The Railroad Week in Review:
The big news this week was the fatal Amtrak accident outside Chicago. What made the story even sorrier than the horror of it all was the misinformed and plain lousy news coverage. It doesn't take a "black box" to determine that the train hit a truck that was wrongfully on the crossing. Where was the emphasis on stop look and listen? Where was the emphasis on the FRA-mandated highway protection device inspection and record keeping? What about the record of the engineer vs. the record of the truck driver? The fact of the matter is the train hit a truck that shouldn't have been there and eleven lives were snuffed out as a result. Manslaughter sounds about right, along with a hefty lawsuit against the steel company the trucker was working for.
As the clouds of railroad reregulation continue to threaten, Canadian National president Paul Tellier let 'em have it in DC this week. Tellier, speaking to the Rail Customer Forum, said the U.S. rail industry isn't perfect, "but I can assure you there is much to admire in how Americans run their rail system." In the past 20 years, U.S. rail consolidation and de-regulation have revitalized a once-moribund industry, making railroads - and their customers - more efficient, productive and competitive.
Tellier acknowledged that rail mergers have sometimes created service issues for shippers. But he cautioned that it would be a "mistake to turn to regulation to solve temporary service issues. The problems are being fixed by an industry that is determined to provide better service - that must provide better service to compete." The bottom line in the rail service debate, he said, is that "a market solution is better than a regulated solution. Clearly rail competition and service levels are inseparably linked to deregulation."
He also warned that Canada is not the US and vice versa. Some of Canada's regulatory measures arose from railroad overbuilding in the early 20th Century and the subsequent failure and government takeover of some railroads. In the US, said Tellier, "Railroad networks were privately financed on the premise that access would cover the networks' true economic cost. Any change in this premise would reduce the railroads' ability to get the additional capital they need to improve their networks for the benefit of shippers. To borrow all or part of the Canadian regulatory system would be a step backwards. It looks like an easy solution, but it's the wrong solution."
Elsewhere, The United Transportation Union and International Brotherhood of Electrical Workers today gave their backing to the proposed CN-IC merger. The transaction now has the support of unions representing more than half of the organized work force of CN and IC in the United States.
RailAmerica released its 1998 results on Wednesday. Year-over-year total revenues were up 63.7% to $77mm and net income was up 131% to $4.4 mm. Gross margins rose 9/10 of a point to 16.3% and net margins rose 1700 basis points to 5.7%. On the other hand LT debt increased 57% to $68 mm while outstanding shares grew 15% to 9.5 mm. Debt grew to 195% of equity from 164%.
On the rail side, annual sales dipped to 42% of the total from 46%. Margins were not provided by business segment, though unit revenue (rail per car, truck per vehicle) dropped 14% on the rail side and grew 12% on the truck side. The report notes that new mines in Chile and increased ag business elsewhere accounted to the rail growth, which partially explains the lowered per car revenue.
Regarding RailTex carloadings, Joe Jahnke writes from San Antonio, "Two of the three new lines we have acquired since last year (the Guelph line and the Dallas lines) are actually reported as part of same store because they are add-ons to an existing property and not separate stand-alone properties. We track them as part of the already existing properties. Obviously that means the same store growth isn't as high if you exclude the add-ons, but it is still quite healthy through February. The difference between same store and total is just the Central Properties at this point." That helps, Joe, and thanks.
GNWR president Charlie Marshall once told a group of shortliners (was it the CSX meeting a couple of Decembers ago?) that the customer/traffic base of any branch changes completely every ten years. For an example of what drives such change we need look no further than the steel industry. Writing in Friday's Wall Street Journal Brookings Institute Fellow Robert Crandall has a few things to say about big steel and the import quotas.
Crandall's argument is that the new US minimills - Nucor, North Star, Keystone et al - have done more to undo the market positions of Big Steel companies (USX, Inland, LTV etc.) than imports. Most of the minimills are in small towns, away from the industrialized "rust belt" inhabited by Big Steel. And small towns increasingly means branch line railroading and shortlines. South Carolina Central (RTEX) is a case in point. Nucor's Darlington SC plant is on this line and the traffic base has grown to more than 24,000 cars since CSX sold the line in 1987. What's nice about this business is loads both ways. Scrap in, finished product out. And the last time I looked the operating ratio on this line was in the low 60s.
Pennsylvania continues to lead the way in shortline and regional railroad support. This week Penn DOT announced plans to plow another $1.3 mm into its network covering twelve projects "to improve railroads that serve existing employers and to construct rail lines to new facilities." In announcing the program DOT Secretary Brad Mallory said, "Shortline and regional railroads play an integral role in moving goods throughout Pennsylvania. These grants will support [Pennsylvania's] economic development strategy by using rail- freight improvement projects to create jobs and get goods to market faster." DOT estimates these grants will help create more than 400 new jobs and retain about 800 employees and put some 30,000 truckloads on the rails. To be sure, the Quaker State has 70 shortlines, more than any other state. But that's no reason some other states can't quit being so hostile to shortlines and take a hint from Mallory.
Neptune Orient Lines Ltd. (NOL) will sell its shares in its North American stack train business unit, Land Transport Services Inc. (LTS), for $315 mm to an affiliate of Apollo Management, L.P., a New York-based investment firm which already has an equity investment in Pacer International, another intermodal service provider. Apollo says it will continue to operate the former NOL business as LTS and under the leadership of Donald C. Orris, who is also Chairman and Chief Executive Officer of Pacer International.
This is the APL sale we first heard about some months ago. APL, recall, is the container shipping and logistics arm of NOL. For Apollo, the purchase will provide a stronger presence in the North American intermodal and logistics markets. For NOL, the sale will generate a net profit of about US$167 mm. The transaction is subject to approval by NOL shareholders, review of US regulators under the Hart-Scott-Rodino Antitrust Improvements Act, and the successful financing by Apollo. It is expected to be concluded by June 1999.
Conrail employees, inspired by the wife of one of their own, solicited more than 300 recipes from employees and published a cookbook that they hope will be a souvenir of Conrail while raising money for breast cancer research. The idea came from a book of recipes called "Mum's Little Black Book," published by Pat Behe, the wife of former Conrail employee Mike Behe, just before she died of breast cancer in 1997. The spirit of Mrs. Behe's desire to leave a legacy led to the creation of Conrail's book, called "The Dining Car: A Slice of Conrail." Books are $10 each and can be ordered by contacting Conrail's Corporate Communications office at (215) 209-1493 or by sending e-mail to email@example.com.
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