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8/3/2019 Winner-Bullock to IBRD Ways to Manage RRs Better 8 Sep 04
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John WinnerRichard Bullock
Ten Ways to Manage Railways Better
September 10, 2004
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Contents
Introduction
Know your customers
Know your costs
Setting the price
Controlling your costs
Summary
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Introduction
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Restructuring a railway is a process which undoubtedly benefits most
railways but it is only a means to an endThe basic objective of restructuring is to reorganise railway activities and assets which in
many cases are stuck in another age - to better meet current market needs
Typically, this involves separating regulatory functions (normally left in Government) from the operational
management of the railway
reorganising the internal operations of the railway from being functionally-based to beingcommercially-based (the Line of Business model)
Sometimes the previous management remains under the new structure, more often it ischanged
Often, the restructured railway performs much better commercially than its predecessor
But this is not guaranteed
And the basic principles of railway management apply just as much in a restructuredrailway as in an un-restructured one
INTRODUCTION
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The basics of successful railway management are the same as forany other business
Know your customersKnow your customers
Set the right prices andcollect the money
Set the right prices andcollect the money
Know your costsKnow your costs
Control your costsControl your costs
DRIVE REVENUEUP
DRIVE REVENUEUP
DRIVE COSTSDOWN
DRIVE COSTSDOWN
INTRODUCTION
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This talk will discuss (and give examples) of each of these four basicelements applied to the three main businesses of most railways
(passenger, freight and infrastructure)
Passenger Freight Infrastructure
Know your customersIf an
infrastructurecompany
Know your costs
Set pricesIf an
infrastructure
company
Control costs
INTRODUCTION
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Know your customers - passenger
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On many systems the passenger fares are regulated but severalmanagements have successfully restricted this to the economy-class
services and developed a flourishing commercial passenger business
Such commercial passenger services generally easily cover their avoidable costs and the mainchallenge in tariff-setting is to establish the market price
Unlike bulk freight, for which the tariff is generally either acceptable or not acceptable for thewhole tonnage on offer, passenger traffic is characterized by a large number of individualdecision-makers, each of whom has their own market price. Increasing the fare, or otherwisechanging the service specification, will thus generally not affect all the traffic in a single step butinstead will cause a change in traffic to a greater or lesser degree. This partial response is
defined by the elasticity of demand with respect to the characteristic that has been changed.
This impact on demand of a particular fare level can be estimated from market research.
A good example of this is the commercial services in Indonesia which have been stronglydeveloped over the past fifteen years. In 2003 the PTKA management undertook a series of on-
board surveys to better understand the market and its response to changes in servicespecification.
KNOW YOUR CUSTOMERS - PASSENGERS
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The survey covered the Argo Wilis (Bandung Surabaya) and ArgoBromo (Jakarta Surabaya) executive services
Southern corridor (blue) is served by services from Bandung Surabaya and by several services from Jakarta to Surabaya and East Jawa(Malang, Kediri, Jombang) in addition to the Jakarta-Solo/Yogya servuces
Northern corridor (yellow line) is served by KA Argo Bromo, KA Sembrani and KA Gumarang
PTKA Train Services in Java (2002)
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Competition in both corridors is provided by executive bus and air
Bandung Surabays RailBandung Surabays Rail
Three services daily
Tariff is Rp. 165,000 (executive) and Rp90,000 (business)
Travel time ranges from 11 -12 hours
Three services daily
Tariff is Rp. 165,000 (executive) and Rp90,000 (business)
Travel time ranges from 11 -12 hours
Bandung Surabaya: Other ModesBandung Surabaya: Other Modes
Airline
Indirect services via Jakarta
Fare : Rp. 640,000 ($80)
Effectively 4 per day, travel time 3.5 hours
Buses
Fare Rp. 130,000
Effectively 2 per day, travel time 12 hours
Airline Indirect services via Jakarta
Fare : Rp. 640,000 ($80)
Effectively 4 per day, travel time 3.5 hours
Buses
Fare Rp. 130,000
Effectively 2 per day, travel time 12 hours
Rail Jakarta - SurabayaRail Jakarta - Surabaya
Five services on two routes
Tariff is Rp. 195,000 (executive) and Rp90,000 (business)
Travel time ranges from 9 to 14 hours
Five services on two routes
Tariff is Rp. 195,000 (executive) and Rp90,000 (business)
Travel time ranges from 9 to 14 hours
Jakarta Surabaya: Other ModesJakarta Surabaya: Other Modes
Airline
Jakarta Surabaya: Rp. 325.000 to Rp390,000
Frequency 10/day, time 1.5 hrs
Buses
Jakarta Surabaya Rp. 130,000
Frequency 10/day, time 14 hrs
Airline
Jakarta Surabaya: Rp. 325.000 to Rp390,000
Frequency 10/day, time 1.5 hrs
Buses
Jakarta Surabaya Rp. 130,000
Frequency 10/day, time 14 hrs
ON-BOARDSURVEYS
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Many Bandung - Surabaya passengers are university students who do not earnany income, while most Jakarta Surabaya passengers are private employees: on
both trains passengers typically earn Rp. 2 6 Mn ($750) per month
0
5
10
15
20
25
30
35
40
45
Unive
rsity
Hous
ewife
Priva
te
Gove
rnmen
t
Self-
employed
Othe
rs
Numberof
respondent
Arbo Wilis Argo Bromo
0
5
10
15
20
25
30
35
40
45
50
N/A < 2 mn 2 - 6 mn 6 - 15 mn > 15 mn
Num
bero
fresp
on
den
t
Arbo Wilis Argo Bromo
Respondents Occupation Respondents Monthly Income in Class
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Most trips between Bandung and Surabaya were for private business andfamily purposes, while trips between Jakarta and Surabaya were for
personal reasons - influenced by the survey being just before a holiday
0
5
10
15
20
25
30
35
40
Privatebu
siness
Governm
entbusines
s
Personal
busines
s
Tourism
Family
reason
s
Othe
r
Numbero
frespon
den
t
Arbo Wilis Argo Bromo
Respondents trip purposes
Note: More representative results will be achieved by combining surveys during peak and off-peak times.
A normal day will have more business-related trips and fewer personal and family purposes trips
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Passengers are not captive to rail: during the last year about 50%of trips were by train, with the balance split over car, bus and air
0
10
20
30
40
50
60
Rail Car Bus Air Other Rail Car Bus Air Other
Numberofrespondent
Arbo Wilis Argo Bromo
Argo Wilis : Bandung Jogja Argo Bromo : Jakarta - Semarang
Argo Wilis : Bandung Surabaya
Argo Bromo : Jakarta - Surabaya
Respondent previous trips by mode of transport
Medium-distance Long-distance
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Safety is the most important reason for choosing rail, followed by comfortand travel time (presumably compared to bus); price is not a primary
consideration
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Safety
Com
fort
Travel
time
Price
Sche
dule
Accessibilit
y
Re
lative
importanc
Reasons for choosing rail (Jakarta - Surabaya)
Smaller ismore
important
Most Importance Least
These results are similarto surveys in other
countries and previoussurveys in Indonesia asfar back as 1981- servicequality is a major factor inmode selection forintercity travel.
