these deposits so th a t the growth in th is segment o f the lin e (north o f Owosso) would appear assured. 102 The growth in sand t r a f f i c has not reached it s predicted levels y e t , however. And whether i t does or not w il l depend la rg e ly upon the outcome o f the In te rs ta te Commerce Commission's current in v e s ti­ gation o f the "reasonableness" 102 o f the sand ra te . When agreement Vincent M. Malanaphy and Associates, In c ., An Evaluation o f the United States Railway Association Prelim inary Plan As I t Pertains to tHe Ann Arbor R ailroad, Op. C i t . , p. 19. 128 was reached between the Ann Arbor and the Ford Motor Company fo r d e liv e ry o f the sand to Cleveland, they s e ttle d on a ra te ($ 3 .1 0 a ton) th a t was protested by the present s u p p lie r o f sand (lo c ate d 1 n Ohio) as non-com petitive. I f the In te rs ta te Commerce Commission finds the Ann Arbor ra te to be too low and requires th a t I t be ra is e d , a large portion o f the sand market w i l l probably be recaptured by Ann Arbor's com petitor. Although sand c a rrie s a low r a te , the Ann Arbor earns nearly 1 0 0 percent o f the fr e ig h t revenues since i t moves the sand almost the e n tir e distance. Consequently, revenues on the sand t r a f f i c compare favorably w ith o ther higher ra te t r a f f i c since the Ann Arbor earns a sm aller portion o f those to ta l fr e ig h t revenues p aid. Analysis o f O rig in a tin g and Term inating F reig h t Shipments in 1973. Table 3 -4 , on the next page, summarizes inform ation on fr e ig h t shipments (commodities, carloads, tons, and gross revenues) th a t o rig in a te d or terminated on the Ann Arbor lin e in 1973. terms o f aggregate numbers, 23,608 103 In carloads o rig in a te d or term inated on the Ann Arbor lin e in 1973. The 23,608 carloads represent over 1 .3 m illio n tons o f fr e ig h t =»nd approximately $3.6 m illio n in gross revenues to the Ann Arbor. 103 O rig in a tin g carloads This fig u re d iffe r s from the one presented in Table 3-3 because the lin e has been defined d if f e r e n t ly . The fig u re s in Table 3 - 4 have been adjusted to r e f le c t the present co n fig uratio n o f the Ann Arbor. T r a ffic between Durand and Ashley has been dropped w hile t r a f f i c between Owosso and Saginaw has been added. These changes have not been made fo r the figu res reported in Table 3-3, hence the di ffe re n c e . 129 TABLE 3-4 ANN ARBOR RAIL LINE (FRANKFORT TO TOLEDO, OWOSSO TO SAGINAW) 1973 Commodity Farm Products Forest Products Fresh Fish o r Other Marine Products M e ta llic Ores Coal Crude Petroleum , N atural Gas, or Gasoline NonmetalUc M inerals Ordnance o r Accessories Food o r Kindred Products Tobacco Products Basic T e x tile s Apparel Lumber or Wood Products F u rn itu re o r F ix tu re s Pulp, Paper, o r A llie d Products P rin ted M a tte r Chemicals o r A llie d Products Petroleum o r Coal Products Rubber or M isc. P la s tic Products Leather o r Leather Products Stone, C la y , o r Glass Products Primary M etal Products Fabricated Metal Products Machinery E le c tr ic a l Machinery T ran sp o rtatio n Equipment Misc. Products o f Manufacturing Waste o r Scrap M a te ria ls Misc. F re ig h t Shipments Containers, Shipping Shipper A ssociation o r S im ila r T r a f f ic Misc. Mixed Shipments Small Packaged F re ig h t Shipments TOTAL Carloads .(Number) Tons (M e tric ) Gross Revenue (D o lla r s ) 1,125 202 6 8 2,917 87,572 2,752 175 537 199,187 297,484 31,168 529 1,764 395,275 - - - - 1,813 - - 164,536 421,552 16,733 84,202 m m » 369 - - « 107 1 1,268 1,158 296 •a a 1,097 40 52,140 11,382 18,414 — 901 630 104 0 7,564 81 54 47 8 4 ,6 3 2 - - 69,747 31,768 1,617 7 560,791 4,595 1,477 1,031 271 105,935 - - 13,089 139 248,050 93,042 68,083 _ _ 224,724 85,866 8,811 37 1,0 24,498 23,423 8,828 9,505 905 554,345 a t» 191 67 56 11,100 897 720 37,865 5,575 5,278 1 2 24 160 240 2,623 23,608 1 ,3 4 4,7 0 4 3,645,995 _ _ 130 accounted fo r 6 6 percent o f the to ta l carloads on the Ann Arbor in 1973 while term inating carloads accounted fo r 34 percent (see Table 3 -5 ). TABLE 3-5 ANN ARBOR RAIL LINE DISTRIBUTION OF CARLOADS BY ORIGIN AND TERMINATION 1973 CARLOADS - 1973 STATUS NUMBER O riginating Terr.rin1nat1ng Total PERCENT 15,556 66 8,052 34 23,608 100 Although the Ann Arbor ra ilro a d originated or terminated fre ig h t in 35 d iffe re n t commodity groups in 1973, seven (7) commodity groups accounted fo r 87 percent, 8 8 percent, and 83 per­ cent o f the carloads, tons, and gross revenues, resp ectively. (see Table 3-6) Coirmodity groups—Stone, Clay and Glass Products and Transportation Equipment— accounted fo r over 50 percent o f the carloads and tons and fo r over 40 percent o f the gross revenues. Two major firms located south o f Owosso are responsible fo r this tr a ffic . 131 TABLE 3-6 ANN ARBOR RAIL LINE DISTRIBUTION OF TRAFFIC BY MAJOR COMMODITY GROUPS 1973 Cumulative D is trib u tio n (Percent) Tons (Number) Cumlatlve D is trib u tio n (Percent) Gross Revenue (D o lla rs ) Cumulative D is trib u tio n (Percent) Coonodlty Group Carloads (Number) Stone. Clay o r Glass Products 7,564 32 560.791 42 1,024,498 28 Transportatior Equipment 4,632 52 105,935 50 554,345 43 Coal 2,917 64 199,187 65 395,275 54 Non-Metal11c Minerals 1,813 72 164,536 77 421,552 65 Lumber or Wood Products 1,268 77 52,140 61 248,050 72 F u rn itu re o r Fextures 1,158 82 11,382 82 93,042 75 Farm Products 1,125 87 85,572 88 297,484 83 Others 3,131 100 165,161 100 611,749 100 T otal 23,608 1,344,704 3,645,995 132 Carloads o rig in a tin g and term inating on the Ann Arbor lin e can be c la s s ifie d according to t h e ir term inating and o rig in a tin g points o f f the Ann Arbor lin e . Table 3-7 In d icates which regions o f the U.S. (w est, midwest, ea st and south-southwest) and Canada term inate carloads o rig in a tin g on the Ann Arbor l in e . In tu rn , Table 3-8 in d ica te s which regions o f the U.S. and Canada o rig in a te carloads th a t term inate on the Ann Arbor l i n e . With reference to o rig in a tin g and term inating points o f f the Ann Arbor l in e , the fo llo w in g states have been grouped together to form the U.S. regions—w est, midwest, e a s t, and south-southwest; West: Montana, Wyoming, Colorado, Utah, New Mexico, A rizona, Idaho, Washington, Oregon, Nevada, and C a lifo r n ia . Midwest: Kansas, M issou ri, Nebraska, Iowa, South Dakota, North Dakota, Minnesota, I l l i n o i s , Indiana, Ohio, Wisconsin, and Michigan. East: Maine, New Hampshire, Vermont, Massachusetts, Rhode Is la n d , Connecticut, New York, New Jersey, Pennsylvania, Delware, Maryland, D is t r ic t o f Columbia, V ir g in ia , West V ir g in ia , and Kentucky. South-Southwest: F lo rid a , M is s is s ip p i, Georgia, South C a ro lin a , North C a ro lin a , Tennesse, Arkansas, Oklahoma, Louisiana, and Texas. The midwest and east c o n s titu te the major markets f o r r a i l shipments o rig in a tin g o r term inating on the Ann Arbor l in e . The midwest receives more shipments from Ann Arbor r a i l users than a l l the other U.S. regions and Canada combined (53 percent fo r the mid­ west and 47 percent fo r a l l other re g io n s ). In c o n tra s t, the east o rig in a te s over 40 percent o f the shipments bound fo r Ann Arbor r a i l users. Although the south-southwest region receives 26 percent 133 TABLE 3-7 ANN ARBOR RAIL LINE DISTRIBUTION OF 1973 CARLOADS ORIGINATING ON THE ANN ARBOR' AND TERMINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION TERMINATING REGION CARLOADS NUMBER PERCENT East 2275 15 Midwest 8325 53 South-Southwest 4064 26 West 459 3 Canada 433 3 15,556 100 Total TABLE 3-8 ANN ARBOR RAIL LINE DISTRIBUTION OF 1973 CARLOADS TERMINATING ON THE ANN ARBOR AND ORIGINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION ORIGINATING REGION CARLOADS NUMBER PERCENT East 3224 41 Midwest 2586 32 South-Southwest 941 11 West 750 9 Canada 551 7 8052 100 Total 134 o f shipments o rig in atin g on the Ann Arbor, i t originates only 11 percent. The west and Canada do not appear to be important markets fo r Ann Arbor r a il users on the basis o f carloads. From a fre ig h t revenue point o f view, the importance o f the various regions (markets) to the Ann Arbor ra ilro a d cannot be determined on the basis o f carload numbers alone. Commodities w ill generate d iffe re n t revenues fo r the railroads p a rtic ip a tin g in th e ir movement depending upon th e ir s iz e , value, and special equipment requirements. Also, the d ivision o f revenue agreements the railroads have established w ill a ffe c t each ra ilro a d 's earnings. Unfortunately, th is information fo r the fre ig h t shipments o rig in atin g or terminating on the Ann Arbor lin e in 1973 was not a v a ila b le . Therefore, the precise value (in terms o f fre ig h t revenue) each region holds fo r the Ann Arbor ra ilro a d could not be determined. Analysis o f Rail Service Operating Revenues and Expenses fo r O riginating and Terminating Freight Shipments in 1973. Determining the Ann Arbor operating costs fo r th at portion o f it s r a il service associated with o rig in atin g and terminating fre ig h t shipments posed a number o f problems. To analyze operating costs associated with o rig in atin g and terminating r a il shipments requires ( 1 ) separation o f line-haul operating costs from car fe rry .o p e ra tin g costs, and then ( 2 ) separation o f line-haul bridge t r a f f i c costs from lin e - 135 haul costs associated w ith o rig in a tin g and term inating t r a f f i c . This 1 s not an easy task. We could s t a r t by id e n tify in g those costs th a t p ertain to the car fe rry operation o nly. But even th is may not be easy. What portion o f the lin e -h a u l expenses are a ttrib u ta b le to the car fe rry operation? I f the fe r ry operation was discontinued tomorrow, would the lin e -h a u l operating expenses decline accordingly? The lin e-h au l costs might d ec lin e, but under ce rta in circumstances they might not decline a t a l l . Consider the follow ing example: Assume fo r the moment th a t a northbound t r a in -u n it o f 50 cars is made-up in Toledo. Twenty cars w il l be dropped-off a t stations along the way as the tr a in moves n orth, 1 0 cars w il l be switched to another c a rr ie r a t Owosso, and the remaining 20 cars w il l be delivered fo r fe r ry service across Lake Michigan. service is discontinued; what savings result? How assume fe rry The ra ilro a d w ill avoid the costs o f the fe rry operation; but as long as the north­ bound t r a in - u n it continues to operate as scheduled, lin e -h a u l costs w ill not change appreciably. Operation o f the tr a in -u n it represents a fix e d cost in terms o f locomotive power and crew size th a t w ill not vary much even though 2 0 fewer cars are being moved (those bound fo r the f e r r y ) . Adjusting lin e -h a u l operating costs to r e f le c t the loss o f n o n -ferry bridge t r a f f i c possesses s im ila r problems. The most lik e ly Ann Arbor management response to the loss o f it s fe r ry and bridge t r a f f i c would be to a lt e r the number o f 136 tr a in -u n its I t operates 1 n the sh o rt-term and a d ju s t the o v e ra ll size o f i t s physical p la n t 1n the long-term . Consequently, w ithout making some ra th e r a r b itra ry judgments about the assignment o f j o i n t costs and operating adjustments l ik e l y to be made by ra ilro a d management, 1 t is very d i f f i c u l t to say what the operating costs associated w ith o rig in a tin g and term inating fr e ig h t shipments a re . Furthermore, i f one is in te re s te d in operating revenues as w ell as costs associated w ith o rig in a tin g and term inating t r a f f i c , addi­ tio n a l problems a r is e . I f we assume the car fe r r y service has been discontinued so th a t we can e lim in a te these costs from the a n a ly s is , we have to allow fo r adjustments in revenues, too. What happens, fo r example, to o rig in a tin g and term inating shipments th a t p resen tly use the car fe rry ? In most cases, the shipments w il l probably be routed through Chicago and Toledo. Even though th is may cause the Ann Arbor to lose some revenue due to changes in i t s revenue d iv is io n s , i t w il l s t i l l re ta in the shipments. On the other hand, i f the cross-lake route is favored by the Ann Arbor r a i l users because i t bypasses Chicago, saving 3 to 5 days in tr a n s it tim e on t h e ir shipments, they may decide to re lo c a te o r truck to and from the C. & 0 . or Grand Trunk Western ra ilro a d s ; ra ilro a d s have cross-lake fe r r y operations. both o f these And the loss o f o rig in a tin g and term inating shipments may a ffe c t the Ann A rbor's operating costs. The main p o in t o f th is discussion has been to i ll u s t r a t e the d if f i c u l t i e s involved in is o la tin g those costs th a t can be a t t r i ­ buted to o rig in a tin g and term inating f r e ig h t shipments on the Ann 137 A rbor. Since i t 1s beyond the scope o f th is research e f f o r t to undertake a d e ta ile d study to determine these co sts, the work o f others w i l l be r e lie d upon. Perhaps the "best" cost fig u re s f o r the operations o f the Ann Arbor r a ilr o a d are contained In a recen t study conducted fo r the Trustee o f the Ann Arbor R a ilro a d Company. ^ The study evaluated the p o te n tia l o f several re o rg a n iza tio n s tra te g ie s f o r the Ann Arbor, in c lu d in g r a i l operations w ith o u t fe r r y s e rv ic e and bridge t r a f f i c . The costs used fo r the various s tra te g ie s were developed from Ann A rbo r's annual repo rts submitted to th e In te r s ta te Commerce Commis­ sion f o r the years 1969 through 1972, working papers fo r the 1973 annual re p o rt, and o th e r accounting and s t a t is t i c a l data supplied by Ann Arbor personnel. Table 3-9 on the fo llo w in g page presents estim ates o f 1973 operatin g revenues, o peratin g expenses, and n et o p e ra tin g income fig u re s f o r the Ann Arbor r a ilr o a d . The o perating revenue and expense fig u re s are fo r r a i l s e rv ic e associated w ith o rig in a tin g and te rm in a tin g f r e ig h t shipments (c a rlo a d s ) o n ly . Revenues and costs associated w ith the c a r fe r r y and bridge t r a f f i c have been excluded. Other sources o f r a ilr o a d revenues, such as sw itching fees and demurrage have not been estim ated . According to the study done fo r the Ann Arbor T ru s te e , they represent less than R eorganization Study o f the Ann Arbor R a ilro a d . A Report to Mr. John N. Chase, J r . , T ru stee , Ann Arbor R ailro ad Comany, by P eat, Marwick, M itc h e ll and C o ., Washington, D .C ., A p ril 1, 1974. 138 TABLE 3-9 ANN ARBOR RAIL LINE (FRANKFORT TO TOLEDO, OWOSSO TO SAGINAW) 1973 FINANCIAL STATUS (In Dollars) Operating Revenues $3,645,995 Operating Expenses^ $7,004,082 Transportation*^ Maintenance o f Equipment^ Maintenance o f May A Structures*/ $2,475,498 724,885 2,323,200 T ra ffic ^ / 55,391 General*/ 323,608 Net Equipment and Joint F a c ilitie s Rents^/ (254,800) Railroad Property Tax 233,100 Railroad Payroll Tax 613,600 Net Operating Income $(3,358,087) (negatlve) ^According to the In terstate Commerce Conmlsslon's Uniform System of AccountsRal1road Compan!es. the various exepnses included in the operating expense are 'the following:" ^ Transportation: expenses Incurred fo r transporting the materials o f others, Including the “expenses associated with stations, tra in s , yards, and terminal service. Compensation fo r tra in and yard employees are the most Important component cost 1n this catergory. Also Included are expenses fo r superintendence, tra in dispatching, fuel and special grade sand fo r tractio n . ^ H a l ntenance of Equipment: expenses Incurred fo r maintenance o f locomotives, frelght-traTn cars, shop and power plant machinery and other In d irec t maintenance o f equipment expenses such as Insurance and employee* health and welfare benefits. Also Included In account are expenses fo r superintendence and depredation o f equipment. ^ Maintenance o f Way and Structures: expenses Incurred to keep road properties In good c o n d itio n .T h is Includes those related to right-of-w ay; track structure, signals and communication systems; appurtenant structures such as bridges, tunnels, and buildings; and other road property f a c ilit ie s such as yards and stations. Major components of cost are superintendence roadway maintenance and maintaining structures. Also Included In this account are In d irec t maintenance o f way expenses such as Insurance and employee's health and welfare benefits. 139 TABLE 3-9 Continued ^ T r a f f i c : expenses Incurred fo r such a c tiv itie s as ad vertising, s o lic itin g , securing t r a f f i c fo r the c a rrie r's lin e and preparation and d is trib u tio n o f t a r if f s governing such t r a f f i c . 3/ General; expenses Incurred fo r administration Including: salaries and expenses o f general o ffic e rs , c le rk , and attendants; general o ffic e supplies, and legal expenses. Also Included in this account are Insurance and other general expenses such as employee's health and w elfare b e n efits, pensions, stationery, and p rin tin g . ^ H e t Equipment and Joint F a c ilitie s Rents: expense incurred is determined by subtracting rent Income from rents payable. The types of rent which are o f the most Importance are: (1 ) hire of fre ig h t cars (per diem); and (2 ) locomotive, work equipment, and j o i n t * f a c il i t y rents. 