The Railroad Week in Review:
Ohio shortline operator Fred Stout writes, "If I hear one thing from my shippers it's transit time consistency over and over again. Let it take an incredible 10 days to get a load of flour from Indianapolis to Wellston, OH but let it take 10 days every time. They also will tell you that 10 days really stinks but it's better than [a range of] five days to two-plus weeks! How any company can operate with the wild swings in transit time that we seem to have is amazing. Makes you wonder what would happen if transit times were reliable. If we can get a high degree of reliability to transit time, we will get a lot of traffic back."
Fred's remarks relate nicely to the thread presented last week about the AAR "Town Hall" series of shipper-meets-railroad meetings. I've reviewed the comments at www.aar.org and I come away with the sense that the class 1s are more than willing to talk about operations and measure them, yet what shippers want most is some commitment to listen earnestly to their concerns and address them.
The first session was August 31 in Chicago. Rail users asked for timely pick- up and delivery, shipment-specific tracking and customer-specific information, and better communications between them and their serving railroads. A month later in Houston customers expressed a desire for more personalized customer service with responsibility, authority and accountability given to local railroad employees. Two weeks after that the Atlanta shipper side said rails need to understand their customers' needs and the needs of their customers' customers and must stop making promises they can't make.
A couple of weeks after that (by now we're in late October) I stopped in at the afternoon session in Newark and heard more of the same. Yet in Newark, as in the previous sessions as reported by the AAR, railroad response was more on how to measure what than how to address specific customer issues. It surely seems one of the biggest is being on time every time, being reliable, and being consistent. Cheap was never mentioned. So why do we continue to price that way?
As IC's Hunter Harrison and management guru Tom Peters have pointed out, you make better money by providing a quality service in the eyes of the buyer and charging a quality price. But you can't have a better service in the eyes of the beholder if he can't see it. Railway Age's Bill Vantuono writes, "There is an attitude that the status quo is working just fine, thank you -- a dangerous thing these days. Asked about a public image campaign, one industry leader quipped that his company didn't sell Coke and there was no need to reach out to average Americans.
"Au contraire," continues Vantuono. "Your railroad may not sell Coke, but it handles the raw materials that go into its manufacture. That, in my humble opinion, is what the average American needs to know. Most people in this country --and many of the legislators they send to Washington and to the statehouses -- know nothing about railroads, or think this is a dying industry. It's time to stop being a 'stealth industry' and take a page from the competition. The ATA has some neat TV commercials demonstrating how the trucking industry serves the average American. Makes you wonder who's minding the railroad store these days."
The actual closing date for the Conrail merger has been elusive, to say the least, however on Friday Norfolk Southern (NYSE: NSC) said that it has taken the initial legal steps necessary to do it March 1, 1999. The latest 10-Q adds a caveat, however. "Closing continues to be subject to a number of contingencies, including attainment of necessary labor implementing agreements and a determination that all necessary systems are in place. [There must be assurances] that implementation can be accomplished safely and with a minimum of service disruptions."
The release goes on to say that NSC will serve 1,946 new stations after it begins running its 58% portion of the CR system. A database listing of those stations and the accounting code numbers identifying them for waybill purposes has been released to the AAR. Programming of computer systems necessary for closing to occur is nearing completion, and final testing will be designed to make sure that NS and Conrail systems are compatible and that systems are sufficiently robust to handle the workload. Finally, merger teams are testing the internal business processes critical to a smooth closing of the transaction.
Speaking at the Railway Age "Passenger Trains on Freight Railroads" seminar in Washington, NSC SVP-Strategic Planning Jim McClellan was his usual candid self. After explaining some basics of railroad economics, he noted that the days passenger train operators could "automatically assume" capacity for them are gone. Why? Because today's underutilized corridors may not be all that underutilized in the future. Finally, "It will take longer to get new services on line and it will cost more up front. The reason is simple: with many parts of the system at or near capacity, adding new passenger services means that facility improvements have to be added before the service begins."
Signs of the times: A weekly chart of Union Pacific (NYSE: UNP) show stock price closing on its 50-week moving average after dipping well below that trend line last summer. Be that as it may, S&P continues to rate UNP with two stars (Avoid) saying current prices "amply discount the sharply higher profits projected for 1999." But there's progress, according to the WSJ. Tuesday's paper reported that grain and coal customers see the trains returning to normal and have their fingers crossed things will continue to get better. Elsewhere, UNP will pay its regular 20-cent dividend Jan 4 to shareholders of record Dec 9. Recall this is down from 43 cents a year ago.
There's been a lot of talk here and elsewhere about the importance of shortlines ("feeder lines, " as some prefer) to the fiscal health of the class 1 trunk roads. To date Burlington Northern Santa Fe (NYSE: BNI) leads the pack in codifying its shortline vision, which is to "realize the growth potential of Shortline/BNSF partnerships by utilizing the inherent advantages of each organization." BNI is the only class 1 to have a web page for its shortline group (www.bnsf.com/business/shortline) and it is the only one to have outlined the contribution of shortlines in a presentation to the investment community. It's nice to know the $billion plus revenues originating and terminating on BNI shortline connections warrants this kid of attention and support.
At the Emons Transportation Group (Nasdaq: EMON) annual shareholder meeting last week CEO and Chairman Robert Grossman said the Board will be "dealing with" the $1.7 mm convertible preferred dividend arrearage very shortly. The dividend was omitted again this year. Grossman noted "Emons is in a business that requires significant capital investment, and we believe it is important to reinvest the Company's cash flow in projects that will enhance the Company's growth rather than use funds to pay dividends at this time.''
On another note I have seen an analyst's report on EMON estimating 1999 earnings of $0.21 a common share on revenues of $21 mm on the assumption that the Canadian acquisition will not be accretive to revenues until 3Q99. The two-year PEG FY 97-99 on earnings is 58, clearly within the buy range of 50-100. My "Industry Spotlight" analysis yields a 4Q99 target price of $3 3/8. In the interests of full disclosure let me add I am long EMON.
RailTex (Nasdaq: RTEX) began operations on yet another ex-Canadian National property this week. The Goderich-Exeter (GEXR) unit commenced operations on a 99-mile rail line between Silver and London, Ontario (the "Guelph Line"). It is composed of the Guelph and Fergus Subdivisions and connects with the GEXR at Stratford, Ontario. The GEXR runs from Stratford to Goderich, Ontario and south from Clinton Junction to Centralia, Ontario. The Guelph Line handles more than 19,000 carloads annually, including traffic from GEXR, primarily from the transport of auto parts, chemicals, and paper products. In addition, VIA Rail Canada, Inc. will continue to operate passenger trains over the line.
There will be no Week in Review for next week due to the Thanksgiving holiday. Look for us the week of 12/5.
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