The general importance isthe same whicheveralternative would be takenif rail did not exist except that time is moreimportant for those whowould otherwise take bus
and less important forthose who wouldotherwise take air
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KNOW YOUR CUSTOMERS PASSENGERS
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If no executive train were available, passengers will generally switch to airwhere it is available, followed by business rail and car or bus
0
5
10
15
20
25
30
35
40
45
move to
business
class
use
airplane
use car use bus use ship cancel
trips
others move to
business
class
use
airplane
use car use bus use ship cancel
trips
others
Number
ofrespondent
Arbo Wilis Argo Bromo
Argo Wilis : Bandung Jogja (no direct flight)Argo Bromo : Jakarta - Semarang
Argo Wilis : Bandung Surabaya
Argo Bromo : Jakarta - Surabaya
Medium-distance passengers behavedifferently to long-distance passengers if theroute is not properly served by plane
Medium-distance passengers behave thesame as long-distance passengers if theroute is properly served by plane
Respondent reaction if executive class is no longer available
Medium-distance Long-distance
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KNOW YOUR CUSTOMERS PASSENGERS
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More detailed analysis can be undertaken using two analyticalapproaches revealed preference and stated preference
STATED PREFERENCE
There are often issues which are difficult to
analyse, particularly hypothetical situations such asthe introduction of a new service or changes in thequalitative aspects of a service
Stated preference methods were thereforedeveloped in which surveys interviewedpassengers who then stated what their reaction
would be to a change in service levels Such methods are widely used but need to be
undertaken carefully quality is an essentialingredient of a successful stated preferencesurvey
Experience has also shown that stated preferencedata generally overstates passenger responses toany given situation in part because idealisticalternatives are often compared to a less-than-ideal existing situationl
REVEALED PREFERENCEREVEALED PREFERENCE
Revealed preference data is data that has beencollected by observing the choices that
passengers have actually made in practice i.e.that have revealedto observers
This data is normally of two types:
cross-sectional data which compareschoices that passengers make, at a
particular point in time, when faced withalternative modes of transport e.g. this typeof analysis would try to relate the choicesbetween air and rail, say, between Jakartaand major centres in Jawa to the level andtype of services available by each mode
time-series data, which records howpassengers changed their habits in responseto changes in modal characteristics e.g. theimpact of changes in air fares on rail and airtravel between Jakarta and Surabaya andother before-and-after studies
Revealed preference data is data that has beencollected by observing the choices that
passengers have actually made in practice i.e.that have revealedto observers
This data is normally of two types:
cross-sectional data which compareschoices that passengers make, at a
particular point in time, when faced withalternative modes of transport e.g. this typeof analysis would try to relate the choicesbetween air and rail, say, between Jakartaand major centres in Jawa to the level andtype of services available by each mode
time-series data, which records howpassengers changed their habits in responseto changes in modal characteristics e.g. theimpact of changes in air fares on rail and airtravel between Jakarta and Surabaya andother before-and-after studies
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An example of revealed preference analysis price elasticity of suburban traffic inBombay
0
5
10
15
20
25
30
35
40
45
50
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
Passenger Kms
Paise / Pass (Constant 1995 money values)
Demand Falls.....
When Fares Rise
The estimated fare elasticity is -0.35, comparable with normal experience
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An example of stated preference value of time and the price of crowdingin Bombay
0%
5%
10%
15%
20%
25%
30%
35%
Affordable Comfortable Reliable Safe Convenient Fast No Choice
%
respondent
0
100
200
300
400
500
600
700
< 2 2-5 5-10 10-15 > 15
Icome / month (Rs 000)
#respondent
0
5
10
15
20
25
30
35
40
< 2 2-5 5-10 10-15 > 15
Income (Rs 000/month)
VOT(Rs/hr
0
10
20
30
40
50
60
70
VOT/income(
KNOW YOUR CUSTOMERS - PASSENGERS
0
5
10
15
20
25
30
35
< 2 2-5 5-10 10-15 > 15 < 2 2-5 5-10 10-15 > 15
Income (Rs 000/month)
WTPas
%o
fVO
WTP for morestanding room
WTP for seatPost-tax
Pre-tax
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Know your customers - freight
KNOW YOUR CUSTOMERS - FREIGHT
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Freight customers are influenced by a range of factors and these all need to beaddressed to operate a successful business
KNOW YOUR CUSTOMERS FREIGHT
PRICE
TRANSIT TIME
RELIABILITY
Schedules
For rail, this includes pick-up and delivery (PUD) this can be aslarge as the linehaul cost for short hauls (under 500 km)
For rail, this also includes PUD
Poor reliability either means the cost of waiting time at destinationterminals or customers factoring expected delays into expected
transit times
Particularly important in the overnight freight markets on longercorridors is also linked to arrival time window
Customers are prepared to trade these attributes off against each other but all too often the only weapon rail uses is price reliability,
schedules, and security are also within managements control
Other important factors are security and damage
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Between Melbourne and Sydney rail is uncompetitive on price and transittime; it is also unreliable besides serving only a small part of what is
essentially an overnight market
0
1 0
2 0
3 0
4 0
5 0
6 0
R a il R o a d
A$/to
nne
L i n e h a u l
P U D
0
2
4
6
8
1 0
1 2
1 4
1 6
1 8
R a il R o a d
Traveltime(hrs)
L i n e h a u l
P U D
0
10
20
3040
50
60
70
80
90
100
-100 0 100 200 300 400
Minutes early/late on schedule
Cumulative%
oftrainsarriving
O OU CUS O S G
0
2
4
6
8
10
12
0 4 8 12 16 20 24
%
ofgoodsdespatche Current rail cut-off
means it only servesabout 50% of the
market
About 55% of trainsarrive on time,
compared to 95% by
road but the 90%rail performance isabout 3 hours late
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But, rail is very competitive on price between Melbourne and Perth, hasreasonable reliability and serves almost all the market
0
2 0
4 0
6 0
8 0
1 0 0
1 2 0
1 4 0
1 6 0
1 8 0
2 0 0
R a il R o a d
A$/tonne
L i n e h a u l
P U D
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
R a il R o a d
Traveltime(hrs)
L i n e h a u l
P U D
0
10
20
3040
50
60
70
80
90
100
-300 -200 -100 0 100 200 300 400
Minutes early/late on schedule
Cumulative%oftrainsarriving
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0 4 8 12 16 20 24
%
ofgo
odsdespatche
Current rail cut-
off enables it toserve at lesat
80% of themarket
About 65% of trains arriveon time, compared to 95%by road but the 90% rail
performance is about 4hours late
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The trade-offs can be expressed in terms of elasticities
In this context, the elasticity is the % change in freightmode share (or demand) in response to a 1% change
in the particular service characteristic. Thus, a 1%reduction in price will increase demand by about 1.1%
PRICE
TRANSIT TIME
RELIABILITY
CUT-OFF TIME
-1.1
-0.3
0.6
0.4
Elasticities for Australian rail long-haul general freight
These elasticities can be used to assess the impact on demand of various changes in railservice characteristics
For example, increasing the rail mode share on Melbourne Perth from 70% (2002) could be done by:
Reducing the price from $103/ tonne to $96/tonne
Reducing the transit time from 60 hours to 45 hours
Improving the reliability from 66% to 75%
Increasing the service availability from 80% to 95%
Reliability (almost entirely a management issue) almost certainly offers the best pay-off
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Almost all this work was undertaken not by an above-rail operator but by atrack authority (ARTC) and they seem to have been doing something right
Rail land freight market share (net tonnes Eastern States to WA)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
90/1 91/2 92/3 93/4 94/5 95/6 96/7 97/8 98/9 99/0 00/1 01/2 02/3 03/4
Netton
nes(mil
60%
65%
70%
75%
80%
85%
90%
MarketShar
Road Freight Rail FreightMarket Share Total Land Freight
Creation of ARTCThird-party access andtrack authority
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Know your costs - general
KNOW YOUR COSTS - GENERAL
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There are two dimensions to knowing your costs knowing your inputcosts and knowing your output costs
Input costsInput costs
Input costs are the costs of undertaking particulartechnical activities e.g.
Cost of locomotive maintenance
Cost of tampingThis information is essentially a matter offinancial accounting a well-structured generalledger will provide the raw material but will alsonormally require some manipulation to produceuseful information.
