B y contrast, the freight business generates positive operating income. In the Base Case scenario, this income increases from about 350 million AMD (US$ 700,000) in 2000 to 900 million AMD (US$ 1.5 million) in 2005. By the end of the period, this is enough to cover about half of the passenger loss.
In the cost reduction scenario, operating income doubles from about 350 million AMD (US$ 700,000) to 2 billion AMD (US$ 3.4 million). Operating expenses for the Transportation CJSC are cut nearly in half, with reductions/downgrading of stations, improved efficiency of freight clerical work and better planning of shunting and train formation work made possible by the investment in the operation management system. That system also improves the utilization of rollingstock, so that the Transportation CJCS needs to buy 16% less service from the Rollingstock CJSC to accomplish the same work. Requirement from Infrastructure are reduced by 7%, through better train planning and the reduction of train-km.
4.3.2.3Cross Subsidy
Review of the passenger and freight results indicates that the freight business makes a substantial cross-subsidy to the passenger business. Cost reduction is necessary if the freight business is to ever have any prospect of covering the passenger loss. But even if freight could cover passenger losses, strong economic reasons argue that it should not.
-
The need to cover passenger losses keeps freight rates higher than they need to be and impairs the railway’s ability to compete. In some markets, the railway could lower its prices and attract traffic away from motor carriers or increase the amounts Armenian producers are able to sell.
-
The need to cover passenger losses uses funds that could be used to maintain or replace assets of the railway. Armenian Railways is operating in near crisis mode, spending very little on materials and making only modest renewals to old equipment. The railway needs to make enough income to eventually support replacing the assets it needs.
The Government of Armenia needs to consider these issues. Over time, it needs to either pay for the losses of the passenger business or allow and encourage the railway to exit the passenger business.
Table 1 Base Case: Infrastructure CJSC, Income Statement, (AMD Millions)
|
Actual
|
Projected
|
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
|
|
|
|
|
|
|
|
Key Operating Statistics
|
|
|
|
|
|
|
|
Gross Tonne-km, system-wide (000,000)
|
853
|
882
|
914
|
945
|
984
|
|
|
|
|
|
|
|
|
Infrastructure Unit Employment
|
1,817
|
1,809
|
1,822
|
1,832
|
1,842
|
1,852
|
1,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue
|
|
|
|
|
|
|
|
Freight operators - infrastructure use fee
|
|
928
|
999
|
1,066
|
1,146
|
1,242
|
1,338
|
Passenger operators - Infrastructure use fee
|
|
699
|
718
|
740
|
756
|
764
|
783
|
Total operating revenue
|
1,591
|
1,626
|
1,717
|
1,806
|
1,903
|
2,006
|
2,120
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
Salary
|
423
|
436
|
456
|
476
|
498
|
521
|
546
|
Pension & health benefits [social insurance]
|
124
|
122
|
128
|
133
|
139
|
146
|
153
|
Materials
|
387
|
378
|
386
|
391
|
397
|
404
|
411
|
Fuel
|
54
|
110
|
112
|
113
|
113
|
114
|
115
|
Electrical power supply
|
77
|
79
|
81
|
83
|
86
|
88
|
91
|
Depreciation
|
362
|
216
|
224
|
233
|
242
|
252
|
262
|
Other operating expense
|
142
|
146
|
151
|
157
|
163
|
170
|
176
|
Bad Debt
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Total operating expenses
|
1,568
|
1,486
|
1,536
|
1,586
|
1,639
|
1,695
|
1,755
|
|
|
|
|
|
|
|
|
Operating Income
|
23
|
141
|
181
|
220
|
264
|
311
|
365
|
|
|
|
|
|
|
|
|
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auxiliary activities*
|
484
|
506
|
530
|
554
|
584
|
617
|
653
|
Gain (loss) on disposal of fixed assets
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
|
|
|
|
|
Interest Expense
|
0
|
0
|
41
|
127
|
215
|
263
|
266
|
|
|
|
|
|
|
|
|
Income Before Income Tax
|
507
|
647
|
669
|
647
|
633
|
665
|
752
|
|
|
|
|
|
|
|
|
Income tax
|
60
|
161
|
167
|
161
|
157
|
165
|
187
|
|
|
|
|
|
|
|
|
Net Income
|
447
|
486
|
503
|
486
|
475
|
499
|
565
|
|
|
|
|
|
|
|
|
Financial Ratios
|
|
|
|
|
|
|
|
Working ratio including depreciation
|
99%
|
91%
|
89%
|
88%
|
86%
|
85%
|
83%
|
Working ratio excluding depreciation
|
76%
|
78%
|
76%
|
75%
|
73%
|
72%
|
70%
|
* Auxiliary activities are primarily resale and distribution of electric power.
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