140 2 percent (1.6 percent) of total operating income. railroad operating income been estimated. lOR Nor has non­ Again, according to the Trustee's report, non-railroad operating revenues represent less than one percent (0.6 percent) of total operating income. Based on the figures presented 1n Table 3-9, the Ann Arbor lost over $3 million in 1973 on ra il service associated with the originating and termi­ nation of freig h t shipments for ra il users located on its lin e . The average loss per carload to the Ann Arbor was $142. One measure o f the relative accuracy of these figures is how well they compare with State revenue and cost figures used to determine the amount of subsidy required to operate the land portion of the Ann Arbor system. The comparison is quite good. The subsidy contract numbers were: (1) expected operation revenues—$3.9 m illio n , (2) expected operating expenses—$7.3 m illio n, and (3) negotiated subsidy—$3.4 m illion. Using a sim ilar format to the one used for the Ann Arbor we w ill now turn to an analysis of the financial and operating status o f the Michigan Northern and C.O.-Northwest railroad operations. Following this, a b rie f comparison of the three lines w ill be made. ^Reorganization Study of the Ann Arbor Railroad, Peat, Marwick, Mitchell and Co., Op. C it. 1 Ofi Michigan R ailroad Plan: Annual Update. Michigan Department of State Highways and Transportation, August, 1976, pp. 14-15. The reported contract costs and revenues for the Ann Arbor land system Included on-branch and off-branch revenues and costs, revenues and costs associated with bridge t r a f f ic , and programmed reh ab ilitatio n . After talking with Michigan transportation o ffic ia ls , the contract figures were adjusted to re fle c t revenues and costs for originating and terminating tr a ffic only. 141 Michigan Northern Rail Line Background. The Michigan Northern railro ad ^ r u n s north from Grand Rapids, 247 miles to Mackinaw C ity and includes the branch between Walton J e t. and Traverse C ity . The Michigan Northern r a il lin e o rigin dates from the early 1800's when the lumber Industry in northern Michigan was flou rish ing . Passenger service, however, made the lin e famous as thousands o f wealthy tourists rode the tra in from the c itie s o f the eastern midwest to fasionable fishing and vacation resorts in Traverse C ity , Petoskey, Harbor Springs, and Mackinaw C ity. The exhaustion o f commercial forest reserves in the early 1900's and the general decline in ag ricu ltu ral product t r a f f ic a fte r World War I I put a financial squeeze on the Michigan Northern lin e that could not be compensated fo r by passenger service. Pas­ senger t r a f f ic f e ll considerably in the la te 1930's and early 1940's as the automobile became the predominant mode o f passenger transportation. In 1961, passenger service was discontinued and e ffo rts were made by Penn Central to disinvest in the lin e . Freight service was reduced from three times a week and maintenance o f track and other structures was cut back sharply. Since the mid-1960's, Penn Central repeatedly petitioned the In te rs ta te Conmerce Commission to 107 The Michigan Northern 1s a new short lin e railroad establihed to operate the lin e , which was formerly part o f the Penn Central System. ^°®Kevin P. Deefe, "How Michigan Got into the Railroad Business," Trains, (October, 1976), 47-48. 142 discontinue s e rv ic e . The p e titio n s were opposed by r a i l users and communities on the lin e ; they argued th a t the loss o f r a i l service to the northern h a lf o f the lower Peninsula would have severe consequences on economic development and growth o f the area. Rather than l e t r a i l service to the area terminate w ith the bank­ ruptcy o f the Penn C e n tra l, the State o f Michigan has contracted w ith the Michigan Northern to provide serv ice. The contract is being funded under the fe d e ra l-s ta te r a i l fre ig h t assistance program established by the RRR and RRRR Acts. Around the turn o f the century, mining and fo re s t products moved from the Upper Peninsula, across Lake Michigan by car fe r ry a t the S tra its o f Mackinaw and down the Michigan Northern lin e to the Chicago gateway. This t r a f f i c represented a s ig n ific a n t source o f bridge t r a f f i c and fre ig h t revenue. With the decline in mining and timber a c tiv itie s during the mid-1900's and the growth in truck competition in the 1940's and 1950's , bridge t r a f f i c on the Michigan Northern v ir t u a lly disappeared. Consequently, the Michigan Northern's primary source o f revenue 1s from it s o r i ­ ginating and term inating shipments. Analysis o f O rig in atin g and Terminating Freight Shipments in 1973. In 1973, 2,411 carloads o rig in ated and terminated on the Michigan Northern lin e (see Table 3 -1 0 ). The 2,441 carload represented 1 0 0 , 0 0 0 tons and generated gross operating revenues close to $400,000. ^ 109 Gross revenue figures taken from the Penn Central (100 percent) w aybill tape have been adjusted to r e f le c t Michigan Northern's share. 143 TABLE 3-10 L LINE W CITY, E CITY 1973 Cornnodlty Farm Products F o re s t Products Fresh F1sh o r O th er M arine Products M e t a llic Ores Coal Crude P etro le u m , N a tu ra l Gas, or G ao lln e Nonmetal11c M in e ra ls Ordnance o r A ccessories Food o r Kindred Products Tobacco Products B asic T e x t ile s Apparel Lumber o r Wood Products F u rn itu re o r F ix tu re s P u lp , Paper or A l l i e d Products P rin te d M a tte r Chemicals o r A l l i e d Products Petroleum o r Coal Products Rubber o r M1sc. P la s t ic Products L e a th e r o r L e a th e r Products Stone * C la y , o r Glass Products Prim ary M etal Products F a b ric a te d M e ta l Products Machinery E l e c t r i c a l Machinery T ra n s p o rta tio n Equipment M1sc. Products o f M anufacturing Waste o r Scrap M a te ria ls M isc. F r e ig h t Shipments C o n ta in e rs , Shipping S h ipper A s s o c ia tio n o r S im ila r T r a f f i c M isc. Mixed Shipments Small Packaged F re ig h t Shipments TOTAL Carloads {Number} Tons (M e tr ic ) Gross Revenue ( D o lla r s ) 12 235 4 1 93 316 3 ,1 2 4 120 60 5 ,5 9 0 1 ,2 2 3 2 5 ,8 5 0 775 223 9 ,9 0 7 360 2 2 ,9 2 8 3 9 ,1 7 4 134 4 ,7 7 3 2 0 ,2 4 5 6 61 318 451 33 97 1 9 ,0 7 7 210 2 ,0 7 4 6 4 ,5 3 8 4 ,0 2 6 6 ,8 9 0 63 168 9 2 ,6 9 8 9 ,3 2 3 129 8 ,7 6 3 2 0 ,8 5 2 922 224 149 81 37 17 39 2 202 20 1 1 9 ,5 9 3 7 ,4 1 2 3 ,5 5 6 1 ,3 8 2 475 1,251 27 1 0,309 242 17 55 3 1 ,9 7 7 3 2 ,6 0 5 3 5 ,7 1 2 7 ,5 8 5 2 ,3 8 0 3 ,8 3 3 251 7 2 ,9 4 9 2 ,2 6 5 305 200 2 7 111 2,441 104,709 393,879 144 In a fashion s im ila r to the Ann Arbor, fre ig h t shipments on the Michigan Northern are f a ir ly concentrated in a few commodities. Although shipments in 26 d iffe re n t commodity groups were originated or terminated on the Michigan Northern lin e in 1973, eight commodity groups accounted fo r 79 percent o f the carload, 89 percent o f the ton, and 78 percent o f the gross revenues. Table 3-12 on the following page displays th is inform ation. In contrast to the Ann Arbor, the Michigan Northern railroad prim arily terminated fre ig h t shipments in 1973 rather than o r ig i­ nating them. Terminating carloads accounted fo r 79 percent o f the to ta l while origin ating carloads made up the rest ( 2 1 percent). Table 3-12 presents this information below. TABLE 3-11 MICHIGAN NORTHERN RAIL LINE DISTRIBUTION OF CARLOADS BY ORIGIN AND TERMINATION 1973 CARLOADS - 1973 STATUS NUMBER PERCENT Originating 503 21 Terminating 1938 79 Total 2441 100 Michigan Northern's fre ig h t patterns are s im ila r to the Ann Arbor's patterns in one repect. The midwest 1s an important market fo r Michigan Northern r a il users. 145 TABLE 3-12 MICHIGAN NORTHERN RAIL LINE DISTRIBUTION OF 1973 TRAFFIC BY MAJOR COMMODITY GROUPS COMODITY GROUP CARLOADS (NUMBER) CUMULATIVE DISTRIBUTION (PERCENT) METRIC TONS (NUMBER) CUMULATIVE DISTRIBUTION (PERCENT) GROSS REVENUE (DOLLARS) CUMULATIVE DISTRIBUTION (PERCENT) Lumber or Wood Products 451 18 19,077 18 64,538 16 Non-Metal!1c Minerals 360 33 22,928 40 39,174 26 Forest Products 235 43 3,124 43 25,850 33 Stone, Clay, or Glass Products 224 52 9,593 52 31,977 41 Waste or Sera P Material 202 60 10,309 61 72,949 60 Petroleum or coal products 168 67 9,323 70 20,852 65 Primary Metal Products 149 73 7,412 77 32,605 73 Food or Kindred Products 134 79 4,773 83 20,245 76 Others 518 100 18,170 100 85,689 100 TOTAL 2,441 104,709 393,879 146 The midwest o rig in a te d 41 percent o f the shipments (carloads) received by Michigan Northern r a i l users in 1973. displays th is Inform ation below. Table 3-13 At the same tim e, Michigan TABLE 3-13 MICHIGAN NORTHERN RAIL LINE DISTRIBUTION OF 1973 CARLOADS ORIGINATING ON THE MICHIGAN NORTHERN AND TERMINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION TERMINATING REGION CARLOADS NUMBER PERCENT 65 14 Midwest 205 41 South-Southwest 162 30 71 15 0 0 503 100 East West Canada Total Northern r a i l users shipped 49 percent o f th e ir to ta l carloads to the midwest. Table 3-14 presents th is inform ation. Next to the midwest, the south-southwest region is an Important market fo r shipments o rig in a tin g w ith Michigan Northern r a i l users (30 percent o f the t o t a l , Table 3-13 above). The e a s t, south- southwest, west, and Canada are f a i r l y equal (14 percent, 15 percent, 13 percent, and 9 percent, re s p e c tiv e ly ) in the percentage o f 147 TABLE 3-14 MICHIGAN NORTHERN RAIL LINE DISTRIBUTION OF 1973 CARLOADS TERMINATING ON THE MICHIGAN NORTHERN AND ORIGINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION ORIGINATING REGION CARLOADS PERCENT NUMBER East 256 14 Midwest 959 49 South-Southwest 290 15 West 264 13 Canada 169 9 1938 100 Total carloads they o rig in a te bound fo r Michigan Northern firm s (see Table 3-14 above). As we noted in our discussion o f the Ann Arbor t r a f f i c flow p a tte rn s , the importance o f the o rig in a tin g and term inating regions (markets) to the Michigan Northern ra ilr o a d can only be determined a f t e r we examine the fr e ig h t revenues associated w ith the d iffe r e n t carload types. Such Inform ation was not a v a ila b le a t the time o f th is research e f f o r t . 148 Analysis o f R ail Service Operating Revenues and Expenses fo r O rig in a tin g and Terminating F re ig h t Shipments. Railway Association (USRA) , ^ 1 0 a consultant 1 1 1 The United States to the Michigan Department o f S tate Highways and T ran sp o rtatio n , and the Michigan Northern ra ilro a d have estimated the operating costs fo r the Michigan Northern lin e . For a number o f reasons the estimates provided by the Michigan Northern ra ilro a d w i l l be used in th is research e f f o r t . As was noted e a r l i e r , the Michigan Northern lin e was a branch lin e in the Penn Central ra ilr o a d system. Consequently, separate operating cost inform ation fo r the branch lin e is not a v a ila b le . system-wide The USRA attempted to determine from Penn Central operating cost records which costs might reasonably be a ttrib u te d to the Michigan Northern branch lin e operation. in to d i f f i c u l t i e s , USRA Running decided to use Penn Central system average operating costs as the measure o f Michigan Northern branch lin e operating costs. Michigan tra n s p o rta tio n o f f i c i a l s , upset w ith USRA procedures and numbers, hired a consultant to determine "more accurately" what the operating costs on the Michigan Northern r e a lly a re . Ir o n ic a lly , ^ °U n ite d States Railway A sso ciatio n, Prelim inary System Plan. V o l. I I , Washington, D .C ., February 26, 1975^ ** *R .L . Banks and Associates, In c ., Michigan Segmented Line Analysis: T r a f f ic , Revenue, Cost andCommunity"Impact, A R e p o r tto the Michigan department o f S ta te Highways and T ran spo rtatio n , October 20, 1975. 149 the consultant ended-up using the USRA's operating cost figures a fte r d eflating them in a few categories. A convincing argument can be made that system-wide operating cost figures do not accurately re fle c t what lin e in th at system the cost o f a single is , p a rtic u la rly a branch lin e . This would c e rta in ly seem to be the case with the Michigan Northern being such a small part o f what was the nation's largest Class I ra ilro a d — the Penn C entral. In addition, in the future the Michigan Northern lin e w ill probably be operated as a short lin e rather than as a branch lin e of a Class I railro ad ; and, its operating costs w ill lik e ly be lower fo r reasons discussed in Chapter Two. Consequently, fo r the purposes of th is research e f fo r t, Michigan Northern's operating costs fo r 1976-77 w ill be used in the analysis. Table 3-15 illu s tra te s the various operating costs associated with the provision o f r a il service on the Michigan Northern lin e . Estimation of operating revenues, operating costs, and net operating income fo r the Michigan Northern are also provided in Table 3-15. Net operating income is estimated to be a negative $666,535. Again, as in the case o f the Ann Arbor ra ilro a d , one measure o f the re la tiv e accuracy o f these figures is to compare them with the figures used to determine the size o f the subsidy payment the Michigan Northern would receive fo r providing r a il service on the 150 lin e fo r one year. The contract figures included (1) expected operating revenues— $450,000; (2) expected operating costs— $1.1 m illio n ; and (3) negotiated subsidy— $640,000. 112 TABLE 3-15 MICHGAN NORTHERN RAIL LINE (GRAND RAPIDS TO MACKINAW CITY, WALTON JCT. TO TRAVERSE CITY) 1973 FINANCIAL STATUS D o lla rs O perating Revenues O perating C o s ts ^ T ran sp o rtatio n Maintenance o f Equipment Maintenance o f Way and S tru c tu re s T r a ffic General .. Net Equipment and J o in t F a c i l i t i e s Rents*** R a ilro a d P roperty Tax. R a ilro a d P a y ro ll Tax“ Net O perating Income D o lla rs 393,879 1 ,0 6 4,4 1 4 1 87 ,89 5 4 4 ,5 0 6 4 4 8 ,9 2 8 29,111 1 1 7 ,0 7 4 * 1 72 ,90 0 (6 6 6 ,5 3 5 ) (n e g a tlv e ) ^See footnore to Table 3 -9 f o r e xp lan atio n o f the component costs o f o f o p eratin g co sts. y»$/not 112 presented s e p a ra te ly ; included in o th e r o p e ra tin g component costs. Source: Michigan Railroad Plan: Annual Update, Michigan Department o f State Highways and Transportation, August, 1976, pp. 14-15. Michigan Northern contract figures were adjusted to r e f le c t operating costs associated with r a il service to o rig in a ­ tin g and terminating t r a f f i c . 151 C.O.-Northwest Rail Line Background. The C.O.-Northwest lin e runs northeast from Manistee, 133 m iles , through Traverse C ity to Petoskey. Although the C.& 0 . ra ilro a d o f f ic ia ls claim th is branch lin e is u n p ro fitab le and are seeking to abandon i t , many people fee l i t can be operated p ro fita b ly . Analysis o f C.O.-Northwest operating revenues and costs w ill be made in the same manner used fo r the Ann Arbor and Michigan Northern ra ilro a d s . Operating revenues are taken from the 1973 C.& 0 . w aybill (100 p ercen t). 113 As a branch lin e o f a major Class I ra ilr o a d , the operating revenues and costs, i f c a lc u la te d , have never been made public fo r the C.O.-Northwest lin e separate from i t s parent system. The abandonment p e titio n (before the In te rs ta te Commerce Commission) does not separate operating revenues from non-operating, nor does i t break operating cost down in to the component costs we have been working w ith ( i . e . , tra n s p o rta tio n , maintenance o f way and s tru c tu re , and so o n). Since the C .O .- Northwest branch is p a rt o f a solvent ra ilro a d i t is not p a rt o f the federal reorganization e f f o r t . Therefore, USRA did not try to estimate operating revenues and costs fo r the lin e ; nor did the State o f Michigan. 113 Michigan Northern ra ilro a d , however, The gross revenues reported on the C.& 0 . w aybill tape were adjusted to r e f le c t operating revenues th a t would accrue to the branch i f operated as a short lin e ra ilro a d . The appropriate divisions o f revenue were provided by Michigan Northern o f f i c ia ls . 152 has estim ated the costs o f o p eratin g the C .O .-N orthw est. ^ For th is reason, Michigan N o rth ern's o p e ra tin g cost estim ates w i l l be used f o r the purposes o f th is study. Analysis o f O rig in a tin g and Term inating F re ig h t Shipments in 1973. Although the C .O .-N orthw est lin e is s h o rte r than the Michigan Northern by about 110 m ile s , i t o rig in a te d and term inated n early tw ice the number o f c a rlo ad s. c a rr ie rs handled 4,253 ca rlo ad s. 2 0 0 ,0 0 0 In 1973, the C.O .-Northw est The carloads represented about tons o f f r e ig h t , generating gross revenues o f n ea rly $750,000 (see Table 3 -1 6 ). The concentration o f t r a f f i c on the C.O .-N orthw est in a few commodities was ju s t as g re a t as i t was on the Ann Arbor and the Michigan N orthern. Although shipment in 33 d if f e r e n t commodity groups were o rig in a te d o r term inated on the C.O .-N orthw est lin e 1n 1973, s ix commodity groups accounted fo r 8 8 p erc en t, 90 percen t, and 87 percent o f the ca rlo a d s , tons, and gross revenues, re s p e c tiv e ly (see Table 3 -1 7 ). Michigan Norhtern has become very knowledgable on the C.O .