Input costs are the costs of undertaking particulartechnical activities e.g.
Cost of locomotive maintenance
Cost of tampingThis information is essentially a matter offinancial accounting a well-structured generalledger will provide the raw material but will alsonormally require some manipulation to produceuseful information.
Output costsOutput costs
Output costs are the costs of the products therailway is producing e.g. the cost of carrying awagonload of freight or the cost of operating a
passenger train:This is essentially a matter ofmanagementaccounting only in exceptional cases canfinancial accounts provide this informationdirectly.
Knowing output costs is essential for: setting floor prices deciding whether to reinvest by replacinglife-expired rollingstock and infrastructure
Historically, most railway accounting systems were quite good at financial accountingbut little effort was put into service and traffic costing and even less use made of it.
Although modern accounting systems may have much more power and capacity thenprevious ones, in the end they are only as good as the quality of the information goinginto them.
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Most railways know their input costs well but not their output costs.A key step is to analyse the contribution of services the difference between
revenue and avoidable cost the costs that would be avoided if the traffic were
not carried or the service not undertaken
Service-basedService-based
The service is taken as the unit of costing
Costs are calculated for the service
Revenue is then allocated e.g. if a passengerhad a through ticket from A to B via C, therevenue would need to be split into A-B and
B-CPassenger traffic is almost always costed using this
approach
The service is taken as the unit of costing
Costs are calculated for the service
Revenue is then allocated e.g. if a passengerhad a through ticket from A to B via C, therevenue would need to be split into A-B and
B-CPassenger traffic is almost always costed using this
approach
Traffic-basedTraffic-based
The traffic is taken as the unit of costing:
Revenue is derived directly from accountingdata (e.g. A-B)
Costs are calculated by combining the cost
of the different legs (e.g. A-C plus C-B)Freight traffic is generally costed using thisapproach
Two approaches to analysis
Where revenue can be related directly to a specific train operation, e.g. where there isno through ticketing for passengers (as in Indonesia) or where freight traffic travels in
dedicated block trains, the two approaches are identical in practice
BUT
KNOW YOUR COSTS - GENERAL
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The most important factor in traffic costing and business managementgenerally is to ensure that reliable financial and operating information is
provided on a timely and consistent basis.
Financial information should enable costs for each of the activities identified in the previousslides to be derived in a reasonably simple manner. If the costs are to be used to support
claims for PSOs, there will be major advantages in credibility if this can be done directly fromthe accounts with a minimum of manipulation using data from other sources
Operational data should be available on both an aggregate and service-specific basis. This isoften a major management weakness. It can be addressed by initiatives such as TIMS
but unless management takes an active interest in reviewing the data on a regularbasis, the quality almost invariably deteriorates.
IF YOU CANNOT MEASURE, YOU CANNOT MANAGE
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Know your costs - passenger
KNOW YOUR COSTS - Passenger
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Botswana Railways (BR) has a network of 888 km and carriesabout 2 million tonnes and 0.7 million passengers
The mainline was constructed in 1897 and formany years was the only line between South
Africa and Zimababwe, as part of RhodesiaRailways
On independence the line continued to beoperated by Zimbabwe Railways until theinfrastructure was purchased by Botswana in1987.
Since then it has been operated independentlyby Botswana Railways
The Selebi Phikwe and Morupule brancheswere funded by Botswana and opened in 1974and the Sua Pan line in 1992.
Mafeking
Bulawayo
Sua Pan
SelebiPhikwe
Morupule
Lobatse
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In 2001/2 BR transport revenue almost covered working expenditure anddepreciation comfortably ahead on a cash basis but this hides a
significant cross-subsidy between freight and passenger
Total revenue of P166 million, of which P130 million from transport activities
Total expenditure of P146 million, of which working expenditure of P112 million, depreciation of P22million (historic basis understates true renewal requirement) and interest of P12 million
Infrastructure costs
rather low and corporatecosts high compared totypical pattern of costs
0
20
40
60
80
100
120
140
160
180
Revenue Expenditure
P
ula(millio
Interest and asset sales
Rents, leases etcOther transport income
Freight
Passenger
Interest and asset sales
DepreciationCorporate management/services
Infrastructure
Above-rail
Transport
revenue
5 Pula = $US
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Description of ServiceDescription of Service
The day train (typically operated as a 8-carconsist) operates daily in each directionbetween Gaborone and Francistown with ascheduled transit time of about 8 hours.
The night train (typically a 10-car consist)operates daily in each direction between
Francistown and Lobatse with a scheduledtranist time of about 10 hours.
The Gaborone schools service operates areturn ten-minute trip twice daily fromGaborone.
The day train (typically operated as a 8-carconsist) operates daily in each directionbetween Gaborone and Francistown with ascheduled transit time of about 8 hours.
The night train (typically a 10-car consist)operates daily in each direction betweenFrancistown and Lobatse with a scheduledtranist time of about 10 hours.
The Gaborone schools service operates areturn ten-minute trip twice daily fromGaborone.
BR currently operates two return passenger services on the north-south line as well as a twice-daily school service in Gaborone
Day Night Commuter
Pass (000) 322 195 215
Passenger-km (mill) 95 74 2
Revenue (P000) 5561 7560 232
Key operating statisticsKey operating statistics
Based on 2002 operations; commuter service estimated
500101315763Loco-hrs
50083954964Train-hrs
2172135Gross tonne-km (mill)
7384330Loco-km (000)
3536942540Car-km (000)
7369318Train-km (000)
7506435Distance
CommuterNightDay
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The day train currently has an average maximum load of about 400passengers, with loadings a little lower north of Mahalapye
F
rancistown
Shashe
Serule
Topisi
Palapye
Radisele
Mahalapye
Pha
laRoad
Dibete
Artesia
Malotwana
Pilane
Gab
orone
Ramotswa
Otse
Lob
atse
0
50
100
150
200
250
300
350
400
Day train (average of both directions)
Alight/board to/from north Alight/board to/from south Passengers on-board
Based on analysis of ticket sales for November 1-7 2002
Th i h i i l d d ffi b G b
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The night train carries mostly end-to-end traffic between Gaboroneand Francistown, with an average load currently of about 280, but
is very lightly loaded between Gaborone and Lobatse
Based on analysis of ticket sales for November 1-7 2002
Francisto
wn
Shash
e
Serule
Topis
i
Palapye
Radisele
M
ahalapye
Phala
Road
Dibete
Artesia
M
alotwana
Pilane
G
aborone
Ram
otswa
O
tse
Lobatse
0
50
100
150
200
250
300
N igh t tra in (average of bo th d irections )
A light /board to/ from north A light /board to/ from south P as s engers on-board
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The overall financial performance is poor revenues barely coverfuel, crew and rollingstock maintenance
P AS S E N G E R R E V E N U E AN D E X P E N D IT U R E 2 0 01 /2
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
R e ven ue Tra in
opera t ions
S ervic e s In fras t ruc tu re C o rpo ra te De prec ia t ion In te res t
Pula
(000
R e v e n u e
Cater ing
Pa rce l s e tc
Fares
T r a i n o p e r a t i o n s
Loco m a i n tenance
C o a c h m a in t e na n c e
F ue l
Loco c rew
S e r v i c e s
Parce l s
Cater ing
S ta t ion servicesP ass enge r se rvi ces
I n f ra / t ra in cont ro l
Train contro l
Infrastructure
C o r p o r a t e
D e p r e c i a t i o n
L o c o
Carr iages
Track renewal
I n te res t
L o c o
Carr iages
Track renewal
Commercially revenue must cover marginal recurrent operatingKNOW YOUR COSTS - PASSENGER
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Commercially, revenue must cover marginal recurrent operatingcosts (train operations and services) as well as the capital costs of
assets that will be replaced
Train operations
Infrastructure
Depreciation
Interest
Corporate
Services
Interest calculated at 7%real. In Botswana, lococapital should be covered;coaches and track could betreated as effectively sunk
Train operations cost probablyunderstated as historically coacheshave been under-maintained.
