The Railroad Week in Review:
Week Ending

Last week I wrote "The gloves are clearly off" regarding the merger rebuttals. Just this past Friday a feature piece by Jack Burke in JOC ran under a similar headline, saying, "The Gloves Are Off. In a massive rebuttal filing last week,Norfolk Southern and CSX came out swinging - contradicting, ridiculing, belittling and even psychoanalyzing the complaints and concerns of some 160 parties who had sought changes in the NS-CSX plan for carving up Conrail.

"The two railroads gave every indication that the deal they cut with the National Industrial Transportation League just days before the filing was due will be their final voluntary concession. They will resist imposition of conditions they say could undermine the economics of their $10.2 billion acquisition...NS and CSX trained their heaviest fire on the likes of Indianapolis, the state and city of New York and the city's Economic Development Corp., APL, the Illinois Central, the Wheeling & Lake Erie and even, albeit to a lesser extent, the NIT League itself." I have a complete set of the rebuttals if you're interested in any specifics.

The STB's Draft Environmental Impact Study (EIS) was released recently. A large chunk of it deals with safety, and within that category comes the highway crossing issue. Interestingly, at no place does it consider closing redundant crossings as a mitigation option. Yet the subject of crossing closings is supposed to be a major FRA initiative. In a related issue, Amtrak's Coast Starlight hit a stalled truck on a crossing the other day. Few were hurt, which is good news, but even better news is that police will charge the truck driver with "interfering with the safe operation of a railroad." It's about time.

The year just ended closed with a $billion press release from Canadian Pacific telling of that money being invested in new power, track improvements, and upgraded information systems. This figure is almost half again CP's record capex program in 1997. Says CP President Rob Ritchie, "Our $1 billion capital program is unprecedented in Canada and signals our firm intent to improve our competitive position in the North American market place.' Sounds good to me. The CR merger will open new customer doors to CP and its SL&H subsidiary, and the sales staff is out beating the bushes already. With rival CN's stock nearly doubling in 1997 and CP's languishing, the opportunities are there.

News came last week that Bethlehem Steel will close its last remaining operating facility in its namesake city. Among the jobs lost will be some 30 or so jobs at rail subsidiary Philadelphia, Bethlehem & New England. Bethlehem has also been in the merger news lately, offering in mid-December to buy Lukens Steel for $25 a share in cash and stock. A week later, Allegheny entered the fray with a $28 all-cash offer (this sounds familiar). And on December 30 Lukens announced that it felt the $28 all cash deal was a "superior offer" and that Bethlehem will now have the opportunity to respond.

As most readers know, PBNE is run by Mike Zaia and Lukens' two railroads, the Brandywine Valley and the Upper Marion & Plymouth, are run by Gary Shields. One has to feel for Mike and Gary. No sooner have they worked through the CR merger than this happens.

I had a nice note from RailAmerica responding to some of my earlier remarks on shortline debt and new business practices. Using figures for the first nine months of 1997, ratios like EBITDA/Debt, EBITDA/Interest, and track maintenance per mile are greatly improved over what I ran for 1996. However, they are not quite to the levels achieved by my "Industry spotlight " group (WIR 11/22). One must remain optimistic that RAIL's stated philosophy of not overpaying for a properties or becoming burdened with a railroad that is a drag on overall performance will enhance results for the coming year.

There was a lot of mail on my track remarks (WIR 12/27). A friend in NC writes, "Maintenance [cost] increases as traffic increases and also runs higher when you don't have much to work with. Those lucky folks who bought lines laid with 132 pound welded rail will have less cost than us old timers trying to limp along with 70-90 pound jointed rail. Bridges are the big wild card though. If your bridges will only take 263,000 you are in for really big expenses in the years ahead. You need to work towards 290,000 pound capacity and then 310,000+++. As long as the trucks grow heavier and bigger, increased capacity is the only way rails can compete."

Journal of Commerce predictions for rail and road 1998 include early resolution of the UP/SP mess and the STB approval of CR/CSX/NS. However, the UP/SP meltdown will drive up the merger cost with more expensive safety and operating restrictions. (Take a peek at the Draft EIS for a sample.). Truckers need drivers, and will have to pay well to get them, especially in the first half or until the economy begins to cool.

Railroad stocks hardly made one rich in the second half. After a first half handsomely leading the averages, the second stumbled so the annual gain was just 20.2%, assuming you put $2,000 in each of the 18 public rails. (I count CR and DOCP as frozen at their end prices). That's well short of the Dow's 24.9% or the S&P's 33.4%. Winner was Providence & Worcester, more than doubling from $7.88 to $18.38 a ticket, on no real news. Other average beaters were, in top-down order, DOCP, KSU, CNI, and RAIL.

CSX turned in a respectable 27.8% gain, especially when compared to its merger partner, NSC, up a mere 4.0% split-adjusted. At the other end of the scale, from bottom up we have RTEX, off 43.2%, and, bottom-up, WCLX, Pioneer, GNWR, and EMON with losses from 41.0% to 14.3%.

Vendor stocks did remarkably well, beating the S&P by 20 percentage points, up 52.8%. The big gainers were JAII and MOPO, up 176.7% and 143.6% each, and Varlen was a clean double, up 101.8%. The only losers were signal maker Ansaldo, off 40.2% and bearing maker TKR, off 22.5% (of course, TKR isn't just in the rail supply business, so other factors enter in). The other two car builders, GBX and TRN, weighed in with gains of 71.3% and 23.5%. Next week the Industry Spotlight turns on vendors with the three stock price gain leaders MOPO, Varlen, and Westinghouse AB.

--Roy Blanchard

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