Saturday, January 26, 2019
Earnings – Write up
By Shri Sundar Ram, Retd Member(Technical)/RCT/SC
Importance of Earnings:
Why are earnings important? Earnings are important to generate “Surplus” (Profit).
So why is “Surplus” important? It is the surplus which allows us to spend money onexpansion of lines, purchase of rolling stock, and to meet all kinds of Capital Expenditure, especially because of the paucity of budgetary support. “Surplus” gives us money to replace assets (DRF), carry out Research and Development (RDSO!)
Surplus = Earnings –Expenditure = Earnings – (Fixed Costs* + Variable Costs)
* Here we are talking about money spent on Revenue expenditure and not Capital Expenditure. Fixed Costs (FC) are costs which do not vary with PKM and NTKM (such as Salaries, Depreciation etc.)
In contrast Variable costs (VC) vary directly in proportion to scale of operations (i.e. PKM and NTKM)
In railways conventionally we measure “Operating Ratio” (OR)
- Operating Ratio = (Expenditure/Earnings)X 100
- Operating Ratio is an indicator of how much railway spends for earning Rs100 and hence gives an indication of Surplus.
- To improve OR--We can increase the Earning or decrease Expenditure. Earnings can be increased with increase of Fixed Costs (FC) or without increasing Fixed Costs (by increasing PKM and NTKM with consequent increase of only Variable Cost (VC).
Concept of Contribution:
- Total revenue increases with each PKM or NTKM of traffic carried and similarly total VC also increases with each PKM and NTKM.
- Contribution per unit of traffic carried = Revenue per unit of traffic carried – variable cost per unit of traffic carried
- Total contribution = number of units of traffic carried X contribution per unit
- Total contribution is the fund generated to meet fixed costs and if total contribution is more than the total fixed cost for that year, we will generate “surplus”
- Surplus (S) = Total revenue (TR) – Total cost (TC) = TR-TC
=TR- (FC+VC) = (TR-VC) –FC
=Total Contribution –FC
= (Contribution per unit x No. of units) –FC
Please note that: Contribution per unit = Sale price per unit- Variable Cost per unit
The concept of “contribution” is very important for railway finances because there are many situations where Surplus can be increased by increasing the volume of traffic carried without spending additional funds on incurring fixed costs. This is called “playing on volume”. For example we are said to be playing on volume, when we are trying to increase occupancy of a coach or even when we add extra coach to a train.
When we “play on Volume”, we reduce Total cost per unit since more NTKM or PKM will reduce Fixed Cost per unit-since the fixed cost is spread over more units of output (PKM or NTKM)
Please note that contribution is different for different products. For example the contribution for an AC 3-tier berth is much higher than unreserved seat in passenger train. So if we want more profit we need to sell more PKM on AC 3-tier. Similarly we get more contribution when we sell Tatkal berth.
Can you think of other cases of “playing on volume”?
Heads of earnings on IR:
Passenger Earning: This constitutes about 27% of Total Revenue (TR) of IR. These earnings are by and large linked to PKM (Passenger Kilo meter). To improve PKM without increasing FC
- increase fare per PKM (be careful-demand may reduce- people may move to flights) or increase PKM (reduce idling of coaches – improve rake links)
- We have to find where there is unmet demand
- If unmet demand is in upper classes revenue generated is more since contribution is higher
- Where demand is less, move coach to train with higher demand
- Tatkal quota
- Move special coaches
- Dynamic fares (when demand is high charge more , when demand is less give discount – please note that an unoccupied berth does not give any earning, so we can sell such berth even at a very low price – remember your fruit merchant, he sells fruits at throw away prices when they are likely to get spoiled.
Freight Earnings: This constitutes about 64% of Total Revenue of IR and is considered as “bread and butter” of IR. These earnings are by and large linked to NTKM (Net Tonne Kilo Meters)
- To increase the freight earnings either we increase Freight per NTKM or we try to boost the NTKMs.
- Today we mostly carry Coal, Cement, Mineral and metal ores, POL, Food grains and Fertilizers – all low value goods so their capacity to pay revenue per NTKM is low.
- The total freight traffic carried by IR has come down from 89% of total goods traffic carried in the country to 40%- POL went to pipelines- Cement, Food grains etc are increasingly going to road. Even Coastal Shipping is taking away Cement Power sector allocation of Coal is rationalized to avoid cross traffic.
- Non availability of wagons to meet peak demand and surplus wagons in low demand season.
Strategies to Improve Freight Earnings:
-Increase of CC of wagons (reduce tare- increase height)
-increase length of train (run long goods trains)
- improve speed limits of goods trains
-generate line capacity
-Improve loading unloading facilities
-Encourage customers to mechanize loading and unloading (to improve wagon turnaround)
´ Offer Mini rakes, two point rakes, multi-point rakes
´ Empty direction traffic generation
´ Cargo aggregation
- Concessions to loyal customers
´ Facilities such as Rail side warehousing, private freight terminals
´ Schemes like Engine on load, wagon investment scheme
´ Connectivity to ports
´ Container Terminals and Multi-modal facilities
´ Dynamic Freight charges
´ Install accurate in-motion weigh bridges.
´ Develop strategies to re-attract wagon load traffic
Other Coaching Earnings
This constitutes other than earnings on account of PKMs
- Good for recapturing lost wagon load and smalls traffic
- For High value commodities
- Quick ad assured transit(no lorry can reach your goods to Delhi in 24hours like our Telangana Express)
- Leasing of VPU space (we fail in this because of poor contract management)
- VPU trains
-Use of room availability on coaching trains
-Refrigerated vans and terminals (our country loses perishables due to lack of refrigerated storage and transport)
- World over Non-fare revenue of railways is 10 to 20% (In Hyderabad metro the non-fare revenue is far higher than Fare revenue)
- IR non-fare revenue peaked 6% in 2016-2017
- Difficult to increase fares for political reasons and elasticity of demand
- Non-fare revenue can be increased to any extant- but creativity is needed.
- Traditional sources- Catering, Book stalls, Telephone booths, Medicine Shops etc, advertising, sale of scrap, Luxury Tourist trains
- Modern sources- Internet Kiosks, Commercial exploitation of real estate, on train magazine shops, water ATMs, sale of organic food
5.0 Conclusion: Earnings should be improved as far as possible without incurring higher fixed costs, since this leads to higher margins. This requires improvement in asset utilisation like wagon Km/Wagon day, Engine Km per Engine day, line capacity utilisation. Only after these saturate we should go for higher fixed cost options like adding of new lines, new wagons etc.