  YOU ARE BROWSING THE OLD STEAMCENTRAL.COM. TO SEE OUR LATEST ENTRIES, CLICK HERE. | ||
| The Sustainable Steam Locomotive Revisited | ||
| or A Sorry Way to Run a Railroad | ||
| By John A. Craft | ||
| " . . . it's a historical fact that one of the best ways to hemmorage a bank account is to put an engine on the main line. Only those with significant reserves of lolly or groups with the ability to raise finance in other ways do it - but then, as the world at large is so keen to point out, we're all slightly off the twig anyway." - David Wilcock in "Down Main," May 1995 Steam Railway. | ||
| My policy for SteamCentral is to publish editorials on the first day of the month. In fact, I had planned to write this editorial much later this year, as a companion to Rich Melvin's piece on excursion costs, which has been delayed due to Rich's busy schedule. But this past week (this is written on 13 August) has seen both the best and worst examples of fiscal responsibility in the steam locomotive community in recent memory. On the good news front, the Fort Wayne Railroad Historical Society has announced a $400,000 TEA21 grant to overhaul its ex-NKP 2-8-4 765 to service in 2001. But the joy of this announcement was tempered by the bad news coming out of Chama, NM. One of the finest historic railroad properties in the country has deteriorated to the point that only two of the six locomotives in recent operation could be called upon for daily service. The convergence of these two happenings made me change my plans. | ||
| I am NOT equating the team in Fort Wayne with the people responsible for the situation in Chama. The Fort Wayne RRHS had to meet some strict measures of responsibility to get that money; they are a sharp outfit that has accomplished quite a lot in 25 years. But they do have one thing in common with the current management of the C&TS: more wear was accumulated on their locomotive than could be repaired with the money available to the mechanical forces. (The FWRHS made a conscious decision to invest in shop facilities; in the case of the C&TS, it is less clear to this outsider where the money has gone.) And these are far from isolated examples; a partial list from the last ten years alone includes 290, 630, 750, 1361, 1744, 2102, and 4501. Avoiding this outcome is a lesson the steam locomotive community has to learn and apply. | ||
| ||
| No matter what fuel, lubricant, or water treatment you use, the most important consumable for a steam crew is MONEY. Earl Knoob of the Fort Worth and Western often refers to "cubic dollars." Steve Lee of the Union Pacific referred to the recent total running gear overhaul on 4-8-4 No. 844 as "lift the boiler, lay down a cushion of 800,000 $1 bills, and lower the boiler down again." Jim Wrinn of the North Carolina Transportation Museum describes ex-BC&G 2-8-0 No. 4's boiler overhaul as "opening the firedoor and tossing in a check for $150,000." It's not a new issue, and the sums are only getting bigger. | ||
| Aarne Frobom of the Michigan State Trust for Railway Preservation, who wrote this month's SteamCentral editorial, wrote a seminal editorial in the December 1996 "TRAINS" magazine titled "The Sustainable Steam Locomotive." It should be required reading to anyone contemplating returning Ol' 999 to service. The basic premise is: If you don't respect the true costs of operating your engine, one day it'll end up in the shed with your bank account empty. If it could happen to a well-managed group like the Fort Wayne RRHS, you can be certain your group isn't immune. | ||
| We're not talking about some deep concept. A steam locomotive is perhaps the perfect example of the accounting concept of depreciation. On a given day, you may spend less than $1000 out of pocket to fire up Ol' 999 and run her on an excursion. But your true cost is greater - a measurable chunk of your engine's finite life span just got used up. A good operation takes it into account the Total Cost of Ownership, and prepares for the day Ol' 999 needs new brass or new flues. | ||
| And it doesn't take a PhD to figure out the sums, although some familiarity with financial analysis is needed. How many miles did you get out of the last overhaul? What's the net present value of all maintenance expenditures since the last overhaul? What's the estimated cost of the rebuilding you are facing? What are the expected economic conditions between now and the next time work will be needed? Put these figures into your spreadsheet, apply the appropriate adjustment factors, "et voila!" | ||
