THE BLANCHARD COMPANY

The Railroad Week in Review:
Week Ending April 4, 1998


Last week there was a discussion of truck diversions road to rail as a result of the Conrail merger. One comment that struck a chord had to do with the potential for some shortlines to lose carload business to competing transload centers directly on class 1 roads. Ever sensitive to this subject, NS immediately sent a note saying "Not here." Moreover, it was stated again loudly and clearly at the NS shortline meeting in Roanoke last week. That is not so say, however, if you're a CSX shortline that NS won't come after you or vice versa. The place to get worried is when you're a shortline connecting only with X and the X transload people come after your carload business. Recall, however, the driving factor is customer economics (Week in Review for 1/24/98, economics courtesy of CSX).

With respect to diversions in toto, a friend at NS writes, "We're not creating any new traffic. It's traffic that is already moving over the road. True, some of it may be rerouted to intermodal terminals, but your comments seem to imply we're creating all this new traffic and creating an urban nightmare. It's already in trucks; we're hoping to take it off highways for a portion of the EXISTING move. Net-net, the public will be a winner, although there likely will be shifts in local traffic patterns." Fair enough.

You've read here and elsewhere about the UTU and BLE Talks. Here's some background on each so you can put all in perspective. The UTU was formed in 1969 through the combination of four rail unions - Brotherhood of Railroad Trainmen, founded in 1883; Brotherhood of Locomotive Firemen and Enginemen, founded in 1873; Order of Railway Conductors and Brakemen, founded in 1868, and Switchmen's Union of North America, founded in 1894. The Railroad Yardmasters of America, founded in 1918, affiliated with UTU in 1985.

The UTU is the largest rail union with about 125,000 members including some 8,000 bus and mass transit workers. Rail members are primarily conductors, brake operators, switch operators and ground service workers. The BLE was founded by 12 locomotive engineers in 1863 and currently has more than 50,000 members, mostly in engine service. The union is headquartered downtown Cleveland in the mezzanine of the Standard Building, which the BLE built in 1924 and still owns. The American Train Dispatchers Association merged into the BLE in 1993.

The STB on Tuesday allowed as how it might consider changes to the UP/SP merger format. What the Board sees as lack of real progress in opening things up is the reason. Chairman Linda Morgan maintains the Board "has a free hand in deciding what changes, if any, to impose." Recall the STB gave itself a five year oversight period for fine-tuning. Elsewhere, KCS and Tex-Mex continue to push for more rail access in and around Houston, and have been actively supporting the STB review of the merger. And the STB will receive proposals to revise the terms of the merger through June 8.

The UP website is a good place to see for yourself how the service recovery process is coming along. For the most recent report, go to http://www.uprr.com/uprr/business/srps/srrwk24.shtml. For the base line period Feb/Mar 1997 the railroad had about 300,000 cars in the system. For the week ending 3/27/98, there were 346,000 cars or about 15% above the base line. Through trains terminated were down 10% from the base line, though trains starts were about the same. Train speed remains at a crawl: 12 mph vs. base line 19 mph. Terminal dwell time is till 40 hours vs. base line 30 hours. Both number of trains held and hours trains held for crews, power, and congestion remain appreciably above base line. That's the bad news. The good news is that most of these factors are showed improvement in March. Trains held and hours held are yet to turn around.

On Wednesday UP announced completion of the $1.5 billion 6 % preferred stock drop. The proceeds will go for unspecified capex and service recovery items. The securities will be convertible into Union Pacific common stock at $68.90 per share. UP common closed the week at $58 a share, up 15% since March first.

Regarding the UP's Mexican Standoff, the governments of the US and Mexican have reached an agreement to allow train inspection to take place in a rail yard on south of the border rather than on the bridge itself. Interestingly, the inspection agreement comes on the heels of UP's Laredo embargo. Now, says UP, up to 400 cars a day make it across compared to just 300 a week ago. For its part, KCS, another user of the facility, said the change has shaved one to two hours off transit times.

A second effort to streamline the border-crossing process was announced by BNSF - a permit system on all southbound traffic to Laredo, Eagle Pass and Corpus Christi. The permit system requires shippers to detail cargo, origin, and destination so that the railroad can keep everything moving. It also helps BNSF control what's presented for movement. According to BNSF spokesman Dick Russack, "In the current situation, you have an embargo at a gateway, which means there are a lot of people who aren't our customers who may wish to have us take on their cars. We need to be responsive to our customers first and new customers in a proper order. This (permit system) helps us organize that.''

Bad things come in pairs, and Norfolk Southern had its second hit in as many weeks on Tuesday morning in Lynchburg, Va. A 65-car block of cars rolled out of a yard, continued for about three miles ran into the side of a standing train. Ten cars were derailed, starting a fire in a tank car carrying acetone. Nearby residents were evacuated as a safety precaution, as were the occupants of a nearby school. The fire was put out and everything was back to normal by the end of the day.

A press release from NS and Guilford came in April 1 (no fooling) to announce competitive new intermodal service for New England. "Beginning in mid-summer, New England Thoroughbred Intermodal Service will link Guilford Rail's newly- constructed terminals at Devens Commerce Center in Ayer, Mass., and at Waterville, Maine, with Norfolk Southern's network of 34 intermodal terminals. The service will operate via the newly-established interchange between Norfolk Southern and Guilford Rail at Mechanicville, N.Y." NS will reach GTI through a haulage agreement with CP. Post-merger NS plans to expand the service "to give customers access to seamless intermodal service to the West and Southwest, as well as options to truck service currently using the Interstate 95 north-south corridor."

As if the congestion in Texas weren't enough, Mississippi River tugboat crews literally walked off the job Saturday. So far about 70 tows from Iowa to Louisiana have been pushed to the riverbanks where crews tied up and went ashore. Seems to me each barge can hold about ten carloads of grain (somebody check me on this), so a five-barge tow is a fifty car train. Seventy of them is a lot of cars. With barges not available for grain presently dockside waiting for a ride down stream, somebody's gonna be looking for cars. Given the Houston problem, this could get interesting.

It's been a couple of months since KCS released 4Q97 and full year results for 1997, however I keep going back to the rather lengthy release in an attempt to see exactly what the KCS rail operation has been doing. Later this year the holding company will split the railroad out of its financial management side, and according to stories in Barron's and the WSJ the present stock price represents something less than the sum of the parts.

The argument goes that the mutual fund arm could be worth $37+ using the multiples of publicly traded T. Rowe Price. The 40% interest in DST is worth another $9 or so, making the stock price $46 for just them, in effect giving one the railroad for free. Regular readers of this review will recall a similar thread some months ago, however it may be worth revisiting. Over the next few days I'll attempt to put the just the railroad into the Industry Spotlight format and will report the results here.

--Roy Blanchard


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