Cost of servicesuncertain as bookingto passenger andfreight cost centres
does not properlyreflect actual activities.
Infrastructure-related costs are largelyfixed but passenger services imposesome costs associated with trackquality, train control and some wearand tear.
Corporate management is high (up totwice) compared to other railways fixed in short run but will vary pro ratato other costs in long-run
Revenue (currently Pula 13million) should aim to cover:
Pula (million)Train operations 13
Services 2
Variable infrastructure 2
Share of corporate 4
Loco depreciation 3
Loco interest 3
Total 27
B d th l i t d l d th t f
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Based on the analysis, management developed three sets ofoptions to improve the financial performance of the services
Operational changes
Improve carriage utilisation by using common rakes on both the day and nightservices reducing fleet requirements and maintenance costs
Attaching priority freight to the night services
Rationalising maintenance and car-cleaning facilities
Route changes
Operate only between Gaborone and Francistown
Withdraw low-volume stops for night service
Level-of-service changes
Withdraw sleeper service and ensure club/second service is a net contributor
Some of these changes can be done on a stand-alone basis others need to be done incombination. The combined effect of the above measures would improve overall cost
recovery from 40% to 60%
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Know your costs - freight
KNOW YOUR COSTS - FREIGHT
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By contrast to passenger, the BR freight traffics easily coveredtheir working costs in 2002
-20
0
20
40
60
80
100
120
Revenue Train-running Infrastructure Surplus before capital
Pu
la(million
)
Passenger Freight Other
Th f i h ffi f fi h l i h S P
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The freight traffics form five groups the largest is the Sua Pansoda ash traffic to South Africa
0
100
200
300
400
500
600
700
800
900
Tonnes (000) Ntk (million) Revenue (P
million)
Revenue/tonne
(pula)
Revenue/ntk
(thebe)
Tonnes/ntk
0
10
20
30
40
50
60
70
80
90
Pula/theb
Sua Pan Selebi Phikwe North South Transit
B t th i b t i i d l it l t i
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But the margin above train running and loco capital costs variessignificantly between traffics
0
5
10
15
20
25
30
35
40
45
50
Sua Pan Selebi Phikwe North South Transit
Pula(million)
Revenue Train-running Loco capital Wagon capital Infrastructure
Th S P t ffi (40% f tk ) g t ll th gg g t
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The Sua Pan traffic (40% of ntkm) generates all the aggregatefreight contribution to passenger and corporate costs
Contribution after train running costs and loco capital (pula million)
0
2
4
68
10
12
1416
18
20
Sua Pan Selebi Phikwe North South Transit
These surpluses have to fund wagoncapital (to the extent it is required)
and infrastructure costs
More detailed analysis showed that many of the individual traffics (especially to/from South) failed to cover even train-running costs
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Know your costs - infrastructure
It is important to understand both your input costs (unit costs of maintenance)
KNOW YOUR COSTS - INFRASTRUCTURE
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p y p ( )and also the factors affecting costs but this latter is not so easy - pay your
money and take your choice!
CONSULTANTS ADVICE TO UZBEKISTAN
To develop accurate levels of variability of expenditureson an activity basis, regression analysis is often usedbut this requires three or four years of statistical data
related to each infrastructure expenditure activity. Inthis instance, this was not feasible as infrastructurerelated expenditures could not be provided by UTY for afour-year period. Therefore based on the consultantsexperience of major freight railways working in acompetitive regime, variability was set at 80% foractivities that are traffic related. While an 80%variability may appear excessive in the light of pastpractice it is, nevertheless, considered normal whendealing with open access for market-driven railwaysand the necessity to recover, as a minimum, all variable
expenditures.
CONSULTANTS ADVICE TO KAZAKHSTAN
Rail infrastructure costs can be considered as beingmostly fixed and not vary directly with the volume oftraffic that uses the infrastructure. There have been
many technical discussions on the issue of thevariability of infrastructure costs due to a higherfrequency or heavier train loads. Typically the variablecosts of providing and operating railwayinfrastructure range between 15% and 25%. Suchcosts include a proportion of maintenance costsassociated with the wear and tear of the track andassociated equipment, certain shunting activities,dispatching trains and other traffic control services,breakdown and emergency services. Most other costsare fixed as they are related to time, weather and the
environment and will be incurred irrespective of trafficdensity.
So what might be the right answer?
The most important group of infrastructure costs track maintenance and
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Many of these cost relationships are non-linear e.g. resurfacing (tamping) isprobably variable with Tonnes0.3
The most important group of infrastructure costs track maintenance andrenewal include activities influenced by a wide range of factors
Line speed Volume Elapsed Standard Climate Curvature % of cost
Time of constr. 2MGTtimber
20MGTconcrete
Visual inspection 2 1
Other inspection 0 1
Resurfacing 8 10
Ballast cleaning 8 10
Rail grinding 1 3
Miscellaneousmaintenance
16 18
Formationmaintenance
13 8
Resleepering 48 25
Rail renewal 4 23
Total 100 100
Cost breakdown shown is fortypical Australian main-line
track (80-100 km/hr linespeed)
An aggregate cost function for Australian track maintenance and renewal
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An aggregate cost function for Australian track maintenance and renewal,based on individual functions for each of the components, shows average
costs reducing rapidly with tonnageTOTAL, AVERAGE AND MARGINAL TRACK
MAINTENANCE COSTS
0
10
20
3040
50
60
7080
0 5 10 15 20 25 30 35 40 45 50 55 60
MGT p.a.
$000/k
0
5
10
15
20
25
Cost($/0
00gtk
Total cost Average cost Marginal cost
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Variability is thus not a single figure it steadily increases with tonnage
from almost zero at very low tonnages to 70-80% at high tonnages
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0 5 10 15 20 25 30 35 40 45 50 55 60
MGT pa
Variability(m
arginal:averagecos
But, beware, track quality (and hence cost) is also correlated with tonnage
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But, beware, track quality (and hence cost) is also correlated with tonnage so statistical cross-sectional analysis is likely to demonstrate a long-
term variability which may not exist in practice
-
5
10
15
20
25
30
35
40
45
50
10 15 20 25 30 35
MGT p.a.
Co
st/km(A$000
Average quality Lower quality Higher quality
Apparent variability alsoincludes impact of quality
chnages
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Setting the price
Research has shown that the choice of mode where a choice exists canbe related to the difference in utility between the modes
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be related to the difference in utility between the modes.
The standard approach to a competitive market suchas that for commercial passengers is to develop achoice model
The simplest form is the binomial logit model,applied where there is a choice between two
alternatives (e.g. executive and business class oftrain where other modes do not exist)
In commercial markets with several alternatives e.g., bus, air and car a multinomial model mustbe used to deal with the multiple choices
A further complication is that some modes arecloser substitutes for each other than others and to overcome this nested logit models havebeen developed to reflect these differingsensitivities
Calibrating a binomial model is relatively simplebut the other models are more difficult and inorder to obtain something useable somesimplifying assumptions generally need to bemade
LOGIT MODEL
The most commonly-used model and one that hastheoretical support is known as the logit model.
In this model, the proportion P of trips made by mode Ais related to the difference U in utility between twochoices by
P = exp(k(U+C))(1+exp(k(U+C)))
Logit models are very widely-used and give goodresults if properly calibrated.
