The Railroad Week in Review:
Week Ending August 22, 1998

Friday was Conrail's last business day. Today is "Control Date" which means Conrail stock will be removed from trust, NS and CSX can exercise their rights as Conrail's shareholders to elect new directors and officers, and bars to the buyers' access to Conrail data are eliminated. Outwardly it will be business as usual and though one might say there is more legal than operational significance to the event, that obscures the historical.

In the 22 years since its April Fools Day 1976 start Consolidated Rail Corp went from a mishmash of money-losing fallen flag railroads to a firm worth more than $10 billion when the gavel went down. As Rip Watson pointed out in JOC earlier this week, "When it began operations the U.S. government owned Conrail's stock, the employee count was near 100,000 and losses exceeded $1 mm daily. Conrail exits the U.S. railroad scene as a profitable company with 80% fewer employees and operating profit approaching $3 mm a day." Thanks, all, for a job very, very well done.

This note from Norfolk Southern's "Implementation Update" page puts Conrail's accomplishments in perspective. "The Pennsylvania Railroad (PRR), a Conrail predecessor line, marked its 150th anniversary in 1996. Beginning as a rural 250-mile line linking Harrisburg to Pittsburgh, the PRR eventually swelled to a 10,500-mile industry leader that served eight of the country's then 10 largest cities and half of the U.S. population. In 1917, the PRR operated 7,600 locomotives and handled 10% of America's freight plus 20% of its passengers. Three years later, in 1920, the line employed 10% of the nation's rail workers with a peak of almost 280,000 employees."

A couple of weeks ago I remarked that the delay on the Conrail merger has let CSX and NS get on with their infrastructure programs. Here in Philadelphia CSX has begun construction of its Grey's Ferry Connection to allow its trains to enter and leave south Philadelphia without the costly reverse move at Locust Street off the old B&O passenger main. The connection will let CSX Philadelphia trains cross the former PRR bridge over the Schuylkill at U Penn and the use the 26th Street Viaduct to access Greenwich Yard. Through trains will be able to run over the high line to Belmont and the West falls bridge, by-passing Park Jct.

Further north, observers have spotted an NS welded rail train working along the route around Allentown and east into New Jersey. Of particular note is the rail set down from Bloomsbury to West Portal, site of an elongated passing siding for use when the Pattenburg Tunnel is single-tracked to clear double- stacks. Up on New York's Southern Tier (ex-Erie) Conrail begins a 12-week track maintenance curfew beginning 8/24, shutting down from 6 AM to 4 PM Mon- Thurs.

Over the past few weeks we've reported on significant new capital projects on shortlines in the US and Canada. You've read about the British government's renewed interest in railroads as expressed in its "transportation white paper." Perhaps a common thread is the US commitment to more rail project funding through "The Transportation Equity Act for the 21st Century," affectionately known as TEA-21.

TEA-21 amends Title V of the 1976 "Three Rs" Act to provide direct loans and guarantees for railroad projects. One $billion of the $3.5 billion available is earmarked for "other than class 1 railroads." That's regionals and shortlines to you and me. Funds can be used to acquire, improve or rehabilitate all manner of rail equipment and facilities, to refinance outstanding debt, or establish new facilities. This ought to come as good news to companies like RailTex (Nasdaq: RTEX), Genesee & Wyoming (Nasdaq: GNWR) and Emons Transportation (Nasdaq: EMON), among others - companies in an expansion mode. It will be instructive to see how they use this new tool to build the business.

What goes around comes around. Recall in this space a while ago (WIR 6/6,13.20) there was a thread on Span of Control: how much railroad can one man run? Bill Burt of the Livonia, Avon & Lakeville noted "[T]he trend immediately post-merger will continue to be super-railroads that are too slow to sense changes in the environment [and] too hidebound to react quickly." Burt cites rails that worked well for their size, including such fallen flags as the Rio Grande, Lackawanna, NKP, and WP, adding that perhaps WC would fit the mold today.

