The Railroad Week in Review:
Monday the STB set April 2, 3 for testimony on rail access and competition issues. The notice from the Board notes specifically that the hearing "is intended to address rail access and competition generally, and not the Board's ongoing case concerning service problems in the West, or the pending merger in the East. [This hearing] is being conducted in response to a request of Senator John McCain, Chairman of the Senate Committee on Commerce, and Senator Kay Bailey Hutchison, Chairman of the Subcommittee on Surface Transportation and Merchant Marine.
"The schedule provides for approximately 8 hours divided among approximately 60 speakers and the parties they represent under the following 8 categories: Large Railroads, Labor, Shippers, Federal Government, State/Local Government, Ports and Related Interests, Maritime and Related Interests, and Short Line and Regional Railroads." Lots of your old friends and the usual suspects are participating. For details see www.stb.dot.gov >> news releases.
UP's Laredo embargo is adding to the competition's revenues and to the ire of public agencies finding a disconnect between reality and UP's account of congestion progress. An item in the WSJ notes that beginning 3/28 UP "won't allow any new southbound traffic destined for its Laredo, Texas, gateway. More than 5,500 cars waiting to move south into Mexico have backed up as far north as Oklahoma and Kansas, a problem the company says is related to congestion on a Mexican rail line."
To put 5,500 cars in context, it's 55 trains, 20,000 truckloads, and as many cars as a typical shortline handles in a year. On the other hand, UP averaged about $1,150 a car in 1997 for total rail freight revenues of $9.9 billion. The Mexican Stand-off thus represents $6.3 million or 0.06% of the total.
There's been a rash of state-by-state press releases from NS and CSX on the beneficial effects of traffic flow changes as a result of the CR transaction. Take PA for example. It is alleged truck traffic will be reduced by 155 mm truck-miles saving the state $18.5 mm in highway repairs. However, every box on a flat car has to use a road to get to its destination. There may be fewer trucks on I-80 but what about US 1 in Elizabeth or the Sure-kill (Schuylkill) Expressway out of Philadelphia? What about all the bulk carload business now going to shortline destinations some class Is are seeking to divert to their own transload centers?
Jim Blaze, a transportation strategizer in nearby NJ, says the savings calculations probably are true, "if examined from the point of view of long term haulage, over the rural portion of the USA interstate highway network." However, he continues, present truckload traffic going direct from interstate to factory or warehouse post-merger will have to pass through downtowns. "Thus traffic congestion in the inner portions of urbanized traffic zones like Newark could increase, as would associated maintenance expense and pollution resulting from overall congestion increases at already densely traveled links."
In the case of shortlines, say each of 100 shortlines in Penna has one customer at risk for diversion to a class I transload, and that each customer is good for a car a week. At four truckloads per car, we're talking 21,000 new truck trips a year. These short-haul guys don't operate at night, on weekends, or on holidays so that's one every 14 minutes from 0600 to 1800 five days a week. If the new trucks travel an average of 100 miles each way we have 4.2 million new truck-miles.
By Pennsylvania's own calculations, the state is paying about $120,000 per million truck-miles in road repairs (or 12 cents for every mile used by one truck). The economics of trucking say a truck has to make $400 a day just to break even, which becomes 100,000 miles a year on a five-day week. In other words, each truck is doing $12,000 in road damage every year. And another 4.2 mm truck-miles costs local taxpayers another half-$million in repairs.
On the school bus issue, a friend writes, "Today a loaded school bus jumped a traffic light in order to make a left turn in front of me. Last week [another] school bus ran a stop sign -- not a "Philadelphia stop," either; he ran it at speed. Last month I was passed on a road with double yellow stripe by a school bus with kids in it, and I was exceeding the speed limit by 5 MPH. Going back a few years, I was driving east/north on 202 near Exton, PA, when a Radnor Twp. bus full of kids passed me at a high rate of speed. I decided to see how fast he was going, but gave up when I hit 85 and he was still gaining on me!" And the carnage continues. CNN last night ran a grisly piece about a school bus making a U-turn on an interstate and getting broadsided by an 18-wheeler in the process. Making highway crossings on our railroads safe with bozos like these on the streets will remain a challenge as long as bozos abound.
An eastbound Conrail through train from Chicago to Newark and a westbound NS train from Detroit to KC collided about 4:30 AM Wednesday. One crewman was pronounced DOA and another two were injured. The site of this tragic meet was in northeast Indiana, where the former Wabash and NYC main lines cross. A correspondent familiar with the geography says the high-speed crossing is protected by an interlocking system and all that goes with it. Neither railroad has made any further announcements. I just hope this incident doesn't give rise to a chorus of "I told you so's" with respect to the merger process.
It's Industry Spotlight time again. This week we'll look at and compare the remaining Big Four class Is: BNSF, CSX, NS, and UP. To recap, the Industry Spotlight seeks to compare companies that compete for the same customer and investment dollars. We look first at the railroads as businesses with financial and investment measures common to all businesses, and then at the so-called "railroad efficiency measures" peculiar to our own industry.
My quantitative model consistently produces business scores for companies like J&J, AT&T, Gap, and CAT in the high 20s. Applying the same yardstick to the Big Four, only BNSF falls in that range, followed by CSX, UP, and NS in that order. Within the business analysis, we see some rather revealing information about the companies and the company they keep. In financials, NS wins easily with five of the nine measures meeting muster and having the strongest margins and ROA of the lot.
UP wins the stock appreciation contest, largely because it's been so beaten down over the SP merger. BNSF is the least over-priced based on forward estimates and NS the most. It's in the equity growth side NS gets really clobbered. Although the 1997 ROE hit 13%, the ACG of shareholders' equity 1991-6 was under six percent. If you run that forward on a price/equity ratio you get a forward price of about $47, not that far ahead of today's price. BNSF's equity appreciation over the same period averaged 33% a year.
Finally, I compare roads on operating ratio, percent change in average per car revenue 1996-7, freight revenue and carloads per mile, revenue per employee, and price divided by operating cash flow per share. The best number among the four roads for each measure wins. NS won on three; the others got one each. Bottom line? In my humble opinion BNSF is an equity powerhouse and NS is a financial rock running the most efficient railroad. Shortliners, take the appropriate page from each book and see what you can do with your railroad.
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