The parameters k and C are estimated during model
calibrationK is known as the spread parameter
C is the mode-specific constant
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-4 -3 -2 -1 0 1 2 3 4
Difference in disutility (mode A - mode B)
Percentagechoosingmode
An example of such a nested multinomial structure was developed in Indonesia: ithas two levels in which level 1 chooses between executive class modes and
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has two levels in which level 1 chooses between executive class modes andbusiness train and level 2 between executive train, airplane, and executive bus
All logit models assume each individual has a utility functionwith a systematic compoent reflecting the physicalcharacteristics of each choice and a random componentreflecting his personal taste. However, each person is alsoassumed to behave rationally in maximising his personalutility
In a multinomial model the probability person t choosesalternative i from a choice set Ct =
Nested logit models are derivatves of the above model inwhich the choices are considered as taking pace in two ormore stages as shown in the diagram
Vit = systematic utility function in this case can be simplifiedas the sum of fare and the value of time, as discussedpreviously
Mode Choice
Business ClassTrain
Executive ClassServices
ExecutiveClass Train
AirlineExecutive
Class Buses
=
Cti
Vjt
Vit
e
ePit
Model characteristics and assumptions
LEVEL 1
LEVEL 2
A model was calibrated using survey data combined with market
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A model was calibrated using survey data combined with marketinformation and general experience
Surabaya Semarang
Mode-specific constants
Executive rail 0 0
Business rail -230 -65
Air 245 75
Executive bus -210 -105Spread parameters
Level 1 0.008 0.008
Level 2 0.010 0.010
Generation parameter 0.001 0.003
Demand model calibration parametersDemand model calibration parameters
These parameters (in Rp 000)allow for non-measured factors
e.g. suitability of schedules,difficulty of booking, general
preferences for a particular mode
due to perceived safety, comfortetc
The spread parametersdetermine the sensitivity of themodel to changes in variables
such as fare, travel time etc they are directly related to the
elasticityof demand.
The generation parameter
determines the amount ofsuppression and generation thatoccurs when variables change these are trips that do not divertto or from other modes but are
not made at all.
The parameters differ for the two routes partly due to theinherent differences in the characteristics of the two marketsand partly due to the mixed quality of the base market data
which could be improved with further research
The model predicts a tariff increase by Rp. 40,000 will reduce PTKA
SETTING THE PRICE - PASSENGERS
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market share by 7%, equivalent to a 26% reduction in demand but some
of these transfer to business class
Surabaya Semarang Surabaya SemarangMarket share
Executive rail 30% 26% 23% 19%
Business rail 14% 40% 15% 43%
Air 49% 18% 54% 20%
Executive bus 6% 17% 8% 18%
Trip generation -1.0% -2.7%
Base Rail +Rp 40,000
Market shares Base Case and with executive rail fare increase of Rp 40,0000Market shares Base Case and with executive rail fare increase of Rp 40,0000
The model forecasts a 26% reduction in demand for a fare increase of 24% to Surabaya and 31% toSemarang. This gives a fare elasticity of about -1, a value at which revenue remains constant.
This prediction can be checked against historic data and the model parameters adjusted accordingly.
Conversely, an air tariff increase of Rp. 50,000 will reduce airs marketshare by between 25 35% and increase PTKA market share by 11% to
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share by between 25-35% and increase PTKA market share by 11% toSurabaya and 5% to Semarang
Surabaya Semarang Surabaya SemarangMarket share
Executive rail 30% 26% 38% 28%
Business rail 14% 40% 17% 42%
Air 49% 18% 37% 12%
Executive bus 6% 17% 9% 18%
Trip generation -2.1% -2.2%
Base Air + Rp 50,000
Market shares Base Case and with air fare increase of Rp 50,0000Market shares Base Case and with air fare increase of Rp 50,0000
The response of PTKA demand to a change in the characteristic of another mode (in this case the air fare) is
known as the cross-el;asticity, and for the Surabaya market is estimated at about 1.8 (an increase in demandof 20% for an increase of 12% in airfare), although the corresponding estimate for Semarang is rather small at0.4.
Again, these predictions can be checked against historic data and the model parameters adjustedaccordingly.
This suggests the current rail fare structure between Jakarta and
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ggSurabaya is about right.
0%
20%
40%
60%
80%
100%
120%
230 210 190 170 150 130
Executive rail fare (Rp 000)
%o
fBaseCas
Executive Business Total
The case study costings estimated the floor price of executive travel at Rp 88 per passenger-km, excludingtuslah. This wpuld cover train operating costs but contribute nothing to track costs or corporate overheads.For the Surabaya service (725 km) this gives an absolute minimum fare of about Rp 75,000, comfortablybelow even the lowest fare considered in this analysis. However, as such a price is below the business classfare it would destroy PTKAs pricing structure and has not been included in this analysis.
0%
20%
40%
60%
80%
100%
120%
140%
160%
230 210 190 170 150 130
Executive rail fare (Rp 000)
%o
fBaseCas
Executive Business Total
Demand as a function of executive rail fareDemand as a function of executive rail fare Revenue as a function of executive rail fareRevenue as a function of executive rail fare
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Setting the price - freight
The Gede Bage terminal is a dry port which is part of a chain of transportservices (including freight forwarders (EMKL) and terminal operators (PT
SETTING THE PRICE - FREIGHT
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services (including freight forwarders (EMKL) and terminal operators (PTMTI and PT JICT)) for Bandung and West Java exporters/importers
EMKL / FreightForwarders/
Trucking
Connect exporterswith foreign market
Have the flexibility touse railway-based orroad based services
Transport containers
from the factory toPTKAs freightterminal or directly tothe port
Influenced by Organdarate for trucking
Connect exporterswith foreign market
Have the flexibility touse railway-based orroad based services
Transport containers
from the factory toPTKAs freightterminal or directly tothe port
Influenced by Organdarate for trucking
PTKA FreightTerminal and Train
Export documentmanagement,quarantine, bankingetc
Container storing
Container handling
(loading off andloading on)
Container transportfrom Gede Bage toPasoso/Lagowastation
Transport containerfrom Pasoso/Lagowato Gede Bage
Export documentmanagement,quarantine, bankingetc
Container storing
Container handling
(loading off andloading on)
Container transportfrom Gede Bage toPasoso/Lagowastation
Transport containerfrom Pasoso/Lagowato Gede Bage
PT. Multi TerminalIndonesia Pasoso
Terminal andTransport
Container handling
Container storing
Container transportingfrom Pasoso station(the land for Pasosoterminal is owned by
MTI) to JICT
Container handling
Container storing
Container transportingfrom Pasoso station(the land for Pasosoterminal is owned by
MTI) to JICT
PT. JICT Container Terminal
Container handling
Ship loading and un-loading
Container storing
Container handling
Ship loading and un-loading
Container storing
KAI, MTI and JICT signed an agreement in year 1999 for a joint tariff
In 1999, PTKA entered an agreement with MTI and JICT to integrate their
SETTING THE PRICE - FREIGHT
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services including offering a joint tariff to the customers
Role and Responsibility of Each PartyRole and Responsibility of Each Party
PTKA prepare export summary list, export documents, container exchange interchangereceipt, train documents and transport container from Gede Bage to Pasoso
MTI inform PTKA on ship schedules, prepare equipment, labor and storage areas,
perform loading off and loading on of container in the Pasoso terminal; transport containersfrom Pasoso to JICT
JICT prepare ship schedules, provide priority to the Gede Bage containers from gate in tothe stacking areas; put containers on the ship
PTKA prepare export summary list, export documents, container exchange interchangereceipt, train documents and transport container from Gede Bage to Pasoso