-Northw est operations since i t m ight be abandoned and they (Michigan Northern) may be in te re s te d in in te g ra tin g the C .O .Northwest l in e in to t h e ir present system. 153 TABLE 3-16 C.O.-NORTHWEST RAIL LINE {MANISTEE TO PETOSKEY) 1973 Gross Carloads (Number) Coomodl tie s Farm Products F orest Products Fresh Fish o r O ther Marine Products M e ta llic Ores Coal Crude Petroleum , N atu ral Gas, or Gasoline Nonmetal 11c M in erals Ordnance Accessories Food o r Kindred Products Tobacco Products Basic T e x tile s Apparel Lumber o r Mood Products F u rn itu re o r F ix tu re s P ulp, Paper o r A llie d Products P rin te d M a tte r Chemicals o r A llie d Products Petroleum o r Coal Products Rubber o r M isc. P la s tic Products L e ath er o r L e ath er Products Stone, C la y , o r Glass Products Primary M etal Products F a b ricated M etal Products Machinery E le c t r ic a l Machinery T ra n s p o rta tio n Equipment M isc. Products o f Manufacturing Waste o r Scrap M a te ria ls M1sc. F re ig h t Shipments C o n tain e rs, Shipping Shipper A sso ciatio n o r S im ila r T r a f f ic M isc. Mixed Shipments Small Packaged F re ig h t Shipments TOTAL 10 52 10 - Tons (^fetFfc) 600 780 300 - 15 - 960 - 55 - 2,667 - 555 - 23,321 - 14 154 - - 938 370 76 - 40,111 2,359 2 ,8 8 8 - 84 517 79 - 4,620 3 0,503 1,185 - 1 ,0 7 8 27 267 10 4 12 - 79,772 1,404 11,782 398 145 960 - 70 4,760 - Revenue (D o lla rs 1,500 9,620 1,851 - 1,829 - 8,655 - 166,500 - 836 - 187,600 48,110 14,250 - 20,321 81,556 13,042 - 116,017 6 ,0 3 2 46,951 3,117 1,033 2,713 - 13,086 - 4 - 6 * 4 ,2 5 3 68 548 - - 138 702 - 209,875 - 747,869 154 TABLE 3 -1 7 C.O.-NORTHWEST RAIL LINE DISTRIBUTION OF TRAFFIC BY BY MAJOR COMMODITY GROUPS 1973 COMMODITY GROUP CARLOADS (NUMBER) CUMULATIVE DISTRIBUTION (PERCENT) METRIC TONS (NUMBER) CUMULATIVE DISTRIBUTION (PERCENT) GROSS REVENUE (DOLLARS) CUMULATIVE DISTRIBUTION (PERCENT) Stone, Clay, o r Glass 1,078 Products 25 79,772 38 116,017 16 Lumber or Wood Products 938 47 40,111 57 187,600 41 Food or Kindred Products 555 60 23,321 68 166,500 63 Petroleum or coal products 517 72 30,503 83 81,556 74 Furniture or fix tu re s 370 81 2.359 84 48,110 80 Fabricated metal products 267 88 11,782 90 48,951 87 528 100 22,027 100 99,135 100 Others Total 4,253 209,875 747,869 155 Freight shipments are more evenly balanced on the C.O.-Northwest lin e In contrast to those on the Ann Arbor and Michigan Northern. Terminating carloads accounted fo r 54 percent of the to tal carloads while originating carloads made up the re s t—46 percent {see Table 3-18). TABLE 3-18 C.O.-NORTHWEST RAIL LINE DISTRIBUTION OF CARLOADS BY ORIGIN AND TERMINATION 1973 CARLOADS - 1973 STATUS NUMBER PERCENT Originating 1941 46 Terminating 2312 54 Total 4253 100 For the r a il users on the C.O.-Northwest, lik e th e ir counter­ parts on the Ann Arbor and Michigan Northern, the midwest is by fa r the most Important region (market) fo r th e ir fre ig h t shipments. Seventy-five percent o f a ll the carloads originated by C.O.Northwest shippers 1n 1973 were bound fo r the midwest (see Table 3-19). In turn, the midwest originated 45 percent of the fre ig h t shipments bound fo r C.O.-Northwest r a il users (see Table 3-20). 156 TABLE 3 -1 9 C.O.-NORTHWEST RAIL LINE DISTRIBUTION OF CARLOADS ORIGINATING ON THE C.O.-NORTHWEST AND TERMINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGION 1973 Terminating Region East Midwest South-Southwest West Canada TOTAL Carloads Number Percent 204 11 1462 75 193 10 82 4 0 0 1941 100 157 TABLE 3-20 C.O.-NORTHWEST RAIL LINE DISTRIBUTION OF CARLOADS TERMINATING ON THE C.O.-NORTHWEST AND ORIGINATING ELSEWHERE IN THE U.S. AND CANADA, BY REGIONS 1973 Carloads O riginating Region Number Percent 160 7 1045 45 South-Southwest 255 11 West 532 24 Canada 290 13 TOTAL 2312 100 East Midwest Analysis o f Rail Service Operating Revenues and Expenses fo r O riginating and Terminating Freight Shipments. In contrast to the Ann Arbor and the Michigan Northern ra ilro a d s , the C.O.-Northwest ra ilro a d operation nearly breaks even (see Table 21). On a per carload basis the C.O.-Northwest operation lo s t only $13. This compares to $273 per Michigan Northern carload and $142 per Ann Arbor carload. 158 TABLE 3-21 C.O.-NORTHWEST RAIL LINE (MANISTEE TO PETOSKEY) 1973 FINANCIAL STATUS DOLLARS DOLLARS O perating Revenues 747,869 O perating C osts^/ 803,339 2 4 9 ,3 2 0 T ra n s p o rta tio n Maintenance o f Equipment Maintenance o f Way and S tru c tu re s 7 5 ,2 7 0 23 9 ,7 1 4 T r a ffic 3 0 ,4 3 5 General 1 1 5 ,5 0 0 Net Equipment and J o in t F a c i l i t i e s Rents-^ R a ilro a d P ro p erty Tax 9 3 ,1 0 0 R a ilro a d P a y ro ll Tax-^ m Net O perating Income (5 5 ,4 7 0 ) (N e g a tiv e ) ^ S e e fo o tn o te to Table 3 -9 f o r e x p la n a tio n o f the component costs o f o p e ra tin g c o s ts . ^ ^ N o t presented s e p a r a te ly , included 1n o th e r component c o s ts . t 159 Summary In th is chapter the cu rren t fin a n c ia l and operating status o f the Ann Arbor, Michigan Northern, and C.O.-Northwest r a i l lin e s have been b r ie f ly examined. A tten tio n was given to the o n -lin e operations o f the three ra ilro a d s . The Ann Arbor was found to be p rim a rily an o rig in a to r o f f r e ig h t t r a f f i c ; the Michigan Northern a term inator o f fr e ig h t t r a f f i c ; and, the C.O.-Northwest s p l i t between o rig in a tin g and term in atin g fr e ig h t shipments. For the r a i l users on the three lin e s , the midwest co n stitu te d the primary market fo r t h e ir fr e ig h t shipment— inbound and outbound. And, even though the three ra ilro a d s o rig in a te d and terminated fr e ig h t shipments in a broad range o f commodity groups less than 25 percent o f the commodity groups accounted fo r over 80 percent o f to ta l carloads, tons, and gross fr e ig h t revenue. Based on the most recent se t o f operating revenue and cost data a v a ila b le , none o f the three ra ilro a d s showed a p o s itiv e net operating income p o s itio n . The Ann Arbor had n et operating income o f negative $3,358,087; the Michigan Northern n et operating Income was negative $666,535; w h ile the C.O.-Northwest fared b e tte r w ith a net operating income o f negative $55,470. considerably Table i 3-22 summarizes a few o f the fin a n c ia l in d ic a to rs fo r the three r a ilr o a d s . TABLE 3-22 ANN ARBOR, MICHIGAN NORTHERN, C.O.-NORTHWEST RAIL LINE FINANCIAL INDICATORS (1973) ■ MILES CARLOADS C.O.NORTHWEST MICHIGAN NORTHERN ANN ARBOR 333 247 133 23,608 2,441 4,253 OPERATING REVENUE $ 3,645,995 $ 398,879 $ 747,869 OPERATING EXPENSE $ 7,004,082 $ 1,064,414 $ 803,339 NET OPERATING INCOME $ (3,358,087) $ (666,535) $ (55,470) NET OPERATING INCOME PER MILE $ (10,084) $ (2,698) $ (417) NET OPERATING INCOME PER CARLOAD $ (142) $ (273) $ (13) (Negative) CHAPTER FOUR PRESENT AND FUTURE OPPORTUNITIES FOR INCREASING RAIL USE LEVELS ON THE ANN ARBOR, MICHIGAN NORTHERN, AND C.O.-NORTHWEST RAIL LINES In Chapter Three, using the best data a v a ila b le , evidence was found to suggest th at the Ann Arbor, Michigan Northern, and the C.O.-Northwest railroads were sustaining operating losses. The purpose o f th is Chapter is to determine i f opportunities e x is t fo r increasing the use o f r a il service ( i . e . , carloads and revenues) on these lin e s ; and, what impact these increases would have on the fin a n c ia l v ia b ilit y o f the lin e s . To achieve th is o b jec tiv e, our analysis w ill take place on two le v e ls . F ir s t, consideration w ill be given to opportunities fo r increasing the present levels o f r a i l use on the three Michigan lin e s . Secondly, an e ffo r t w ill be made to determine what the potential demand fo r r a i l service on these lines might be in the fu tu re . Opportunities fo r Increasing the Present Level o f Rail Use on the Ann Arbor and Michigan Northern Rail Lines Demand fo r Rail Service and Rail Service Q u ality. In Chapter Two the importance o f r a il service q u a lity from the r a il users' perspective was discussed. The frequent claim made by r a i l users th a t they would Increase th e ir use o f r a i l service, i f i t was more re lia b le was also noted. 161 162 To date, the body o f em pirical work on fr e ig h t transportation demand is small re la tiv e to the work th a t has been done on trans­ p ortation production and cost re la tio n s h ip s . There has been, however, a growing In te re s t 1 n the s e n s itiv ity o f transportation demand to v a ria tio n in service q u a lity . countries reveal Recent studies in several European that r a i l users do recognize r e la tiv e service q u a lity a ttrib u te s between modes. Recently 1n Michigan, Johnson developed an em pirical procedure fo r estim ating the response o f demand and modal selection p ro b a b ility to changes in service 116 q u a lity . The procedure was used to estim ate service q u a lity e la s tic itie s fo r outbound ra ilro a d shipments o f grain from county elevators and inbound ra ilro a d shipments o f f e r t i l i z e r and feed. Johnson found th a t the q u an tity o f ra ilro a d services demanded by grain shippers is s ig n ific a n tly influenced by firm s iz e ,.th e delay in the d e liv e ry o f ra ilro a d cars, and the magnitude o f damage and loss in tr a n s it. An increase (decrease) in e le v a to r s ize by 10,000 bushels o f storage capacity re s u lts in a 1.356 Increase (decrease) in the quantity o f ra ilro a d service demanded annually, c e te ris paribus. Each day added to 115 B.T. B ayllss, Demand fo r Freig ht Transport— P ra c tic a l Results o f Studies on Market Operation, (P a ris : European Conference o f M inisters o f Transport, 1973;. 11^Marc A. Johnson, Market and Social Investment and D isin ­ vestment in Railroad Branch Lines: Evaluation Procedures and Decision C r it e r ia , PhD Thesis, Michigan S tate U n iv e rs ity , l375j Marc A. Johnson, "Service Q uality and Transportation Demand", American Journal o f A g ric u ltu ra l Economics, V ol. 53, No. 3, (Aug'ustf"T576) , 496-503. 163 the average delay in re c e iv in g ra ilro a d cars causes grain shippers to demand 5.6% less ra ilro a d service ann ually, holding o th er influences constant. The is o ­ la te d e f f e c t o f an Increase in ra ilro a d fr e ig h t damage o f $1 per $ 1 , 0 0 0 o f shipment value 1 s a decline o f annual r a i l usuage by 1.25%. H 7 With respect to modal s p l i t between r a i l and motor c a r r ie r s , Johnson found th a t a number o f movement and firm c h a ra c te ris tic s as w ell as serv ice q u a lity c h a ra c te ris tic s appear to in flu en ce the proportionate use o f tra n s p o rt modes in the shipment o f g ra in . For an Increase (decrease) in the average distance to market by one hundred m iles , the proportion o f r a i l to truck shipment increases (decreases) by 29% c e te ris p arib u s. Firm s ize and truck ownership a ffe c t the proportion o f modal services used. Larger firm s tend to place pro­ p o rtio n a lly g re a te r re lia n c e upon motor ca rria g e than do sm aller grain handlers. As the e le v a to r storage capacity Increases by 10,000 bushels, the r a tio o f r a i l to truck decrease by 3.7% c e te ris p arib u s. . .Truck ownership by grain handling firm s reduces proportionate use o f r a i l tra n s p o rta tio n . Promotional e f f o r t by tra n s p o rta tio n companies appears to be im portant in s e le c tin g tra n s p o rta tio n modes. An a d d itio n a l contact by a tru cking firm decreases the r a t io o f r a i l to motor usage by 6.7%, holding o th er influences constant. An a d d itio n a l contact by a ra ilr o a d company w il l increase the r a tio by 55%, c e te ris p arib u s. Promotional contacts by ra ilr o a d firms are few, and there may e x is t dim inishing returns a t higher le v e ls o f e f f o r t . However, a t e x is tin g low le v e ls o f promotional e f f o r t , p erso n alizin g ra ilro a d in g may have high payoff from grain e le v a to rs . I * 8 Inbound shipments o f f e r t i l i z e r were found to be s e n s itiv e to r a i l t r a n s it time due to the nature o f it s seasonal use. The less ^ 7Marc A. Johnson, "Service Q u ality and Transportation Demand," Op. C i t . , pp. 501-502. 118I b i d . , 502. 164 r e lia b le r a i l tr a n s it tim e, the g re a te r the lik e lih o o d the f e r t i l i z e r w il l move by tru c k . Inbound shipments o f feed were found to be s e n s itiv e to tr a n s it tim e, but less so than f e r t i l i z e r . Because a larg e percentage o f feed en terin g Michigan 1s in bags, damage and loss associated w ith r a i l and tru ck service was found to a ffe c t the q u a n tity o f service demanded from those modes. 119 Johnson concludes th a t the re s u lts o f his regression analysis support the notion th a t service q u a lity does tend to a ffe c t r a i l ­ road service demand but not to the e x ten t suggested by the testimony o f many r a i l users before the In te rs ta te Commerce Comnission. * Johnson suggests th a t the d iffe re n c e between vocal complaint and action can be explained by the concept o f economic action thresholds. While a r a i l user may be 1nconv1enced by the r e la t iv e ly poor service o f the r a ilr o a d , operating costs associated w ith the poor service may not exceed the d iffe re n c e between the published ra ilro a d and motor c a r r ie r fr e ig h t ra te s . Consequently, the ra ilro a d may decrease service q u a lity u n til e ffe c tiv e p ric e o f consuming r a i l services equals the e ffe c tiv e p ric e o f the next le a s t mode. Only a t th is le v e l o f service d e te rio ra tio n w il l the r a i l user have reached an 120 economic action threshold which causes him to change modes. Demand fo r R a il Service by R a il Users on the Ann Arbor and Michigan Northern R a il L in es. Are r a i l users on the Ann Arbor and the Michigan Northern s e n s itiv e to changes 1n r a i l service q u a lity ? 119 Marc A. Johnson, Market and Social Investment and D isin vest­ ment in Railroad Branch Lines: Evaluation Procedures and PecisTon C r ite r a , Op. C 1 t., pp. 150-156. 120I b i d . , p. 155. 165 What dimensions o f r a il service q u a lity are they sensitive to? I f r a i l service was Improved, how would r a il users on the Ann Arbor and Michigan Northern respond; th a t 1s, how many more carloads per year would they move by ra il? In an attempt to answer these questions, and others, Interviews with r a i l users on the two lines were conducted as part o f this research e f f o r t . Time did not permit Interviews with r a il users on the C.O.-Northwest. Interview Procedure Between July and October, 1976, 76 r a il users on the Ann Arbor and 6 8 r a il users on the Michigan Northern r a il lines were interviewed. The objectives o f the interviews included the following: 1. To estimate the level o f r a il use by r a il users on the two lines 1n 1975 and 1976. Rail use Is measured 1 n terms o f carloads, tons, and ra ilro a d gross revenues, by type o f commodity. 2. To id e n tify thedimensions o f r a il service quality th at r a i l users on the two lines consider to be Important. 3. To estimate the r a il user's probable response to Improvements in r a il service q u a lity . Rail user re­ sponse is measured in terms o f carloads, tons, and ra ilro a d gross revenues by type o f commodity. 4. To determine the extent to which r a il users route th e ir shipments, engage in pooling o f th e ir shipments, and p a rtic ip a te 1 n other cooperative arrangements. 166 5. To determine r a i l user's a ttitu d e s on the need to re h a b ilita te th e ir r a i l lin e s . Interviews were completed w ith a ll known (current) r a il users on the Ann Arbor and the Michigan Northern lin es (w ith a few exceptions th a t w ill be discussed). I n i t i a l determination o f names and locations o f the 144 r a il users was made through a crossreference check with o ffic ia ls in the Rail Freight and Port Authority Section, Michigan Department o f State Highways and Transportation and the Michigan Department o f Commerce. R ail users located on the Ann Arbor lin e between Durand and Ashley were not interviewed because they receive th e ir r a il service from the Grand Trunk Western (GTW) ra ilro a d . Also, r a i l users located between Owosso and Saginaw were not interviewed because time did not perm it. Based upon a review o f past fre ig h t shipment data, i t was estimated th a t r a il users on th is branch (Owosso to Saginaw) originated or terminated less than 5 percent o f the to ta l t r a f f i c on the Ann Arbor in 1973. 121 F in a lly , e ffo rts were not made to interview o f f- lin e Ann Arbor r a i l users who might be trucking a short distance between th e ir place o f business and a 121 The Owosso to Saginaw branch lin e was formerly p art o f Penn C entral's (PC) operations in Michigan. A review o f the PC 1973 ( 1 0 0 percent) w aybill fo r stations on th is branch lin e indicated o rig in atin g and term inating, when added to the Ann Arbor, represented approximately 4 .7 percent o f to ta l carloads on the Ann Arbor lin e . The State o f Michigan's in te re s t 1n th is branch lin e is not fo r the local t r a f f i c i t generates, but fo r the potential bridge t r a f f i c i t might generate. In past years, u n it coal tra in s moved to SaginawBay City-Midland area over th is branch lin e . 