The Railroad Week in Review:
Week ending June 10, 2000

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Companies that don't realize their markets are now networked person-to-person, getting smarter as a result, and deeply joined in conversation are missing their best opportunity. Cluetrain Clue No. 18

Norfolk Southern says it’s cut cars online inventory to the lowest number since Split Date a year ago, 214,000 cars. The numbers, courtesy of NS, include three days of 1999 ops over Conrail so for the first time we have a clear YTY comparison of NS performance.

Note: RoadRailer(R) units included in Intermodal for the current 2000 week:

4,598 compared to 4,608 in 1999.

When this quarter’s results are announced in about seven weeks we ought to eye closely the revenue and expense trends. One would hope that for the 19.5% increase in carloadings we’ll see that much or more in revenues and significantly less than 19.5% more expense. Of course, readers know my bent tends more to the high margin carload business. The whopping increase in this department is a strong indication there is still a lot of life left in the carload biz. Now if we can only get the last corners of resistance in car management covered, we’ll be in fat city.

A few weeks ago about a dozen major rail user responded to my informal survey about car supply. It appears railroad car management teams are rightly under the gun to keep car hire ("equipment rents" in 10K parlance) down yet opportunities to cut car costs as a percentage of revenue are routinely missed.

For example, a shortline wants to put cars in service to increase outbound carloads because the class 1 is short that particular car type. Class 1 car management says, "No you can’t because that puts more car hire cars on my railroad." Never mind the railroad will make a dollar in revenue by spending a dime in car hire. Car management doesn’t see it that way – it only sees absolute car hire numbers going up. And that’s where deprescription has really hurt, too.

Another customer, one whose rail traffic coordinator has worked for both class 1s and shortlines, is having a terrible time getting decent cars and says, "The most frustrating thing is that you most continually re-educate the same people. At least with truckers, you call ‘em up, you tell ‘em once and – boom! – it’s done." A small customer, perhaps, with only 500 carloads a year at $1,500 each. However that $750 mm will buy 15 boxcars. Turned every two weeks, there’s enough equipment to supply 80% of the needed fleet. And then they’re paid for. Doubles the money in 2 years. Hmmm.

Several major rail users with sizeable private car fleets are now increasing fleet size in the east because cycle time has so deteriorated the number of cars in the fleet won’t support the traffic to be moved. In other instances loads are being shifted to highways and so leased cars have to be parked. But finding space is tough due to congestion. Yet without congestion cycle time would be OK and the business stays on rail. A nasty cycle, to be sure. But breakable.

A few weeks ago we mentioned railroad safety data being posted on the FRA website. Now I can report the URL: http://safetydata.fra.dot.gov/officeofsafety. This is one of a goodly number of safety stat pages, and the one shippers may find most useful in deciding whether to consign their goods to a particular carrier. As you know, chemical shippers have perhaps the greatest exposure of anybody, and their concern is evidenced by the Responsible Care program of the Chemical Manufacturers Assn.

A particularly fine treatment of the Railroad industry participation in the program may be found at http://www.uprr.com/uprr/she/cts/respc.shtml. Unfortunately, it may come as no surprise that there are major chemicals producers that shun shortlines because of what they perceive to be a poor safety record. Now the FRA website can either refute or support the perception. Investors in EMON, GNWR, PWX, RAIL among others would be well-served by checking out the individual roads at the FRA site above.

The Wall Street Journal on-line version reports that AXA New Zealand says "it is close" to a 5% stake in TranzRail (TRZ), the national railroad in which WCLX has a 24% interest. The article said the stake is the "latest example of AXA's strategy to target well-performing NZ companies." Share prices of TRZ have been steadily rising since the May 2000 low, the nadir of a downtrend that began in 1997. Recall earlier this year TRZ completely reshuffled the top management team (WIR 5/27/2000).

RailWorks (Nasdaq: RWKS), is a $528 mm (sales) provider of integrated rail system services and products on a "turnkey" basis throughout North America, offering rail system solutions under the "RailWorks" brand. This week the company announced three more acquisitions: Breaking Technology Corporation, Hovey Industries Ltd. and certain assets of Western Tar Products Corporation.

Breaking Technology (1999 SALES $3 mm) provides NYC area rail and civil construction support in concrete repair and demolition services as well as sales and leasing of sophisticated construction equipment. Hovey Industries, located in Ottawa, Ontario, is a manufacturer of railway switch heaters and railroad equipment shelters (1999 sales $8 mm). Parts of Western Tar’s tar distillation and wood treating divisions have been renamed RailWorks Wood Products and represent $16 mm in 1999sales. RailWorks now has a network of five wood treatment facilities east of the Mississippi with annual sales of $60 mm.

Providence and Worcester and Connecticut DOT will rebuild 12 miles of former New Haven RR between Hartford and Middletown. The $1.8 mm project will afford P&W the opportunity to service the Greater Hartford market, particularly in the movement of forest products, metals and STCC 01 and 20 food stuffs. Construction of the line is expected to be completed by July 1, 2001and rail freight service will start shortly thereafter.

In an interesting trend reversal Canadian Pacific Railway (CPR) has begun a Montreal-Toronto-Detroit roll-on, roll-off service to increase share of the total freight moving between the US and Canadian midsections. These are relatively short trains – 50 platforms or so – and are designed to accommodate ordinary trailers instead of specially reinforced ones needed in the more usual lift operations. Two trains of 60 trailers each can be simultaneously loaded in an hour’s time and there will be two train pairs operating six days a week.

This is a particularly significant development because CPR trains can not provide double stack service between Montreal and Chicago/Detroit since the Detroit - Windsor segment of their route uses the height-restricted tunnel under the Detroit River. Since trucks now have 90% of the Detroit-Toronto market, about 1.8 mm boxes, it’s clearly a market worth going after. Thus CPR’s approach has been to cooperate with trucking companies and so far has signed up about 50 individual carriers. CPR has spent C$50 mm on three terminals and 240 new rail platforms that are designed to produce almost no slack from one end of a train unit to another. Quebec City when new terminals are completed this year, and down to NYC in 2001.

Rail stock prices didn’t do much this week. The Little Three (KSU, WCLX, FEC) all lagged the DJIA which itself was off almost 2%. The Big Six (BNSF, CP, CN, CSX, NS, UP) didn’t far much better, in fact NSC, CSX, and UP fared worse, down 7 to 10% among ‘em. The shortlines (GNWR, PWX, RAIL) at least had one winner, PWX, up 30%, with the others flat. Obviously somebody is looking at nice revenue increases for the quarter and looking past a net that was hammered by fuel costs, depreciation, and out-of-pocket track costs. I would have to agree with those who see the better revenues as a positive sign.

--Roy Blanchard

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