MTI inform PTKA on ship schedules, prepare equipment, labor and storage areas,
perform loading off and loading on of container in the Pasoso terminal; transport containersfrom Pasoso to JICT
JICT prepare ship schedules, provide priority to the Gede Bage containers from gate in tothe stacking areas; put containers on the ship
Activities & Rate in 1999 (Rupiah 000)Activities & Rate in 1999 (Rupiah 000) FeetFeet
Container from TPKB to JICT viaPasoso or vise versa
Container from TPKB to JICT viaPasoso or vise versa
Container from TPKB to Pasoso or viseversa
Container from TPKB to Pasoso or viseversa
Empty container from TPKP Pasosoor vise versa
Empty container from TPKP Pasosoor vise versa
20
40
20
40
20
40
20
40
20
40
20
40
PTKAPTKA
232
390
232
390
232
390
232
390
137
233
137
233
MTIMTI
107
154
107
154
47
73
47
73
23
37
23
37
JICTJICT
23
37
23
37
TotalTotal
363
580
363
580
279
463
279
463
160
270
160
270
$US = Rp 8000 approx
The tariff package (KAI + MTI + JICT) was increased in May 2001 andagain, by an average 66% by each party in February 2003; both increases
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Export from Gede Bage (TEU) 1999-2002
again, by an average 66% by each party in February 2003; both increaseshad a significant impact on rail container traffic
0
500
1000
1500
2000
2500
Jan
Feb
MarchAp
rilMa
yJu
ne July
Augu
stSe
pt OctNo
vDe
cJa
nFe
b
MarchAp
rilMa
yJu
ne
TEU/m
ont
0
200
400
600
800
1000
Tariff(000rp/TEU
TEU Rate
31267 31436
23156
20826
0
5000
10000
15000
20000
25000
30000
35000
1999 2000 2001 2002
Tariff increased in May 2001 and again in February 2003
Export from Gede Bage (TEU) in 2002-3
The current tariff structure causes the rail-based service to be lesscompetitive than the road-based service; even more so when the
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p ;comparative travel time and flexibility are taken into account
Comparison Between Rail and Road Cost for JKT BDG JKT (20 FEET in 1000 Rp)
0
200
400
600
800
1000
1200
1400
1600
1800
trucking
(empty)
Depo
JKT to
Pasoso
Lift on
depo
JKT
PT. MTI KAI
Pasoso -
TPKb
(empty)
OB +
Lo/Lo
Depo
Bdg
Trucking
depo
Bdg -
Factory
KAI
TPKB -
Pasoso
PT. MTI PT JICT Total Rail Road
Time of travel (Gede Bage Pasoso)Scheduled : 6.5 hoursActual : 7 hours
But access and egress to/from terminals arejust as large, if not more sot
Time of travel(factory JICT)5-6 hours
After the latest tariff increase revenue now cover train operating and
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p grollingstock renewal costs but still not its terminal costs
3938
2294 2350
91
819
1303
439
7296
0
1000
2000
3000
4000
5000
6000
7000
8000
Revenue Train operating
cost
Terminal Anciliary Rolling s tock
capex
IMO Corporate OH Total
Effect of Tariff Increase for Gede Bage Revenue and Expenditure, 2003 Forecasted (in Million Rupiah)
There are at least three alternatives for an improvement strategy tocreate an avoidable cost that is less that market price
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Review the operating plan and unit costs Train operation (schedules, train consist etc)
Rolling stock maintenance (loco, wagons etc)
Station and terminal operations etc
Review unit costs
Should plans be based on actual or future/efficientcosts?
As a last resort, prepare exit plan
Review the business model
Gede Bage container traffic should PTKA be awholesaler or a retailer
Factors which justify support by Government ?
Road congestion and damage
General political/development considerations
First decide objective (e.g. what should Gede Bagelook like in 5 years time)
Develop plan to achieve objective
Operation Plan ImprovementOperation Plan Improvement
Within the Gede Bage general cost, 77% are for theterminal operation that is being outsourced. PTKAshould analyse and renegotiate (if required) for theoutsourcing of the Gede Bage freight terminal
management Establishment of Gede Bage as a business unit
under the Divisi Kereta Barang that will beestablished as part of the KAI restructuring
Gede Bage freight services as well as other unitsshould be operated with clear performance indicators
to ensure the traffic is not treated as second classafter the passenger traffic
High flexibility to be given to the Gede Bage unit indetermining the business model
Establishment of a separate account for the GedeBage service in order to more easily identify financial
information
Within the Gede Bage general cost, 77% are for theterminal operation that is being outsourced. PTKAshould analyse and renegotiate (if required) for theoutsourcing of the Gede Bage freight terminal
management Establishment of Gede Bage as a business unit
under the Divisi Kereta Barang that will beestablished as part of the KAI restructuring
Gede Bage freight services as well as other unitsshould be operated with clear performance indicators
to ensure the traffic is not treated as second classafter the passenger traffic
High flexibility to be given to the Gede Bage unit indetermining the business model
Establishment of a separate account for the GedeBage service in order to more easily identify financialinformation
ALTERNATIVES
In terms of its business model, PTKA should take more control over theoverall chain in upstream and downstream
SETTING THE PRICE - FREIGHT
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overall chain in upstream and downstream
Upstream Possible ImprovementUpstream Possible Improvement
Operate as a retailer
Deal direct with customers
Have direct contracts with local truckcompanies to collect and deliver locally
Have freedom to hire truclks if necessaryto carry by road to the port when there aredelays by rail
Operate as a retailer
Deal direct with customers
Have direct contracts with local truckcompanies to collect and deliver locally
Have freedom to hire truclks if necessaryto carry by road to the port when there aredelays by rail
Downstream Possible ImprovementDownstream Possible Improvement
Deal direct with JICT
Employ contractors for local terminal handling anddelivery in Jakarta
Consider other container-related servicesRepairs
Cleaning
Storage
Deal direct with JICT
Employ contractors for local terminal handling anddelivery in Jakarta
Consider other container-related services Repairs
Cleaning
Storage
However, it will be very difficult for PTKA to successfully compete under public-sector constraints
The container business unit must have considerable commercial freedom and should be clearlyseparated from the rest of PTKA
While rail-oriented it should not be 100% tied to rail
It could own or lease the container wagons with haulage provided by PTKA proper under a formalcontract probably on a take-or-pay arrangement
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Controlling costs - passenger
Better ticketing systems can be installed at little cost to the railway
CONTROLLING COSTS - PASSENGER
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Bangladesh Railways installed one at little cost to itself
Contract awarded using twoContract awarded using two--stage processstage process
The contractorThe contractor::
Designs, sets up and operates the computer network andDesigns, sets up and operates the computer network andterminals,terminals,
Maintains hardware and software,Maintains hardware and software, Pays a fixed monthly stipend to BR booking clerks,Pays a fixed monthly stipend to BR booking clerks, Hands over the system to BR at the end of the contract period.Hands over the system to BR at the end of the contract period.
BRBR
Pays the contractor at a rate per ticket issuedPays the contractor at a rate per ticket issued Pays normal salary to the booking clerksPays normal salary to the booking clerks
Contract durationContract duration
4 years after commissioning, or after a specified total number4 years after commissioning, or after a specified total numberof tickets have been issued.of tickets have been issued.
CONTROLLING COSTS - PASSENGER
Fare evasion is often widespread but it can be controlled by a suitableinspection regime
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0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.00% 0.50% 1.00% 1.50% 2.00%
Inspection Probability
ProportionofPassengersWithValidTicket R=40
R=3
Approximately
3% gap
Approximately
0.7% Inspection
Probability
R is the ratio of
penalty charged to
fare evaded
LONDON TRANSPORT POLICY
Each passenger should have theirticket checked or see another
customers ticket being checked onone in every five trips. This seems tomaximise the efficiency of ticketchecking at lowest sensible costs.
