Following on my article of yesterday, I noted on the Progressive Railroading.com site that they had an article covering Bill Rennicke's testimony to Congress. Rennicke is a consultant director at the firm of Oliver Wyman.
Rennicke made some points in front of the House Transportation and Infrastructure Committee regarding the Railroad Competition and Service Improvement Act of 2007 (H.R. 2125/S. 953). This pending legislation proposes some controls on railroad pricing. His key point however seemed to be that railroads should adopt an airline model of yield management. That idea is flawed in a few ways.
On airline routes, such as Atlanta to New York, there is consistent and heavy competition. Further, individual airlines offer multiple flights a day to a passenger base that is widely disparate in its needs. Thus, it is easy to put in place a pricing scenario that takes into account such things as flight time, available seats, competition, How close to flight time did the passenger book, etc. Generally it becomes highly need based. Passenger need to travel vs. Airline need to cover open seating. This is a highly elastic passenger based economic model.
Railroads deal with customers who buy in bulk, buy long term and on contract. Key issues become availability of capacity and access to rail lines. Captive customers are those who have access to one railroad only. (bad news!). Non-captive customers are those who have access to at least two railroads (say, NS and CSX). That introduces a layer of competition that does provide some boundary to pricing. There is little resemblance to airline yield management at the flight level toward the railroads.
Where there IS some similarity is in route level pricing by the airlines. Fly from Atlanta to New York...and the price is around 300 dollars round trip. Its a highly competitive route but subject to special fares when needed. Now, try flying from Atlanta to Jackson, MS. The airfare is 1400.00. Less than half the distance, four times the rate. Why? No competition. Delta owns that market. If Southwest decided to fly to Jackson, the prices would drop like a rock. Now in the Jackson market, there is still a yield management principle involved. Not everybody pays the highest rate. However, the floor in the equation is MUCH higher. In captive markets, rates are higher. That is a mode independent fact.
Congress should get involved in making sure that there is a relative linkage between captive and non-captive rates in the rail market. The base reason is that barrier to entry is substantial in the rail industry. Railroads own the tracks. A discount carrier flying into a new market is relatively easier than laying down new rail track.
Eric
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