167 r a i l s ta tio n . Discussions w ith Michigan tra n s p o rta tio n o f f i c ia ls suggested th a t these r a i l users do not (p re s e n tly ) c o n s titu te a s ig n ific a n t percent o f the f r e ig h t shipments o rig in a te d or term i­ nated on the Ann Arbor lin e . E ffo rts were not made to In te rv ie w Michigan Northern o f f - l i n e r a i l users. Again. Michigan tra n s p o rta tio n o f f i c ia ls in d icated there were very few o f f - l i n e r a i l users using Michigan Northern se rv ic e . L ater discussions w ith Michigan Northern ra ilro a d o f f i c i a l s , however, revealed t h e ir b e lie f th a t s ig n ific a n t o f f - l i n e t r a f f i c could be developed— p a r tic u la r ly i f a TOFC ( t r a i l e r - o n - f l a t - c a r , "piggyback") operation were established e ith e r in C a d illa c , Traverse C ity , and perhaps Petoskey. Nevertheless, time did not perm it in te rv ie w in g o f f - l i n e firm s w ith respect to t h e ir in te r e s t in using "piggyback" servi ce. The survey questionnaire (Appendix A) was designed to supply inform ation th a t would perm it regression analysis (s im ila r to th a t used by Johnson) to measure the s e n s itiv ity o f tra n s p o rta tio n demand to v a ria tio n s in service q u a lity . R ail users responses were inadequate, however, to perm it the use o f regression a n a ly s is . Part o f the problem was due to the la rg e number o f commodities involved-^, sixteen commodities. Only fo u r commodities— lumber, g ra in , f e r t i ­ l i z e r , and feed— had .ten o r more r a i l users. Consequently, fo r twelve o f the sixteen commodities, the number o f observations were too few to perm it the use o f regression. were Incom plete. In a d d itio n , the responses Nearly a l l o f the r a i l users interview ed said they had been asked s im ila r questions a t le a s t three times in the past y e a r. They could not understand why "government people" kept 168 asking the same questions. As one r a il user put i t , "don't you government people share information?" Many o f the r a il users in te r ­ viewed did not answer questions that required them to review th e ir records. They said they had already provided the Information to other interviewers and they did not have the time to look fo r i t again. 1 2 2 The interview resu lts, however, did permit the id e n tific a tio n o f dimensions o f r a il service q uality and rough estimates o f r a il user response to improvements in r a il service were obtained. Discussion o f Interview Results Tables summarizing fre ig h t shipment information—commodities, carloads, tons, ra ilro a d gross revenue, and key r a il service q u a lity dimensions—on an individual r a il user basis are provided in Appendix B. In this Chapter, r a il user interview results w ill be grouped in a number o f ways fo r comparative purposes. There are many ways to group and analyze the responses given by the r a il users. We begin by classifying r a il users on the basis o f whether they originated or terminated fre ig h t shipments or both. Using this i n i t i a l break down, r a il users are next c la s s ifie d according to whether or not they would increase th e ir use o f r a il service i f service was improved. The areas o f needed r a il service improvements are also id e n tifie d . 122 Efforts to determine which State government units have been surveying r a il users in the State were largely unsuccessful. 169 Rail User C las sifica tio n by O rigination and Termination o f Freight Shipments. Of the 76 Ann Arbor r a il users interview ed, 53 (70 percent) terminated carloads, 9 (12 percent) originated car­ loads, and 14 (18 percent) both terminated and originated carloads in 1976. A s im ila r pattern was found fo r the 6 8 Michigan Northern r a il users interviewed; 58 (85 percent) o f the r a il users indicated th at they terminated carloads, 6 (9 percent) o rig in ated , and 4 ( 6 percent) both terminated and originated carloads (see Table 4 -1 ). TABLE 4-1 CLASSIFICATION OF ANN ARBOR AND MICHIGAN NORTHERN RAIL USERS BY ORIGINATION AND TERMINATION OF CARLOADS Status o f Rail Shipments Ann Arbor Shippers Number Percent Michiqan Northern Ship pers Number Fercent O riginating 53 70 58 85 Termlnatlng 9 12 6 9 O riginating and Termlnatlng 14 18 4 6 TOTAL 76 100 68 100 170 I R ail Users' S e n s itiv ity to Rail Service Q u a lity . F o rty-fo u r r a i l users (58 percent) and 42 r a i l users (62 percent) interviewed on the Ann Arbor and Michigan Northern lin e s , re s p e c tiv e ly , said they would increase t h e ir r a i l shipments i f r a i l service was improved (see Table 4-2 below). TABLE 4-2 CLASSIFICATION OF ANN ARBOR AND MICHIGAN NORTHERN RAIL USERS BY WILLINGNESS TO INCREASE THEIR USE OF RAIL SERVICE Increase Rail Shipments 1 f Ra1t Service Improved? Rail Line Yes Number Percent Number No Percent Total Number Percent Ann Arbor 44 58 32 42 76 100 Michigan Northern 42 62 26 38 68 100 171 Of the 44 Ann Arbor r a i l users in d ic a tin g they would respond to improvements in r a i l s e rv ic e , 29 ( 6 6 percent) term inated carloads; 6 (14 percent) o rig in a te d carlo ad s. For the 42 Michigan Northern r a i l users in d ic a tin g a p o s itiv e response to improved r a i l s e rv ic e , 33 (79 percent) term inated carloads; 6 (14 percent) o rig in a te d carloads; and 3 (7 percent) both terminated and o rig in a te d carloads (see Table 4 -3 ). TABLE 4-3 CLASSIFICATION OF ANN ARBOR AND MICHIGAN NORTHERN RAIL USERS BY ORIGINATION AND TERMINATION OF CARLOADS AND RESPONSIVENESS TO IMPROVEMENTS IN RAIL SERVICE QUALITY Status o f Rail Shipments Increase R a il Shipments Ann Arbor Rail Users Number Percent Michigan Northern R ai1 Users __ Number Percent Term lnating 29 66 33 79 O rig in a tin g 6 14 6 14 Term inating & O rig in a tin g 9 20 3 7 44 100 42 100 TOTAL 172 Dimensions o f Rail Service Q u ality. A large number of the r a i l users on the Ann Arbor and Michigan Northern indicated that r a il service can be Improved. Tables 4 -4 , 4 -5 , 4 -6 , and 4-7 illu s t r a te the areas o f r a il service th at need improvement according to the r a il users interviewed on the two lin e s . For Ann Arbor r a il users terminating fre ig h t shipment, consistent tra n s it (42 percent), fa s te r tra n s it time (19 percent), and reduced r a il rates (17 percent) were the dimensions o f r a il service mentioned most frequently (see Table 4 -4 ). TABLE 4-4 ANN ARBOR RAIL USERS’ TERMINATING CARLOADS, NEEDED AREAS OF RAIL SERVICE IMPROVEMENT Needed Rail Service Improvements Rail Users Number Percent 15 42 Faster T ran sit Time 7 19 Reduced Rail Rates 6 17 Available Unloading Fac. 4 12 Increased Service Freq. 2 5 Reduced Damages In-Trans i t 1 3 Add. Storage F a c ilitie s 1 2 36 100 Consistent T ran sit Time TOTAL 173 On the other hand, av ailab le r a il cars (55 percent) and fa s te r tra n s it time (23 percent) were the r a il service problem areas mentioned most frequently by Ann Arbor r a i l users th at originated fre ig h t shipments (see Table 4 -5 ). TABLE 4-5 ANN ARBOR RAIL USER ORIGINATING CARLOADS, NEEDED AREAS OF RAIL SERVICE IMPROVEMENT Needed Rail Service Improvements Shippers Number Percent A vailable Rail Cars 8 55 Faster T ra n s it Time 3 23 Consistent T ran sit Time 2 14 Reduced Rail Rates 1 4 Reduced Damages In T ran sit 1 44 TOTAL 15 100 174 For r a i l users on the Michigan Northern term inating fre ig h t shipments, consistent tr a n s it time (33 percent) was the dimension o f r a i l service q u a lity o f greatest concern. Increased service frequency (30 percent) and fa s te r tr a n s it time (12 percent) were also considered important (see Table 4 -6 ). TABLE 4-6 MICHIGAN NORTHERN RAIL USERS' TERMINATING CARLOADS, NEEDED AREAS OF RAIL SERVICE IMRPOVEMENT Needed Rail Service Improvements Ship aers Number Percent Consistent T ra n s it Time 12 33 Increased Service Frequency 11 30 Faster T ra n s it Time 4 12 A v ailab le Unloading Fac. 3 6 Required Damages In -T ra n s it 3 8 Reduced R ail Rates 2 7 Improved Car Spotting 1 2 TOTAL * 36 100 175 Like t h e ir Ann Arbor counterparts, Michigan Northern r a il users o rig in a tin g fr e ig h t shipments Indicated th a t a v a ila b le r a i l cars (80 percent) and fa s te r tra n s it time ( 2 0 percent) were the areas o f greatest service concern (see Table 4 -7 ). TABLE 4-7 MICHIGAN NORTHERN SHIPPERS* ORIGINATING CARLOADS, NEEDED AREAS OF RAIL SERVICE IMPROVEMENT Needed Rail Service Improvements Shi ppers Number Percent A vailab le Rail Cars 6 80 Faster T ra n s it Time 2 20 TOTAL 8 100 . R ail User Responsiveness to Improvements in Rail S e rv ic e -Aggregate Measures. Based upon interview re s u lts , the aggregate response o f r a il users to improved service would appear to be f a i r l y la rg e . For the Ann Arbor, improved service would re s u lt in to ta l carloads, tons, and c a r r ie r gross revenues increasing by 16, 24, and 23 percent, re s p e c tiv e ly . The increases are even la rg e r fo r the Michigan Northern; to ta l carloads, tons, and c a rr ie r gross revenues would increase by 27, 22, and 38 percent, resp ectively (see Table 4-8 on the follow ing page). TABLE 4-8 CARLOADS, TONS, CARRIER GROSS REVENUE FOR ANN ARBOR AND MICHIGAN NORTHERN RAIL LINES UNDER PRESENT RAIL SERVICE QUALITY AND IMPROVED RAIL SERVICE QUALITY Carloads, Tons Carrier Gross Revenues Present Rail Serv. 1976*2/ Ann Arbor Improved Rail Sery. 1976**=/ Percent Change 1976*—1976** Michigan Northern Improved Present Percent Rail Serv. Rail Serv. Change 1976* 1976*-1976** 1976** 27.4 19,689 22,878 16.2 2,014 2,566 Tons (Metric) 1,122,620 1,394,202 24.2 120,315 146,897 2 2 .1 Carrier Gross 3,352,628 Revenues (Dollars) 4,116,703 22.7 241,621 333,927 38.2 Carloads ^ 1 9 7 6 * carloads, tons, c a rrie r gross revenuesare shipper estimates based on present r a il service quality characteristics, i . e . , tra n s it time, variance in tra n s it time, frequency of service, car supply, and so on. ^ 1 9 7 6 ** carloads, tons, c a rrie r gross revenues are shipper estimates based on improved ra il service. 177 D istrib u tio n o f Freight Shipments by S tatio n s. The aggregate fre ig h t figures (carloads, tons and c a rrie r gross revenues) fo r the Ann Arbor and Michigan Northern lines presented in Table 4-8 do not convey the d is trib u tio n o f t r a f f i c on the two lin e s . A r a il lin e can be thought o f as a series o f links ( or segments) between t r a f f i c generating points (s ta tio n s ). Each segment represents a set o f Incremental revenues and costs to the ra ilro a d . I f the ra ilro a d provides service over more than one segment, the sum o f the incremental revenues and costs constitute the ra ilro a d 's to ta l operating revenues and costs fo r providing service on the lin e . A ra ilro a d may fin d th a t i t can improve it s net operating income position by modifying it s operations through segment adjustments. In Chapter Five, the sequential segment approach w ill be used to evaluate the fin a n c ia l status o f the Ann Arbor, Michigan Northern, and C.O.-Northwest r a il lines under a lte rn a tiv e segment configura­ tio n . In th is section, the Ann Arbor and Michigan Northern lines are segmented and fre ig h t figures (carloads, tons, c a rrie r gross revenues) are assigned. Tables 4-9 and 4-10 present 1976 fre ig h t figures fo r the Ann Arbor and Michigan Northern, resp ectively, based on present r a il service (q u a lity ). Tables 4-11 and 4-12 present 1976 fre ig h t figures fo r the Ann Arbor and Michigan Northern, resp ectively, based on improved r a i l service (q u a lity ). The purpose fo r separating the 1976 fre ig h t figures in th is manner is to show which segments o f the two lin es are lik e ly to gain the most from improved r a il service. 178 Response to improved r a i l service on the Ann Arbor is greatest on th a t segment o f the lin e north o f C a d illa c , between Copemish and F ran kfo rt. Yuma. The primary reason fo r th is is the sand t r a f f i c a t Improved service on the Ann Arbor w il l re s u lt in an increase o f 3,189 carloads fo r the lin e as a whole— 2,000 o f these carloads are sand. Excluding the sand t r a f f i c , the g reatest gains in r a i l use from improved service are lik e ly to occur between North S tar and C ad illac (Table 4 -1 0 ). For determ ination o f the t r a f f i c increases * on a s ta tio n -b y -s ta tio n and commodity-by-commodity basis, the reader is re ferre d to Appendix B. On the Michigan Northern, the greatest increase in r a i l use is lik e ly to occur between C a d illa c and Petoskey (Table 4 -1 2 ). Again, the reader is referred to Appendix B fo r a more d e ta ile d analysis o f r a i l user response to improved r a i l serv ice. In the next section o f th is Chapter, discussion w il l center on dimensions o f r a i l service q u a lity and how they a ffe c t the demand fo r r a i l service on the Ann Arbor and Michigan Northern lin e s . TABLE 4-9 ANN ARBOR RAIL LINE 1976 CARLOADS TONS, CROSS REVENUES BY LINE SEGMENT (Present Rail Service) Rail Stations TOLEDO-BYRON NORTH STAR-CADILLAC 'COPEMISH-FRANKFORT ..TOTAL Carloads Percent 12,950 66% Metric Tons Percent 622,393 55% Gross I Revenues Percent $1,678,458 50% 2,614 13 96,433 9 577,110 17 4,125 21 403,794 36 1,097,060 33 100% $3,352,628 100% 19,689 100% 1,122,620 TABLE 4-10 ANN ARBOR RAIL LINE INCREASES IN 1976 CARLOADS, TONS, GROSS REVENUES, BY LINE SEGMENT (IMPROVED RAIL SERVICE) Rail Stations TOLEDO-BYRON Carloads 457 Percent 13% Metri c Tons Gross Revenues Percent _ (Dollars.) 12% 33,620 82,940 Percent 11% 1 755 24 38,564 14 146,710 19 COPEMISH-FRANKFORT 2,007 63 200,280 74 534,425 70 TOTAL 3,189 100% 272,464 100% 764,075 100% NORTH STAR-CADILLAC TABLE 4-11 MICHIGAN NORTHERN RAIL LINE 1976 CARLOADS, TONS, GROSS REVENUE BY LINE SEGMENT (PRESENT RAIL SERVICE) Metri c Tons Percent Gross Revenues Percent $ 87,623 36% Rail Stations Carloads Percent GRAND RAPID-CEDAR SPRINGS 980 49 60,171 50% HOWARD CITY-TUSTIN 205 10 11,719 10 26,333 11 CADILLAC-PETOSKEY 706 35 42,324 35 116,126 48 KINGSLEY-TRAVERSE CITY 104 5 5,761 4.8 9,721 4 PELLSTON-MACKINAW CITY 19 1 340 .2 1,818 1 120,315 100% $241,621 TOTAL 2,014 100% 100% TABLE 4-12 MICHIGAN NORTHERN RAIL LINE INCREASES IN 1976 CARLOADS, TONS, CROSS REVENUES BY LINE SEGMENT (IMPROVED RAIL SERVICE) Rail Stations GRAND RAPIDS-CEDAR SPRINGS Carloads 84 Percent Metric Tons Percent Gross Revenues 15* 4,050 15% $ 8,690 Percent 9% HOWARD CITY-TUSTIN 101 18 6,019 22 14,271 15 CADI LLAC-PETOSKEY 346 63 15,313 58 66,099 72 KINGSLEY-TRAVERSE CITY 18 3.5 1,040 4 2,320 3 PELLSTON-MACKINAW CITY 3 .5 160 1 926 1 552 100% 26,582 TOTAL 100% $92,306 100% 183 Commodity Types and S e n s itiv ity to Dimensions o f R ail Service Q u a lity . In examining the r a i l users' responses in g re a te r d e t a il, we fin d th a t a broad range o f commodities are s e n s itiv e to changes in r a i l service on both lin e s . Two o r three commodities on each l in e , however, c o n s titu te a very larg e percentage o f the p o te n tia l fr e ig h t increases (see Tables 4-13 and 4 - 1 4 ) . On the Ann Arbor, although 23 commodities would appear to be responsive to various improvements in r a i l s e rv ic e , two commodities, sand and g ra in , c o n s titu te the major source o f p o te n tia l increase in fr e ig h t shipments. Sand and grain together account f o r 73 percent, 84 percent, and 83 percent o f the p o te n tia l increases in carloads, tons, and c a r r ie r gross revenue, re s p e c tiv e ly , on the Ann Arbor. (see Table 4-1 .3). The major shipper o f sand on the Ann Arbor in d icated th a t the lack o f r a i l cars (approxim ately 7 per day) prevents him from shipping 2 , 0 0 0 a d d itio n a l carloads o f sand a y e a r. is This problem may be solved soon, however; the firm 's manager o p tim is tic th a t the In te rs ta te Commerce Commission would ru le th a t the present Ann Arbor sand ra te is "reasonable". Such a ru lin g would l ik e l y encourage p riv a te investment in ad d itio n a l r a i l cars to move the sand. TABLE 4-13 ANN ARBOR RAIL LINE SHIPPER RESPONSE TO IMPROVEMENTS IN RAIL SERVICE QUALITY—INCREASES IN CARLOADS, TONS, AND GROSS REVENUES, BY COMMODITY AND KEY RAIL SERVICE QUALITY ELEMENTS ms I (BOUND (IB ) com ooin CARS OUTBOUND (OB) (NUMIER) TONS (RIMERS) 200.000 REVENUE ms CARS TONS REVENUE (PERCENT) (PERCENT] 62.7 75.9 70.3 AVAILABLE U IL CARS 12.2 AVAILABLE U IL CARS (DOLLARS) {PERCENT) OB Z.000 GUM OB 330 11,970 92,170 10.3 8.7 DIMENSION LIM B l IB HO 5,650 29,828 4.4 2.1 4.0 CONSISTENT TRANSIT T IK , REDUCED U IL RATES FEED IB 128 5,807 20,970 4.0 2.2 2.8 CONSISTENT TRANSIT T IK , FASTER TRANSIT TINE. INCR. SEA. FREQ. FERTILIZER IB 99 5,931 18,514 3.1 2.3 2.4 CONSISTENT TRANSIT T IK , FASTER TRANSIT T IK , UNLOADING FAC. COKE IB 02 5,760 10.640 1.4 CONSISTENT TRANSIT T IK . REDUCEO RAIL RATES CARBON BLACK IB 72 4,880 ROOFING SHINGLES IB 59 2,280 AUTO FARTS OB SO 1.500 CHRISTMAS TREES OB 47 FROZEN FOOO IB BRICK SMB 532.000 KET U IL SERVICE QUALITT ELEMENT 2.6 2.2 2.2 1.9 9,390 1.9 0.9 1.2 CONSISTENT TRANSIT T IK , FASTER TRANSIT TDK, RED. M IL MIES 4,500 1.7 0.6 0.6 AVAILARLE M IL CARS, FASTER 570 7,050 1.5 0.2 1.0 AVAILABLE M IL CARS, FASTER TRANSIT T IK 35 850 9.425 1.1 0.1 1.2 INCREASED SERVICE FREQUENCV