The Railroad Week in Review:
Week ending November 4, 2000

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In most cases, neither the conversation inside the company nor with the market is going very well. Almost invariably, the cause of failure can be traced to obsolete notions of command and control. Cluetrain Clue No. 54.

Continuing Earnings Week, KSU reported $2.4 mm net income on revenues of $144 mm for 3Q00 vs. $4.6 mm net on $149 mm in 3Q99. To be fair, add back $2.8 mm in debt reduction (always to be applauded) and you have a net increase in earnings to $5.7 mm. TFM equity income dropped 32% to $2.6 mm from $3.8 mm while the US railroad operating income rose 38% to $18.7 mm from $14.6 mm.

Be that as it may, the real value for KCSR may be its 29.5% interest in TFM, which funnels 60% of all US-Mexico rail traffic across the border. According to Railway Age, TFM has added 150 new AC units from both GE and EMD, has reduced the bad-order car rate to 5% from 20% in three years, and boasts an OR of 68. Throughput at Laredo has more than doubled to 3000 cars daily and transit times for the 700-mile trip to Mexico City are down to 34-41 hours.

Looking ahead, KSU has, with TFM, firmly ensconced itself in Mexico. As for the US, KCSR will be faced with continued rate pressure from competitors who are 20 times bigger and it could well wind up absorbed in the merger end game. What the winner gets, either way, is a formidable competitor South of the Border.

Wisconsin Central's story is one fraught with challenges from within and without, from the home front to distant shores. Absent special items both last year and this, EPS dropped 15% YTY to 30 cents from 36 cents. Not that the North American operations did badly with revenues up for the 9th consecutive quarter and an OR down 1.3 points YTY to 71.2 (absent fuel follies it'd have been 69.8). Equity from Affiliates continued the downward drift to $1.5 mm for the quarter with no assurances it would get much better near term. For the year, this line on the Income Statement could be down to 2/3 of what it was in 1997.

Further complicating matters is the Proxy fight. On October 23 Former CEO and major shareholder Ed Burkhardt filed with the FEC for removal of WC's management team citing the 17% loss in share value in the year following his resignation in July 1999. SEC papers filed by WC cite even larger share value losses in the last two years of Burkhardt's tenure.

It may well be this is a different world than it was in 1997 and that the forces of change have caught up with WC. Friday WC announced that it is considering selling off its NA operations and divesting its interests overseas. The question is what the whole is really worth, and some estimates remain in the low teens.

Wednesday's GNWR conference call was predominantly good news led by the recent successful bid for Australia's WestRail and performance ratios that met or exceeded expectations. Revenues gained 11%, led by North American Rail freight operations, up 20%. This was partially offset by the 17% decline in AUS freight sales thanks mainly to softness in grain and currency exchange rates, though in the call Jack Hellman said it's now coming to market and will show in the 4Q00 results. Industrial switch sales rose 8% to 2.7 mm.

EBITDA was up 2%, and net income rose 28% excluding the tax benefit taken in 3Q99. The consolidated operating ratio rose 80 BP to 86.7%. Fuel was not as big a factor as it has been elsewhere, rising 40 BP to 8.5% of sales. Recall the class 1s last week said it went into the 8% range from what had been in the neighborhood of 5% a year ago.

Looking ahead, more Australian grain revenues will partly offset loss of the Melbourne-Perth Specialized Container Transport franchise. The NY salt mines will start up again early in 2001, more coal is expected on the Illinois property, projections are for continued forest products strength in the PNW, and the annual sugar cane harvest in the Louisiana Delta will all be positive factors for the North American properties. On the down side, GNWR sees the same generally softening in the US economy talked about last week.

The WestRail and Bolivian transactions are expected to close next month. The former will make GNWR the largest non-government rail operator. By way of review, WestRail was gaveled down on Oct 30 to the Australian Rail Group (ARG) for $A323 mm. GNWR owns 50% and Wesfarmers Ltd. owns the other half. Earnings are expected to be accretive right away. Further details may be found at

Having the BNSF Earnings presentation back-to-back with its shortline meeting in Fort Worth has certain advantages for those of us keen on the carload business. The theme of the latter was "A Vision for the 21st Industry" and for the first time that I can recall the class 1 host broke out some of the key Wall Street slides thus giving the shortline partners a taste of the real financial, commercial, and operational drivers of its actions.

Matt Rose, President and COO, set the tone at the outset, saying the job is to provide the best transportation value by listening to customers and doing what it takes to exceed their expectations. Shortlines will be increasingly important for gathering and distribution: in FY 2000 BNSF merchandise (individual carload, not auto, not grain) traffic was up just 2% on its core lines vs. 6% on shortline feeders.

According to Carl Ice, SVP operations, goals for the merchandise trade include tighter planning objectives, better service consistency, and improving equipment velocity. Chuck Schultz, EVP Marketing, said simply that where carload business isn't working the way it should you need a better model and a better way to handle it. Echoing this sentiment VP Network Planning Pete Rickershauser noted that the themes of specify, shorten, and simplify will carry the day.

Dave Marin, Industrial Products Group VP, then rattled off a whole host of commodity-specific shortline opportunities complete with shortline percentages of total revenues. The good news here is that for the small railroad community BNSF is clearly Open for Business. The Vision presented has a great deal of congruence with what we know about B2B buying behavior. And it's clear small railroads have a very big role to play in the BNSF scheme of things.


--Roy Blanchard

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