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E-Commerce and its Potential for
Shortline Profits
Canadian Pacific Shortline Conference
Calgary, Alberta
October 17,2000
Roy Blanchard, The Blanchard Company
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The Facts of Life...
• Railroads continue to lose market share to trucks in all but
the lowest value, highest volume bulk commodities.
• Revenue gains and revenue carloads remain at or below
GNP growth rates as shareholder returns grow only as a
result of reduced costs.
• The focus continues to be on running trains rather than
providing a competitive value-adding transportation
product.
• The Internet has the power to make a difference.
2
Networked markets are beginning to self-organize
faster than the companies that have traditionally served
them. Thanks to the web, markets are becoming
better-informed, smarter, and more demanding
of qualities missing from most business organizations.
www.cluetrain.com
3
Some Internet Implications
• The Internet is rapidly obliterating the differences between
manufacturers and suppliers, distributors and producers, delivery
channels and content.
• Web-based trading networks eliminate bureaucracy and red tape,
streamline procurement and supply chain management, and cut the
cost of paper and manual processing.
• Application service providers (ASPs) running via the internet integrate
Enterprise Resource Planning (Oracle), Procurement (Ariba), Supply
Chain Management (i2), Customer Relationship Management
(Siebel)*.
• E-Commerce transactions will account for 90% of all B2B purchases
by 2003.
• Companies seek continuity among applications, e.g. MS-everything.
* Full discosure: positions in all 4
Transportation Buyers Want Painless
Transportation Solutions.
• Shippers don’t really care how the goods move as long as
the transportation is easy to buy, easy to manage, and
reasonably priced.
• One-click shopping -- pricing the move, ordering the car
for loading, launching the trip, watching its progress,
arranging for delivery, and paying for it in one seamless
motion.
• To make all this work there will have to be major structural
changes in railroad marketing practices, management style,
train operations, and car management.
5
The Shortline E-commerce Challenge
• Shortlines are limited in their ability to conduct one-click
shopping on own websites
• Marketplaces and auctions are of limited value as
shortlines can’t control whole route
• Most shortline business is carload, not intermodal
• But...
6
Merchandise carload railroading does have
a future, in spite of what some people say
• Merchandise carload traffic (not coal, auto, or IM)
accounts for more than half of all class 1 revenues
• Shortlines, predominantly carload carriers, grow
traffic at twice the annual rate of class 1s
• Shortlines increase carloads about 30% following
branchline takeovers from class 1 owners
• Responsive customer service is the main driver.
7
Shortlines have a major role to play
• In marketing and sales: Superior operating
performance combined with web-based customer
service
• In car management: A new paradigm designed to
take $billions out of class 1 and shipper car costs
8
What does a railroad do?
• Runs Trains
• Operates a Right of Way
• Provides Railcars
• Maintains its Locomotives, Cars and Right-of-Way
• Schedules Service for Shippers
• Prices that Service for Shippers
• Invests in new Locomotives, Cars and Right-of-Way
• Pulls all those things together in one package
9
What is the Core Business Model?
What is the “Franchise”?
• Trains • Marketing/Sales
• Power • Freight Cars
• Right of Way • Back Office
• Yards • MoE
• MoW
10
The Model is running out of gas
• Volume Growth anemic @ 1-2% per year
• Revenue Growth only about 2%
• Fortunately, Expenses grew at only 1.2%
• But, now Fuel and Labor Costs are rising sharply
• CapEx Growing at 7%..faster than GNP
• Debt Growing…Debt:Equity up to 55% from 38%
• Asset Utilization Unacceptable
• Truck Competition Intense
• Marketing Hindered by 20:80 Perspective
11
Non-core functions already moving to the
Internet
• Marketing/Sales: Class 1 “Order-to-cash”
websites; FreightWise.com, shortline
“brochureware,” where it can go
• Freight Cars: TranShopNet.com, RailMatch.com
• Back Office: Arzoon.com
12
Tariff or
Price? Contract One-Stop Shipping
Laptop or Transit Time? RR Website
Spot
Local Order, Ship
Estimates
Net-redi Trace
Order to Cash Cycle
Information Flows Place
Pay 13
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Benefits of Full-Service Links
THIRD PARTY
SHIPPERS CARRIERS PROVIDERS
Access to quality carrier Improved Yield Access to quality carrier
capacity, multi-modal Management through capacity, multi-modal solutions,
solutions, neutral dynamic pricing / neutral solutions
solutions auctioning capabilities
Reduced search and Broader market coverage Reduced search and comparison
comparison costs / time and reach at overall lower costs / time
cost
Simple, easy to use Decreased financial risk Broader market coverage and
interface across all reach at overall lower cost
processes /
transportation modes
Multi-modal ancillary Accessorial management Decreased financial risk
services
Seamless Light to Tight Seamless Light to Tight
systems integration systems integration
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Where Shortlines can Take This
• Strive for Wider links to class 1 websites
• Substitute shortline carloads for trucks in
the FreightWise model
• Create invisible customer links to class 1