Inspection Number of inspections Likely level of evasion (%)
probability (%) Annually Frequency Low penalty High penalty
0.20 1.2 About every ten months 40 15
0.50 3.0 Once per four months 20 100.75 4.5 Once each quarter 13 91.00 6.0 Every two months 10 81.50 9.0 Every 5-6 weeks 8 52.00 12.0 Every month 5 23.00 18.0 Every 2-3 weeks 2
Outsourcing can be an effective cost control techniqueOutsourcing can be an effective cost control techniqueWholesaling Local Passenger Trains in BangladeshWholesaling Local Passenger Trains in Bangladesh ....
CONTROLLING COSTS - PASSENGER
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ObjectiveObjective
Curb unauthorizedCurb unauthorized travellingtravelling and to reduce dependence on PSOand to reduce dependence on PSO Gain experience in a new area of PPPGain experience in a new area of PPP
Basic concept of scheme, the lesseeBasic concept of scheme, the lessee
Operates trains.Operates trains. Collects revenue directly from passengers,Collects revenue directly from passengers, Pays BR on the basis of carriagePays BR on the basis of carriage--trips operated.trips operated.
Pilot project:Pilot project: DhakaDhaka--NarayanganjNarayanganj section were selected for the pilot projectsection were selected for the pilot project Award of contract in July, 1997Award of contract in July, 1997 88% rise in BR88% rise in BRs revenue from the trainss revenue from the trains Service quality improved and there was an increased demand for sService quality improved and there was an increased demand for serviceervice
Frequency of service then increasedFrequency of service then increased Further 28% overall rise in revenueFurther 28% overall rise in revenue
Now leasing out more trainsNow leasing out more trains -- so far 44 more trains leased out (37% of nonso far 44 more trains leased out (37% of non--intercity seatintercity seat--km)km)
Result: An average 68% rise in BRResult: An average 68% rise in BRs revenues revenue
CONTROLLING COSTS - PASSENGER
and Outsourcing Onand Outsourcing On--Board Services for Intercity TrainsBoard Services for Intercity Trains
Outsourcing can be an effective cost control techniqueOutsourcing can be an effective cost control technique
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and Outsourcing Onand Outsourcing On--Board Services for Intercity TrainsBoard Services for Intercity Trains
ObjectiveObjective
Improving quality of onImproving quality of on--board servicesboard services Preventing pilferage of fittings and fastenings of passenger carPreventing pilferage of fittings and fastenings of passenger carriagesriages
Basic concept of scheme, the contractor provides stewardsBasic concept of scheme, the contractor provides stewards Take over the coaches before departure of the trainTake over the coaches before departure of the train Admit passengers in the coach & help them occupy the allottedAdmit passengers in the coach & help them occupy the allotted seatsseats Look after the comfort of passengers ;Look after the comfort of passengers ; Hand over the coach to BR staff after the round tripHand over the coach to BR staff after the round trip
TypicallyTypically
BR pays the contractor at the agreed rateBR pays the contractor at the agreed rate Contractor rents BRContractor rents BRs buffet cars buffet car
ResultsResults Pilot project achieved a 48% real improvement in contribution toPilot project achieved a 48% real improvement in contribution to BRBR
CONTROLLING COSTS - PASSENGER
Outsourcing OnOutsourcing On--Board Services for Intercity TrainsBoard Services for Intercity Trains
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Outsource Whole Business Segments Where Possible
Rail Services Provided by Private Operators
CONTROLLING COSTS - PASSENGER
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Concessioning and outsourcing have grown dramatically around the world
As a result, there are a number of qualified investors and operators
While often complex, concessioning can dramatically reduce costs and investmentneeds
Light Rail
& Metro
Mainline
Suburban &
Commuter
Domestic
Intercity
Passenger
International
Passenger Freight
United Kingdom X X X X X
France X X 1
Sweden X X X X
Germany X X X
Netherlands X X Planned
1: Limited to local services operated under contract (by private operators) to SNCF
Rail Services Provided by Private Operators
Competitive Tendering Has Reduced Costs Dramatically
CONTROLLING COSTS - PASSENGER
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Outsourcing provides the opportunity to bring private capital as well as new andmore focused business practices-turning fixed costs and investment needs intovariable costs
%
System Period Converted Total Cost Service Level Unit Costs
Auckland 1990-1996 100.0% -21.2% 16.5% -33.5%
Denver 1988-1995 25.0% 3.0% 25.0% -18.0%Indianapolis 1994-1996 70.0% 8.5% 38.4% -25.9%
Copenhagen 1989-1996 56.0% -18.5% 5.0% -22.3%
Las Vegas 1993-1994 100.0% 135.0% 243.0% -33.3%
London 1985-1996 57.0% -30.0% 28.7% -45.7%San Diego 1979-1996 37.0% 2.7% 46.6% -30.0%
Stockholm 1992-1995 59.0% -18.5% 2.8% -20.3%
%ChangeCompetitive Tendering of Transit Services to the Private Sector
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Controlling costs - freight
Simplify Business Structures
Extended Core Railway (UZRR)
Ukrzaliznytsia (UZ)*
CONTROLLING COSTS - FREIGHT
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UZ had over 440business units andover 500,000employees
Cumbersomestructures tend tomake costs fixed
Eliminateunnecessary
business units,and consolidateothers
Business unitsshould focus on
defined marketswith similarcharacteristics
State Administrationfor Railway Transport
of Ukraine
Donetsk
Railway
InterTransFreigh
Forwarder
City MetroServices(3-1/2)
ComputerCenter
Lviv
Railway
LiskyIntermodal
IndustrialRailways &
Services
PrintingNewspapers& Gazette
Odessa
Railway
SpecialWagon Unit
(tanks)
Railway Shops(21 factories6 bureaus)
KievRollingstock
Bureau
Dneiper
Railway
RefrigeratedWagon Unit
Manufacturing& Sleepers(9 factories)
Catering& Trading
Group
Southwest
Railway
PassengerCustomer
Center
MaterialsStores &
Distribution
Hospitals& Medical
Supply
Southern
Railway
FreightCustomer
Center
EngineeringDesign
Bureaus (4)
Training &Education(15, 5, 1)
Core Railway
y ( )
Government
Rolling stock
Commercial
Railway
Administration
Look for ways to reduce assets
Fleet Rationalization and Workshop Improvement Investment Rationalization & Workshop Upgrade Program
CONTROLLING COSTS - FREIGHT
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Many state railways have multiple workshops for wagon, coach and locomotive repairs
Most private operators, even big ones, have a single big workshop with a few smaller facilitieslocated strategically around the system
In part, this practice is often based on how assets are used and managed
Locomotives assigned to particular services and particular geographies are especially egregious
Common purpose equipment, managed across geographies, improves utilization and reducesassets required
Fleet Rationalization and Workshop Improvement Investment
0
2
4
6
8
10
12
14
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
US
$(millions)
p pg g
0
5
10
15
20
25
30
35
40
45
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Numb
erofWorkshops
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Numb
erofEmployees
Workshops Closed
Staff Reductions
Look for ways to reduce assets
Centralization & Computerization Investment Computerization Improvement Program
CONTROLLING COSTS - FREIGHT
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Information technology can reduce operating costs dramatically by eliminating small stations,centralizing call centers, billing and accounting systems
Improved train control systems, even for light density railways (through radio dispatching, for
example), can reduce operating costs and eliminate unneeded assets associated with stations andmini-control centers
Better traffic costing systems help identify opportunities and focus attention
0
1
2
3
4
5
6
7
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
US$(millions)
0
200
400
600
800
1000
1200
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
