The Railroad Week in Review:
Week ending June 24, 2000

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Companies need to lighten up and take themselves less seriously. They need to get a sense of humor.
Getting a sense of humor does not mean putting some jokes on the corporate web site. Rather, it requires big values, a little humility, straight talk, and a genuine point of view. Cluetrain Clues 20, 21.

A pig may be able to cross Chicago without changing trains, but you canít, and neither can a piggyback load. It doesnít look like thatís ever going to change; however, the railroads are finding ways to do TOFC/COFC run-throughs by avoiding Chicago entirely.

Take NS and BNSF. Norfolk this week opened its new Rutherford Yard just outside Harrisburg, PA. Here loads to and from the west are sent and received in blocks made without regard to changing trains in Chicago, saving literally days in transit time. Whatís more, NS can decide from train to train whether to rail or road loads east depending on road and rail traffic congestion. This being the case, shorter, faster, more frequent trains should not be begging the question. Can scheduled moves be far behind?

For its part CSXI is cutting down on its trailer interchanges in Chicago for Charlotte and Atlanta by exiting that service altogether at the end of July. Benefits outlined in the CSX press release include offering customers faster and more reliable service for freight originating in Chicago and Ohio destined for Florida. Bypassing Atlanta, CSX said, should cut 5-8 hours off the trip to Florida.

The NIT League is not amused, noting that during the STB consideration of the CR split the railroads promised better and more reliable rail service and a reduction of the number of trucks on the highways in the already congested east coast traffic corridors. Several League members have expressed concern as to the real commitment of the railroads to deliver on these promises, especially in regard to reducing the number of trucks on the highways.

Perhaps the correct approach is to look at the pure economics of the decision. First, the container business remains and no terminals will be closed. Second, a container tends to be more profitable than a trailer because of the efficiency of double-stacking containers and significantly lower equipment costs. For example, the per diem cost for a trailer is about $12 a day, whereas a container can be leased for $3-5 a day.

True, you need a chassis for the box once grounded. But thatís another buck or so a day and the container still comes out ahead. If CSXI sees a nominal 2 mm loads a year in these lanes that's a lot of money saved. Third, the intermodal trade is moving toward containers anyway, and this could help the transition along. I think CSXI should get good marks for taking this stand.

The STB in Ex Parte 558 (sub 3) determined the 1999 railroad industry had a composite after-tax cost of capital of 10.8%. The formula is based on a 7,2% cost of debt, 12.9% common equity capital cost, and 6.3% in preferred equity cost. The underlying capital structure mix is 35.5% debt, 62.7% common equity, and 1.8% preferred equity capital. Who earns it? Not many.

For 1999 net margins ranged from zero for CSX to 13.7% for WCLX. Recall a thread here last summer based on Wall Street analyst Scott Flowerís work on Return on Invested Capital (ROIC). The argument is that if the industry canít earn its cost of capital it will be hard-pressed to maintain its competitive position vis a vis other shipper alternatives. So it boils down to whether the revenue base is sufficient to cover what it costs to maintain the infrastructure needed to support the revenue base.

Right now there is an e-mail conversation going on regarding the future of the merchandise carload business. Some argue that the carload business is doomed because the railroads will never be able to make that product anywhere near truck-competitive. The emphasis therefore must be on making coal, intermodal, and unit trains profitable. The dissenters say the carload business largely subsidizes the other three and so making it work is a matter of survival. They have a point.

Over the past month or so Iíve ridden, driven, or walked considerable stretches of both main line and branch line track of Norfolk Southern, Wisconsin Central, Canadian Pacific (Soo), Union Pacific, and a handful of shortlines. Iíve looked at everything from tie condition to car count, all with an eye to how this or that part contributes to the whole. There is still an awesome amount of non-unit train carload business out there on these feeder lines. Take it away and one must question whether the core routes could survive. And thatís the conundrum.

Merchandise carload shippersí e-mails to me carry two themes: service is irregular and not dependable and we canít find anybody to can help fix the service problems. As a result these customers are seeking other options wherever possible. A paper customer dissatisfied with UP-direct service built a warehouse on BNSF and now transloads and trucks to the UP site. A consumer food goods maker uses Amtrak RoadRailers because NS direct carload service is inadequate. A frozen food distributor loses a customer due to CSXT "congestion." And so it goes.

It seems to me that each class 1 railroad needs to decide if it wants to be in the branch line carload business, If yes, then provide it to customer spec. If no, then get out of the way and let other providers do it. Which leads us back to revenue adequacy and cost of capital. Take away the millions of merchandise cars (NS, for example, did 2.5 mm in 1999) and it's doubtful the operating margins of what's left will support the main lines needed to run whatís left.

Carload service, like politics, is local. Shippers donít care whose name is on the side of the locomotive as long as they get adequate service levels to support their supply chain objectives. It will not do for the major railroads to say, "Thatís my business!" and then fail to provide the service. The only winner then is the truckload provider as railroad revenue becomes even less adequate.

In Europe, however, itís a different story. Weíve written before about the UKís Strategic Rail Plan aimed at reducing shipper dependence on highway haulers, for example. Now the French. International Railway Journal for June 2000 features an interview with Francis Rol-Tanguy, newly tapped Minister of SNCF Freight. He faces a lot of the same issues we do Ė car utilization, track capacity, closing the gaps between operating and commercial sides of the business.

But it seems the French may do better at service design. The focus is on "adjusting the operation of trains according to our customersí needs" and punctuality is key. They are setting up express service lanes where failure to meet schedules results in customer refunds, and simultaneously improving international moves. (If the French can arrange fluid international carload moves, why canít we do it interline?)

The EUC is putting a lot of pressure on rail freight providers to perform. And, apropos of getting out of the way, where SNCF cannot itself provide a needed service, it makes arrangements with companies that can. For example, Cadeter handles iron and steel products between France and Spain. Ermefret does the same with chemical and petroleum business with Italy. And cereals will be handled to and from Spain by Agrifer.

Est-ce-que the French have the right idea to boost ROA? What are les Americains missing?

For that, allow me to quote from a recent paper presented by Henry Posner of Railroad Development Corp. He writes, "Overseas railroads have higher cost structures which means there is room for improvement, [and that] would suggest that overseas railways are potentially as profitable as railways in the US. The strength of the [US] Short Line industry continues to be that, for focus on retail customers, the Class 1s are not doing it, theyíre looking to Short Lines to do it, and that continues to be a very valuable element that Short Lines bring to the business." Manage the revenue stream, provide the service you can within the cost structure, and outsource the rest. Nothing could be simpler.


--Roy Blanchard

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