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.