| Since the 765 announcement is one of the reasons I decided to write this, let's use her as an example. According to the FWRRHS, No. 765 accumulated 51,893 miles on 277 operating days between December 1979 and October 1993. In addition to the interim work performed during those years, over $400,000 is now needed to prepare 765 for a return to the mainline. (Figuring that the inevitable will happen and FWRRHS will find more work to do than is planned now, I'm guessing $500,000 will go up in brass, steel, and labor between now and 765's shakedown runs in 2001.) | ||
| Since I don't have exact figures, I'm going to pull a figure of $250,000 out of the air for the cost of interim maintenance on 765. (This is assuredly too low.) To find the figure appropriate to your locomotive, get out every receipt for fittings, tools, contract services, etc., translate the cost into a present-day figure, and total them up. | ||
| So for the sake of this example, we've got the net present value of every repair job needed by 765 between 1979 and 1999; $750,000. | ||
| (Think that's a lot of money? Not really. Norfolk and Western 4-8-4 611 consumed $500,000 during her 1981-1982 return to service, and that was only a down payment. Firebox work in 1983, flues in 87-88 and 90-91, more firebox work in 93, crosshead guides on several occasions and lots of other repairs added well over $1 million to the total, and NS was facing another overhaul when it sent 611 back to Roanoke in 1994. Sister 1218 is reported to have consumed $1.2 Million before she made her first test run.) | ||
| $750,000 for 51,893 miles of service on 277 days. For every mile 765 rolled, $14.45 in Society assets simply disappeared up 765's stack. And it'll happen for every mile 765 rolls after the upcoming rebuild. Call it wear and tear, call it depreciation, call it whatever you want - it happens, and it doesn't do any good to pretend it doesn't. And that's before the cost of fuel, lubricant, water treatment, hotel rooms, meals, tools and electricity for the shop, and a thousand other costs are even discussed. | ||
| But for now, this is the figure we're interested in. $14.45 per mile. Want 765 to come to Chicago and run a pair of trips on the Nickel Plate main to Argos, IN? $8670 worth of depreciation MUST be earned before out-of-pocket expenses are even considered if 765 is to avoid the fate she met in 1993 - almost a decade of storage. Four New River trips? Put $26,252 into a financial instrument, like a bond or mutual fund, before the fire dies on 765's grate back in Casad Industrial Park for the winter. | ||
| But we're not done with the analysis yet; there are two more constraints on the equation. Under the new FRA rules governing steam locomotives, an organization will be able to operate their locomotive on 1472 "service days," or for 15 years (whichever comes first), before a major inspection of the boiler is required. If we assume that 765 will get the opportunity to run another 50,000 miles during that period, and that she needs a complete overhaul as a result, then $50,000 per year, or $509.51 per service day, must be accumulated. And days spent in steam but not working count as a service day. A quick analysis of steam tests, shakedown runs, fire-up and cool-down days, and layovers leads pretty quickly fo ratio of 2 service days per operating day for most operations. So over $1000 for each of those 736 operating days has to be set aside. | ||
| And that's if you are able to use up all of your service and/or operating days. No. 765 didn't; she was operated on only 277 dates in 14 years of service. For no. 765, operating days become the controlling constraint: $2527 per operating day must be set aside at that level of daily use (equivalent to 174 miles run, pretty close to 765's daily average of 187 miles). | ||
| The final rule of thumb for our example? $2527 per day minimum, or $14.45 per mile (including ferry moves), whichever is greater, put away for maintenance and overhaul. Then add the direct costs of the operation as listed earlier. Honor this rule and there will ALWAYS be enough money when 765 needs work. Ignore it and 765 will one day become a hanger queen again, and another grant will have to be found. | ||
| Let's repeat the same example for a small engine. The North Carolina Transportation Museum was kind enough to provide the overhaul cost of Graham County Shay 1925 ($400,000); let's estimate $150,000 in total maintenance over the 15-year life of the rebuild, and figure 50 miles per operating day. Per mile, $14.90; per day, $750; per year, $36,666. | ||
| One final example: From 1991 to 1994, Tennessee Valley Railroad offered its ex-SOU 2-8-2 4501 to Norfolk Southern on a daily rate that did not cover the day's wear. Now 4501 sits at East Chattanooga, her restoration fund growing slowly, but it will be years before she's serviceable again. | ||