IB 33 1,620 4,505 1.0 0.6 0.6 CONSISTENT TRANSIT T IK . FASTER T IK , RED. DAMAGES IN TRANSIT PAPER MATERIAL IB 25 t,5D0 4.500 0.8 0.6 0.6 CONSISTENT TRANSIT T IK SCRAP HETAL OB IB 900 3,000 0.6 0.3 0.4 AVAILABLE M IL CARS, FASTER TRANSIT T IK CRUDE RUBBER IB 14 950 2.590 0.5 0.4 0.3 REDUCED M IL MTES UNLOADING FACILITIES BEER 1 NINE IS 12 600 2,100 0.4 0.2 0.1 INCREASED SERVICE FREQUENCE OIL IB 10 300 1,650 0.3 0.1 0.2 STORAGE FACILITIES ALU4IMM IB to 500 0.3 0.2 FARM EQUIPMENT IB 7 124 630 0.2 0.05 0.1 STEEL BEANS IB S 250 925 0.1 0.07 0.1 FASTER TUNSIT T IK 250 1,000 0.1 0.07 0.15 REDUCED M IL MTES 0.06 0.05 FASTER TRANSIT T IK ° -05 0.10 FASTER TRANSIT T IK SHEET KTAL IB 5 POLES IB S ISO 310 0.1 ___ L ___ 120 600 0.1 1,189 272.464 5 756,317 1001 DOG FOOD TOTAL IB ' 1001 UNLOADING FACILITIES io n FASTER TRANSIT T IK , UKQADING FACILITIES TABLE 4-14 MICHIGAN NORTHERN RAILROAD SHIPPER RESPONSE TO IMPROVEMENTS IN RAIL SERVICE QUALITY-INCREASES IN CARLOADS, TONS, AND GROSS REVENUES, BY COMMODITY AND KEY RAIL SERVICE QUALITY ELEMENTS GROSS INBOUND (IB ) COMODITT CARS OUTBOUND (OB) (■USER) TONS REVENUE GROSS CARS TONS REVENUE (NUMBERS) (DOLLARS) (PERCENT) (PERCENT) (PERCENT) KEY RAIL SERVICE QUALITY ELEMENT IB 157 6,934 20,665 28.4 26.0 22.4 CONSISTENT TRANSIT TIME, INCR. SERV. FREQ. IB IIS 4,775 33,000 26.8 18.0 36.0 STORAGE FACILITY. REDUCED RAIL RATES COM. IB 40 2,000 4,100 7.2 7.5 4.4 CONSISTENT TRANSIT TIME. I NCR. SERV. FREQ. FEED IB 35 2,312 5.294 6.3 8.6 5.7 CONSISTENT TRANSIT T IK , FASTER TRANS. T IK CHRISTMAS TREES OB 20 445 2,375 3.6 1.6 2.5 AVAILABLE RAIL CARS, RASTER TRANSIT T IK SOW CABLE 08 20 1,000 3,640 3.6 3.8 4.0 AVAILABLE RAIL CARS. I NCR. SERV. FREQ. PIG SKIMS IB 20 800 1.650 3.6 3.0 1.7 INCREASED SERVICE FREQUENCY BRICK IB IB 980 3.092 3.2 3.6 3.3 CONSISTENT TRANSIT T IK , REDUCED DAMAGES AVAILABLE RAIL CARS SOAP LEATHER « 15 900 1,200 2.7 3.3 1.3 GRAIN 08 15 1.200 2,250 2.7 4.S 2.4 AVAILABLE RAIL CARS 2.3 2.3 AVAILABLE RAIL CARS, FASTER TRANSIT T IK 2.144 2.5 « 14 530 L.P. GAS IB 13 945 1,260 2.3 3.5 1.3 FASTER TRANS. T IK , INCR. SERV. FREQ. ASPHALT ROOFING PRODUCTS IS 13 590 1,760 2.3 2.2 2.0 INCR. SERV. FREQ., UNLOADING FACILITY, REDUCED RATES FERTILIZER IB 10 820 1,771 1.8 3.1 2.0 CONSISTENT TRANSIT T IK , CAR SPOTTING PAPER PHOOUCTS IB 10 200 720 1.8 1.0 1.0 UNLOADING FACILITIES 7 420 2,450 1.2 1.6 2.6 FASTER TRANSIT T IK , REDUCED RAIL RATES « 300 1.050 1.1 1.1 1.0 CONSISTENT TRANSIT T IK , FASTER TRANS. T IK 200 1,040 0.7 1.0 1.0 CONSISTENT TRANSIT T IK , INCR. SERV. FREQ. TIMER PIPE 08 NINE IB t FARM EQUIPMENT IB 4 SOYBEAN NEAL IB 4 320 720 0.7 1.2 1.0 CONSISTENT TRANSIT T IK , INCR. SERV. FREQ. BEANS 08 S 300 450 0.7 1.1 0.5 AVAILABLE RAIL CARS SEA ANIMAL OIL IB 1 90 450 0.5 0.3 0.5 FASTER TRANSIT T IK ASBESTOS IB 3 50 300 0.5 0.3 0.3 UNLOADING FACILITIES TAMING OIL IB 2 60 300 0.5 0.3 0.3 CONSISTENT TRANSIT T IK POLES H 300 500 6.9 1.1 0.5 CONSISTENT TRANSIT T IK 26,582 t 92.201 TOTAL ___ 5_ 552 1001 1001 loot 185 OINEKSION u m a PIPE 186 Inadequate car supply has also been reported as a major problem by grain shippers. Nearly every grain e le v a to r (7 out o f 8 ) surveyed on the Ann Arbor in d icated th a t la te a r r iv a l o f cars forced them to ship su b stan tial amounts o f grain by tru c k . In 1976, fo r example, elevators moved the eq u iv alen t o f 330 (100 ton) hopper cars o f grain by truck because r a i l cars were not a v a ila b le when the shipper needed them. The average number o f days fo r la te d e liv e ry on r a i l cars (to the grain shippers surveyed) ranged from 5 days to 42 days (see Table 4 -1 5 ). Another common problem experienced by grain elevato rs is the a r r iv a l o f r a i l cars in a non-useable co n d itio n . Rail cars fre q u en tly are d eliv ered d ir t y and the shipper must e ith e r invest his own time and money to clean them or not accept them and send them back. In any case, the grain shipper incurs the added expense o f not having a useable r a i l car when he needs one. Although the data in Table 4-15 does not stron g ly support the contention th a t la rg e r grain shippers have an e a s ie r time in obtaining r a i l cars, other evidence suggests th a t th is is the case. For example, most Michigan grain ele va to rs shipping by r a i l ship m u lti-c a r units d ir e c tly to the east coast. A few o f the sm aller e le v a to rs , however, ship s in g le cars to subterminals in the Toledo area. Interview s w ith grain e le v a to r managers in d icated th a t the sm aller elevato rs (under 1 0 0 , 0 0 0 bushel cap acity) had a harder time obtaining cars than did the la rg e r elevato rs (over 1 0 0 , 0 0 0 bushel c a p a c ity ). One reason fo r t h is , according to personnel in 187 TABLE 4-15 ANN ARBOR RAIL LINE GRAIN SHIPMENTS 1976, IMPACT OF CAR SHORTAGE SHIPPERCOMMODITY DESTINATION NUMBER OF CARLOADS SHIPPED BY RAIL-1976 AVERAGE NUMBER DAYS RAIL CARS DELIVERED LATE CARLOADS MOVED BY TRUCK DUE LATE CAR DELIVERY Grain E. Coast 30 11 45 Grain E. Coast 400 5 112 Grain E. Coast 40 27 20 Grain E. Coast 20 42 40 Grain E. Coast 16 6 8 Grain South 4 6 2 Grain Midwest 12 12 8 Beans S. West 35 27 30 Beans S. West 20 23 40 Beans South 10 23 25 charge o f ConRail's Ann Arbor operations (located in Owosso) is th a t "everybody wants a r a il car a t harvest time, causing car shortages. To maximize the u tiliz a tio n of available cars, and earn the highest possible return fo r the ra ilro a d , our (ConRail's policy) 188 .is to meet demands fo r u n it-tra in s f i r s t . single car A shipper who wants a 123 every now and then w il l ju s t have to w a it." According to the executive secretary fo r the Michigan Grain and A gri-D ealers 1 Association, technological changes in the ra ilro a d industry over the past 25 years has favored the large grain shipper when i t comes to obtaining r a il cars. 124 In the past, grain moved in 50 ton box cars; today i t moves p rim arily in 100 ton covered hopper cars. In ad d itio n , the railroads use lower rates to encourage shipments in th ree-car u n its . The three-car ra te per bushel is around 60 to 80 cheaper than the single 1 0 0 ton car ra te and 1 0 0 to 1 2 0 cheaper per bushel than tru ck. To take advantage o f the lower th ree-car rate requires an elevator to have minimum storage and blending capactiy. Since each 100 ton hopper holds approximately 3,500 bushels, 10,500 bushels are required fo r a th ree-car u n it. To blend e ffe c tiv e ly on a three- car basis requires minimum storage capacity o f 50,000 bushels. 125 Consequently, the chances th a t an elevato r w ill get r a i l cars on or near the date ordered w ill improve i f the ele va to r is large enough to ship in th ree-car u n its . A recent study o f the modal s p l it o f 1973 grain shipments by Michigan grain elevators indicates th at larg e r elevators (bushel 123 Information supplied by a ConRail o f f ic ia l during a te le ­ phone conversation, August, 1976. 124 Conversation w ith Stan Sherman, Executive Secretary, Michigan Grain and A gri-D ealers' Association, Saginaw, Michigan, A pril 1, 1977. 189 capacity) ship a higher percentage o f th e ir grain by r a i l than do sm aller e le v a to rs . Table 4-16 below. 1 ?fi The study results are summarized in The sm aller elevators d e fin ite ly u tiliz e d r a il service less than the medium-sized and large elevators in 1973. TABLE 4-16 GRAIN SHIPMENTS BY MICHIGAN ELEVATORS, BY MODE, 1973 E le v a to r Storage Capacity (Bushels) Truck R a il Tons P ercent T ms P ercent 4 5 ,8 3 3 6 7 6 9 ,5 8 4 94 2 5 ,0 0 0 -1 9 9 ,9 9 9 383,402 42 5 2 3 ,4 1 9 58 2 0 0 ,0 0 0 -4 9 9 ,9 9 9 385,801 48 4 1 3 ,1 0 2 52 5 0 0 ,0 0 0 -la rg e r 387,609 51 2 7 4 ,3 3 0 49 1 -2 4 ,9 9 9 Source: Michigan F re ig h t T ra n s p o rta tio n S urvey, p. 33. These figures do not convey the f u ll s to ry , however. The d if f i c u l t y in obtaining useable ra ilro a d equipment, according to the re p o rt, caused nearly h a lf (45.5 percent) o f grain volume intended fo r r a i l shipment to move by truck in 1973. 126 When percent diverted Marc A. Johnson, The Michigan Freight Transportation Survey: An Empirical In y e s tiq a tio rT b f Modal Choice, A Report to the Michigan Department o f S tate Highways and Transportation, 1975. 190 is c la s s ifie d according to e le v a to r s iz e , we fin d th a t the small elevators were a t a su b stantial disadvantage in o btaining r a i l cars v is -a -v is the medium sized and larg e ele va to rs (Table 4 -1 7 ). E ig h ty-fo u r percent o f the sm aller e le v a to rs , in co n trast to only 1 0 percent o f the la rg e s t e le v a to rs , had to d iv e r t grain intended fo r r a i l shipment to truck shipment due to u navailab le r a i l cars in 1973. TABLE 4-17 GRAIN SHIPMENTS BY MICHIGAN ELEVATORS INTNEDED FOR RAIL, BUT DIVERTED TO TRUCKS FOR LACK OF CARS 1973 Elevato r Storage Capaci ty (Bushels) Percent D iverted From Rail to Truck 1-24,999 84 25,000-199,999 56 200,000-499,999 27 500,000-1arger 10 Source: Michigan F reig h t T ransportation Survey, p. 34. There are various reasons fo r la rg e r elevators o btain ing b e tte r equipment s e rv ic e . Perhaps the most im portant one from the r a i l ­ road's perspective is th a t la rg e r elevators tend to have a f a i r l y s ta b le , constant demand fo r r a i l cars. In a d d itio n , la rg e r elevators tend to order m u ltip le car units which generate more revenue fo r 191 the ra ilro a d than single car orders; th is also fa c ilita te s b etter equipment u t iliz a tio n . captive service 127 securing r a il cars. Leasing hopper cars and putting them in is one option smaller elevators have fo r This may not be economical, however, i f the cars are not used in productive service year around. Another option would be fo r a group of small elevators to invest in a larger elevator giving i t the technical a b ilit y to ship grain in m u lti-c ar u n its. Besides unavailable r a il cars, inconsistent tra n s it time was also a problem fo r many r a il users on the Ann Arbor. For example, unreliable delivery times caused Ann Arbor r a il users to d iv ert 140, 128, and 99 carloads o f lumber, feed and f e r t i l i z e r , respec­ tiv e ly , from r a il to truck in 1976 (Table 4-1 3 ). According to many o f the Ann Arbor r a il users interviewed, unreliable tra n s it time not only caused many o f them to sustain higher inventory costs, but i t also put them a t a competitive disadvantage. A large feed dealer, Who buys his feed grain for blending from a wholesaler in I ll i n o i s , gave the following example: Week One: Early Monday morlnlng feed dealer "A" byys bushels o f feed grain from a wholesaler in Ill i n o i s . He makes arrangements to have the grain delivered by r a il 2 ,0 0 0 1 27 The owner or leasor o f a r a il car can specify that his cars be returned empty by the most d ire c t route. This improves his chances o f having a car available when he needs i t . 192 on Thursday. But his shipment does not a rriv e u n til la te Saturday. Consequently, he has to pay over-time to his employees to work on Sunday, blending the grain In to the proper mixes so th at i t can be sold on Monday (o f the second week). In the meantime, feed dealer A's competitor, feed dealer "B", purchases 2,000 bushels o f grain from the same wholesaler on Thursday (o f the f i r s t week) a t 4 t less per bushel; wholesale grain prices had fa lle n . Rather than use r a il service, feed dealer Bhires a motor c a rr ie r to d e liv e r his feed Friday morning. The cost per bushel o f grain delivered by truck is 3r. .vnpments f---------- ■■■ Yes N0 Total Number Number Number Percent Percent Percent Ann Arbor (ConRall) 21 28 55 72 76 100 Michigan Northern 28 37 40 63 68 100 202 Fewer shippers on the Ann Arbor (21 ) than on the Michigan Northern In d ic a te d they had pooled shipments w ith o th e r r a i l users. Again, lumber dealers (15 ) u t il i z e d pooling arrangements the most. Two fu r n itu r e stores In d ic a te d they had once made arrangements to s p l i t a carload o f fu r n itu r e o rig in a tin g a t the same p la n t in the south. A number o f g rain e le v a to rs In d ic a te d they had s p l i t carloads o f f e r t i l i z e r and bagged dog food in the p a s t. Lower rates was the reason given by grain e le v a to rs fo r seeking to pool shipments. One e le v a to r manager, however, in d ic a te d his experience w ith pooled shipments o f f e r t i l i z e r was not good. On one occasion he s p l i t a carload o f f e r t i l i z e r w ith two o th e r e le v a to rs . stop on the lin e and by the He was the la s t time th e r a i l c a r reached him, h a lf o f his f e r t i l i z e r bags were broken and a few were m issing. According to the r a ilr o a d , the car had not been p ro perly sealed a f t e r the f i r s t e le v a to r removed i t s p a rt o f the shipment and the ship­ ment was vandalized during the n ig h t. The e le v a to r f i l e d a damage claim w ith the r a ilr o a d but no actio n has been taken f o r over a y e a r. The e le v a to r now receives i t s f e r t i l i z e r shipments by tru c k . Problems a r is e also f o r lumber dealers th a t s p l i t carlo ad s. According to a few o f Michigan Northern lumber d e a le rs , shipments o fte n become damaged due to the la rg e amount o f handling involved in the separation and unloading. In a d d itio n , some dealers hold a car two o r th re e days w h ile w a itin g fo r a convenient time to unload t h e ir p o rtio n o f the shipment. This tends to add to the e r r a t ic nature o f r a i l t r a n s it time experienced by many r a i l users. 203 T h irty -th re e and 45 percent o f the r a il users on the Ann Arbor and Michigan Northern, resp ec tively , said they would pool th e ir shipments or engage 1 n other cooperative e ffo rts i f i t would re s u lt in lower rates and/or b e tte r service. An additional 25 and 20 percent o f the Ann Arbor and Michigan Northern r a i l users, respec­ t iv e ly , indicated they might pool shipments or engage in other types o f cooperative e ffo rts (see Table 4 -2 1 ). TABLE 4-21 ANN ARBOR AND MICHIGAN NORTHERN RAIL USERS Would You Pool Shipments or Engage 1n Other Cooperative Efforts 1n the Future? Yes Railroads No No. Per­ cent 25 Michigan Northern 31 Ann Arbor (Conrall) Total Maybe No. Per­ cent No. Per­ cent No. 33 32 44 19 25 76 100 45 24 35 13 20 68 100 Percent R eh abilitation o f the Ann Arbor and Michigan Northern Lines. In Chapter Two the argument was made th a t poor and d eterio ratin g track and roadbed conditions lead to poor r a i l service and subsequently to a decline in the demand fo r r a i l service. I t was also noted th at frequently railroads and r a i l users get caught-up in a sequence of behavior and counter-behavior; th is leads to the d eterio ratio n of track and structures and the eventual abandonment o f r a il service on many lin e s . As p a rt o f this research p ro je c t, an e f f o r t was 204 made to determine the physical condition o f the Ann Arbor and M ichi­ gan Northern lin e s . E ffo rts were also made to determine the impor­ tance r a i l users on the two lin e s place on the condition o f t h e ir lin e s . A number o f estimates have been made o f the cost to r e h a b ili­ ta te the Ann Arbor and Michigan Northern lin e s to d iff e r e n t oper­ a tin g standards. Two recent estim ates, fo r example, have been made o f costs necessary to upgrade the Michigan Northern lin e from It s present substandard condition to Federal R ailroad A dm inistration (FRA) Class 2 standards (25 mph). One o f the studies was conducted in 1975 by the R ailroad Section o f the Michigan Public Service Commission. They estimated i t would cost $3.5 m illio n to r e h a b ili- ta te the lin e to FRA Class 2 standards. The study, however, underestimated the f u l l cost o f r e h a b ili­ ta tio n because i t did not Include a u x ilia r y track areas (yards, lo c al spurs, and branches), sig nals or communications aspects, b ridg es, buildings and o ther fix e d f a c i l i t i e s . In a second rep o rt submitted (September 1976) to the R ail F reig h t and Ports A u tho rity S ection , Michigan Department o f S tate Highways and T ransportation, Michigan Northern o f f i c ia ls estimated r e h a b ilita tio n costs close to 5 m illio n d o lla rs to upgrade the lin e to FRA Class 2 standards. 129 130 Inform ation was provided in a l e t t e r from C.E. Magoon, Super­ v is o r , R ailroad S ection , Michigan Public Service Commission to James Schuman, Chairman, R ail Advisory Committee, November 17, 1975. 130 Michigan Northern Railway, Special R e h a b ilita tio n P ro je c ts . A Report Submitted to k a il F reig h t and Ports A u th o rity Section, Mi chi gan Department o f S tate Highways and Tran spo rtatio n, September 29,1976. 205 The Michigan Northern Report estimated re h a b ilita tio n costs fo r bridges, buildings and other fixed f a c ilit ie s as well as yards and spurs. Using Michigan Northern figures and a ten-year amortization period, the average (annual) cost to re h a b ilita te a mile o f track would be approximately $2,230. In comparison to the Michigan Northern lin e , the Ann Arbor is in good condition. The Michigan Public Service Commission Report (c ite d before) estimated th at i t would cost about $1.7 m illio n to re h a b ilita te the Ann Arbor lin e up to FRA Class 2 standards (25 mph). This figure also includes estimated costs fo r a u x ilia ry trackage areas (yards, local spurs and branches), signals and communication equipment, bridges, buildings and other fixed f a c i li t i e s . The Report also estimated i t would cost between $ 6 and $6.5 m illio n to re h a b ili­ ta te the Ann Arbor to FRA Class 3 standards (40 mph). Many people t fa m ilia r with the Ann Arbor situ ation believe th at the track and roadbed should be upgraded to Class 3 standards i f a service-oriented fre ig h t operation is to be sustained. 