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Costing Railway Services and Traffics

A railway service is most competitive when it delivers a better price and service mix to its customers than its competitors. Costs incurred in producing these services will dictate the lowest possible prices that will sustain the overall financial sustainability of the railway entity. Therefore, cost levels are critical, and a well-run railway will devote considerable attention to measuring and controlling costs.

Railway financial accounts will reveal total costs, which are essential to analyze overall financial viability. Benchmarking total costs against other similar railways will highlight areas for seeking cost efficiencies. However, most national railways provide a range of freight and passenger services. For freight customers, services might be tailored, for example, to bulk freight customers, container forwarders, and general freight. Passenger services might include inter-city, regional and suburban services. Each broad freight or passenger group will contain multiple market segments.

In a well-run railway, commercial managers need to know costs and financial performance for each market segment, disaggregated by route and other factors, sometimes even a specific train or freight customer. In a multi-product railway, these costs cannot be derived directly from general corporate accounts. They require application of costing techniques (see Costing in Section 2). But understanding rail business management and pricing requires a general understanding of the main costing concepts. Two of the concepts are common costs and joint costs, which can be either fixed or variable with regard to traffic levels.

Common costs
In the railway industry, most common costs are associated with infrastructure and corporate overhead functions that support all users and services. Lines for mixed-use railways are usually built, maintained, and controlled to standards that can serve all types of passenger and freight trains.25 Some design elements and some management characteristics are more specific to either passenger services or freight services, but most infrastructure network costs are common among all users on a mixed-use, multi-product railway.

If costs were variable with usage, they could be attributed to specific services that are provided with facility capacity, or to specific traffic. However, most rail infrastructure network costs are common and fixed, so a ‘relative usage’ formulation is technically arbitrary, not based on cost causality.

Also, many operations costs are ‘technically common’ such as train crews or locomotives, but over the medium term, these costs vary—more traffic equals more trains, more locomotives, more crews. Therefore, these costs can be attributed to specific services and traffic segments.

Joint costs
In the railways industry, joint costs are largely associated with train operations and occur when producing one good or service produces another good or service. For example, if the wagon can attract a regular load in both directions then the wagon movement cost is joint between the two traffics. Similarly, if a locomotive and crew is scheduled to haul a container train in one direction and return with an intercity passenger train, these costs are joint between freight and passenger services.

Joint costs cannot be attributed unambiguously to each beneficiary service or traffic because reverse movement is still required and costs are incurred even if one service or traffic is no longer operated. Fortunately, joint costs are becoming rare. Now, passenger services are more segmented into service types and fixed-formation trains operate services in both directions. Similarly, a much higher proportion of freight services now operate two-way trainloads of specialized wagons for coal, containers, and oil, among other cargoes. Therefore, joint costs can usually be ignored, except in unusual circumstances.26

Next, the three main uses of traffic costing are discussed below: financial contribution analysis; commercial management; and railway pricing policy. Each is important to the financial sustainability of railways.