There's an old joke about the neophyte manager who, when told by his boss that the company was losing money on every sale, replied reassuringly, "That's OK. We'll make it up on volume."
But executives of CSX Corp., parent of one of the nation's biggest railroads, weren't laughing when they discovered several years ago that the railroad's intermodal business had been run that way.
Intermodal operations, which compete with trucks for cargo that can move in trailers or marine containers, were thought to be generating about $20 million in profits annually.
However, after CSX decided in 1987 to establish the business as a stand-alone profit center, the performance of the new intermodal company revealed something very different. Intermodal freight was not generating anything like $20 million in profits. In fact, it was losing money, to the tune of $28 million in 1988.
"That's a $50 million swing," recalls CSX Chairman and Chief Executive Officer John W. Snow, describing that figure as "serious money." The problem was that the railroad, like the young manager in the joke, had been pursuing a strategy based on volume, not fully understanding the costs associated with each piece of business.
Today CSX Intermodal Inc., the Hunt Valley-based unit that runs the intermodal business, has demonstrated that it is possible for a rail freight company to make money competing with trucks for intermodal cargo. The company, which generated a small profit in 1989, was firmly in the black last year.
By the end of 1992, Mr. Snow expects CSX Intermodal to be carrying its own weight in the corporation by earning a respectable profit. "We're making very good progress," he said.
The key was to figure out what freight to pursue and what to turn away. "We've learned to say no," Mr. Snow said.
Learning to say no was not a painless process. CSX Intermodal was created by merging separate intermodal departments of two CSX subsidiaries: its railroad, CSX Transportation Inc., and its steamship line, Sea-Land Service Inc.
And M. McNeil Porter, CSX Intermodal's president, was operating under considerable internal pressure. CSX had grown impatient with the unfulfilled promise of the intermodal business, which had seemed like a way for the railroads to win back traffic they had been losing to trucks for decades. The company's board of directors gave the intermodal company a five-year lease on life to demonstrate that it could make a significant contribution to the parent company's bottom line.
"We had to prove that intermodal was what everyone said it was," Mr. Porter said.
Trying to determine how best to operate the combined #i organization, CSX Intermodal (then called CSX/Sea-Land Intermodal) conducted a rigorous review of its business.
"We took the business out and put it under a microscope," Mr. Porter recalled. "We found we didn't make money with a volume mentality."
The company concluded that it needed to concentrate on filling its trains on long hauls while shedding much of the shorter-haul traffic. That led to a decision to close 18 of the smaller intermodal terminals operated by CSX east of the Mississippi.
That decision was not popular in the cities served by those terminals. And Baltimore port officials were distressed that they could no longer offer direct rail service by CSX to a number of Midwestern markets, including Toledo, Ohio, and St. Louis.
"We got a lot of concerned letters from people," Mr. Porter said.
The cuts created a more compact system focused on high-volume core routes. But other basic problems still remained, including the poor reputation intermodal rail service had among shippers.
"Low cost and slow; that's the way you used to talk about it," Mr. Porter said.
Rail service also tended to be less reliable than trucks and more susceptible to damage. As a consequence, railroads have to set their prices below that of trucks. And during the last decade truck rates have moved down steadily.
"The intermodal business is very, very competitive. The rates stink," said Jeffrey S. Medford, an analyst for Wheat First Securities in Richmond, Va. In 1980, truck rates were about $1.70 a mile, while today the figure is about $1 a mile, according to Mr. Medford. Taking inflation into account, the rate today is 50 cents a mile, or less than 30 percent of the rate a decade ago, he said.
Despite the low rates, CSX Intermodal had to improve service to be more competitive with trucks -- something CSX had never been able to do within its railroad organization. "It's tough to think like a trucker inside a 44,000-person railroad," Mr. Snow observed.
Until their deregulation a decade ago, railroads tended to be very bureaucratic operations more intent on satisfying the demands of the Interstate Commerce Commission than their customers.
Railroads presented shippers with "take it or leave it" proposition. And many who could leave did, shifting their cargo onto trucks. By industry estimates, intermodal rail operations have been able to capture only about 16 percent of the potential market of $35 billion to $40 billion a year.
Since deregulation, railroads have tried to become more fleet-footed in their approach to marketing and service. But old habits die hard. Most shippers still find it much easier to do business with the more-flexible and responsive trucking companies than the ponderous railroad organizations.