1 “31 With a ten-year amortiza­ tion period, the (annual) cost to re h a b ilita te a mile o f Ann Arbor track to Class 3 standards would be between $2,020 to $2,188. Rail user a ttitu d e towards the re h a b ilita tio n o f th e ir r a il lin e varied. Rail users on the Ann Arbor and Michigan Northern were asked i f re h a b ilita tio n o f lines was necessary to improve r a il service. Twenty and 38 percent o f the Ann Arbor and Michigan 131 _ Ann Arbor Railroad Properties: Operating Proposal to Michigan Department o f state Highways and Transportati'onT Harlan.~Bethe ft — Meyers, In c ., Hardy & Chapman, and V.M. Malanaphy & Associates, In c ., September, 1976. 206 Northern r a i l users, resp ec tively , said yes; an additional 47 and 28 percent, resp ectively, indicated "maybe" (see Table 4 -2 2 ). TABLE 4-22 ANN ARBOR AND MICHIGAN NORTHERN RAIL LINES Is Rehabilitation o f Your Line Needed For Improving Rail Service? > Rail Yes Users Total Maybe No Percent No. Per­ cent No. Per­ cent No. Per­ cent Ann Arbor (Conrall) 15 20 25 33 36 47 72 100 Michigan Northern 26 38 23 34 19 28 68 100 No. Rail users on both lines were also asked about th e ir w illin g ­ ness to help finance re h a b ilita tio n projects on th e ir lin e s . responses, fo r the most p a rt, were very noncommittal. Their In general, those r a i l users who indicated they might contribute expressed concern about protecting th e ir investments in the event the lin e was abandoned. In ad d itio n , many r a i l users questioned whether r a il service would be improved much by re h a b ilita tio n o f track; they f e l t th a t the primary cause o f poor r a il service was the u n re li­ able service provided by the in te r lin e c a rrie rs . A number o f r a il users on both lin es indicated they would consider contributing to a re h a b ilita tio n p ro ject only i f a ll users 207 on the lin e paid th e ir share. F in a lly , 32 r a i l users on the Ann Arbor and 21 r a i l users on the Michigan Northern indicated th a t under no circumstances would they pay fo r r e h a b ilita tio n ; they f e l t the re s p o n s ib ility fo r maintenance and upkeep o f lin e was the r a i l ­ ro ad 's. Summary. The purpose o f the section has been to consider opportunities fo r increasing the present lev el o f r a i l use on the Ann Arbor and Michigan Northern lin e s . The re su lts o f interview s with 76 and 6 8 r a i l users on the Ann Arbor and Michigan Northern, re s p e c tiv e ly , were presented and discussed. Estimates o f the demand fo r r a i l were made. The importance service on the two lin es o f various dimensions o f r a i l service q u a lity on the demand fo r r a il service were examined; a v a ila b le r a il cars and consistent tr a n s it time were found to be the dimensions o f r a i l service q u a lity o f greatest concern to r a i l users. Based on r a il user responses, i t was estimated th a t improving r a i l service on the two lin es would re s u lt in sizeab le increases in r a i l use over th e ir present le v e ls . On the Ann Arbor, i t was estimated th a t improved r a il service would lead to 16, 24, and 23 percent increases in carloads, tons, and c a r r ie r gross revenues, re s p e c tiv e ly . Increases on the Michigan Northern were estimated to be s lig h tly higher w ith 27, 22, and 38 percent increases in carloads, tons, and c a r r ie r gross revenues, re s p e c tiv e ly . Even w ith these increases, i t was found th a t the Ann Arbor and Michigan Northern would s t i l l sustain large operating losses. 208 Table 4-23 summarizes the fin a n c ia l status o f the two ra ilro a d s under conditions o f improved r a i l s e rv ic e . Table 4-23 FINANCIAL STATUS OF ANN ARBOR AND MICHIGAN NORTHERN UNDER CONDITIONS OF IMPROVED RAIL SERVICE R ailroad Financial and Other C h a ra c te ris tic s Ann Arbor Michigan Northern 333 247 CARLOADS (1976, Improved S e rv .) 22,878 2,566 OP. REV. (1976, Improved S e rv .) $4,116,703 $ OP. EXPENSES $7,004,082 $1,064,414 MILES ($ 2 ,8 8 7 ,3 7 9 ) NET OP. REVENUES REHAB. COSTS (Class 2 ) * $1,700,000 REHAB. COSTS (Class 3 ) * $6 , 0 0 0 . 0 0 $6,500.00 333,927 ($ 730,487) $5,000.00 - not calcu la ted *Annual cost based on a 10 year am ortorization period. Time did not perm it in terview s w ith C.O.-Northwest r a i l users. Consequently, estim ates o f p o te n tia l increases in r a i l use in response to improved r a i l service could not be made. For the purposes o f th is research e f f o r t , the operating revenue and cost fig u re s estimated in Chapter Three fo r the C.O.-Northwest w il l be used in la t e r a n a ly s is . Future O pportunities fo r Increasing R ail Use Levels on the Ann Arbor, Michigan Northern, and C.O.-Northwest The demand fo r r a i l service in a given region w ill vary w ith changes in economic a c t iv it y and the demand fo r a lte r n a tiv e modes o f tra n s p o rta tio n . The purpose o f th is section is to consider changes 209 that are taking place in the economic base and business a c tiv itie s of the 21 counties served by the Ann Arbor, Michigan Northern, and C.O.-Northwest ra il lines (see Figure 4 -1 ). A detailed stuc(y of the economic characteristics of the 21 counties is beyond the scope o f this research e ffo r t. For the purposes o f this study, consideration w ill be given to population and employment changes at the county level over a 12-year period (1959 to 1972). This information w ill be suggestive o f changes in the aggregate demand fo r fre ig h t transportation services. Available data does not permit modal s p lit analysis at the county le v e l. Some information on modal s p lits , however, is a v a il­ able a t the state le v e l. This information, plus state and county data on the d istribution o f trucks by major use, w ill be used to measure the re la tiv e change in demand for r a il and truck service in the 2 1 -county area. Population and Employment Changes at the County Level. For the purposes o f discussion, the 21 counties have been placed into three groups--Region include: 1, Region 2, and Region 3. Counties in Region 1 Emmet, Charlevoix, Antrim, Kalkaska, Grand Traverse, Leelanau, Benzie, Manistee, Wexford, and Missaukee. Rail service to these counties is provided prim arily by the Michigan Northern and C.O.-Northwest. A portion o f the Ann Arbor lin e cuts across the bottom t ie r o f counties. Region 2 contains the counties of Osceola, Mecosta, Montcalm, and Kent. service from the Michigan Northern. These counties receive r a il Counties making up Region 3 210 21 Counties FIGURE 4-1 21-COUNTY AREA SERVED BY ANN ARBOR MICHIGAN NORTHERN, C.O.-NORTHWEST RAIL LINES Include: C lare, Is a b e lla , G ra tio t, Shiawassee, Livingston, Wash­ tenaw, and Monroe. Rail service to these counties is provided by the Ann Arbor. Between 1959 and 1972, Region 1 experienced a 22.4 percent increase in population. Of the counties in this region, Kalkaska had the larg e st gain (39 .2 percent) while Manistee had the lowest increase (11 .8 p ercent). tio n . Table 4-24 displays th is informa­ Region 2 experienced a 16.3 percent increase in population w hile Region 3 had a 21 percent increase fo r the 1959-1972 period. Population increases in Region 2 ranged from a high o f 45.8 percent (Mecosta) to a low o f 14.4 percent (K ent). In Region 3, Living­ ston County had the highest increase (70 percent) while G ra tio t experienced the lowest population increase (9 .4 percent). The o verall increase in population fo r the 21-county area from 1959 to 1972 was 19.2 percent. While population growth has been taking place in the 21county area, growth in manufacturing and wholesaling a c tiv itie s has not. The percent o f the labor force employed in the manu­ facturin g and wholesaling sectors has declined s lig h tly (on the average) over the 1959-1972 period (see Tables 4-25, 4-2 6, and 4 -2 7 ). The percent employed in transportation and public u t i l i t i e s has remained constant or increased s lig h tly ; contract construction has increased s lig h tly (on the average) in a ll three regions. The percent employed in r e ta ilin g , on the other hand, has increased in the three regions. The growth in r e ta ilin g , re la tiv e to the other 212 TABLE 4 - 2 4 POPULATION CHANGE IN SELECTED MICHIGAN COUNTIES 1960 and 1972 County 1960 (0 0 0 ) 1972 (0 0 0 ) P ercent Change 1960-1972 15,904 13,421 10,373 4 ,8 3 2 3 3 ,4 9 0 9,321 7 ,834 19,042 18,466 6 ,7 8 4 1 9 ,7 0 0 1 7 ,6 0 0 1 4 ,2 0 0 6 ,1 0 0 4 2 ,7 0 0 1 1 ,3 0 0 9 ,1 0 0 2 1 ,3 0 0 2 0 ,9 0 0 7 ,8 0 0 2 3 .8 31.1 3 6 .8 3 9 .2 2 7 .5 2 1 .2 1 6 .2 1 1 .8 13.1 1 4 .9 TOTAL - REGION 1 139,467 1 7 0 ,7 0 0 2 2 .4 Osceola Mecosta Montcalm Kent 13,595 21,051 35,795 363,187 1 6 ,4 0 0 3 0 ,7 0 0 4 1 ,5 0 0 4 1 5 .6 0 0 2 0 .6 4 5 .8 1 5 .9 1 4 .4 TOTAL - REGION 2 433,628 5 0 4 ,2 0 0 1 6 .3 C la re Is a b e lla G r a t io t Shiawassee L iv in g s to n Washtenaw Monroe 11,647 35,3 48 37,012 53,446 38,233 172,440 101.120 1 8 ,4 0 0 4 7 ,6 0 0 4 0 ,5 0 0 6 6 ,8 0 0 6 5 ,0 0 0 2 4 0 ,6 0 0 1 2 3 .7 0 0 5 7 .9 3 4 .6 9 .4 2 4 .9 7 0 .0 3 9 .5 2 2 .3 TOTAL - REGION 3 4 49,246 5 4 4 ,1 0 0 2 1 .0 1,0 2 2,3 4 1 1 ,2 1 9 ,0 0 0 1 9 .2 Emmet C h a riev o lx Antrim Kalkaska Grand Traverse Leelanau Benzie M anistee Wexford Missaukee TOTAL (3 REGIONS) Source: Michigan S t a t i s t i c a l A b s tra c t, 1960, 1972. TABLE 4-25 NON-AGRICULTURAL EMPLOYMENT DISTRIBUTION IN EMMET, CHARLEVOIX, ANTRIM, KALKASKA, GRAND TRAVERSE, WEXFORD, MANISTEE, MISSAUKEE, LEELANAU, AND BENZIE COUNTIES, MICHIGAN, 1959 - 1972 Year Total County Employment Contract Construction No. Pet. Manufacturing Pet. No. Transportation and Public U t i l i t i e s Pet. No. Wholesaling R e ta ilin g No. No. T c t7 I PctT~ EMMET COUNTY 1959 1965 1972 2,762 4,338 5,819 153 452 545 5.5 10.4 9 .4 22.2 613 1,292 938 29.8 16.1 184 195 328 6.7 4 .5 5.6 187 243 277 8.0 804 979 1,320 29.1 5.6 4 .7 3.6 5.9 6.7 46 95 168 1.7 3.0 4 .5 352 390 670 13.4 27 19 47 2.7 1.4 2.1 210 21.0 248 391 18.1 17.9 7 35 1.7 11.8 83 99 226 33.5 40.3 475 651 804 7.9 7 .7 7 .0 1,382 1,997 3,151 23.0 23.5 27.6 2 2 .6 22.7 CHARLEVOIX COUNTY 1959 1965 1972 2,628 3,185 3,750 38 79 134 1.4 2 .5 3.6 1,754 1,570 1,780 66.7 42.3 47.5 95 109 251 12.2 17.8 ANTRIM COUNTY 1959 1965 1972 998 1,368 2,199 62 71 112 6.2 5.2 5.1 569 791 1,076 57.0 57.8 50.0 KALKASKA COUNTY 1959 1965 1972 416 295 560 3 29 1.0 5.2 134 107 118 32.2 36.3 21.1 1 .4 2.0 GRAND TRAVERSE COUNTY 1959 1965 1972 6,012 8,487 11,432 375 480 737 6.2 5.6 6.4 1,791 2,282 2,341 29.8 26.8 20.5 455 643 816 7 .6 7.6 7.1 (continued) TABLE 4 -25 (continued) Year Total County Employment Contract Construction Ho. Pet. Manufacturing Pet. Ho. Transportation and Public U t i l i t i e s Ho. Pet. Wholesaling No. Pet. 5 .3 6.1 5 .0 220 225 311 2.8 3 .8 3 .4 R e ta ilin g No. Pet. 6 .4 5.2 6.1 818 968 1,175 23.7 22.5 23.2 133 143 424 3 .8 3 .2 9.2 564 727 555 16.1 16.1 18.5 3 .3 4 .6 4 .6 36 7 - 10.7 2.2 - 199 141 230 59.5 43.5 45.7 3.1 4 .0 2 .6 58 9 5 11.3 1.3 .4 108 202 306 21.0 28.5 25.3 .7 26 17 3.2 1 .2 183 211 331 22.4 19.8 21.5 U IXF0RD Cl3UHTY 1959 1965 1972 3,443 4,296 5,066 109 131 85 3.2 3.0 1.7 44.3 42.7 38.0 1,527 1,837 1,929 184 264 257 MitalSTEE : ouiity 1959 1965 1972 3,500 4,512 4,614 134 159 213 3 .8 3 .5 4 .6 57.6 58.8 51.3 2,016 2,656 2,370 97 173 159 MI!>SAUKEE ; oumty 1959 1965 1972 334 324 503 22 26 60 6.6 8 .0 12.0 9 34 47 2.3 10.5 9 .3 11 15 23 L ■ELANAU ;ounty 1959 1965 1972 514 707 1,206 52 68 161 10.1 9 .6 13.3 157 195 159 30.5 27.6 13.2 16 28 32 1JENZIE C iuHTY 1959 1965 1972 818 1,065 1,539 51 77 119 6.2 7.2 7.7 394 539 680 48.2 50.6 44.2 6 - 44 - 2 .8 m - TABLE 4-26 NON-AGRICULTURAL EMPLOYMENT DISTRIBUTION IN OSCEOLA, MECOSTA, MONTCALM, AND KENT COUNTIES, MICHIGAN, 1959-1972 Year Total County Employment Contract Construction No. Pet. Manufacturing No. | Pet. Transportation and Public U t i l i t i e s No. P'ct. Wholesaling Ho. Pet R e ta ilin g No. Pet. OSCEOLA 0OUNTY 1959 1965 1972 2,092 2,474 3,167 34 46 166 1.6 1.9 5.2 62.6 64.9 59.7 1,310 1,607 1,891 23 50 169 1.1 5.3 111 97 104 5.3 3.9 3.3 387 396 509 18.5 16.0 16.1 7.2 7 .6 7 .6 95 60 89 4 .0 1 .7 2 .3 620 895 1,144 26.3 26.3 30.2 2 .6 2.2 280 278 261 4 .4 3 .4 3 .0 1,120 1,455 1,846 17.6 17.6 21.3 5.6 5.4 4 .8 7,023 9,532 11,971 7.0 7 .8 8 .4 15,689 20,298 26,696 15.7 16.7 18.6 2.0 215 MECOSTA COUNTY 1959 1965 1972 2,360 3,406 3,788 112 139 162 4 .7 4.1 4 .3 984 1,535 1,463 41.7 45.1 38.6 171 260 289 MONTCALM COUNTY 1959 1965 1972 6,357 8,269 8,672 135 159 163 2.1 1.9 1.9 3,869 5,101 4,375 60.8 61.7 50.4 169 165 192 2.0 KENT COUNTY 1959 1965 1972 99,687 121,750 143,163 4,379 4,842 6,106 4 .4 3 .9 4 .3 46,965 55,021 55,704 47.1 45.2 39.0 5,611 6,524 6,854 TABLE 4-27 NON-AGRICULTURAL EMPLOYMENT DISTRIBUTION IN CLARE, ISABELLA, GRATIOT, SHIAWASSEE, LIVINGSTON, WASHTENAW, AND MONROE COUNTIES, MICHIGAN, 1959-1972 Year Total County Employment Contract Construction No. Pet. Manufacturing Pet. No. Transpoi-ta tio n an Operating Cost FIGURE 5-1 LINE SEGMENT ANALYSIS HYPOTHETICAL SITUATIONS RAILROAD I 230 e n tire lin e is not necessary, however. I f the ra ilro a d abandons service on segment CD, i t can operate the shorter lin e (AC) with a p o sitive net income o f $7,000 per month. In another s itu a tio n , Panel (b ), ra ilro a d "I" may be sustaining operating losses o f $2,000 per month on its lin e , AD. Even though segment CD generates a p ositive net operating income, i t is not enough to o ffs e t the losses on segments AB and BC. road is considering abandonment o f the lin e . a new shipper locates on segment DC. Again, the r a i l ­ Suppose, however, that Suppose also th at the ra ilro a d is operating tra in -u n its with unused capacity. The ra ilro a d could handle the additional t r a f f i c generated by the new shipper at a r e la tiv e ly small Incremental cost. With the new shipper, operating revenues (O.R.^) fo r segment DC become $40,000 and operating costs (O.C.^) become $21,000. Line segment DC now generates net operating revenues o f $19,000, more than enough to cover the operating d e fic its o f lin e segment BC ($10,000) and lin e segment AB ($2,000). In such a s itu a tio n , the ra ilro a d would be ju s tifie d in retaining service on the e n tire lin e . Now consider Figure 5-2 illu s tr a tin g the operations o f two railroads "I" and " I I " , th at in te rs e c t a t one point (D ). operates lin e AD and Railroad I I operates the lin e XZ. Railroad I Railroad I has decided to abandon service on it s lin e because i t is incurring operating d e fic its o f $5,000 per month even though segment DC generates a positive operating income o f $20,000 per month. road I I is also considering abandonment o f it s lin e XZ. R a il­ Operating d e fic its on segment XY ($10,000 per month) are not o ffs e t by the X *. Ra11 road 11 R a l1 road O .R . » O perating Revenues O .C . = O p e ra tin g Costs FIGURE 5-2 LINE SEGMENT ANALYSIS HYPOTHETICAL SITUATIONS RAILROADS I & I I 232 $4,000 per month o perating surplus on segment YZ. were to purchase segment CD from R ailro ad I , I f R ailroad I I the lin e XYDCZ would generate a p o s itiv e operating income o f $14,000 per month. On the o th er hand, i t would not help R ailro ad I to purchase segment YZ. from R ailroad I I . The $4,000 in p o s itiv e n et o perating income would not o f fs e t the n et operatin g d e f ic it s o f $5,000 per month on lin e AD. Although these examples have been h ig h ly s im p lifie d , they i l l u s ­ t r a t e a procedure th a t can be used fo r analyzing the fin a n c ia l impact o f lin e segment adjustments— d eletio n s and a d d itio n s . This procedure w i l l be used to e v alu ate a lte r n a tiv e combinations o f the Ann A rbor, Michigan N orthern, and C.O .-Northw est lin e s . E valuation o f Line Segmentation and A lte r n a tiv e Regional R ail Subsystems Data Used. For purposes o f e v a lu a tin g in d iv id u a l lin e seg­ mentation and a lte r n a tiv e lin e combinations, data presented in Table 5-1 w i l l serve as our s ta r tin g p o in t. The o perating fig u re s fo r the Ann Arbor and Michigan Northern are based on the r a ilr o a d s ' 1976 o p e ra tio n s . For the C .O .-N orthw est, o perating fig u re s fo r 1973 w i l l be used. Unused T ra in -U n it C a p a city. Both the Ann Arbor and the Michigan 1Og Northern operated w ith unused t r a in - u n i t capacity in 1976; they continue to do so in 1977. 136 Info rm ation on Ann A rbor's o perating capacity was provided by Mr. Dennis C u lle n , a ConRail o f f i c i a l in Owosso, during an in te rv ie w on A p ril 18, 1977. Inform ation on Michigan Northern operating cap acity was provided by Ms. Beth Andrus, President o f Michigan Northern Railw ay, during an in te rv ie w on A p ril 12, 1977. 