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Command-and-control management styles both derive from and reinforce bureaucracy, paranoia, and an overall culture of power tripping. Paranoia kills conversation. That's its point. But lack of open conversation kills companies. Cluetrain Clues 50, 51.
Canadian Pacific Railway held its First Ever shortline meeting in Calgary this week and they Did It Right, according to the attendees. The Sunny Sunday Train Ride though the mountains past Banff and Lake Louise was so magical it must have boarded on Platform 9 ¾ (an obscure reference - ask your kids about Harry Potter). Our hosts made us feel welcome at every turn and the fin-de-siecle opulence of the Palliser Hotel was an ideal setting.
Clearly there is something significant going on here. E-commerce is growing thanks to a six-figure budget and top management support. Car management and supply is being streamlined. Operations and Marketing are being combined in the field to eliminate stovepipes and their resultant hindrance to customer satisfaction.
Operating income for 1999 was $762 mm (all dollars Canadian), up from $448 in 1995 and in the same period the operating ratio has dropped to 78.2 from 87.4. Return on capital averages better than 14% a year 1996-1999. Capex was $ 1.1 bn in 1998, $843 mm in 1999, and will probably be in the $600+ mm range this year. Thus operating cash flow and capex are closing in on each other, which means the present 38% debt to capital ratio can be still further reduced.
For the first two quarters of 2000 CPR reported $1.8 bn in revenues vs. $1.6 bn in 1999’s first half. In the same period operating expense dropped to $1.4 bn from $1.9 bn. The down side is that revenues per GTM followed the industry and actually declined 5% in the first half compared to last year. Looking across commodity groups one sees increases in revenues, revenue ton miles, and carloads while the revenue/RTM drifts ever southward.
The good news from the shortline perspective is that CPR generates about 10% of its revenue base from shortlines and is looking for more as they go to longer trains on core routes. Asked how shortlines could do more for CPR, one CPR shortline team leader remarked, “More from the shortlines? I only wish we could do more for them.”
Fuel costs did in what otherwise would have been a pretty decent quarter for Union Pacific. Recall earlier this year UP said they expected to grow revenues at “GNP-plus,” and 6% year to year surely delivers that; in fact, the successive quarterly increases this year have been 1.6%, 2.3%, and 3.1%. Maybe not dot-com excitement however respectable none the less. The OR dropped 40 BP over last year to 80.2, even with fuel at 11.7% of revenues vs. 7.6% last year. A recalculated OR using the lower fuel expense is 76.1, which is more like it.
UP Chairman Dick Davidson told the assembled analysts on Thursday he doesn’t see fuel costs relenting. That’s a real bummer. Back out the fuel increase and the ops expense hardly went up at all against the 6% revenue growth YTY. So if fuel stays high, even growing revenues 6% a year keeps the OR just a few BP below 80 out a year or two. The net margin, however, has been comfortably north 8 % in four of the last six quarters. That’s at least some help.
The class 1s have weighed in on the question of shortline treatment. A friend with CSXT writes, “Careful! There a bit more mud than ink on the editor's fingers, or so it seems. While the ASLRRA claims their data shows only a 20% success rate with the Railway Industry Agreement [with shortlines] it now appears the test posed to the responding shortlines was whether or not the RIA proposal actually moved traffic. This is a high hurdle; a 20% success rate on all our single- line initiatives would be welcome news around here.
“To my thinking, the radical differences in the perception of a RIA problem between large and small railroads is much more troubling. My sources say the response rate was around 20% of all shortlines. Thus one must ask whether this response rate represents a fundamental problem with the Agreement. Could it be that 80% of the shortlines are satisfied with the existing agreement?”
A UP Marketing VP adds, “It is my hope that future stories on the Paper Barrier Issue will receive balanced treatment. At UP we are interested in facilitating increased business with our shortline partners. Only through growth and increased volume can shortlines meet the pressures of maintaining their infrastructures. A lot of cooperation is currently going on between the class 1s and shortlines. The result is increased business and hopefully a more healthy shortline business portfolio."
While these are good signs, a note from the CN tells of some dissatisfaction with their experience South of the Border. “The big problem we have is with the Big Four in the US blocking the use of more efficient gateways. If they were more cooperative, we could take a lot more shipments off the road. However, they still have the mentality of protecting revenues versus contribution. Our view is that we don't need to run cars on our road longer just for practice. If we make the same net money and/or provide a customer better service via a different routing -- we do it.”
As if to underscore his remarks, Larry Kaufman writes in JOC, “Railroads today are part of a capital-intensive industry. Operating strategy generally has been shaped by a desire to reduce expenses in an effort to improve the ratio of operating expenses to revenue and thereby increase net revenue and return on capital. Executives seem to be content with revenue growth that at best keeps up with industrial growth in the economy.”
For example, we continue to see emphasis on running bigger trains infrequently because fewer train starts mean less operating cost per car. That’s important when service levels are cost-driven and sold so as to beat the lowest bid on the table. However, it’s a long-established fact that a quality product as measured by the customer always commands a premium price. Then you can afford to do what the customers want.
BNSF proved that with their I-5 Corridor premium Service (WIR 9/30/2000). UP on Thursday said their Express Lane service to the NY and Boston markets is up markedly. We know the demand is there. Charles McHugh of International paper recently told the Northeast Assn of Rail Shippers that “Rail operations as currently formed, organized and managed are not capable of meeting the current or expected performance needs of its now rather limited number of customer industries.”
It sure looks like shippers, Wall Street, the pundits and the consultants get it. Why don’t all but a few railroad managers?
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