| If you operate your engine infrequently (Mr. Frobom's beloved ex-Pere Marquette 2-8-4 1225 comes to mind), and do everything with volunteer labor, you may need less. But a retubing with some firebox replacement can cost $150,000 or more if performed by a contractor. Running gear overhauls are similarly expensive (ask the company that insured ex-SOO 4-6-2 2719). (If you do the calculations for your organization, please consider sharing the results with us.) | ||
| Now these are only examples. As I said, the real costs for 765 are going to be different; for example, 765's running gear has over 100,000 miles wear, not 52,000. And the characteristics of the revenue stream that mainline operators like FWRRHS face are very different than those a museum like NCTM contends with, and for-profit outfits like C&TS face yet another set as well. | ||
| Nor am I saying that FWRHS has to charge trip operators $2527 per day over the cost of operating the locomotive. The money doesn't have to come directly from the trip sponsor; a good merchandising program, coupled with regular fundraising before the money is needed (so it's there when you need it, can be invested and earn a return, and your engine (your most impressive asset) doesn't sit useless while you raise it), can take some of the sting out of ticket prices. Shrewd investment and good returns can cut the input requirement by 10% or more. But the money has to come from somewhere, or your group will end up with a display engine one day. | ||
| Someone in Chama seems to have ignored this rule. By my calculations a normal tourist season on the C&TS involves 20,000 train miles, with an additional 5000 or so miles in helper, extra, and other movements. If $14 per mile turned out to be the appropriate figure, an annual budget of $350,000 (about 17% of the annual revenue stream) is warranted for locomotive maintenance. I don't know how much has been spent since December 1996, but my guess is that it's less than that. The result? A train on the 10th of August that ran over six hours late. (The lucky passengers were the ones denied a seat on the train that morning because a helper locomotive wasn't available.) In other words, lower revenue. Thus begins a downward spiral of even less money available for maintenance, more loco failures, more angry customers telling friends not to go to Antonito or Chama to ride the train. | ||
| The sad thing is, in Chama it didn't have to happen. On 14 October 1992, five locomotives sat hot in Chama for the first time since the D&RGW ended year-round operation in 1963. | ||
 | ||
| It happened again in 1993, and a sixth locomotive was put into service in 1994. Kyle Railways, the previous operator, managed to maintain these locomotives in rotating service on a revenue stream very similar to that being earned today, and still earn enough profit to please management for over a decade. I don't know what happened, but I do know it was avoidable. | ||
| Fort Wayne RRHS just got its cash infusion, and will no doubt be prepared when 765 is up for a major inspection in 2016. The equipment in Chama, neglected for over two years now, is still waiting for the money required to return it to reliable service. Don't let your engine end up like 497, with running gear so worn out that crankpins are banging into the crossheads, and FRA inspectors are standing there ready to tag your engine unsafe. | ||
| John A. Craft | ||
| What's your reaction? Send your comments to mail@steamcentral.com. | ||
| From Mike Brown, TVRM: | ||
| "Steam locomotives, as you know, require varying degrees of maintenance, depending on age and use. Although it may not be needed now, let's say that 5 years after the 765 returns to service (2006), Rich and company find that it needs a crown sheet and other firebox repairs that were not part of the upcoming rebuild. Obviously, the cost of these repairs can't be attributed to that five years of service alone. Such repairs should rather be considered sunk costs. It is true that measurable wear items such as rod brass, crown brasses, tires, shoes and wedges (for those locos that have these), flues, air brake components, axles (if you have friction bearings), crankpins (remember these last two can only be turned down so far), engine and trailing truck wheels, tender wheels, brake shoes, valve and piston rings and cages and liners, crosshead guides (the brass there in) among other things should be taken into account for standard operating maintenance costs, but to try to account for such things as heavy firebox repairs, some of which are good for 20 years or more would be extremely difficult, at best." | ||