233 The Ann Arbor is presently operating a t about 80 percent tr a in u n it capacity between Toledo and C ad illac. According to the ConRail o f fic ia l in charge o f Ann Arbor operations, approximately 5,000 more cars a year could be handled with an increase in operating costs o f only 5 to 8 percent. Unused tra in -u n it capacity between Toledo and Cadillac is about 15 cars per day and between C adillac and Frankfort 1 0 cars per day. Unused tr a in -u n it capacity fo r Michigan Northern's operations is close to 60 percent. Michigan Northern o f fic ia ls estimate with th e ir current operating schedule, they could handle 15 additional cars a day with only a s lig h t increase in costs (3 to 5 percent). At 15 cars a day, the Michigan Northern could move 5,500 additional cars a year, retain in g as p r o fit nearly 1 0 0 percent o f the gross revenues generated by th is t r a f f i c . Information was not obtained on unused tr a in -u n it capacity with current C.O.-Northwest operations. Time did not permit a d etailed analysis o f the C.O.-Northwest operations. A word o f strong caution is advised in in te rp re tin g the results o f analysis in th is Chapter. The operating data present in Table 5-1 {and subsequently, Tables 5-2 through 5-9) is based largely on estimates. people Although the estimates have been made by fa m ilia r with the operations o f the three ra ilro a d s , they may not be completely accurate. To the extent th a t the estimates 234 are accurate, the re su lts o f lin e segmentation on the Michigan Northern and C.O.-Northwest should be f a i r l y accurate also. The analysis becomes d i f f i c u l t , however, when the three r a i l lin es are linked together to form d iffe r e n t r a i l subsystems. Oper­ atin g the lin es as a subsystem may re s u lt in an e n tir e ly d iffe r e n t set o f revenue and cost figu res than are shown fo r lin es as inde­ pendent operations. For example, tra in schedules and tra in -u n its (locomotive horsepower and crew s ize ) may be changed to r e f le c t d iffe r e n t operating conditions. costs. Such changes w il l a ffe c t operating Operating revenues may change also as t r a f f i c is routed over the subsystem ra th e r than over form erly independent lin es to d i f f e r ­ ent connecting c a rr ie rs . The d iv is io n o f revenues per car may changes. With these words o f caution, we w ill turn to lin e segment analysis o f the Michigan Northern and C.O.-Northwest. This w ill be followed by analyses o f fiv e a lte rn a tiv e regional r a i l subsystems made up o f various segments o f the Michigan Northern and C .O .Northwest linked to the Ann Arbor r a i l lin e . For the purposes o f analysis in th is Chapter, the Ann Arbor w ill remain in ta c t. The Ann Arbor w ill serve as the backbone to the regional system. Michigan Northern Line Segment A nalysis. In Table 5 -2 , the Michigan Northern is segmented in to fiv e lin k s . Based upon th is segmentation, we fin d th a t the Cedar Springs to C ad illac lin k generates over 40 percent o f the to ta l d e f ic it on the lin e . While being responsible fo r 32 percent o f the Michigan Northern's opera­ tin g costs, th is segment contributes only 1 2 percent o f the ra ilro a d 's ?35 TABLE 5-1 BREAK EVEN POINTS FOR ANN ARBOR, MICHIGAN NORTHERN AND C.O.-NORTHWEST RAIL OPERATIONS IN 1976 WITH IMPROVED RAIL SERVICE RAIL OPERATION CHARACTERISTICS MILES ANN ARBOR MICHIGAN., NORTHERNS' NORTHWEST^ 333 247 133 22,878 2.566 4,253 1,394,202 146,897 209,875 OPERATING REVENUES $4,116,703 $333,927 $747,869 OPERATING COSTS $7,004,082 $1,064,414 $803,339 ($2,8 8 7 ,3 7 9 ) {$ 730,487) ($55,470) $2,887,379 $730,487 $55,470 CARLOADS TONS NET OPERATING INCOME DOLLAR INCERASE IN OP. REVENUES TO BREAK EVEN PERCENT INCREASE IN OP. REVENUES TO BREAK EVEN DOLLAR DECREASE IN OP. COSTS TO BREAK EVEN PERCENT DECREASE IN OP. COSTS TO BREAK EVEN NET OP. REVENUE PER ADDITIONAL CARLOAD INCREASE IN CARLOADS (NUMBER) TO BREAK EVEN PERCENT INCREASE IN CARLOADS TO BREAK EVEN 70S $2,887,379 219% $730,487 41% 69% $150^ $118^ 1 9 ,2 4 9 ^ 6 ,190^ / 84% 241% 7% $55,470 7% n .a .^ n .a . n .a . &fhe Ann Arbor r a i l lin e Is defined to Include s tatio ns between F ran kfo rt and Toledo, and Owosso and Saginaw. S tations between Ashley and Durand are excluded. ^ T h e Michigan northern r a i l lin e Includes sta tio n s between Grand Rapids and Mackinaw C ity , and Walton J e t. and Traverse C ity . S W C.O. -Northwest r a i l lin e includes s ta tio n s between Manistee and Petoskey. 236 TABLE 5-1 (continued) ^The Ann arbor 1s operating a t about BO percent tra in -u n it capacity between Toledo and Frankfort. Ann Arbor o ffic ia ls estimate that an additional 15 cars a day (5,475 cars a year) can be handled with only a s lig h t Increase 1n operating costs ($4 per additional c a r). I f we assume service Is Improved and r a il users Increase th e ir carloads by 3,200, 2,275 additional carloads can be orlgnlated or termnated a t a net revenue o f $150 per car, to the Ann Arbor. S/At a net revenue o f $150 per car, 1t would require 22,387 additional originating or terminating carloads to break eve. The Ann Arbor w ill have to add more traln -u nlts to handle total carload Increases o f more than 2,275. This w ill a lte r tra in -u n it capacity and net revenue per car. Consequently, I t mayrequire more than 22,387 carloads to break even. —^The Michigan Northern 1s operating a t about 40 percent tra in -u n it capacity between Grand Rapids and Mackinaw C ity . Michigan Northern o ffic ia ls estimate an additional 16 cars a day (5,840 cars a year) can behandled with only a s lig h t Increase in operating costs ($5 per addi­ tional c a r). I f we assumeservice Is Improved and r a il users Increased th e ir carloads by 550, 5,340 additional carloads can be originated or terminated a t a net revenue of $118 per car to the Michigan Northern. St In contrast to the Ann Arbor, the Michigan Northern could (almost) break even by Increasing the number o f cars i t moved up to present tra in -u n it capacity. ^T h e degree o f unused tra in -u n it capacity In present C.O.-Northwest operations was not determined. Time did not permit an analysis o f the C.O.-Northwest operations. TABLE 5-2 MICHIGAN NORTHERN RAIL LINE SEGMENT ANALYSIS: 1976 CARLOADS OPERATING REVENUES AND COSTS, NET OPERATING COSTS (WITH IMPROVED RAIL SERVICE) NET OPERATING REVENUES X GRAND RAPIDSMACKINAW CITY 2,566 100 $333,927 100 $1,064,414 100 ($730,487) GRAND RAPIDSCEDAR SPRINGS 1,064 41 96,313 29 106,441 10 (10,128) 306 12 40,604 12 340,612 32 (300,008) 1,052 41 182,225 55 404,477 38 (222,252) PETOSKEYMACKINAW CITY 22 1 2,744 4 117,087 11 (114,343) WALTON JCT.TRAVERSE CITY 122 5 12,041 4 95,797 9 (83,756) 1,174 46 194,266 59 500,274 47 (306,008) STATIONS CEDAR SPR1NGSCADILLAC CADILLACPETOSKEY CADILLACTRAVERSE CITYPETOSKEY X OPERATING COSTS X 237 CARLOADS OPERATING REVENUES 238 % operating revenues. In co n trast, the Grand Rapids to Cedar Springs segment generates 29 percent o f the Michigan Northern's operating revenues and only 10 percent o f the operating costs. This segment o f the lin e also generated 41 percent o f the to ta l carloads fo r 1976. The C ad illac to Petoskey segment is by f a r the la rg e s t generator o f operating revenue w ith 55 percent o f the t o t a l. fo r 38 percent o f the ra ilro a d 's operating cost. I t also accounted The Petoskey to Mackinaw C ity segment is the weakest segment o f the lin e ; and, the Walton J e t. to Traverse C ity segment is not much stronger. In fa c t, interviews w ith r a il users on the segment in d icate th a t 95 percent o f the t r a f f i c e ith e r o rig in ates or terminates a t Traverse C ity . Segment analysis o f the Michigan Northern suggests th a t the long-term v i a b i l it y o f the ra ilro a d might be improved by abandoning service between Grand Rapids and C a d illa c as w ell as between Petoskey and Mackinaw C ity . Serious consideration, however, should be given to operating the Grand Rapids to Cedar Springs segment as an independent short lin e w ith connections w ith other c a rrie rs at Grand Rapids. Or, the segment could be served by ConRail. This segment is nearly breaking even now and i f operated independent from the remaining portions o f the Michigan Northern, i t may become p ro fita b le . The remaining segments— Cadi 1 lac to Traverse to Petoskey--would co n stitu te the Michigan Northern lin e . This version re tain s 46 percent, 59 percent, and 47 percent o f the carloads, operating revenues, and operating costs, re s p e c tiv e ly , o f the o rig in a l lin e . 239 Reconfiguring the Michigan Northern lin e in th is manner reduces it s operating d e f i c i t by 42 percent, from $730,487 to $306,008. (see Table 5 -2 ) The v i a b i l i t y o f the Michigan Northern might be improved even more 1 f service was discontinued over the Walton Oct. to Traverse C ity segment. This a lte r n a tiv e w i l l be considered momentarily when the C.O.-Northwest and Michigan Northern are considered together. Figure 5-3 illu s t r a t e s the Michigan Northern C ad illac-T raverse City-Petoskey lin e and the d if f e r e n t statio n s comprising i t . C.O.-Northwest Line Segment A n aly sis. In co n tras t to the Michigan Northern, the C.O.-Northwest appears to possess p r o fita b le segments (Table 5 - 3 ). The Grawn to Petoskey segment is responsible fo r over 80 percent o f the carloads and 85 percent o f the operating revenues fo r the e n tire lin e . The t r a f f i c on the lin e is f a i r l y concentrated around the Traverse C ity and the Charievoix-Petoskey areas. These two segments c o n s titu te 77 percent o f the carloads in 1973 and 74 percent o f the operating revenues. C le a rly one measure fo r improving the v i a b i l i t y o f the C .O .Northwest lin e would be to discontinue service on the Manistee to Grawn segment. In doing t h is , however, the C.O.-Northwest would lose it s connections w ith it s parent company a t Manistee and the Ann Arbor c a rrie rs a t Thompsonville. The C.O.-Northwest would have to re ly on i t s connections w ith the Michigan Northern a t Traverse C ity . Figure 5-4 illu s t r a t e s the C.O.-Northwest Grawn to Petoskey lin e and the various statio n s comprising i t . 240 MICHIGAN NORTHERN RAIL LINE OTHER RAIL LINES IAViMOM gHTCWIV 5 <$>I * n sK S o i* | i a ll* i ! M. fM N IT O U I M JM ITO U I. N T 1 R 8 l> $ £ 1 i& A M C fL O M A < > J IN N ARBOR CARFEDRY tS V ew aunee- n “ V g R v j. Vp p s c k ai l K A S K A > i ! i^ i° ^ ■<*> LARK C IT t •Cat <$> 4? <8 > C ftO C A R F E R R V S M rP <$> © FIGURE 5-3 MICHIGAN NORTHERN RAIL LINE Cadillac-Traverse C1ty-Petoskey © TABLE 5-3 C.O.-NORTHWEST RAIL LINE SEGMENT ANALYSIS: 1973 CARLOADS OPERATING REVENUES AND COSTS, NET OPERATING INCOME LINE SEGMENTS- NET OPERATING REVENUES % OPERATING COSTS t $747,869 100 $803,339 100 ($55,470) 13 97,223 13 160,668 20 (63,445) 148 3 14,957 2 80,334 10 (65,377) GRAMN-PETOSKEY 3,590 82 635,689 85 562,337 70 73,352 THOMPSONVILLE-BATES 1,744 41 284,190 38 241,002 30 43,188 GRAWN-BATES 1,744 41 284,190 38 170,688 21 113,522 PETOSKEY-CHARLEVOIX 1,531 36 269,233 36 120,501 15 148,732 % OPERATING REVENUES 4,253 100 MANISTEE-THOMPSONVILLE 662 THOMPSONVILLE-GRAWN STATIONS KANISTEE-PETOSKEY (nega tive) CARLOADS 242 C.O.-NORTHWEST RAIL LINE •OTHER RAIL LINES •A V M O M { 7 'f e A V V l C W A R L IV O I * ' I! aiai naa N . M A M ITO U I * V. THAVKHSi BA V oto umioN MAM TOU I • Y L L A IH Q 8 M C CIO N A , 1;£/£«« H’/of ve------- ✓ / j .ii v / y,u I awm iY <>»| ■£»«■ fI j -<8 > <8 > ” “ <8> <8 > lit**' ARBOR CARFERR V t7 k e w a u n e c ~ “ <8 > 8 < > \ V lU C H W G T O CAOCARFERRV J jL TOMANITO*VOC c. 0 BWl 8 < > vo Vt 4. J- 5. 2. Time-in-Transit 1976 (D a ys) Commodity 1 .______ 2 .___ 3.________ 4. 5 RAIL USERS' SURVEY, CONTD 3 . Comment: Origin /Rail / Truck / / Damages-in-Transit ($/$ 1000) Rail / ± Truck Inventory Time (Days) 1975 Commodity Destination Time-inTransit (Days) /Rail / Truck/ Damages-lnZRail Shipments Transit /Rail / Truck to Truck Equipment Delay(Days) /Rail/Truck/ Promotional Visits /Sail /Truck/ / / / / / / / / / / / 1. / 2. / / / / / / / / / / / / / / / / / / / 1 I / / / / / / / / / /_ / / / / / 7 / / 7 / / / / / / 3. 4. 5. _ 1976 Commodity Destination Equipment Delay(Days) /Rail/Truck/ /._ / Promotional Visits /Rail /Truck/ Time-inTransit (Days) /Rail / Truck/ Damages-inTransit /Rail / Truck 1. / __/ / / / / / / / / / / 2. ./ / / / / / / J I / / / 3. J. / / / / __ / / J /, / / / 4. I / / / / / / / / / / / 5. I . / ../ _/ / . / .. . / Z.. Z... / Comments: / ZRail Shipments to Truck RAIL USERS' SURVEY, CONTD. B. Outbound 297 RAIL USERS' SURVEY, CONTD. 5 III. Firm Characteristics 1. Number of Employees 2. Truck Ownership 3. Modal Split Number Z Rail Z Truck 4. Markets Rail Service: Truck Service: IV. Firm's Operating Procedures 1. What aspects (elements) of transportation service do you consider to be most Important to your business operations; and which, ultimately play a decisive role In your choice of transportation inodes? a. b. c. d. e. f. g. rates transit time variance In transit time frequency of service car and equipment availability damages other (specify) 298 RAIL USERS* SURVEY, CONTD. 6 2. How did rail service provided by Ann Arbor (Penn Central) fair with reapect to these aspects of rail service7 3.Has rail service improved with ConRail (Michigan Northern)? How? 4. From your point of view, how can rail service be improved? i 299 RAIL USERS' SURVEY, CONTD. 7 5. If rail service were Improved (In which way?), how would It affect your use of rail service? Commodity Tons 1• * * m 2, * * * 3‘___________________ I t Carloads Markets _________ I_____________________ 4* » j , t M i t Commenti 6. Did you specify routings with Ann Arbor (Fenn Central)? 7. Do you specify routings with ConRail (Michigan Northern? 8. Have you ever engaged In pooling of shipments (l.c.l. or otherwise) with other firms? Yes______ No______ Which firms? When? How did It workout? 9. Would you consider pooling In the future If It meant a chance for reduced rates and/or Improved service? 300 RAIL USERS' SURVEY, CONTD. 8 10* Do you see opportunities for Improving rail service through cooperative efforts with other shippers? Explain? 11. Would you be Interested In a joint investment with ConRail (Michigan Northern) and/or other shippers to construct loading and unloading facilities, sidings, TOFC-COFC ramps, etc.? 12. Do you feel that rehabilitation of your line is necessary for improving rail service? Under what conditions would you be willing to contribute financially to the rehabilitation of your rail line? 301 RAIL USERS' SURVEY, CONTD. 9 13. Under vhat conditions would you be willing to contribute flnanlcally to a operating subsidy to maintain rail service on your rail line? 14. Do yoc have any additional comments or observations to make with respect to rail service on your line, In Michigan, In the US? APPENDIX B TABLE B-l ANN ARBOR RAIL USERS SURVEY Station CBMQj l t T Inbound (IB) Origin Outbound (01) CarDeatlnatlon loada Frankfort Fruit Vafflaa Trocen Food Frozen Food Frozen Food Frozen Food (IB) (IB) (0B) (0B) (0B) (OB) Honor Beulah Tboapnon- ▼ 111a 1975* Tona Traffic Data 1976-Earinate l3 1976-Kstlnate 2' '.Groan Groaa CarCroaa CarRevenue loada T o n a Revenue loada Tone .'Ravenua 10 11 10 2 670 250 222 205 A0 2 eo A,250 3,000 3,575 A,500 290 780 Dlnenalon Lunbar (IB) H. Coast (IB) IL Steel 3 3 120 180 750 A50 Frozen Food (OB) South 3 2A0 Chrlstnas Treen (0B) W. Coast 3 Filter Fonder Frozen Fruit (IB) NT (0B) TN Cana l'reah Fruit Frozen Fruit Frozen Fruit (IB) PA (IB) V. Coast (OB) E. Coast (0B) W. Coast 2 6 10 • 5 9 Dlnenalon Lumber (IB) W. Coast Roofing Shingles (IB) IL 9 CA PA E. Coast CA MI Canada Dlnenalon Lunber (IB) V. Coast Roofing Sblnglee (IB) South (IB) Ohio Brick Chrlatnan Treea (0B) V. Coast 25 1 80 A,250 3,000 3,575 A,500 290 780 3 3 120 180 750 AS0 1,125 3 2A0 1,125 AS 750 5 75 1,250 2 30 100 300 AA0 2,310 2 6 100 300 AA0 2,310 5 250 30 300 5A0 60 1,500 900 6 18 900 6 1 360 60 2,310 350 10 300 160 2,000 760 3.A65 350 25 10 11 10 2 2 670 250 222 205 A0 270 A0 1,800 190 2 2 120 80 100 720 200 A00 3 2 2 120 80 100 720 200 A00 6 90 1,500 6 90 1,500 1 -3 A Kay Rail Sarrtca Parents CO O ro 500 Avail. Rail Cara, Fane. Trane. Tina 1,925 Avail. Rail Cara TABLE B-1, Continued 4m Arbor Rail ibors Survey continued.. Rage 2 CcudltT Inbound (IB) Origin Outbound (OB) CarDestination loads Traffic Data 1976-Estimate 2 1976-Estimate 1^ 1975 Cross CarGross Gross CarRevenue loada Tons Revenue loads Tons Revenue Tons Sand (08) OH 3,000 300,000 Copamlah Shrubs (IB) H. Coaat 3 36 300 2 24 200 Cedlllec Can Goods (IB) U.S. 60 900 6,000 60 900 6,000 Telephone Folee (IB) South 12 680 1,620 15 840 2,025 13 4 600 150 3,600 450 20 6 800 225 4,800 675 10 10 400 370 2,400 1,110 Dimension lumber (IB) NC Roofing Shingles (IB) OH 2 4 80 160 400 640 3 4 120 160 600 640 12 3 480 120 2,400 480 Furniture (IB) MA 10 250 1,600 9 225 1,440 Crain Fertiliser (IB) OH (IB) OH 2 160 960 3 240 1,440 5 8 400 640 2,400 2,400 Chrlataaa Trees (0B) South ' 20 240 2.800 15 180 2,100 20 240 2,800 Avail. Ball Cars, Fast. Trane. Has Bear 4 Wine (IB) CA 12 600 2,100 15 750 2,625 12 600 2,100 Increased Service Frequency Plywood Bulsa Hood Resin Aluminum (IB) (IB) (IB) (IB) 72 30 15 2,000 1,800 500 12,000 4,350 2,000 10 500 1,200 Beer (IB) GA *12 1,100 4,774 30 1,500 6,510 Urethane Fade Containers Bucket Seats Int. Auto Trim Bucket Seats (IB) FA (IB) IL (0B) OH (0B) MI (0B) Canada 296 400 220 96 143 2,960 4,000 4,500 672 2,703 44,400 50,000 180,400 18,720 11,726 296 400 220 96 143 2,960 4,000 4,500 672 2,703 44,400 50,000 