The task of making CSX Intemodal act like a trucking company was given to Mr. Porter, in part because he spent most of his career in the trucking industry before going to Sea-Land in 1977. Even at Sea-Land, most of his work still centered on trucks rather than ships.
"Most Sea-Land work is really the trucking business. Ninety percent of it is how you get [cargo] to the ship. I've been in the trucking business for 35 years. I feel like I'm still in it," Mr. Porter said.
Much of the service issue is a question of information -- being able to tell a shipper where his cargo is and when it will arrive. CSX Intermodal has put in place sophisticated computer systems that make that possible. To resolve problems, it has also developed a customer service department with authority over operations.
While CSX Intermodal was cutting back terminals east of the Mississippi, the area serviced by its sister railroad, it was moving ahead to provide coast-to-coast service though partnerships with other railroads. For example, CSX Intermodal uses the Southern Pacific Transportation Co.'s rail yard in Los Angeles, while SP uses the CSX Intermodal yard in Chicago. Both can offer customers coast-to-coast service without spending huge sums on new terminals.
CSX can arrange the transportation of cargo between virtually any two points in the world. The cargo during its trip may move by a combination of truck, train and ship, but the shipper will deal only with CSX Intermodal and will receive just one bill.
Changing the perception of shippers of intermodal service has not been easy.
Thomas F. Putschoegl, a transportation specialist for Minnesota Mining & Manufacturing Corp. in St. Paul, Minn., said he has a hard time convincing people within his organization to accept the use of intermodal services, which they view as slow, unreliable and prone to damage. "My struggle is internal," he said, since many people at 3M are happy with truck service and reluctant to switch to intermodal -- even if the price is cheaper.
Some 3M products move by CSX Intermodal under contract with steamship lines. But 3M itself does not now have its own contract with CSX Intermodal, although one is under negotiation.
So far, CSX Intermodal has made a good impression on Mr. Putschoegl. "I think they're doing a real nice job in how they approach this," he said. "They're very much in synch with what we're looking for in a carrier."
Although intermodal may often be slower than truck, that disadvantage can be overcome by providing very reliable service. Before 3M signs any kind of contract, CSX Intermodal will have to demonstrate it can deliver that kind of reliable, damage-free service. "The standard will be just as high for CSX as for any motor carrier," said Mr. Putschoegl, explaining that 3M will insist on testing CSX's performance before agreeing to a contract.
Increasingly, CSX Intermodal has been able to win over skeptics among shippers. No longer is the intermodal business the stepchild of a railroad focused on more profitable commodities such as coal, vehicles and chemicals. Now, CSX Intermodal is a growing profit center with control over its own destiny. Concentration of resources, tight management and improved service levels have been the formula for success.
"We are a very profitable unit of CSX," Mr. Porter said, adding, "We've done it with minimum capital investment."
Mr. Porter has no illusions that the success of CSX Intermodal poses a mortal threat to the trucking industry. He acknowledges that trucks will continue to carry the lion's share of traffic. "We're really a niche business selling a service that's distinctly ours," he said. "It was never meant to replace trucks."
CSX Intermodal remains a very small piece of the CSX pie, generating about 8 percent of the corporation's $7.7 billion in operating revenue last year.
The company has made significant contributions to the economy in the Baltimore area. Employment for Baltimore's CSX Intermodal operation has more than doubled from 90 in 1988 to 205 at present. The company is the sole tenant of the state-owned rail yard adjoining the port of Baltimore's Seagirt Marine Terminal. In 1990, the company handled about 70,000 containers and trailers, up from about 60,000 the year before. So far this year, Seagirt volume is up about 6 percent, according to CSX Intermodal.
For now, CSX Intermodal is content with trying to do better with its current assets. "If I have to spend a lot of capital I'm not going to make any money at it," Mr. Porter said. But he believes the current system could handle twice the current traffic without a major expansion of facilities.
"The ability to double your size is incredible," he said. "Fortunately, American railroads made the investment [in intermodal facilities and equipment] years ago. Now we're beginning to utilize them fully."
No longer is there any question of whether the intermodal business can be profitable. The issue now is how profitable. As Mr. Snow said, "The proof of any pudding is in the eating. This one is tasting pretty good."