1. Management of
Transportation
Seventh Edition
Coyle, Novack, Gibson &
Bardi
© 2011 Cengage Learning
Chapter 8
The Bulk Carrier
Industries
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or duplicated, or posted to a publicly accessible website, in whole or in part.

2. Introduction
• Domestic water and pipeline carriers
– Both account for substantial shares of intercity
freight volume
• For some commodities, one or both are the dominant
modes
– Most freight carried tends to be high volume, low
value, and of limited variety
• Chapter includes
– Types of carriers, market structure, competition
– Operating and service characteristics, equipment
and cost structure
– Current issues
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Brief History: Water Transport
• First principal form of long distance freight
and people transport
• Important contributor to early U.S. economic
and social development
– Linked initial population/industrial concentrations
along coast and rivers
• Waterways are natural ways
– Public expenditure for improvements occasionally
necessary

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Water Transport Industry Overview
Significance of Water Transport
• A primary transporter of
– dry bulk commodities
– bulk petroleum, petroleum products and chemicals
• 13% of intercity freight ton-miles in 2005
• Market share decline since 1980s due to
– Economy changing from manufacturing to service-
based
– Supply chain orientation emphasizes faster modes

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Water Transport Industry Overview
Types of Carriers
• Classification by legal form of carriage
– Private carriers
• Own the freight transported
• Own or lease the vessels
• May transport exempt commodities on a for-hire
basis
• Excluded from federal economic regulation
• Three or fewer commodities transported in the
same barge unit also exempt from economic
regulation

6. Water Transport Industry Overview
Types of Carriers
– For-hire water carriers are carriers that charge a fee
for services. Includes
• Exempt carriers
– Excluded from federal econ. regulation adm. by STB
– Carriers are exempt when transporting dry or liquid bulk
commodities
– Most goods transported by water are bulk commodities, thus
most for-hire carriers are exempt from economic regulations
• Regulated common carriers
– Common carriers
– Contract carriers
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Water Transport Industry Overview
Types of Carriers
• Classification by waterway used
– Internal or inland carriers
• Operate barges and towboats on principal U.S. rivers
• Most found on river systems flowing north to south
through central U.S.
– Great Lakes carriers
• Provide services between ports on Great Lakes
• Lake ships tend to remain on lakes
• Some lake ships access Atlantic and Gulf coast ports
via St. Lawrence Seaway

8. Water Transport Industry Overview
Types of Carriers
– Coastal carriers
• Operate ocean-going ships and barges along
Atlantic, Pacific and Gulf of Mexico coasts
• Moves large quantities of crude oil from Alaska
ports to refineries along Pacific Coast
– Intercoastal carriers
• Operate ocean going ships and barges between
coasts
• Moves large quantities of oil from Gulf to Atlantic
ports
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Water Transport Industry Overview
Number and Categories of Carriers
• Relatively small number of small firms
– Approx. 680 domestic for-hire carriers in 2006
• Number of carriers rapidly declining since 2000
• Inland carriers earn highest share of revenues
– Inland carrier revenues flat over last decade
– Coastal carriers earn next highest share
– Great Lakes carrier revenues are growing due to
increase in higher valued freight

10. Water Transport Industry Overview
Competition
• Moderate intramodal competition
– Small number of carriers on each waterway system
• Intense intermodal competition
– With rail for dry bulk commodities (grain, ores, coal)
• Competition focused around central U.S. river system and
the Great Lakes
– With pipelines for oil and petroleum products
• Competition focused along coasts and Mississippi River
system
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Water Transport Industry Overview
Operating and Service Characteristics
• Principal competitive advantages
– Low cost transport service for large volumes over
medium to long distances
• Average cost = $.72 per ton-mile
• Average shipment distances
– 400 miles for inland carriers
– 1,500 miles for coastal carriers
– Relatively large carrying capacity
• Barges: 1,500-3,000 tons per barge (50-100 truckloads)
• Lake vessels: 20,000 tons
– Fuel efficient

12. Water Transport Industry Overview
Operating and Service Characteristics
• Principal competitive disadvantages
– Speed of service
• Slowest mode for dry cargoes
– Weather-related service disruptions
• Vulnerable to ice, flood, and drought conditions
– Accessibility limitations
– Packaging requirements for high-value goods
• Service disadvantages may add cost for user and
create tradeoffs with low rate advantage
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Water Transport Industry Overview
Operating and Service Characteristics
• Commodities hauled
– Water carriers well suited for low value-to-
weight cargoes where transport rates are
significant part of total delivered cost
– Distribution of waterborne traffic (2007)
• Coal and coke 29.3%
• Petroleum 26.5%
• Crude materials 17.6%
• Food and farm products 12.5%
• Chemicals 8.2%
• Mfg. goods and equipment 5.7%

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Water Transport Industry Overview
Equipment
• Vessels
– Have large openings into cargo holds to
facilitate cargo loading and unloading
– Watertight walls divide holds enabling carrying
of multiple types of commodities
– Largest vessel: tanker 18K – 500K ton capacity
• Used largely to transport petroleum
– Barges – powerless vessel towed by towboat
• Used largely on inland waterways
• Low marginal cost to add barge to a tow
•

