The Railroad Week in Review:
Week ending October 14, 2000

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Ann Thoma, WC's Director of Investor Relations, recently returned from the UK and has filed an enlightening report on EWS initiatives. She notes that CEO Philip Mengel's "Customer First" mission, first outlined in May (WIR 5/27/2000) is beginning to take shape. To start, the marketing group has joined operations and engineering at the Doncaster CSC Customer Service Center.

Says Thoma, "The move was more than symbolic. As had been discussed in quarterly conference calls, the weak link had been with marketing communication, in which commitments were made to customers without assurance of the availability of equipment and trains, which led to severe service failures." Today, with everybody in one place, the nuances are caught and service problems are everybody' problems. Looks like the classic shortline model to me.

Another area crying out for streamlining was the EWS interface with RailTrack. Thus nine EWS regions were shrunk to six "field service delivery units" to approximate RailTrack's zones. As a result, change applications are significantly faster. And customers are talking about opportunities more than they are about failures.

So how do the numbers look? As reported at the time, net 2Q00 EWS income contribution to the WC Holding Company excluding special items, was $3.5 mm vs. $1.8 mm in 2Q99. Revenues improved 8% against expenses up 7% primarily due to increased equipment lease expense and a 46% increase in fuel expense. Fuel in 3Q00 will continue to be problematic, however the programs begun thus far appear to be producing results. We'll see when the quarter's results are announced 10/25.

US Railroads are concerned that low grain prices are keeping grain in elevators and not moving to market. Two years' worth of grain has piled up and if prices were to rise quickly it's questionable whether enough cars would be there to handle it. Only 2% of the BNSF fleet is idle and demurrage has shot to as much as $75 a day for cars placed but not loaded.

Corn can be stored for about 3 years before it spoils and government programs subsidize farmers who opt to store grain holding out for higher prices. Moreover, farmers have the Loan Deficiency Program that pays the difference between the price per bushel for which they contracted with the government and the market price of the grain.

The St Joe Company (NYSE: JOE), Florida's largest real estate operating company, completed its spin-off of its 54% interest in Florida East Coast Industries to St. Joe shareholders. Under the recapitalization, St. Joe received one new Florida East Coast Class B common share for each Florida East Coast common share held. St. Joe then distributed the Class B common stock to its shareholders and now no longer has a stake in Florida East Coast following the spin-off.

Now FEC can go about its business without worrying about a parent, and CEO Bob Anestis can continue his plan to capitalize on his company's strengths in transportation (FEC Railroad), real estate (Flagler Development) and telecommunications (EPIK). YTD the stock has remained in the low 40s, though the 200-day trend is decidedly up. According to Zack's the sole analyst following the stock rates it a buy with a price potential in the 50s, based largely on the fiber optics side.

On the subject of long vs. short trains, former Soo-man and fellow newsletter publisher Tom Murray reports from the West Coast, "Long trains are more susceptible to drawbar stress than short trains, and thus more vulnerable to broken knuckles and other forms of train separation. And when this occurs on a long train, fixing the problem and getting under way again takes longer than it does with a short train. Not a plus when you’re striving for reliability and consistency of service."

Another strike against big trains, continues Murray, is line capacity. "Part of the reason for this is the mix of fast and slow trains moving over certain subdivisions. If all trains moved at roughly the same speed, the railroad would operate more like a pipeline. When you have a mix of fast and slow trains, the slow trains have to get out of the way of the fast, high-priority trains that overtake them. This is costly in terms of line capacity."

Something else we've touched on is the shortlines' ability to pre-sort and pre-block cars to distant points. Bob Libby of Central Oregon & Pacific (formerly RailTex, now RailAmerica) writes, "Last year we began blocking through trains for the UP bypassing the Eugene, OR hump yard. UP furnishes the locomotives for the run-through trains. Five days a week we build Portland and Hinkle blocks for BNSF and long east cars respectively." The long east transit time now runs 32+ hours better than before."

Across town, Bob Melbo writes that his Portland & Western and Willamette & Pacific roads (GNWR) do pretty much the same thing. "We make a Portland block for delivery to UP at Brooklyn yard in southeast Portland, seven days a week. UP has identified certain destinations for interchange at Portland for forwarding to Hinkle, UP's hump classification yard in eastern Oregon. Most of the Midwest and Eastern transcontinental traffic goes this way instead of to Roseville, as UP, quite naturally, prefers to take it east across Idaho, Wyoming, etc. Of course, SP didn't enjoy this option so all transcon business from our area was focused at Roseville or the Sunset Route for most of the 20th Century."

Shows what mergers can do to speed things up. But the opposite can be true, too. Back east a shortliner writes "Under CR, we used to pre-block cars [because] we felt that if it helped the shipments move along and made our class 1 partner's job a little easier, it was worth it. Our new interchange partner told us to stop doing it last June."

Mergers, as everybody knows, slow things down as well. Which is one reason why we’re seeing Ex Parte 582 being revisited, and this week’s e-mail has been quite pointed as to the reasons. The consensus appears to be the lovely language has no teeth, and that absent teeth, there’s nothing in this new version that wasn’t in the old. Makes one wonder why - if this is so - the BNSF/CN transaction had to be put off for 15 months in exchange for no change.

I’ve also gotten an earful from the shortlines who feel the long-lauded Railway Industry Agreement (RIA) has gotten short shrift from the class 1s. On the one hand the big railroads say they’ve approved every application. On the other hand the ALSRRA says only one in five was approved. Moreover, only a quarter of the shortlines responding to the association’s survey had even attempted an RIA application.

Shortlines are not happy. Some say when they take an RIA opportunity to the class 1 the larger RR shops the intended destination firm for an alternate source which they themselves can originate. Others say the class 1s have ignored RIA provisions for new business to be routed via the most competitive route. Still other say the RIA is applied unevenly among market managers of the same railroad. Clearly it doesn’t seem to be working the way it was supposed to under Ex Parte 575, for which we all had great hopes.

This is a very upsetting. The shortlines can have a significant and profitable industry role going forward but only as long as the class 1-shortline relationship is amicable. Perhaps the ASLRRA’s own Alice Saylor says it best: “The jury is still out on the RIA and EP 582. Figuring it all out is the main challenge, and cooperation between railroads large and small is the only option.” The alternative is not pleasant.

--Roy Blanchard

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