The Railroad Week in Review:
Week ending September 30, 2000

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Companies depend heavily on open intranets to generate and share critical knowledge. They need to resist the urge to "improve" or control these networked conversations. Cluetrain Clue 47

Executives representing companies in the chemical, electric power, and forest products industries have sent a letter to key congressmen asking for increased competition in the railroad industry -- read open access and greater rail-to-rail competition. It also supports the ASLRRA's "Shortline Bill of Rights" with regard to the elimination of paper barriers.

To me, this smacks or a backward move toward pre-Staggers regulation, and the rails have in some measure brought it on themselves. Manufacturing companies are going increasingly to single-source procurement relationships for everything from components to trucking, however the usual starting point is one where there is already a horde of viable competitors at the door.

Rail consolidation has for many customers reduced the horde to a lone wolf setting its own rules. Ergo no competitive bidding for the transportation needs of the customer and no need to provide responsive service. If, on the other hand, the lone wolf were to provide service levels guaranteed to delight and surprise, there would be no need for re-regulatory howls from captive shippers. And a regulator -- moved by whatever considerations God pleases -- is a far more serious threat to the viability of the transportation marketplace than any competitor ever could be. QED.

The STB on Wednesday launched Ex Parte Decision 94 requiring "consolidated reporting by commonly controlled U.S. railroads and their U.S. railroad-related affiliates." What this means is that regional and shortline railroad families (GNWR, RAIL, WCLX, et al) could have their revenue-based AAR "Class" changed. Recall that a Class I railroad is one that has annual revenues of at least $250 mm, as indexed for inflation. A Class II railroad has inflation-adjusted annual revenues between $20 mm and $250 mm. And a Class III railroad has inflation-adjusted revenues below $20 mm.

Ex Parte 94 stipulates that "FASB No. 94, Consolidation of All Majority-owned Subsidiaries, which was issued in 1987, requires the preparer of financial statements to use consolidated reporting for all majority-owned subsidiaries unless control is temporary or does not rest with the majority owner." This will not affect financial statements, but it could affect the filing status -- and reporting requirements -- of the reporting railroad holding company (see Note 9 of the decision, available at Interested parties may submit comments referring to Ex Parte No. 634 by October 25, 2000.

It's been a busy week for NS. On Tuesday it adopted a "Shareholder Rights" plan to protect against any unfriendly acquisition efforts. Largely a preemptive measure, it allows holders of NS stock at the close of business 10/16/200 to buy additional shares at half price should there be an offer by a would-be acquirer to corner 15% or more of the company. Then on Thursday NS filed a shelf offering to periodically sell up to $1 bn in common and preferred stock, depository shares and debt securities. Proceeds will go to debt reduction, working capital and other uses.

Friday NS simultaneously announced sale of subsidiary companies' timber rights for about $72 mm and warned that 3Q00 results may fall short of expectations. Earnings will likely be in the range of 22-26 cents including the 12-cent benefit from the timber. That's against 13 cents a year ago and a drop to 27 cents (consensus) from 35 cents three months ago. Split the difference, back out the timber gain, and you have essentially no change from 3Q99, the first full quarter following full absorption of Conrail. Share prices are where they 90 days ago after spiking up 30% in early August. NS will report earnings at its regular quarterly presentation in NYC October 25.

BNSF will, beginning in October 2000, offer the rail industry's first ever no strings, 100% money-back, on-time carload service guarantee. The so-called Carload Service Assurance Program debuts on the I-5 corridor for carload freight moving between Vancouver, BC; Northern California; Southern California and Arizona. Transit times run from five to seven days depending on the distance.

The full refund option asks that the shipper pony up a ten to 15% premium and in exchange BNSF will guarantee the car's on-time arrival. A less aggressive option asks for either a price premium of 5% per car or an increase of 15 percent in contract volume. BNSF will provide cash-back allowances of between ten and 15% for each carload of freight that does not arrive on time under this option.

FreightWise, a wholly owned BNSF subsidiary, has been gathering momentum. I spent an hour with Greg Fox, President of FreightWise, in his Fort Worth office last week and we discussed in some detail his plans for this web-enabled goods movement management system. Fox says merchandise transportation is a terribly fragmented market, with nearly two-fifths of it moving in private trucks. Shippers are in a continuous search-mode for not only back-hauls but also front-hauls, and available space is an increasingly perishable commodity.

Since there has traditionally been no integrated system for finding and filling space from all providers, seeks to fill the need with an airline-type inventory database and booking process. The initial rollout, scheduled for later this month, will be limited to a handful of name-brand third party logistics providers (3-PLs), freight forwarders, and intermodal marketing companies.

Says Fox, "The beauty of is that it offers "an End to End Solution. "Many transportation web sites are simply bulletin boards for posting demand and supply, with the actual transaction happening off-line. At FreightWise buyers and sellers execute their transaction online - from matching loads and capacity, to tendering agreements, to tracking and tracing, to financial settlement." For the time being, the service will be limited to TOFC/COFC service between BNSF-served points, however this could easily expand to carload service between DCs on BNSF, or even to shortline-served points where the small railroad replaces the highway dray. Stay tuned for more on this important interview.

Union Pacific, in cooperation with wireless systems provider I.D. systems, has completed its real-time railcar-tracking program with FMC Corporation. The pilot program integrated web-based data management with GPS location tracking and cellular communications to report real-time locations of chemical trains between Wyoming and Nevada. Both on-demand location updates and exception notices are available.

Regarding the CSXT fuel surcharge, there has been some legal discussion saying that the applicability of the fuel surcharge in existing individual contracts may depend upon the specific provisions of the contract. Their view is that parties can protect themselves, in the future, from such unilateral changes in contract charges by incorporating tariffs or circulars in place only as of a specified date. This would "freeze" the charges at the existing levels.

Canadian National has launched a new car ordering program covering its 4,200-car fleet of 73-foot center-beams used primarily for lumber loading in Canada. The program will be extended to all CN owned or controlled boxcars, flat cars and gondola cars in the near future. It is CN's belief that the guaranteed delivery policy will give customers greater confidence regarding car supply even as it helps CN to anticipate orders, improve its demand forecasting and overall distribution planning, and generate better asset utilization. And isn't that what it's all about?


--Roy Blanchard

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