15. Water Transport Industry Overview
Terminals
• Functions
– Facilitate intermodal transfers
– Provide temporary storage in port area
• Require significant capital investment
– Facilities include ship loading/unloading equipment,
land for storage, road and rail access
– Most are publicly provided and operated
– Some are owned by large bulk commodity shippers
• Recent improvements focus on mechanization
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Water Transport Industry Overview
Cost Structure
• Relatively high variable, low fixed costs
– Fixed costs: about 15% of total operating costs
• Nature provides ways
• Governments provide for improvements to rivers,
canals, channels, locks, dams, terminals and ports
– Variable costs: about 85% of total
• Water transport is not labor intensive
– In 1997, 2.72 million ton-miles per water carrier employee
(note – rail and pipelines are even less labor intensive)
• Carriers pay user charges for portion of publicly
provided improvements

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Water Transport Industry Overview
Current Issues
• Drug and alcohol abuse
– Random and pre-certification testing
• Port development challenges
– Economic vs. environmental tradeoffs
– Appropriation of port revenues
– Inter-port competition
– Impact of “mega-ship” emergence

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Brief History of Pipelines
(Focus on Oil Pipelines)
• Highly specialized mode, hauling small
variety of products
• Initial role, late 1800’s – move crude oil
from wells to other modes
• Early 1900s – pipelines owned, operated
by large oil companies
• After WWII – Chaplin Oil Case:
pipelines ordered to operate as common
carriers

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Pipelines Industry Overview
Significance of Pipelines
• Carry 20% of intercity ton-miles (2005)
– Crude oil and petroleum products represent
66% of ton-miles, natural gas 33%
• Earn 4% of total intercity transportation
revenues
– Reflects efficiency of pipeline transport and
low value per ton of products transported
• About 160,000 miles in oil pipeline network
– 1,478,000 in natural gas pipeline network

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duplicated, or posted to a publicly accessible website, in whole or in part.
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Pipelines Industry Overview
Types of Carriers and Ownership
• 90% of carriers operate as common carriers
• Individual, vertically integrated oil companies
own and operate most oil pipelines
• Some lines are joint ventures of two or more
oil pipeline companies
• Other types of ownership
– Railroads
– Independent oil companies
– Other types of industrial companies

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Pipelines Industry Overview
Number of Carriers (Market Structure)
• Small number of large carriers: 2,297 (2006)
• Industry tends toward oligopoly
– 20 integrated oil companies control 66% of crude oil
mileage
– Entry costs are high: capital intensity, obtaining
rights-of-way
– Significant economies of scale in investment and
operation
• Capacity rises more than proportionally with increase in
line diameter. Thus, investment cost per ton-mile and
operating cost per barrel both decline as size increases.

24. Pipeline Operating and Service
Characteristics
• Commodities carried – 4 principal products
– Oil and oil products
– Natural gas
– Coal and coal products
• Moves in pulverized form as slurry
• Requires large quantities of water – very few such lines
– Chemicals
• Primarily anhydrous ammonia (used in fertilizer)
• Propylene (used to manufacturer detergents)
• Ethylene (used to make antifreeze)
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Pipeline Operating and Service
Characteristics
• Relative advantages
– Low rates
– Low loss and damage rates
– Warehousing function (3-5 mph)
– High delivery dependability
• Relative disadvantages
– Slow speed limits responsiveness
– Limited geographic flexibility
– Limited variety of products carried

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Pipeline Competitive Conditions
• Very little intramodal competition
– Small number of carriers
– High capital costs and scale economies
– Procedural requirements for entry
– Ownership by large oil companies
• Limited intermodal competition
– Difficult for other modes to match rates
– Water carriers are principal competitors

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Pipeline Equipment
Oil Pipeline Network
• Includes system of
– Gathering lines and stations
– Crude oil and product trunk lines
– Pumping stations, refineries, and terminals
• Gathering lines
– Move oil from wells to gathering stations
– Relatively short distance movement
– Small diameter, laid on ground surface

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Pipeline Equipment
Oil Pipeline Network
• Crude oil trunk lines
– Move crude oil from gathering stations to
refineries
– Long distance movement
• Shipments average 800 miles, may move
1,000s of miles
– Large diameter lines laid underground
– Pumping stations provide power
– Capacity determined by line diameter and
pumping station power

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Pipeline Equipment
Oil Pipeline Network
• Finished product trunk lines
– Move product from refineries to market area
terminals
– Long distance movement
• Shipments average 400 miles, may move 1,000s of
miles
– Large diameter lines laid underground
– 15 grades of finished product, including
kerosene, jet fuel and gasoline
– Final delivery to customer usually by truck

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Pipeline Cost Structure
• High % of fixed costs
– Pipeline owners provide right-of-way
– Capital invested in
• Rights-of-way, pumping stations, terminal facilities
– Significant economies of scale
• Helps explain joint ownership
• Very low labor costs
– Pipeline industry employs 8,000
– Motor carriers employ 10 million to move
comparable ton-miles

31. Pipeline Cost Structure
• Rates
– Freight classification is not necessary due to
small number of products
– Conditions are not conducive to differential
pricing
• One-way movement, limited geographic coverage,
limited variety of products
– Rates quoted on a per barrel basis
• Typically point-to-point or zone-to-zone
• Minimum shipment sizes (tenders) required
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