The Railroad Week in Review:
Week ending September 2, 2000

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Companies make a religion of security, but this is largely a red herring. Most are protecting less against competitors than against their own market and workforce. Cluetrain Clue No. 41

The old e-mailbox fairly buzzed with responses on short frequent trains. Most everybody said they had seen what could be done in years past however the railroads involved - many now fallen flags - stopped these successful efforts for a variety of reasons. Exactly why remains a mystery.

A friend in Jacksonville writes, "Been there done that many times. CSX had a string of short trains under various programs. One called Rock Runners specialized in aggregate trains, moving rock to markets that were relatively close less than 100 miles. Another group of such trains in the Florida Business Unit (FBU) ran trips as short as 10 miles handling large volumes (3 million tons per year).

"These trains cycled three times a day with crews reporting for an 8 hour shift and changing with another crew when the train came back to the origin. Generally the crew itself unloaded the cars which were modified to enable push button unloading. Should be noted that these trains beat out trucks that were specifically designed for this run and the local community was elated to have their roads back. (BTW, The shuttle trains are still in place.)"

Another chap, this one a Conrail veteran, says, "T&E crews particularly benefit from an operating plan which features short frequent fast trains. Labors away from home time will be greatly reduced if there are frequent trains which can get over the road on schedule. Given the advantage to labor, I believe that this would give railroad management leverage into a new manning agreement.

"Believe me, if an operating plan provides for small frequent trains the traffic will move, the yards will stay fluid and the assets will be better utilized. Yards are the bane of the railroad customer. Cars will dwell in these holding pens waiting for a ride, for 12-16- 24 hours and more. One way to keep the yard fluid is to operate frequent small trains. An operating plan with a foundation of small fast frequent trains, could be structured to bypass as many yards possible, going as far as possible before being broken up and switched. Cooperation between adjoining roads would be an added bonus in this type of operation."

Or take the flip side, when service is plain awful and the customer figures out how to use it his advantage. "The customer was ordering much more material than he needed and was in the habit of holding loaded cars which not only resulted in a shortage of equipment, but took up limited track space at the customer's facility and the delivering road's serving yard as well. This resulted in extensive yard delays not only for this customer's traffic, but all traffic as well due to congestion.

"It turned out that the reason that this had escalated to this point was due originally to inconsistent service. The customer in fear of facing a shutdown situation would order in the manner described to forestall a critical situation. It took a joint meeting between the railroad, their sales and operating people and the customer to bring the origins of this situation to light and to begin the process of building the customer's level of confidence, with consistent service. The results not only pleased this customer but eased up the congestion in the serving yard as well, which resulted in reduced car hire, crew expense and increased customer service throughout the terminal."

One final story, this from a rail veteran who's been in the aggregates business a good long time. "Why don't short frequent trains work? (1) Too many crews thanks to Balkanized ownership. (2) Too many crews thanks to multiple class 1 crew districts and the same results. (3) Too much single track. You can't run short fast frequent trains without double track CTC. (4) Distances - trucker can cover 500 miles a day with 1 man (conservatively speaking)."

Short, fast, frequent, long, slow, infrequent. It all boils down to velocity and Return on Invested Capital. As NS discovered in its auto parts trains, better cycle times meant more revenue-generating ability per car, even though revenues per carload might have been less. Ergo better return on the capital invested in the cars. The next step then is to do the same thing with merchandise trains as one does with intermodal and unit trains: let somebody else provide the cars and use the capital saved to enhance capacity.

On Thursday the Gods shined on the Dow and the Naz and the rails shined with them. Except for a few as losses, albeit small, were taken by CSX, RAIL, PWX and NSC. GNWR continued its tear, rising 3.61% to $21.50, besting second place KSC, up 3.50% to $9.25.

The tale lies in volumes traded, though. In a thinly traded stock like GNWR (Average volume 16,000 shares a day, $320,000 worth) a few players loading up or unloading can cause wide swings in price. KCS, on the other hand, trades at a rate of 1.2 mm shares a day, 70 times as many shares and at a dollar volume of $10 mm a day. At this rate it's much harder for one or two players to stack the deck.

Elsewhere, NSC and CSX are still having a tough go with their merger workout as stiff pockets of resistance remain. And although coal seems to be coming back, a cooling economy puts the targeted 3% sales growth somewhat beyond reach. Industry-wide, for Week 34 (Aug 26) carloads are about even with not only 1999 but also 1998 (ASI Carloading report, ). CSX and NSC, after the Conrail bounce, are not doing a lot better than they did in 1999.

As we said last week, the 3Q00 reports will be viewed with critical eyes looking for signs of improvement on 1999's numbers. Only then can see be sure the Conrail transaction is beginning to work and the promised accretion will soon be at hand.

Some shortline readers have complained that the financial analysis done here does not fit their "private company" status. However, the fit may be closer than they think. One shortline found itself in the position of having more than 500 shareholders with just four holders owning 40% of the stock and 30 holders with 2/3 of the stock. Clearly something had to be done.

Making matters worse, the $2.5 mm (sales) 80-mile property paid out $18 a share in dividends and could not afford the SEC-mandated expense of going public. Sub-chapter S was out of the question as there were more than 75 stockholders. Yet the company qualified as "private" as 54% of the stock was in the hands of officers and directors (the minimum is 50% to qualify as "private.")

The answer was to propose a one-for-ten reverse stock split, buying out fractional shares at an agreed "fair value" of almost $500 each. The result? Total shareholder population is reduced to 40 souls. Nearly a third of the repurchased stock goes into an options plan for employees. Officers and directors have signed a Shareholder's Agreement restricting rights to sell to outsiders. Thus the shareholder numbers have become manageable, the right filing status was achieved, employees are rewarded, and local control remains assured. What more could one ask?

Short takes: Concerning BNSF's new train-time calculator, a shortliner in Pennsylvania writes, "I checked a shipment of wood pulp from Wallula, WA, to the NS interchange at Streator. The car was billed on Monday, August 21 and was interchanged to NS six days later, August 27. The BNSF schedule estimate was six days" …In the context of merger-related service failures comes this mot: "The market punishes those who can't manage their businesses"… And concerning the short vs. long view, "When budgets are tight, short term financial performance overrules all else and drives the type of service provided." Roy Blanchard


--Roy Blanchard

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