The Railroad Week in Review:
Week Ending January 10, 1998

The UP unpleasantness continues to raise concerns. Anna Wilde Matthews, writing in Tuesday's WSJ, reports, "According to a Salomon Smith Barney survey in December, some 13% of customers responding said they may never return to Union Pacific. another 30% will give only some business back to the railroad." This is distressing news, especially for shortline operators with a high concentration of STCC 28 (chemicals) customers.

It takes time to find new vendors, so if your regular Texas Gulf source kicks out UP, the shortline guy uses a truck near term while he finds another source. That truck, as likely as not, could be coming from a class I bulk transfer terminal. And if that's the case the short line stands to lose the business entirely. Investors would do well to seek out shortlines and shortline holding companies with high carload per mile traffic density and a high average revenue per carload the better to withstand these shocks.

As recently as Friday, the Texas Railroad Commission notes that UP began with a record 356,000 cars system-wide against a normal "uncongested" 310,000 cars. It dipped to about 334,000 and now it's back to 340,000. The Texans did not note whether the Texas situation was improving or not.

Meanwhile a Reuters filing Friday said current and former UP officials "allegedly breached their fiduciary duties in connection with the CNW and SP acquisitions, according to the plaintiffs' attorneys in a shareholder derivative action. In a statement the Wilmington (DE) law firm of Morris and Morris said the complaint was filed in the Federal District Court for the Northern District of Texas on November 26. Officials of the firms were not available to explain the delay in announcing the suit. The complaint filed in the action alleges that the defendants' misconduct injured the company's business and reputation and caused it to suffer financial losses. It also cited UP's failure to ensure the railroad had adequate systems to control railroad traffic and monitor railroad safety in its mergers activity."

Elsewhere on UP, a Nebraska grain elevator asked the STP to issue an emergency order directing UP to supply empty covered hoppers for grain loading. The customer maintained the UP violated a common carrier obligation by not giving priority to cars ordered under the UP voucher program. Happily, the STB declined, saying that to do so "would potentially subject UP to a flood of similar actions." The Board also noted that doing so would favor one group of shippers against another, something clearly against its own charge.

My friend and fellow correspondent Jim Blaze writes about "an interesting contrast between the ocean shipping industry and the US rail industry. The latter today has much in common with the former in the bad old days. Too much capacity -- too little returns -- no direct subsidy -- but plenty of regulation. Rates were lousy and re-investment in the industry dropped. At least the US railroads found a way to take the excess capacity out of both their competitive structure and their physical networks, including equipment aspects. The trains filled up and began to run at a profit.

"What happens with all of the excess ocean slot capacity in the next five years? What if the state financed ship building subsidies run out? Someone in ocean carrier management, I believe, will find a way to eliminate excess capacity. Smart customers will find a way to build their distribution networks to anticipate the eventual "right sized" carrier networks. But if the steamship operators miss the signal, they may end up with facilities sitting on what in rail terms amount to light density branch lines." Port operators, take note. And railroaders, take note of the ports you serve.

RailTex carloadings for December 1997 were up 42% over December 1996. Traffic gains were in autos, railroad equipment, coal, chemicals, lumber, metals, non- metallic ores, paper, farm products, and other products. On a "same railroad" basis, carloadings increased 13% primarily due to higher coal and metals shipments. Year-to-date December 1997 carloadings increased 36% to 488,264 from 359,669 in the prior year period. "Same railroad" carloadings increased 6% to 364,048 from 344,406 in the prior year period. As noted before RTEX reserves its revenue reporting for the quarterly reports. The next is due 2/4/98.

Nationwide, 1997 carloadings hit new highs. The railroads carried 1.37 billion total ton miles of freight, beating the 1996 record of 1.36 billion ton-miles. Carload freight was up 0.8% to 17.8 mm. TOFC/COFC business grew by 6.8%, topping out at 8.1 mm boxes. Commodity gainers were automotive, chemicals, metals, and lumber. North of the border, Canadian carload freight was up 4.4% and intermodal boxes rode 11.2%.

People on the move: John Waltman to Dakota, Minnesota & Eastern as Vice President - Energy, effective January 1, 1998, "with responsibility for development of the railroad's services to coal companies and electric utilities" meaning developing DM&E's efforts to build into the PR. Gerald L. Nichols to Vice Chairman of CSX Transportation to oversee integration of CSX rail assets and the 42% of CR going to CSXT. Carl N. Taylor moves to EVP- Operations, CSXT, succeeding Nichols in that slot, from SVP-Operations and Mechanical. Taylor will oversee all rail operations, with special emphasis on improving service reliability.

W. Robert Bentley moves to President, New York Cross Harbor Railroad, from Mass Central Railroad. Norfolk Southern taps two more from Conrail: Dr. John M. Samuels to VP Ops Planning effective Jan 16, based in Norfolk, from VP Operating Assets for Conrail, and William L. Barringer, Jr. to Director Safety, also in Norfolk on Jan 16, from Safety Director for Conrail.

A press release from Norfolk advises that "Paul Austin, NS vice president Personnel, and Sally Basso, CSXT vice president Human Resources, advised Conrail non-agreement employees in a joint letter that the next step in the non-agreement employment process will be departmental interviews. The interviews will begin this month for the Conrail Information Systems Department, with other departments starting interviews in March. Employment offers will be made on and after May 1, effective on the Control Date and thereafter. For the most part, it is expected that employees in operating positions outside the Philadelphia Headquarters office in territories to be operated by CSX or NS or in the Shared Assets Areas will remain in place after the Control Date.

Vendor Notes: ABC Rail Products Corporation (ABCR) has purchased from Permatrack(R) the exclusive rights to its patents for the manufacture and sale of heat-treated and head-hardened rail in the Americas. In a related agreement, Illinois Central Railroad has signed a five-year contract under which ABC Rail Products will process the greater of 8,000 tons or 95 percent of IC's annual requirements of used rail using the Permatrack method. ABCR estimates U.S. Class I railroads now buy up to 80 percent of their annual rail needs in the form of premium grade rail which lasts four times longer and costs about 25 percent more than ordinary carbon steel rail and is sourced mainly from Japan.

Now, says ABCR, "The competitively priced Permatrack process provides one- quarter mile rail sections with a precise hardness pattern that eliminates the need for substantial mechanical straightening and results in a safer, more wear-resistant rail that is of uniform residual stress and free of hardness variations. The Permatrack process essentially doubles the life of used rail and can represent a significant cost savings to our railroad customers." The beauty of the this acquisition is its ability to put ABCR in new markets effectively growing the market itself rather than trying to carve up shares of a shrinking market for new US rail product. I wish more suppliers would get the message. Market share is dead; market creations builds profits.

Regarding crossing closures (WIR 1/3/98), a good friend with a state DOT writes, "I am a little disappointed that the class I railroad response to crossing safety has been rather underwhelming. Getting them to give closures attention on a level above the divisions is very hard to do these days. To be sure we are enjoying some success where there is a class I vice president in town. I think it also helps that the VP's employer is also one with whom we've been working very closely on some high-visibility corridor projects."

--Roy Blanchard

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