Armenian Railways: Five Year Business Plan



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4.3.2.2Freight Business


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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