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:
Operating
Strategies:
-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)
Commercial
Strategies:
´ 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
Parcel Traffic:
- 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
- Use of SLR capacity (many SLRs are still
going vacant)
-Refrigerated vans and terminals (our
country loses perishables due to lack of refrigerated storage and transport)
Sundry
Earnings
- 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.
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