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The Railroad Week in Review 7/19/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern


One of the problems with big mergers is that transactions in progress get derailed. Bulk terminal and trucking company operator Matlack has sued NS and Conrail over three terminals it was set to buy in Baltimore, Jersey City, and Pittsburgh. The suit alleges Matlack signed a letter of intent to buy the sites after submitting a high bid of nearly $400,000 and that NS pressured CR not to complete the transaction. For its part, NS has said the suit is "meritless;" CR says just that the deal is "on hold."

Trucker Schnieder International is raising pay, hiring more drivers, and resetting governors for 65 mph. With trucks now capturing more than 75 cents out of every goods movement dollar, having trucks parked for want of drivers is not good business. Better business is having enough drivers moving fast enough to pick all the freight that wants to move. That's why driver pay rates have gone up a third or more in the past year and why -- in some parts of the country -- driver unemployment rates are as low as two percent. More than 13,000 drivers work for Schneider and that number is expected to grow.

Increasing truck speeds increases productivity by expanding driver range. At 55mph, a driver can average about 500 miles in ten legal hours. Let that same truck run 65 mph and the range increases to 550 miles, or ten percent. And since drivers are paid by the mile, there's an incentive to go the extra mile for the company. There is doubtless evidence that higher speeds increase accidents, so Schneider plans to keep the more experienced drivers on the faster trucks. That doesn't satisfy safety advocacy group Citizens for Reliable and Safe Highways (CRASH), though. Says CRASH, "It's been proven that excessive speed leads to more accidents and fatalities."

In a press release attacking an up-coming anti-triples article in the Sunday supplement PARADE, trucking industry advocate The Traffic Safety Alliance notes that CRASH "is a front group formed by the railroad industry for political purposes...to support the railroads' competition with the trucking industry for market share of the shipping business." Weíve done some work with CRASH over the years and are not aware of this linkage; true, it is a non-profit educational forum, as is the Traffic Safety Alliance. As for that groupís funding, a spokeswoman for the Alliance said, yes, they do receive funding from trucking companies for their work promoting triples. For more information call (800) 879-8142.

Pssst Hey, Buddy -- wanna buy a business car? Union Pacific has hung FOR SALE signs on six SP cars made surplus by the UP/SP merger. They are Business Car No. 141, the "Oakland;" No. 292, the "Sunset Limited," a 10/6 Sleeper; No. 293, Chair Car; No. 298, Baggage Car; No. 295, Baggage Car; and Business Car No. 106, the "Oregon." Purchasing details may be found on the UP website at http://www.uprr.com/uprr/business/forsale/buscars/carstoc.htm.

Norfolk Southern and Union Pacific announced on Tuesday a new fourth-morning intermodal service between Columbus, Ohio and Los Angeles to compete with the present rail/truck offerings via Chicago. The new interline service operates over NS Columbus-KC and on UP beyond. This Monday through Saturday service reduces the current schedule by two days. Service improvement is made possible because trains will operate through Kansas City without being switched or held in either railroads terminal in the Kansas City area. And it's a harbinger of things to come with what the NS Merger Operating Plan calls "The Southwest Gateway Route" offering service from east coast points.

Union Pacific held its second quarter analysts conference in NY in Thursday and it was a pretty picture indeed. Earnings were up 33% including one-time merger implementation expenses. The railroad operating ratio dropped 2.1 percentage points to 80.9 percent, again after merger implementation expenses. As is typical in these cases, UP used a pro forma set of financials restated as if the SP merger had taken place at the beginning of the year.

To put things in perspective, letís compare pro forma UP/SP results for 1996 with merged NS/CR and CSX/CR using 1996 revenue and income figures and the 58/42 split. Neither company is issuing any new stock, so the outstanding shares remain the same. I arbitrarily assigned the UP pro forma for eps to the other columns to get a pro forma stock price. (in millions, except per share data)

1996 UP/SP NS/CR CSX/CR
ops revenues $10,113 $6,924 $11,916
ops inc $1,671 $1,546 $1,774
earnings $871 $968 $999
shares 218.1 126.4 213.6
earnings per share $3.99 $7.66 $4.68
price 12/31/96 $60.125 $114.916 $70.129
PE .06 15.00 15.00

It is instructive to note that in the merger application filed with the STB in November 1995, annual operating income merger benefits five years out would be $612 mm. Now that the implementation process is well underway, UPRR has revised the expected benefits upward to $820 mm, an increase of 34%.

One final note on the UP/SP merger. The plan is to bring the entire UP/SP rail system under the UPís Transportation Control system (TCS) in four stages. First was the Central Corridor between KC and Salt Lake City on May 1, and Dick Davidson told the analysts it went off without a hitch. Second will be the Cotton Belt and SP/east, roughly Chicago-KC-Roswell NM and Chicago-St. Louis-Memphis-DFW on 8/1. Third will be the Sunset Route, Yuma-New Orleans and Roswell 2/1/98. The I-5 Corridor will be last, 5/1/98, covering Portland-Yuma and Salt Lake City-Oakland. This time schedule is six months ahead of the preliminary implementation plan.

Vendor News. Last week I went on a tour of Amtrakís Bear (DE) carshops where they rehab Amfleet-1 and -2 cars. For about $350,000 they can completely strip and rebuild a coach from top to trucks. What I found particularly fascinating was the story on brakes. More than 20 years ago when the Amfleet coaches first came out, some had disk brakes from German supplier Knorr, others were WABCO-equipped.

When it came time to repair and replace, Knorr support was non-existent; WABCOís was right on top. So when it came time to order replacement sets, Knorr (now part of NYAB) was not successful partly due to the added cost of Amtrakís having work around the vendorís short-comings. Itís part of what UP calls its cost of quality, a tool which measures the cost of not doing it right the first time.

According to UP, in 1987 failure costs amounted to 28% of revenue. By 1996 these costs had been reduced to 12% on a UP stand-alone basis. With the integration of SP, the pro forma cost of quality has been reset to 16%. This equates to $1.6 billion in failure cost. Vendors take note.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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