“order-to cash” customer service sites
• Lap-top pricing and full-service links
20
Non-core functions already moving to the
Internet
• Marketing/Sales: Class 1 “Order-to-cash”
websites; FreightWise.com, shortline
“brochureware,” where it can go
• Freight Cars: TranShopNet.com (GE Capital),
RailMatch.com (neutral)*
• Back Office: Arzoon.com
*Full disclosure: equity position 21
Railroad Investment
Other Equipment
Freight Cars 5%
9%
Locomotives
11%
Road
75%
22
52%
50%
Railroad Share of Total Railcar Fleet
48%
46%
44%
42%
40%
Railroads Getting Out of the Railcar Business…Sooner or
38% Later
36%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
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The Solution:
Take the freight cars out of
the railroad business model
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Changing the Business Model for Cars
• Create cooperative pools and for profit car management
companies – focus & expertise
• Separate car ownership from management and control –
sell load capacity not individual carloads
• Price transportation and car supply separately
• Use ecommerce to:
– Allocate surpluses/shortages in a neutral market
– Improve utilization with new car mgmt. tools
– Finance new capacity for short- and longterm
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The Current Order
RR RR RR
Shippers Purchase Bundled Transportation Services from Railroads including
Haulage of Lading, Loaded and Empty Car and (Often) Car Supply
Shipper
Shipper
Shipper
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The Current Order-2
• Shipper leases 2,000 cars, averages 10 turns per car per
year (700,000 car-days), 100% empty return, annual cost
@ $6000 per car per year = $12 mm. Lease cost $17.14
per car per day for 3 year term
– IF service degrades allowing only 7 turns per year, shipper must
lease an addtl. 857 cars to cover his 20,000 loads; ($5.1mm)
– IF trip time improves permitting 12 turns a year, shipper is stuck
with 333 cars for the term of the lease ($2mm)
• The current order is good for leasing companies and at best
just OK for RRs and shippers
29
The Current Order
CPR
1000 miles loaded
CPR
1000 miles mty
CN
1000 miles mty
CN
1000 miles loaded
Total Car Miles = 4000
Total Car Days = 40 @ 100 miles per day
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Cost Components of a Freight Rate
Shipper Pays Railroad Shipper Pays Manager
for Bundled Services
Car Rental
Car Rental
Shipper Pays Railroad
Trans. Lading Trans. Lading
Shipper Pays Manager Pays Railroad
Trans. Car MTY
Trans. Car MTY
Trans. Car Ld.
Trans. Car Ld.
Current Order New Paradigm
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New Paradigm
CPR
Shortline A
1000 miles loaded
100 miles mty
100 miles mty
CN
1000 miles loaded
Total Car Miles = 2200 Shortline B
Total Car Days = 22 @ 100 miles per day
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The New Paradigm
RR RR RR
Capacity
Mgr.
Shippers and Mgr. Use Car
Manager Uses Car Source to Add
Source to Openly Allocate
New Cars or Dispose Surplus Cars
Capacity During
Car Source
Shortages/Surpluses
Shipper Shipper
Shipper
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The New Paradigm-2
• To cover his 20,000 loads per year, shipper purchases
700,000 car-days at spot market price of $18 per car-day,
total cost $12.6 mm vs. $12 mm today (35 days a turn)
• IF service temporarily degrades to 50 days a turn, shipper
purchases an additional 300,000 car-days;
300,000*$18=$5.4mm extra cost vs. $5.1 mm over 3 years
• IF service improves to 12 turns a year, shipper can
immediately sell his excess capacity on Railmatch ($6mm)
• Car-day prices change according to market forces so a long
position could be sold at a gain. Short sales an option
• Improved utilization from the car pool will provide
substantial additional savings
34
Benefits to Railroads and Shippers
• Reduce Future CapEx • Expand Car Supply
Requirements • Meter Investment
• Source of Funds into/out of Private
• Free Up Line Capacity Fleet
• Improve Yields • Improve Rate
• Focus on Core Transparency
Competence • Reduce Overall Costs
35
How big could the numbers be for the RRs?
• Avoidable CapEx in Railcars : $30 B.
• Potential Asset Sales : $ 12.5 B.
• System Gains @ 10% utiliz. improvement
– 17.5 m. fewer cars days @ $16 : $280 m.
– Many fewer train starts per year
• Fewer locomotives and less MoE expense
• Reduced line and yard congestion
36
Where Shortlines can Take This
• Connecting class 1 prices assume empty backhauls
- load ‘em up and get the head-haul rates down.
• Supply the cars yourself and pay your own car
hire out of higher allowances
• Find back hauls on connecting or near-by RRs if
you have none.
• Become a market-maker in car days
37
How This Fits In the New Economy
Communications
– Cheap, Fast, Everywhere
Central Marketplaces
– Neutral, Liquid
New Tools
– Tracking and Tracing, Back Office
New Players
Internet Changes Everything….
– Faster, Smaller, Smarter
No Change is not an Option
38
Conclusions
• The merchandise carload business may
change but it isn’t going away
• Shortlines will be more important to the
carload business going forward
• Shortline success is directly tied to the ease
of doing business with you
• And remember...
39
Service quality is measured by
the customer, not you
The Internet is your key to being
perceived as a quality service
provider in the eyes of the customer
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Go Do It!
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