THE BLANCHARD COMPANY

The Railroad Week in Review:
Week ending February 12, 2000


Florida East Coast Industries has posted a 10% increase in net income for 4Q99 over last year. On a per share basis, it was 33 cents vs. 30 cents. Quarterly operating revenues were up $25 mm to $89.8 mm, largely the result of real estate sales. For the year earnings were off 6.7% to $1.12 a share due to special charges. Absent these charges net was up 5% to $1.26 a share. FY 1999 revenues hit $324.3 mm vs. $247.8 mm a year ago.

The Florida East Coat Railroad (FEC) continues to provide the largest single chunk of revenue to the company, $42.4 mm for the quarter and $166 mm for the year. Rail revenues in 4Q99 were unchanged from 4Q98. Unit volume growth in aggregates (1.7%), autos/auto parts (9.7%) and conventional rail carloadings (3.6%) along with improved pricing was offset by continued weakness in intermodal traffic - a decline of 8.7%.

FEC 4Q98 ops expense was up only $0.2 million, despite the quarter having included an abnormal charge of $2.7 million related to a settlement of a lawsuit involving a 1994 incident. That plus increased fuel costs of $0.9 million were offset by savings from severance programs started in 1998 and other cost controls. The abnormal charge of $2.7 million caused Railway's operating ratio for the quarter to increase to 74.7% compared to 74.2% in 4Q98.

Stock prices have enjoyed a nice run of late. From the high 20's a year go to a recent close of $42 represents a rise of 61.5%. Can't think of any predominantly railroad companies that have done as well, especially when you consider it took from Jan 88 to Feb 96 to get from $10 to $20 a share. By comparison, CP took just about as long to reach $20 from $10, however it is still stuck below $30 a share.

CSX was able to announce results for 4Q99 and FY99 this week having finalized the SeaLand transaction. Recall we previously reported CSX earnings (WIR 1/29/00) as underwhelming, and that was before the final results were in. Now, with all the special charges laid on, it appears CSX lost 12 cents a share for the quarter and made a penny a share for the year.

Happily the rail and intermodal side remains pretty much as it was, with an adjusted operating ratio (before special charges) of 89.1 for the quarter and 86.2 for the year. Both are up from the 82 scored in 4Q98 and FY98. "Conrail Operating Fee, Rent, and Services" for the year hit $280 mm. Sure would like to know how much of that was CSX' share of the Shared Area operating expense.

Misery Loves Company Department. US Rail shares aren't the only ones getting whacked of late. RailTrack, owner and maintainer of the railroad fixed plant infrastructure in the UK, saw its share price cut in half to 794 pence from 1558 pence in one day. That close was the lowest since the summer after privatization in 1997.

According to The Financial Times, "S&P cut the rating from AA- to A because of concerns about tougher regulation, political hostility, rising investment costs and poor project management." FT goes on to say the rating change "will add an estimated 60 basis points to RailTrack's cost of borrowing for investment, which could rise to 40bn ($66bn) over 10 years."

The wrap? "RailTrack's monopoly position and the political imperative of improving the railways are ultimate security. But as costs rise the public must pay - as passengers or taxpayers. So the pressure on income must remain and shareholders could be squeezed in the middle." Remember, sports fans, RailTrack is Open Access in spades.

RailAmerica will pick up two new Board members from RailTex, Ferd Meyer and Gus Pagonis, which bodes particularly well. RAIL is beginning to strike many people as an activist company taking some risks -- the debt load is one -- yet with a clear goal in mind. And in this regard having these gentlemen on the board has got to be good news.

Meyer is Executive Vice President and General Counsel of Central and South West Corporation (CSW), a public holding company for five electric utility companies operating in the south central states and the UK. Pagonis is Executive Vice President of Logistics for Sears, responsible for all of Sears' Logistics functions including vendor relations, transportation, distribution, international logistics, outlet stores, home delivery services and the integration of logistics information services. Utilities and retail -- what a powerful combination.

Even better, Pagonis is a retired army Lieut. General and was General Norman Schwarzkopf's logistics commander during Desert Shield/Desert Storm. A good friend who is also a retired Army general says Pagonis "did great work under very trying circumstances in the desert." This is important.

My friend and I have had many thoughtful discussions about the similarities between the combat environment we both saw in Vietnam and the railroad environment today. In the peacetime army and in the usual corporate environment one moves from day to day making incremental changes in the way one operates to satisfy shareholders or to improve combat readiness. But the rate of change accelerates in hostile environments.

That the rail industry is in a hostile environment is clear by the rapid fall from grace of stock prices (CSX, NS, and UP hit 52-week lows Thursday) and the defection to truck by so many shippers. Combat leaders know that speed, surprise, and excellence of execution will win the day more often than creeping about the edges of the battlefield looking for targets of opportunity. The rails could do worse than follow this example.

There are signs some are. The CN+BNSF move is one example; the CSXT senior staff reorganization and announced shift to more market pricing is another. And both were preceded by the RailAmerica acquisition of RailTex, which took many observers by surprise.

There are two excellent publications to review. One is the RAIL/RTEX transaction prospectus, which lays out the reasons for the proposed merger, the risks faced, and the rewards expected. It is, in essence, a battle plan for the merger. The other document is Amy Field Manual (FM) 101-5, Staff Organization and Operations, particularly Chapter 5, The Decision-Making Process. You can get the Prospectus from RailAmerica; you can download FM101-5 as a PDF file at www-cgsc.army.mil/cdd/f540/f540.htm.

Why move faster? Because even if you don't your competition will, and the Internet is driving much of the accelerated rate of business change. Business-to-business e-commerce is expected to become a $2.7 trillion industry by 2004, with "e-marketplaces" leading the way. RailMatch, the web-based railcar trading floor mentioned here previously, has seized that lead in the railroad industry.

According to some recent research, it is projected that within two years more US companies will be on the web than not, and the chief driver is the ability to reach a greater audience in a more efficient manner. In four years, so-called e-marketplaces -- which facilitate such e-commerce activities as auctions, bid systems and exchanges -- are expected to account for 53 percent of all online business trade.

Further down the pike, e-marketplaces may feed three-fourths of all e-commerce with the largest impact in -- surprise! -- utilities, shipping and warehousing. Now do you see why RAIL's recent board picks are right on target? As science fiction write Robert Heinlein once penned, "Moderation is for Monks. Take big bites." In other words, football's "three yards and a cloud of dust" again and again won't make it any more. Bang heads, take names, and move out.

--Roy Blanchard


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