| From Gary Landrio, Vice-President - Rail Operations, Stone Consulting and Design: | ||
| "Years ago I read my first shortline annual report. In it was an item labeled Sinking Fund. When I asked what was it for, I was told that the bonds of the railroad came due in 1984 and the railroad had to over years accumulate the needed money to pay the bondholders on that due date. No railroad operation is any different. Call it a Sinking Fund or some thing else, you need to set aside money not only for the locomotive, but also for the wear on the cars and track and bridges and buildings. We at Stone Consulting specialize in consulting to the shortline and tourist rail industry. Some of our hardest work is educating project advocates to ALL the realistic costs associated with their goal. Some groups are very well managed, but the ones who run the operation out of their check book unfortunately all have a day of reckoning." | ||
| From Jim Wrinn, North Carolina Transportation Museum: | ||
| In some ways, we've probably shot the needle off the scale, possibly too far. We put roughly $400k into the Graham County Shay over an 8-year period. A goodly chunk--i don't know exactly how much--went into labor costs; our organization valued getting the engine done economically, but also realized that we had a lot of money tied up in an engine that was not going to get done unless contractors came in and moved it to completion. (Working Saturdays and Sundays forever will get you there, so your engine can begin making money again when you're 78 and the engine is 150 years old!) Secondly, in the case of the 1925, we were putting back what about 70 years of hard labor in the mountains, 24-hour running from the 20s through about 1940, a wreck in 1968 and a lot of other hard service took out of the engine. In its current useage and light service at Spencer, i don't expect to live long enough to see the kind of work we did take place again. Also, we took several steps to get ahead of the game--both the frame and the water tank (inside and out) are coated in an expexior-type material which should leave them encapsulated (read rust free) for decades. The bottom line is that steam engines are expensive, and we should all be putting aside money in some sort of index fund so that when it's tube time, there will be money to get a new set. One of our long-range goals at NCTM Foundation is an endowment that would accomplish this; the flipside, of course, is that we don't want to price ourselves so high that nobody can afford us. What is the market willing to bear? Our big annual fund-raiser for the NCTM Foundation is a $12 ticket for adults and half price for kids, which is roughly double the daily rate for 1 train ride. If that ticket was $20/$10 I think we'd get a lot fewer customers. | ||
| From Ron Goldfeder: | ||
| "People can nit pick the details of your article, but this subject needs to be discussed frequently. The air of unreality that many steam fans surround themselves with is hard to believe and harder to penetrate." | ||
| From Michael Carlsson, SteamCentral's Sweden correspondent: | ||
| "Just read about what you´re paying for workshop visits in the U.S. An idea just flew in to one ear, and out of the other: Ever thought of sending parts to Meiningen, Germany? A 40ft container shipped from U.S. East Coast to Sweden costs approximately 1000$, one way. A total overhaul incl. change of gauge(!) was offered to a Swed. Ass. by the Meiningen Works for US$121,000. Need new tires and firebox? Could it be cheaper to buy the job abroad?" Michael refers to the ex-DR workshops in Meinigen, Thuringen, Germany, now a private locomotive contractor. It's certainly food for thought - not many US locomotives will fit into a 40-ft. container, but perhaps some components can be refurbished more cheaply overseas. | ||
| From Don Micheletti, Golden Gate Railroad Museum: | ||
| "So much has been written on this subject and so little is heard! NO ONE, who has not done it, realizes how much money it takes to operate a main line steamer. Right now our locomotive, 2472, is down for repairs. Even though we realized we should be putting money in the bank for such events, we failed in our efforts. While money alone is not the reason 2472 has been down for so long, it has certainly been part of the problem. We are facing the new FRA laws. Since our locomotive is down anyway we may go ahead and do all that work now. I am still amazed at the number of folks who approach me about returning a park engine to operation. They usually estimate between $25,00 and $50,000 for the repairs. When I question the numbers the usual response is that the "other" work is going to be donated - and I shouldn't be so negative. It costs a lot of money to run a locomotive - like the others I feel the locomotive might as well be burning $20 bills." | ||
