Conrail Mercury, Hub and IBM: have they cracked the code? - even computerized, intermodal transportation still is not profitable; includes related article on the Hub Group's usage of the AS 400 computer

Railway Age, May, 1991 by F.K. Plous, Jr.

Let's be blunt: For all its undoubted achievements in the ten years since deregulation, the U.S. intermodal industry remains haunted by a specter-low profitability. For the railroads in particular, intermodal's growth is a two-edged sword: Double-digit annual growth figures seem to suggest spectacular success, but the growth is in revenues, not the net left on the bottom line.

And that widening gap between revenues and profits spells danger: On most Class I's, intermodal is the only form of traffic that's growing. That means that if intermodal's profitability problem isn't solved soon, intermodal economics eventually will drive the whole balance sheet, and the direction they'll drive it will be down. Like the proverbial discount merchant who claimed, "We lose a little on each transaction but we make it up on volume," carriers with big intermodal sectors have to wonder if they'll ever find themselves "succeeding to death," running bigger and bigger fleets of glamorous stack and van trains that seemingly demonstrate a railroad recovery but never produce anything for the stockholders.

Two years ago that nightmare led Conrail, the nation's biggest intermodal carrier, with $550 million in annual intermodal revenues, to start rethinking intermodal economics. The company asked three questions:

-Is intermodal inevitably doomed to be a low-profit business for railroads? Is there something inherent in intermodal technology, intermodal management, or intermodal marketing that keeps railroad profits low?

-If not, what is the problem? Where is the "black hole" down which intermodal's profits seem to vanish? Is there some activity, some cost center, that railroad intermodal managers have ignored or overlooked?

-If there is a black hole, what is to be done about it? What kind of technological or organizational innovation is required to overcome it?

* Plugging the black hole. Intermodal, in the gospel according to Conrail savants, is not inherently an unprofitable activity. But it does have a black hole into which large-denomination bills flutter with depressing regularity. The black hole, Conrail managers say, is poor trailer and container utilization. To be blunt again, rail intermodal managers are squandering their highway rolling stock in ways that would get them fired by most motor carriers. Start managing trailers (or containers) the way the motor-carrier industry does, Conrail insists, and railroads will start earning truck-style profits. In fact, Conrail says, those profits will be big enough to spread around to all the participants-railroads, drayage operators and shippers' agents.

On the other hand, if railroads and their partners continue to permit sloppy box utilization, dissatisfied investors will balk at replacing today's growing container fleets, leading the industry to implode sometime toward the end of the decade. Mercury, say Conrail officials, was established to address the box utilization problem. In fact, says Mercury President Steve Pasquini, that was the only reason Mercury was established. Contrary to alarmists who see Mercury as an attempt by the rail industry to bypass third parties and bring intermodal retailing in house, Mercury's real role is to be a pilot project in trailer management. If it works, Conrail intends to share the results with the whole industry, including shippers' agents, with whom it expects to continue working.

"Mercury is a venture on Conrail's part to answer some questions about equipment utilization," Pasquini says. "For years we've pushed the third parties to help us with equipment. If we're going to do that we have an obligation to help them move down the right path."

Even before deregulation, Pasquini says, the industry's more alert managers had noticed that intermodal trailers simply weren't working as hard as those used by motor carriers. They stood idle longer and they spent more of their time running empty.. Obviously, there's a "utilization gap." But how serious is it? Pasquini's answer: "Very."

"Our objective is to be competitive with the major truckload carriers, the Freymillers and KLLMs and the J.B. Hunts," he says. "Their cycle is an average of six days per trailer. That means every six days there's a fresh load in a trailer and a fresh waybill cut for that trailer.

"Do you know what our utilization rate is? In the Conrail free-running fleet we average 18 days per trailer, and 70% of our business is interline, which means that the other carrier has it for another 18 days, for a total of 36 days between loads. Thirty-six days!"

So the typical high-performance trucker gets six times more use out of the same asset than the railroad industry does. What does that look like on a financial statement?

Look," says Pasquini, "a box-any box, be it a trailer or a container-costs you about $10 a day to own or lease, whether you load it and run it or just let it stand there empty. Either way, it cannot cost you less than $10 a day. If you're loading your box once every 36 days and your competition is loading his every six days, you don't have to be a rocket scientist to know that you're suffering 30 days of lost utilization at $10 a day. That's $300 of re-investment in product improvement or market competitiveness that you cannot use."