180,400 18,720 11,720 Stntton H. Coast FL TX IA 400,000 1,064,000 2,000 200,000 532.000 303 Dimension Lumber (IB) W. Coast Roofing Shingles (IB) South 798,000 4,000 I n Kail Service Blsaante TABLE B -1 , Continued A m Arbor Rail Users Survey continued.. Page 3 Station Comaodltv Inbound (IB) Origin Outbound (OB) CarDestination loada Cadillac Furniture (OB) E. Coast Crude Rubber Zinc Oxide Carbon Black Crude Rubber Oil 1975 Tona Cross Revenue Traffic Data 1976-Estimate l3 CarGross loads Tons Revenue 120 2,600 12 72 1,560 (IB) LA (IB) MT (IB) LA (IB) KY (IB) OB 9 2 610 60 1,800 250 12 3 813 90 2,400 375 Brick Brick (IB) OH (IB) TN 20 10 1,000 500 3,500 1,200 25 10 1,250 500 Chrlstnas Trees (OB) South 18 216 2,700 5 13 550 2,925 Dimension Lumber (IB) W. Coast 72 14 10 4,880 950 300 4,375 1,200 10 10 500 500 1,750 Lower Rail Rates 1,200 Fast. Trans. Tins 60 750 2S 300 3,750 Fast. Trans. Time, Red. Dam. in Trans. B 320 1,800 10 400 2,250 Cons. Trans. Time, Red. tall Rates 20 800 3,200 Unloading Facilities 30 600 7,500 Increased Service frequency Coke Clay (IB) Midwest (IB) AL 60 24 3,000 1,200 9,300 3,600 60 24 3,000 1,200 9,300 3,600 Coke Refactory Hat. Metal (IB) IN (IB) AL (IB) IL 40 5 15 1,600 300 600 6,400 610 1,875 25 4 12 1,000 240 480 4,000 488 1.500 Paper Products frozen Food (IB) KI (IB) H. Coast 8 120 384 11 165 528 Lucas Coal (IB) KY 4 200 800 2 100 400 MeBain Fertiliser (IB) MI (IB) IL Feed Dimension Lusher (IB) V. Coast 17 "l& 21 850 1,150 1,050 1.700 3,200 5,250 17 16 21 850 1,150 1,050 1,700 3,200 5,250 10 400 1,600 12 440 1,920 Feed Fertiliser Fertiliser (IB) IL (IB) HO (IB) MI j Key Kail Servlet 2 4 3 12 6 100 285 150 8,928Unloading Facilities 2,590 Lower Rail Rates 1,650 Storage Facllltlee 200 Cone. Trans. Tine 800 Increased Service Frequency 750 Red. Rail Rates 600 2,100 Unloading Facilities 200 600 Unloading Facilities 304 20 1976-Eatinat* 24 CarGross j loads TonB Revenue TABLE B-1* Continued Am Arbor ta ll Snrwy continued Pag* 4 Traffic Data 1976-Estlnata l3 1975 Gross Croaa CarRevenue To m Revenue loada Tona Inbound (IB) Origin V V lr lW U W \V H / Destination loada Rev Ball Service Elaaants OiaaMlon Lvsaber (IB) W. CoMt Roofing ShlnglM (IB) IL 3 2 150 100 810 400 4 2 200 100 1.080 400 100 150 540 Cana. Trona. Tina 600 Bed. Ball Bate* Anhydrous Aanonla (IB) OH Fertiliser (IB) Ml Potaah (IB) Canada 5 4 1 125 200 75 1,530 800 175 6 4 2 150 200 150 1,836 800 350 50 612 Cona. Trans. Tina 3 120 450 21 9 1 1,400 360 22 5,250 1,665 80 21 9 1 1,400 360 22 5,250 1,665 80 120 2 24 180 2 24 180 24 9,600 175 ■ 140 12 2 2 900 100 100 9,600 350 280 Plastic Raaln # Clara Dlnenalon Limber (IB) W. Coast (IB) OH Brick (IB) IB Insulation Fan Equlpnenc (IB) M0 Wheat Potash Llq. Nitrogen (OB) OH (IB) CaMda. (IB) AL 12 1 1 900 50 so Potash Phosphate Urea (IB) CaMda (IB) FL (IB) Ohio 15 32 8 1,500 2,360 640 3,000 5,760 2,400 17 32 9 1,700 2,360 720 3,400 5,760 2,700 SlneMlon Luaber (IB) CaMda 5 150 1.200 5 150 1,200 Soybean Heal PotMh Fertiliser Fertiliser (IB) Illinois (IB) Canada (IB) Alabana (IB) Illinois -15. 15 30 40 1,200 1,200 1,500 2,100 3,600 3,000 3,810 6,825 17 16 33 42 1,360 1,280 1.650 2,250 4,080 3,200 4,191 7,312 Soybean Meal Calclua Carbonate Dog Food One (IB) Illinois (IB) Illinois (IB) Illinois (IB) Canada 150 30 20 8 10,000 1,200 800 640 36,000 5,250 4,000 1,600 160 32 22 9 10,667 1,280 880 720 38,400 5,600 4,400 1,800 GO O tn 18 2 4 2 3 40 8 3 1 180 Unloading Facilities 1,350 14,400 Avail. Kali Cara 100 350 Cona. Trans. Tina 400 1,120 Cons. TraM. Tina 300 220 400 3 555 Bed. Ban. la Trans. 600 Co m . TraM. Tine 540 Fast. TraM. Tlaa 1,500Paat. TraM. Tina 240 320 100 107 720 600 254 348 Co m . Transit Co m .Transit Cona. Transit Cona. TraMlt. 6 Fast. Traaalt 6Fast. Transit 6 Fast. Traaalt 6Fast. TraMlt ZZ iZ (IB) GA Famuli 2,667 320 120 80 9,600 1,400 600 200 Cona. TraMlt Co m .TraMlt Co m . TraMlt Co m . TraMlt 6Fast. 6 Fast. 6 Fast. 6 Fast. UiZ Marlon 1976-Estlnate 2 CarCroaa loada Tona towsut TraMlt TraMlt TraMlt TraMlt TABLE B -l, Continued Ann Arbor Kali Survey continued., Faga 5 Inbound (IB) Origin Outbound (OB) CarStatlon CnmdltV Destination loada Paper Scrap Paper (IB) Ohio (OB) Ohio Fertilizer Fertilizer Corn Oats Wheat (IB) (IB) (OB) (OB) (OB) Dimension Lwber , 1975 Traffic Data , 1976-r.stlaate 1 Cross CarGross Tona ._ Revenue loads Tons Revenue 10 12 600 260 920 1,080 52 52 3,120 2,040 4,784 4,683 Iowa 1 Canada 11 East Coast16 South 6 Michigan 60 740 1,440 320 139 4,070 4,560 740 1 11 18 4 60 740 1,620 320 139 4,070 5,130 740 (IB) Vest Cosst 2 60 420 2 60 420 1976-Estlnate 2 CarCross loads Tons Revenue" 15 5 6 1 20 900 336 540 80 2,000 2,085 1,850 1,710 185 10,000 nts Consistent Transit Tlaa Consistent Transit Tim Available Rail Cars Available Rail Cara Available Rail Cara Co Ithaca Dimension Lusber Plywood (IB) Canada 7 (IB) Mlsalsalppl6 280 240 2,100 696 8 7 320 280 2,400 812 7 3 280 120 2,100 348 Roofing Shingles (IB) Ohio 6 160 640 5 200 800 1 40 160 Roofing Shingles (IB) Illinois 3 120 480 3 120 480 1 40 160 Roofing Shingles (IB) Illinois 25 1,000 4,000 Plastic Risen (IB) Ohio 25 1.250 8,750 60 3.000 21,000 Fertilizer Crain Beans (IB) Illinois 5 (OB) East Coast40 (OB) Texas 35 200 4,000 3,100 600 8,000 12,250 5 40 35 600 4,000 8,000 3,100 12,250 5 40 35 200 4,000 3,100 600 8,000 12,250 Consistent Transit Tina Available Rail Cara Available Rail Cara Feed Concentrate Oyster Sheila (IB) Indiana (IB) Alabana 75 5,625 12-* , 480 12,750 1,200 75 12 5,225 12,750 480 1,200 25 6 4,250 1,875 240 * 600 Consistent Transit Tine Consistent Transit Tina Fiber Class (IB) Ohio 15 375 1,200 30 750 2,400 Steel Beans Sheet Metal Scrap Hetal Non-Ferrous Metal (IB) (IB) (OB) (0B) 10 10 30 10 SO0 500 1,500 500 1.8S0 2,000 5,400 1,500 10 10 30 10 500 500 1,500 500 1,850 2,000 5,400 1,500 5 5 10 8 250 250 500 400 925 1,000 1,800 1,200 8 160 720 5 100 450 5 100 450 Far* Equipment Pa. Pa. Pa. Texas '(IB) Missouri Reduced Rail Rates Consistent Transit Tine Faster Transit Tine Consistent Transit Tina Faster Transit Tine Consistent Transit Tine Faster Transit Tine -Reduced Damages In Transit Faster Transit Tine Consistent Transit Tina Faster Transit Tina Faster Transit Tlaa Paster Traaalt Tine O o> TABLE B -l, Continued Ann Alter tell Imm t continued... f i| t 6 Inbound (IB) Origin Outbound (OB) CarDutlnatlen loada Station Coauodltv^ Itteca cost* U M t i n Lteber (IB) Georgia . 1975 Tona Traffic Data . 1976-Estinate Car­ Croat Groat Revenue lemma load* Tona . 1976-Estinate 2' Grata g Carloada Tona Revenue by Bail Service Eltntt ® 3 120 540 Cooaiatent Tranalt Tlaa, Fatter Trenalt Tine Conalatent Traaalt Tlaa, tetter Tranalt Tine Consistent Tranalt Tine, Fatter Tranalt Tine 16 560 2,880 5 150 310 4 3 25 25 IS 320 240 2,500 2,500 1,500 800 375 8,125 5,000 4,500 Consistent Tranalt Tine Consistent Tranalt Tine Available Ball Cara Available Ball Cera Available Ball Cara looting SMngt— (IB) Ohio Telephone Poles (IB) Georgia Bortb Star Fertiliser Fertiliser Crain Beane Beane 2 (IB) Canada 2 (IB) Florida (0B) East Coaat 20 <0B) Southwest 20 (0B) Tennesse 10 160 160 2,000 2,000 1,000 400 250 6,500 4,000 3,000 2 2 20 20 10 160 160 2,000 2,000 1,000 400 250 6,500 4.000 3,000 Byron Dlnenalon Limber (IB) Meat Coaat 4 1,600 1,000 5 2,000 1,000 Cohoctah Fertiliser Fertiliser Fotaah Crain 250 250 100 3,000 600 .750 400 5,700 5 5 1 25 250 250 100 2,500 600 750 400 4,750 40 4,000 7,600 Available tell Cara, Futer Tranalt Tint Dlnenalon Intel (IB) Vest Coast 30 1,200 7,200 30 1,200 7,200 10 400 2,400 (IB) Hut Coaat 15 600 2,850 15 600 2,850 5 200 950 680 7,473 1,260 1,700 18,683 25 90 1,000 7,473 2,500 18,683 20 800 2,000 Consistent Tranalt Tine, Reduced Ball Kates Consistent Tranalt Tine, Reduced Ball btea Consistent Tranalt Tine 5,760 36 1.260 5,760 15 700 1,100 27,500 2,505 99,000 15 700 1,100 27,500 2,505 99,000 4,500 Available Bell Cart (IB) California 40 1,200 3,000 45 1,350 3,375 Dlneneloa lteer (IB) Hut Coatt200 8,000 44,000 200 8,000 .44,000 llldtania Lake Flaatlc bain Auto Parte tea Biter Vise (IB) Texas (0B) U.S. 3 Dlnenalon Lrater (IB) Louis. Asphalt (IB) Ohio OU (IB) Hew York 5 5 1 *4 1 Flyvood J I tenaU (IB) Illinois (IB) Ohio (IB) Canada (0B) 17 90 36 - a t • 50 1,500 TABLE B -l, Continued Ann Arbor Ball Survey continued.. Inbound (IB) Origin Outbound (OB) CarStation ten Arbor coBdnal 36,000 300 Tons COMOdltT' Dlnenalon Liaber (IB) South Dlnenalon Lobar (IB) Canada 300 (IB) South Sallaa Plastic Anto Parts (IB) Ohio (OB) U.S. Mllaa Dlaanalon Lunbar (IB)tf. Coaat Babin 12.000 25 1,250 150 3,450 11,250 51,750 12,000 36,000 30 1,500 3,000 26,250 200 345,000 3,600 15.000 54.000 35,000 360,000 2,500 1976-Estlaate 2* CarGross 5 200 1.400 Faatar Transit Tina 10 500 1,000 Consistent Traaalt Tlaa, Danagea in Transit 50 2,000 11,750 Consistent Tranalt Tlaa, Bail Kates 100 10,000 18,000 Available Ball Cara 62 4,960 7,440 Badneed Ball Bates 60 3,000 14,100 32 1,280 7,520 Plaatlc Baaln Plaatlc Baaln (IB) Texas 1 (IB) Louisiana 2 60 120 200 600 1 2 60 120 200 600 Grain (OB) E. Coaat 400 40,000 72,000 400 40,000 72,000 Coal Goal Coal Coke Cypsua Ccnant (IB) Kentucky 800 (IB) Oblo 200 (IB) Pa. 273 (IB) Virginia (OB) Michigan 385 (OB) Hldweat3,445 56.000 14.000 19,100 112,000 28,000 40,950 800 200 273 56.000 14.000 19,100 112,000 28,000 40,950 25,550 275,700 40,425 385 25,550 482,300 3,445 275,700 40,425 482,300 food Frodncte Paper Material (IB) Calif. 109 (IB) Vleeonsln416 3.240 6.240 19,440 83,200 108 416 3.240 6.240 19,440 83,200 Peed PaUata (0B) Hidwest 480 4,800 48,000 450 4,500 45,000 50 500 5,000 Available Ball Cass Paper Material Paper Hatarlal (IB) Ulaconln 197 ,• 11,820 (IB) Canada 200 12,000 39,400 36,000 200 200 12,000 12,000 40.000 36.000 25 1,500 4,500 Consistent Traaalt Tlaa Coal (IB) H. Va. 31,200 312 15,600 31,200 TOTAL Z CHABCE 1975-1976 312 15,600 18508 1.113.628 3.066.912 19,689*1,122,62Ch . 352,6283,189 272,464 764,075 46.4 +10.7 19.3* k u c a w i 1976-1 to 1976-2 Vtt IMPBOVBD Bin 87EVICE +16.22 +24,22 =22.7* 308 Brick Toledo, Oblo Groai Traffic Data . 1976-Estlaate 1 CarGross Tona 1973 TABLE B -l, Continued Ana Arbor tall ( N o Survey entlmd.. Page t fo o t n o te s ^ p H o d l t l u a n grouped by adding the m b e r of by shipper on a par aCation baala. The n a t o of ehlppera at any aCation (and for all atatlona) can ba datarnlaad rnaiillty groupInga under each aCation heading. *1973 traffic data (cara, tona) vaa collected by field and telephone aurveya by Bob Bryant, Michigan Department of Connerce, and John Koehler Jla Satchel UPTSAH, Michigan Department of State Hlghvaya and Transportation. The preaent surrey verified their flgoraa and aada “’" ■ f and additions, aa nacesaary, *1976 - Estimate 1 traffic figures (care, tons) are estimates made by the shippers at the time of this survey. The estimates are baaed on present rail service quality characteristic*, I.e., transit time, variance in transit time, frequency of service, car supply, damages, and rates. *1976 - Estimate 2 traffic figures (cars, tons) are shipper estimates based on Improved rail service. Specific changes In rail service quality Important to shippers are listed In the colum Key Kail Service Elements. *It should ba noted that many idthe rail service variables listed involve the performance of railroads beyond the Michigan carrier. For example. Increasing transit time and reducing the variance of transit time associated with a given shipment (Inbound or outbound)nay Involve three or fear railroads. *1975, 1976 - Estimate 1, 1976.- Estimate 2 revenue figures are estimates. Tor the most part, shippers are not sure of the freight chargee they paid on their rail shipments. And, even if they do know the total freight charge paid, they do not know what percent vent t> the Michigan carrier. Therefore the following procedure was used to estimate revenues earned by Michigan carriers. The fright charges for comparable shipments (fluidity, tons, origin, destination) were determined from the 1001 1973 Ann Arbor and Penn Central (Michigan Northern portion) waybill tapes. These figures were then used to estimate the 1975 and 1976 revenue figures pcrsented hers. TABLE B-2 MICHIGAN NORTHERN RAIL USERS SURVEY Inbound (IB ) Origin . Outbound (OB) Station_____ Co—P d ity ________ Destination Pellston Petes key , 1975 Car* loads Tons Gross Revenue T ra ffic Data . 1976-Estimate V CarGross loads Tons Revenue 2 50 384 4 150 (OB) ALA 10 140 700 15 200 Brick (IB) Ohio 12 720 2,268 17 1,020 Dimension lumber (IB) West Coast 3 120 526 Asphalt Roofing Products (IB) IL 2 100 340 Feed F e rtiliz e r is Ohio Charcoal (IB) TN 4 200 -640 4 200 640 Wine (IB) CA 10 500 1,750 10 500 1.750 Asbestos (IB) IN Dimension Limber (IB) West Coast 40 1,200 7.680 45 1,350 Dimension Lueber Dimension Lumber i:si South West Coast 150 750 555 3,675 L.P. Gas L.P. Gas (IB) HI (IB) HISS 3 15 »v 18 12 1.296 864 2,790 1,260 Flour Can Goods (IB) IA (IB) IA 6 6 240 240 1,344 960 Timber (OB) ICY 3 135 370 Paper Products (IB) WI 40 840 Dimension Limber (IB) Kest Coast Christmas Trees Key Rail Service Element 3 90 576 Increased Service Frequency 1,050 5 70 350 A vail. Rail Cars 3,213 8 480 1,512 850 3 150 510 12 6 862 420 1,680 1,371 Fast. Trans. Tine Cons. Trans. Time, Car spot 6 300 1,050 Cons. A Fast. Trans. Time 3 60 300 8,640 7 210 1,344 Cons. Trans. Time, Incr. Freq. 5 250 20 1,000 925 4,900 6 3 300 150 1,110 735 Cons. Trans. Time, Incr. Freq. Cons. Trans. Time, Incr. Freq. 20 1,440 14 1,008 3,100 1,470 1 2 72 144 155 210 Increased Service Frequency 5 250 768 Ohio 2,880 , 1976-estimate 2* CarGross loads Tons Revenue Cons. Trans. Time, Reduce Damage Unloading F acilities Unloading F a cilities 6 270 742 4 180 494 Fast. Trans. Time, Incrc. Freq. 45 900 3,240 10 200 720 Unloading F ac ilities TABLE B-2, Continued Station * Boyne City Boyne Falls Coamodltv1 Inbound (IB) Origin Outbound (OB) Destination Scrap Iron (OB) PA Dimension Limber (IB) West Coast Poles Scrap Cable (IB) South (OB) MI Dimension Limber (IB ) West Coast 3 85 357 3 85 357 Crass Arms Insulators (IB) South (IB) East 2 2 80 80 240 280 2 2 80 80 240 280 Food (USOA) (IB ) U.S. 2B 560 3,50ft 28 560 3,500 Timber (OB) South 19 950 2,470 22 1,110 2,860 Cedar Paneling (IB) West Coast 12 446 1,606 20 743 2,678 1 16 95 1 16 95 2 197S to to to to to to to to to 7 - to to * to to to to 1 to - 1 47 3 8 4 0 6 2 25 0 0 0 0 4 0 0 0 0 503 100 to • « to to > - to «. to - . - 19 46 175 41 30 121 45 26 0 4 9 35 8 6 24 9 5 0 Penn Central 100? Waybill Tape. Percent 6 235 14 40 21 1 28 9 123 0 1 1 1 20 1 1 0 1 • . * * * • * - Total 100 TABLE C-7 C.O.-NORTHWEST RAIL LINE 1973 INBOUND-OUTBOUND COMBINED CARLOADS, BY COMMODITY BY REGION Cocmodlty Food or Kindred Products Containers, Shipping Coal Clay, Concrete, or Glass Machinery Nonmetal11c Minerals Lumber or Wood Products Petroleum or Coal Products Rubber or Misc. P lastics Transportation Equipment Pulp, Paper, or A llie d Products T e x tile M ill Products Waste or Scrap M aterials Chemicals or A llie d Products Fabricated Metal Products E le c tric a l Machinery Primary Metal Products Furniture or Fixtures Farm Products Fresh F1sh and Other M1sc. Mixed Products Forest Products TOTAL PERCENT Source: C. fi 0. 100* Waybill Tape. teqion 5 6 100 34 13 - - _ _ 24 - - - - - 2 23 69 6 1 36 - - _ 35 4 3 1 53 11 32 - 10 1 2 3 4 87 4 30 127 60 - - - - - - • 19 15 14 4 2 5 1 2 - - 3 1 5 1 - 9 - 925 1 47 134 431 12 9 20 - 3 - - 2 75 2 21 1 4 38 63 55 143 3 13 268 2 - 4 14 1 _ 37 - 1 1 1 10 6 10 25 - - ~ 3 7 - - _ • 29 2 8 7 Total 9 102 2 - 4 — - - 70 - 7 15 1078 10 55 938 517 80 12 76 14 70 84 267 4 26 372 14 4 6 52 46 5 1 375 - 3 258 1 1 - - 1 1 4 - - _ _ 2 _ _ _ _ - - 2 2 1 - 11 _ _ • - - - - - 8 2 7 • _ 1 3 • 6 _ . 6 5 - . _ • 4 _ — • * _ _ - - 2 10 - 35 555 - _ - - 220 144 2258 261 249 187 141 503 290 5 3 53 6 6 5 3 12 7 4253 Percent 13 0 1 25 0 1 22 12 2 0 2 0 2 2 6 0 1 9 1 0 0 1 100 100 TABLE C-8 C.O.-NORTHWEST RAIL LINE 1973 INBOUND CARLOADS, BY COMMODITY BY REGION Commodity Food or Kindred Products Containers, Shipping Coal Clay, Concrete, or Glass Machinery Nonmetal11c Minerals Lumber or Wood Products Petroleum or Coal Products Rubber or M1sc. P lastics Transportation Equipment Pulp, Paper, or A llie d Products T e x tile M ill Products Waste or Scrap M aterials Chemicals or A llie d Products Fabricated Metal Products E le c tric a l Machinery Primary Metal Products Furniture or Fixtures Farm Products Fresh F1sh and Other TOTAL 2 6 4 - - 15 14 1 2 2 1 2 - - - 1 - 2 - 3 1 - 1 69 - 4 1 5 _ - 2 19 1 4 — _ - 3 4 35 8 - - - 55 1 27 32 431 11 7 19 3 51 44 140 1 13 7 - 6 49 4 4 - - 8 7 2 m - - 23 — — — 2 13 69 2 - * 35 4 3 51 11 46 » w - - * - w • • 10 _ m 2 10 6 10 25 • - m • 2 1 11 • 36 1 1 1 • 56 Total 9 37 • 70 * • • - - - 1 2 - - 4 2 1 m - - 7 5 1 373 « — • — - Region 5 2 1 - m 3 258 1 m m • - * m 3 6 m 92 68 877 177 168 78 124 438 290 4 3 38 8 7 3 5 19 13 PERCENT Source: 1 C. & 0. 1002 Waybill Tape. Percent 164 4 15 207 7 35 812 517 18 7 75 14 58 72 254 2 24 13 10 4 7 0 1 9 0 2 35 22 1 0 3 1 3 3 11 0 1 1 0 2312 100 0 100 TABLE C-9 C.O.-NORTHWEST RAIL LINE 1973 OUTBOUND CARLOADS, BY COMMODITY BY REGION Comnodlty Food o r Kindred Products Furniture or Fixtures Fabricated Metal Products Lumber o r Wood Products Farm Products Rubber or 111sc. P lastics Chemicals or A llie d Products Machinery Transportation Equipment Clay, Concrete, or Glass E le c tric a l Machinery Waste or Scrap M aterials Forest Products Nonmetallie Minerals Pulp, Paper, or A llie d Products Primary Metal Products Misc. 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