Now comes Union Pacific (NYSE: UNP) to tell the word it is devolving into three operating regions with a VP for each, in UNP's words "to improve customer service and management of the railroad." UNP had one of the first centralized operations, set up in the early 80s. Then came the MOP, the WP, CNW, and SP and all of a sudden the carrier was faced with unwieldy size, different operating traditions, and competing corporate cultures. With this news one may now hope a reversal is at hand. I'll undoubtedly learn more at this weekend's UNP shortline retreat.

The STB has issued its written decision on the Conrail merger and with it a fairly long-winded press release. Of particular interest to readers of this page, the decision imposed some conditions requiring customer access to a second railroad in a few 2:1 cases. The Board also has used its broad conditioning authority to preserve or enhance service and competitive opportunities for areas in the Northeast that lost significant competitive alternatives in the railroad bankruptcies that led to the formation of Conrail in the 1970s.

The Board also recognized the important role of smaller railroads in providing essential service, and imposed several conditions - see Ex Parte 575 et. al. -- to ensure that this service will be continued. Additionally, the Board imposed conditions to preserve service or competitive opportunities for certain individual shippers. Finally, The decision discusses the imposition of the 5-year oversight period during which the Board will closely study the effectiveness of the conditions imposed.

RailAmerica's revenues for the first half were off 4.6% to $7.0 mm as the domestic transportation revenue per carload decreased from $331 to $322 primarily due to the difference in product mix. Carloads were off 1.8% to 21,803 from the prior year period. The decrease was primarily the result of low agricultural commodity prices, which resulted in commodities being stored and not shipped during the first six months of 1998. Here again, as in so many of the class 3 rails, the change in revenue relative to the change in carloading bespeaks a decline in yield. On a brighter note, the operating ratio improved 120 basis points to 76.8.

For the quarter, rail revenues were off 4.8% to $3.5 mm as yield per car dropped to $323 from $335, again due to product mix. Loads were off 1.4% and the OR remained unchanged at a 78.2. To put all this in context, recall RAIL's interest in the heavy-duty highway trailer business. For the half trailer sales nearly doubled to $20 mm vs. last year. Income before taxes was $3.3 mm for an operating margin of 16.8%. Interesting. The rail operating margin (100 minus the OR) was 23.2%. Which tells me the railroad portfolio could do more if revenues could get a boost. The appearance here is one of selling a low- price service, not a low-cost service, a common failing among shortlines.

Burlington Northern Santa Fe (NYSE: BNI) came in with some great numbers for the quarter and the half. Unluckily for me, they scheduled their NY conference while I was still in England*, however the kind folks in Fort worth provided the exhibits via mail. A word or two is in order. Recall first that last month BNI announced a 3:1 stock split and a 20% divided hike for shareholders of record on 8/17 and that CEO Rob Krebs had hinted at this on May's Stampede Pass trip. Second, the keen observer can learn a lot about how to run a railroad from results like these.

The net for 2Q98 was $277 mm, $1.74 per diluted share, up 18% over 2Q97's net of $235 mm, $1.50 per diluted share. Revenues hit $2.2 bn, up 8% from $2.1 bn a year ago. Operating expenses rose just 5% to $1.7 bn in the period. The OR improved to 76.2 from 77.8 in 2Q97. For the half, the adjusted net was $510 mm, $3.21 per diluted share, up 32% from 1997's net of $385 mm, $2.46 per diluted share. Revenues for the period were $4.4 bn, up 7%. Operating expenses were $3.4 bn, up 3%, and the OR went down to a 77.7 vs. the 80.7 reported a year earlier. Numbers aside, the view from here is that BNI is a powerhouse of ideas and innovation. The pattern of steadily increasing revenues and income coupled with steadily decreasing ORs and injury rates is one the class 2s and 3s would do well to emulate.

--Roy Blanchard

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