The Railroad Week in Review:
Week Ending May 30, 1998

Wall Street Journal readers on Friday were treated to Danny Machalaba's Union Pacific Railroad paralysis analysis as spread from the UP situation and compounded by the merger scene. He reports that several major rail users have been disappointed with their service even as they place more demands on rail systems that have been until now a mode-of last-resort, i.e., we'll use rail only when we've run out of trucks.

In a way, the rails have been victims of their own success. They have gotten their houses more in order than they've been for decades and gone back the shippers who had shunned them asking no longer to be the mode of last resort. Shippers have responded more widely than anticipated and lines previously downsized are being pressed back into service. Witness the BNSF line over the Stampede pass.

Fitting the asset to the need is always the challenge. You add capacity in good times only to have it lie fallow in bad. It's the problem paper companies have been plagued with forever. So, as the class 1s have merged and consolidated they've created hundreds of new feeder line properties in the process of shedding assets no longer suited to the available traffic base. And now they wish they had some of these lines back.

Maybe 20% of all the feeder railroad miles are owned by publicly traded operating companies: RailTex (RTEX), Wisconsin Central (WCLX), Emons (EMON), RailAmerica (RAIL), Genesee & Wyoming (GNWR) to name a few. And if you go to their financial reports, you'll see traffic and revenue increases in the double digits for many consecutive quarters. How can the smaller roads do what the big ones can't? By matching the commitment to the capability, the service to the need. And if the class 1s need to buy back segments, you can bet it won't be cheap.

The very problems of bigness which Machalaba so ably describes are at the root of a major service problem. The STB's insistence that the class 1s come forward with real solutions by real dates will, I surely hope, encourage the class 1s to follow the class 2s and class 3s to get more user-friendly.

Union Pacific (UNP) got more headlines than it wanted this week, I'm sure. From the WSJ to CNBC's Market wrap UNP came in for some heavy criticism as it reported its third consecutive losing quarter. Unhappy shippers continue to press for settlements, and some of the majors -- Dow, DuPont, Phillips, and Union Carbide, e.g. -- have even brought suit even as hundreds of smaller claims have been settled one-on-one.

As if that weren't enough, the Overnite problem won't go away over night. UNP says it will "incur a loss from discontinued operations as a result of the planned sale of Overnite Transportation by means of a 100 percent initial public offering of shares." And traffic tie-ups have moved to the core of the system from the Texas Gulf, further exacerbating congestion. The net effect is a bigger customer hit for damages than was anticipated, meaning more money for settlements.

S&P has lowered its ratings on UNP saying the outlook is negative, and that the downgrade "reflects the impact of persistent, serious congestion on Union Pacific's financial position." As if that weren't enough, UNP closed Friday at $47.75, down 1 7/8, a new 52-week low at the close. Intra-day, it was as low as $46 and change.

RailTex, Inc. (Nasdaq: RTEX) has made some management changes, though the new President's name is still a mystery. Jim Davis was tapped as VP-Operations of RailTex Service Company, Inc. and Joe Jahnke as Treasurer, effective May 27, 1998. Davis joined RailTex eight years ago and has served the Company in various general manager positions, including Regional General Manager. Most recently he served as Interim Vice President- Operations. Jahnke has been with RailTex for three years and has served in various finance and treasury positions, most recently as Director of Finance, and has been a key provider of helpful information for this letter. Congratulations and a tip of a ten- gallon hat to both.

Writing in Railpace, a northeastern rail news magazine, writer Carl Perelman reports that the feds OK'd 22 miles of third track for freight along Amtrak's NEC in Rhode Island. Double stack clearances will allow operations between the Quonset Industrial Park in North Kingstown with a Providence & Worcester (PWX) rail yard in Central Falls. If the Port of NY doesn't get its act together major players like Maersk and SeaLand might move to the deeper waters of New England from still undredged NY.

The City of Cleveland took a major hit this week as the STB's final environmental Impact Statement (EIS) came down on the side of he merging railroads. The city had wanted the STB to force Norfolk Southern (NSC) and CSX (CSX) to reroute increased train traffic away from the city's poorer neighborhoods. The STB has said no.

Writing in the Washington Post, transportation columnist Don Phillips writes, "The Cleveland decision sends a strong message to cities and towns that are considering demands for protection from growing freight train traffic. In effect it says that the board will offer some help when a merger clearly has an adverse impact on a community by making railroads deal with problems caused by extra train traffic. But the board will not throw a monkey wrench into railroad plans if changes would have a major impact on interstate commerce."

Railroad stocks ended the fifth month still trailing the S&P average. My market basket of equal dollar shares in each of the traded companies was up a piddling 4% YTD, held down by problems at UNP (off 23%) and questions about the role of PWX going forward (off 22%). Even CSX got nicked for 12% while NSC, its erstwhile partner in the CR deal is up only 3%. The market-beating gainers continue to be CN, FLA, and KSU.

Vendors have done better, up 25% YTD propelled by JAII (up 88%) and MPO (up 44%). Bob Matthews, executive director of the American Car Institute says, "The North American freight car building industry continues to operate at levels not seen in two decades. The industry will continue to produce cars at high levels." Cars on order but undelivered April 1 stood at more than 60,000 units. Other beneficiaries of this trend ought to be TRN, GBX, and WAB.

Over the weekend I was a guest on a special rail move between northern NJ and eastern Pennsylvania over Conrail. We skirted the south side of Allentown Yard and saw a number of road freights along the way. What was most striking was the percentage of 286,000 lb. gross weight cars, giving further weight to the argument advanced here just recently. The preponderance were covered hoppers, with capacity ranging from 3,000 to more than 5,000 cubic feet, about evenly split between private and railroad marks. The only 286 boxcars I saw were three NS plate F cars with 7,600 cu ft capacity. They're coming folks; better get your track in shape.

Short takes: Computerworld awarded CSX the Number One Spot among non-tech companies in its Sixth Annual Best Places to Work in Information Systems list...GATX splits 2:1 effective June 2; Florida East Coast (FLA) splits 4:1 June 16...Amtrak has received clarification of what exactly constitutes "express" traffic suitable for tagging onto its passenger trains and UP/SP have been told to let Amtrak move it on their tracks...Amtrak also received terms and conditions for its use of Guilford tracks Boston-Portland...A letter to the Editor in the May 1998 issue of Railway Age suggests that with the next two years CN may well take a "strong equity position" in WCLX.

STB takes testimony in the CR merger June 3,4. Stay tuned.

--Roy Blanchard

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