NumberofStations
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
CumulativeStaffReduction
Look for ways to reduce assets
Operating Plan & Improvements Cumulative Impact of Operation Plan & Network Improvements
CONTROLLING COSTS - FREIGHT
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In railways where traffic patterns have shifted, a new operating plan can reduce the need formarshalling yards and terminal facilities and eliminate the need for locomotives
Most major railways develop new operating plans every year and modify them intensively during the
year
CN, one of the best operated railways in the world, was able to eliminate over 300 locomotives andclose 3 major marshalling yards, by developing a new operating plan focused on its best businesssegments
Operating Plan & Improvements
0
2
4
6
8
10
12
14
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
US
$(millions)
Cumulative Impact of Operation Plan & Network Improvements
0
2
4
6
8
10
12
14
16
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Numberof
TerminalsClosed
0
2
4
6
8
10
12
14
16
StaffRed
uctions(000's)
Concentrate traffic on fewer routes where possible
Black SeaG i
Russia
30 35 40
Black SeaG i
Russia30 35 40Bulgaria
CONTROLLING COSTS - FREIGHT
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TCDD, Turkeys national railway, has a very light density network
The largest density is near citiessuburban services mostly, about 20 million tonnes per kilometer
The rest of the network averages less than 2 million-tonnes per kilometer per year
AnkaraKirikkale
Zonguldak
Kayseri
Mersin
Adana
Narh
Ulukisla
Konya
Iskenderun
AfyonManisa
Kutahya
Izmir
BandirmaSivas
Kars
Samsun
Malatya
Turkey
Georgia
Armenia
Syria
Greece
Lebanon
Iraq
Iran
Medi terranean Sea
35
40Ankara
Kirikkale
Zonguldak
Kayseri
Mersin
Adana
Narh
Ulukisla
Konya
Iskenderun
AfyonManisa
Kutahya
Izmir
BandirmaSivas
Kars
Samsun
Malatya
Turkey
Georgia
Armenia
Syria
Greece
Lebanon
Iraq
Iran
Medi terranean Sea
35
40
23
22
21
20181617
1905
04
0607
07
08
09
40
39
38
4128
29
3031
37
35
48
36
86
10
43
4245
46
44
71
7273
74 7576 77
78
80
79
69 64
65 66
63 67
6870
81NA
8283
85
25
26
87
5651
8988
60
62
61
56
57
58
52
54
55
59
24
37
5090
49
0302
01
11
12
13
14
15 IstanbulHydarpasa
Consider radical solutions
Black Sea30 35 40
BulgariaRussia
TCDD Core Network
CONTROLLING COSTS - FREIGHT
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A strategy of reducing TCDDs network to a core system (red), seeking subsidy forstrategic pieces (purple), and concessioning the rest (green) is not enough to make TCDDself supporting
AnkaraKirikkale
Zonguldak
Kayseri
MersinAdana
Narh
Ulukisla
Konya
Iskenderun
AfyonManisaKutahya
Izmir
Bandirma
Sivas
Kars
Samsun
Malatya
IstanbulHydarpasa
Black Sea
Syria
Greece
Lebanon
Iraq
Iran
35
40
Bulgaria
Turkey
Georgia
Mediterranean Sea
Armenia
23
22
21
2018
16
1719
05
04
09
4039
41282930
3137
3548
3686
43
4245
46
44
71
7273
74
75 7677
7879
64
6566
63
6967
6870
81 NA
8283
84 85
25
26
87
5351
888960
6261
56
57
58
52
55
59
24
37
5090
49
03020111
13
15
54
1412
06
07
08
38
10
80
Sometimes, even that is not enough
Operating Cost of Railway$0
CONTROLLING COSTS - FREIGHT
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Even complete concessioning requires ongoing subsidy
($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$
Millions(2002)
Concessioning
Efficient Core
Core Network
90% of Traffic
Existing Strategy
No Change
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Controlling the costs - infrastructure
Look for programs that prolong asset life
CONTROLLING COSTS - INFRASTRUCTURE
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Many railways are able to achieve rail life of more than 2 billion tonne-kilometers while others persistwith practices that have rail life of 500 million tonne-kilometers:
Rail grinding, flange lubrication
Maintenance practices based on replacement of track components rather than whole systems
Substitution of lower cost components (e.g., the 12 piece Soviet style rail fastening system by the5 piece Pandrol type fastening)
Elimination of little used brancheseither through sale (short-lining) or closure
Track Investment
0
10
20
30
40
50
60
70
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
US$(millions)
Track Rationalization & Maintenance
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
cumulative staff reduced
cumulative track kilometers eliminated
COMMERCIALIZATION OF BRS TELECOM SYSTEM
IInn 19871987--89, BR established its own optic89, BR established its own optic--fibrefibre telecom networktelecom network
CONTROLLING COSTS - INFRASTRUCTURE
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IInn 19871987 89, BR established its own optic89, BR established its own optic fibrefibre telecom networktelecom network
BR equipped it with 120 channels for its own use but a large latBR equipped it with 120 channels for its own use but a large latent capacity remained untapped.ent capacity remained untapped.BR decided to exploit this capacity through PPP withBR decided to exploit this capacity through PPP with GrameenGrameen Telephone.Telephone.
Contract structureContract structure
Long term lease (20Long term lease (20--30 years) of the system for commercial use30 years) of the system for commercial use
Existing telecom capacity and facilities used by BR retained andExisting telecom capacity and facilities used by BR retained and provided by the lessee free ofprovided by the lessee free ofcostcostThe lessee (The lessee (GrameenGrameen Phones) :Phones) :
bears costs of repair, replacement and upgrading of the systembears costs of repair, replacement and upgrading of the systemreimburses salaries and allowances of BR telecom personnelreimburses salaries and allowances of BR telecom personnel
pays BR an annual rental for use of the system up to a specifiedpays BR an annual rental for use of the system up to a specified limit;limit;shares revenue with BR for any subshares revenue with BR for any sub--lease of any channel capacity;lease of any channel capacity;shares revenue with BR for capacity utilization beyond the specshares revenue with BR for capacity utilization beyond the specified limit;ified limit;makes an upmakes an up--front payment to BR at the time of contract signing.front payment to BR at the time of contract signing.
Lease contract for 20 years signed inSeptember1997Lease contract for 20 years signed inSeptember1997 payments currently being renegotiatedpayments currently being renegotiated
New contract is likely to represent about 10% of gross earnings - and 30% ofpassenger earnings at no cost to BR
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Summary
It is all too easy for railways to get caught in a cycle of doom
Many railways are starved for capital, and
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spend what little is available on the wrongthings
Investments that expand profit making businesssegments will help brake the cycle of doom;
investments that enhance the ability to losemoney strengthen the cycle
Investments that reduce costs also help brake
the cycle: mechanizing track maintenance,replacing unreliable locomotives
Eliminating divisions and assets with poor profitperformance, especially those with private
sector counterparts (e.g., advertising, printing,engineering design, construction, buildingmaintenance, etc.) also brake the cycle
PoorTrackConditions
OldLocomotiveFleet
High OutOf ServiceLevels
SlowTrainOperations
ExcessEquipment
NeedsExcessLocomotiveNeeds
ExcessTrains,Crews
ExcessCosts
Slow &UnreliableService
Low Fares
Rates &Tariffs
DecliningTrafficBase
InsufficientCapital &Funds
Cycleof
Doom
Restructuring in isolation may only rearrange the boxes specificmanagement measures are also required to escape the cycle
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Know your customersKnow your customers
Set the right prices andcollect the money
Set the right prices andcollect the money
Know your costsKnow your costs
Control your costsControl your costs
DRIVE REVENUEUP
DRIVE REVENUEUP
DRIVE COSTSDOWN
DRIVE COSTSDOWN
And dont forget about safety!!
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