The Railroad Week in Review:
Week ending May 20, 2000

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People in networked markets have figured out that they get far better information and support from one another than from vendors. So much for corporate rhetoric about adding value to commoditized product. (Cluetrain Clue Number 10)

A friend writes, “E-commerce will transform the railroad industry over the next decade. E-stores make it easier for existing customers to do business with a company by using the Internet to offer more information and faster communication. Internet-based marketplaces and exchanges that actively match buyer and seller provide many of the potential benefits often associated with mergers.” Today’s buyers’ market for cars and locomotives is the logical place to start. Think “Amazon” and e-mail me.

Concerning the value of the KCS Railroad separate from the Financial Management side, we ran a comparison with WCLX and FEC based on the 1999 SEC Form 10-K for each. Looking at KCS by itself - no GWRR, no Mexican involvement - it ranks first in revenues among the three, first in route miles (though WC is a close second), and tied with FEC in revenues per employee. On the other hand, KCS fares less well than its peers in operating ratio, revenues per locomotive, revenues per carload (counting 1.6 intermodal units as a carload), and carloads per locomotive unit.

KCS also has garnered a rave review from Eric Lee, CEO of the connecting Meridian Southern, a new regional carrier. He writes, “I couldn't resist responding to your question about the KCS. Without exception, the folks at KCS have done everything in their power to help us in acquiring and commencing operation of our new property in Mississippi that we acquired from them at midnight on March 31, 2000. This has really helped us to hit the ground running. Based upon our prior experiences elsewhere KCS has been a real breath of fresh air. In the long term deals like ours can only benefit the KCS and add to their local traffic base.” And that’s the kind of stuff that makes stakeholders happy.

GNWR presence in Australia just got another nudge. On Thursday GNWR's Australia Southern Railroad (ASR) took delivery of 16 locomotives to be used in the construction phase of the Alice Springs to Darwin rail line. By way of review, Genesee & Wyoming Australia (GWA) has a small piece of the Asia Pacific Transport Consortium, mandated in 1999 to design, build, and operate this 1,420 KM stretch of new rail. ASR will operate the line once open.

It ain’t going to be easy. A friend in Melbourne writes, “The rail link has been discussed by Australian Governments for decades and although partially funded by the Commonwealth Government whether it [will be] a highly successful venture remains to be seen. The proponents believe that there is significant traffic movement between Darwin and the eastern seaboard where the bulk of Australia’s population resides. But the reality is that there is very little volume traveling between north and south. What the consortium is hoping for, is that with the rail link that Darwin could become a major shipping terminal both inbound and outbound and all this freight being moved by rail to and from the eastern sea board.” At least GNWR is in on the ground floor.

It's a basic business tenet that you can't fix what you can't measure. Fortunately our friends at the class 1s are getting a lot better at measuring and taking action. We've seen how UP has used velocity measures to fix its route structure and locomotive utilization. We've seen how CSX has taken days out of perishables transit times to the Northeast. Now here comes NS with a remarkable tool to measure its own responsiveness to customers.

One of my beefs has long been that it takes railroads more time to get a rate request answered than it does for a truck to make two round trips between the OD pairs in question. Norfolk Southern has addressed the issue head on. Don Seale, SVP Merchandise Marketing, challenged John Kraemer, AVP Shortline Marketing, to come up with an e-commerce application to streamline the business development communication process. The result is the new Business Development Activity Worksheet (BDAW). You'll find it on line at

ready for downloading and immediate use.

Not only is this worksheet an excellent streamlining tool, it's also a powerful measurement tool, and that carries a number of significant benefits. First, NS will be able to measure what shortlines (SLs) can do in the new business arena, something that's always talked about but never measured. Now it can be. Second, it measures response time to SL rate requests, and that time interval between request and answer is date-stamped on the e-mail.

Third, it lets NS measure the quality of rate requests from SLs. Some SLs, as you know, are prone to tilt at windmills. The number of quotes that actually produce freight moves will be measured. Thus it is in the SLs' best interest to use the form and use it a lot, first making sure the request has decent odds of resulting in cars moving.

Fourth, the revenue request put in by the SL will be an indicator of how well the SL knows its own markets. A high allowance request on a modest freight bill and a small number of potential cars will raise more eyebrows that a generous requirement on an aggressively priced value move -- my $6,000 boxcar, e.g. One caveat is in order, however.

We have always maintained class 1s will be more receptive to ways for SLs to make more money by moving more cars with the same allowance schedule than they will be to raising allowances "just because." Budgeting seems to take a back seat on many SLs and as a result they really don't know what it costs them to run a train, what business potential is out there, and how much money they can make with the current rate structure and more business. Norfolk's sharper pencil could add some needed discipline.

The bottom line for shareholders is that with NS measuring its own response time to rate requests as well as the quality of those requests, NS will be able to accelerate the rate-making process and make it more accurate in the bargain. More revenue, lower cost. I like that.

At least three rail stocks seem to be coming out of the doldrums. Recall from our previous musings that the directions of the 200-day moving average and the daily stock price chart can help in gauging market sentiment. This week UNP, NSC, and WCLX all closed further on their moving averages. UNP looks most promising, with the 200-day curve flattening out and the stock price crossing the curve at $45 on Friday. Right behind UP is NS at $18.75 with the lines converging at about $20. Third is WCLX. We look for a cross around $14 even though the stock closed Friday at $12.625 on a down tick.

Last week I sent this note to a dozen or so heavy users of rail freight services: “Have you seen any change in transit time for your shipments? More time, less time, changes in reliability and consistency. The reason I ask is that there appears to be in some quarters a major push on keeping car hire down even as cars languish in yards and interchanges.” Within two days most had responded, some with fairy detailed and lengthy commentaries. Yes, it’s been bad, though there are signs it’s getting better. Results will be distilled and sanitized for next week’s Review.

--Roy Blanchard

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