| From Robert Kittel, Operations Manager, San Bernardino Railroad Historical Society: | ||
| "Excellent article . . . this will be required reading." | ||
| From Les Jarrett, Railway Productions: | ||
| "One item that you mentioned was a good merchandise program. It astonishes me how some groups let this important revenue stream go untouched. Go into their gift shops and they have a few cheap trinkets and a 16 year old behind the counter looking bored. Talk to a high chieftan in the operation and they'll tell you that the gift operation makes little if any profit and is hardly worth the effort. Then go somewhere like Strasburg or the Illinois Railway Museum and you will find well-stocked stores with items for a variety of tastes. Best of all, in addition to inexpensive gifts, they also manage to move some "big ticket" items like books and upscale clothing. The bottom line is that the merchandise operation has to be run like a business. The person running it shouldn't be whatever volunteer one can rope into doing it. As in everything else in life, the reward one gets is a direct result of the effort put forth, and sadly many of these organizations put little effort into merchandise sales." | ||
| From John West: | ||
| "Pricing should be based on marginal cost not average cost. Yes, you have to cover average cost to stay in business....or keep your loco running. But anything that covers marginal cost plus some margin contributes to the needed pot and reduces the mark up you need from the rest of the business. The secret is finding enough robust (inelastic) demand where you can mark price up enough to keep the average revenue above average cost. Kinda like what the N&W coal traffic did for the rest of the business. Both are essential to maximizing contribution, and having the best chance of covering your average costs. Let's think about charter freights on the C&TS. The railroad charged based on marginal costs (including a capacity cost during the busier parts of the season). Whether we ran charter freights or not had no impact on the volume or price of excursion business. And the railroad recognized that if it tried to charge us more, many of the freight charters might not have happened...ours is elastic demand. Hopefully the excursion demand is sufficiently inelastic so that the average revenue can be kept above average cost. But whatever markup he made on the charter freights was additional money in the pot that wouldn't otherwise have been there." The distinction between depreciation (the subject of this analysis) and pricing is an important one to make. Pricing strategy is going to vary based on the type of revenue stream. The C&TS has a day-in, day-out business bringing in revenue five months of the year; the FWRHS earned money only a dozen or so days per year on average. Consider YOUR revenue stream when determining your pricing strategy - but as John says, cover your average costs over the long term. (JAC) | ||
| From Rich Melvin, Fort Wayne RR Historical Society: | ||
| "You have overlooked the fact that the 765 rests comfortably in a modern, heated and insulated shop building that sits on 15 acres of prime industrial property, and we own it all, free and clear. There is no mortgage or lien of any kind against either the property or the building. Many years ago we decided to take a very long term view in our care and management of the 765. We reached a consensus that the single most important "maintenance item" needed for the 765 was a PERMANENT HOME. No more harsh, Indiana winters sitting outside under the pigeons. No more unheated leased buildings with broken windows, no security and plenty of rain both inside and out (Lima Locomotive Works and Casad Building 201.) No more living from month to month wondering if this is the month we get asked to vacate the building (NS Bellevue Roundhouse.) The shop facility we now have insures that no matter what happens to the Fort Wayne RR Historical Society or the steam excursion industry in the future, the 765 has a PERMANENT and SAFE home. That property and the shop building were recently appraised at well over the $400,000 overhaul figure, so the "overhaul" funds were used this time around to build that home. The shop and property are an "out of sight, out of mind" situation that a lot of folks overlook. However, I think the case could be made that the shop and property may be our biggest asset!" | ||
| YOU ARE BROWSING THE OLD STEAMCENTRAL.COM. TO SEE OUR LATEST ENTRIES, CLICK HERE. | ||