The Railroad Week in Review:
Week Ending June 5, 1999

Week One of a World Without Conrail has essentially been one of non-news. There was Don Phillips' piece in the Washington Post about the NS computers that were fed the wrong tapes at changeover. And CSX was not immune to the unplanned as Thursday evening a bolt of lightning hit the Jacksonville Ops center disabling signal and communications for about an hour on parts of the railroad's non-Conrail territory. That being said, the story thus far is one of pretty good execution on both sides. Which means all the up front planning and hand-wringing is paying off.

Some shortlines report data-chain interruptions and a few signs that shippers held off releasing cars till after Split Date. Some interchanges have been missed and there have been a few other minor system glitches. NS short line guru John Kraemer is keeping a running tally of slips and has an organization in place to address them as they occur. But so far nothing points to a massive meltdown. Let's see what Weeks Two and Three bring. Less of the same, we hope.

In a feature article this week Traffic World suggests the organizational changes and employee cuts announced May 21 by Burlington Northern Santa Fe may have had as much to do with keeping up with a revitalized Union Pacific as with adjusting to a more customer-focused rail industry. The view from here is they were more about customer focus than they were about cost cutting. Or worries about UP breaking the BNSF rice bowl.

There has been a growing need to improve coordination between operations and marketing. One way to do this is to slim down the organization. Thus Matt Rose moves to President and COO from SVP Ops while Charles Schultz moves to EVP and Chief Commercial Officer from SVP, Intermodal and Automotive. On the ops side Carl Ice becomes SVP Ops, taking Rose's old job.

To top it off a new organizational unit has been established to further integrate door-to-door transportation services. Transportation is increasingly a value-added service, and shelf-to-shelf considerations are relacing mere train schedules. So, the reasoning goes, by providing customers with a more complete package of logistics and information products you increase your ability to attract new business to the railroad. Thus has Greg Swienton, formerly VP Coal and Agriculture, been named SVP, Growth Initiatives reporting directly to Krebs. Looks a lot like what Jim McClellan does for NS and John Rebensdorf does for UP. Excellent move.

As for reductions in capex, Krebs said in a press release, "Since the beginning of the year, our service has consistently exceeded 90 percent on time. Our locomotive situation is such that we have virtually eliminated locomotive delays on our system. Because of the capacity and efficiency investments we have made since merger, the overall condition of our railroad is excellent and for the first time, we have excess capacity. Therefore, we will be able to reduce capital spending and we intend to devote a greater share of our cash flow to our shareholders."

Recall in last week's Review we wrote "use what you have to best advantage to add maximum customer value before putting more money into fixed plant than you need. It appears from the revenue and operating income growth rates we may not be maxed out in usable capacity quite yet. Now let's see some aggressive revenue growth." So it looks like that's exactly what Krebs & Co. have in mind. And to the extent there is cash flow left over, reducing the number of outstanding shares is an excellent idea.

Elsewhere, Traffic World notes that The Big Four LTL carriers, which endured a costly 24-day strike in 1994 in order to place as much as 28 percent of their freight on the railroads, are in the process of taking some off the rails and putting it back onto trucks. Says TW, "Disgusted with shoddy rail service the past couple of years, top executives of the major four unionized LTL carriers disclosed plans to reduce their annual rail miles. At the same they are in the process of increasing hiring of Teamsters over-the-road drivers to build up more sleeper-team operations in an attempt to improve transit times." Poor service, fewer trucks, fewer trains, less need for expensive capacity. QED.

The new UP interchange plan for NS and CSX as they take over their respective pieces of CR will eliminate a lot of the switching formerly done at the BRC (Belt Railway Company) in Chicago. From now on, all switching will be done at Proviso Yard for eastbound traffic, and at Pittsburgh, Willard, and Elkhart for westbound traffic. Traffic from the West for CSX and NS will be built into blocks at North Platte, and at Proviso. Through trains will also be built for New York State, Pittsburgh, Nashville and Elkhart.

In another change, all chemical traffic to and from Houston will use the Salem, Illinois gateway east of St. Louis, instead of going through the Alton & Southern at St. Louis. UP will build run-through trains for Indianapolis, Bellevue, Albany, Cumberland, and Pittsburgh. In return, CSX and NS will build trains for Pine Bluff, Englewood, Westfield and Fort Worth. About 20 run-through trains, for both the CSX and NS, will be affected. Current interchange arrangements on the Gulf Coast will remain the same (information courtesy of

Recall last year Union Pacific called off the planned IPO to spin off its Overnite trucking operations. Maybe UP is wishing it hadn't. Earnings for 1Q99 were off 12% from a year ago and now the Teamster's union has warned that 100,000 of its members are preparing to back a threatened strike by Overnite drivers and dock workers over alleged unfair labor practices. Union officials are also saying the efforts to unionize Overnite drivers was a factor in UP's decision to hold off on the IPO.

A good friend from the CSX Forest Products group writes, "Regarding market share growth, we have to look at the different segments by commodity. Rail is strong in the smokestack segments and market share is stable and high. The LTL segment is growing faster and market share is 0. Have any studies been done based on the market share within segments?" The closest I've seen is a commodity breakout provided by the AAR which shows that (in 1997) the rails has a 40-share of all coal moves and a less than ten percent share of everything else from chemicals (8.2%) down to glass and stone (2.9%). See and click on Railroads and States - 1997/US Summary.

My correspondent continues, "When dealing with market share changes it is important to know if RRs are losing share within the segments or are they losing share since the segments are losing share as a part of the US economy. Hence a need to focus more on the growing segments with products such as Intermodal, and highly reliable boxcar service lanes." There the AAR and other sources leave me. Any suggestions?

Writing on the customer service issue, a former Conrail marketing exec observes, "My experience on the railroad was that if you did nothing to court your existing business in a year, about 20% of what you paid no attention to would go away. If that is true of intermodal business, then something will have to be done just to maintain the status quo. My guess is that much of that is marginal traffic anyway, however even if CSX and NS get all the new potential business from the deep south to the northeast, won't they end up with just the low fruit?

Much of the traffic NS and CSX will be competing for is the stuff that the gypsy will haul until his tires fail. This is not usually lucrative business. What it comes down to is this question: Is there enough intermodal volume that railroads can make a buck at for which they can provide competitive service? Factor in ramping, deramping, draying, and checking in and out costs into a haul that a trucker can make overnight and you don't seem to be doing much but bottom fishing.

One of the friends I made early in my railroad career was a smart, hardworking and honest intermodal guy for whom I had a great deal of respect. In his opinion [supportable IM freight rates] do not provide for the extra tracks used by these "premium" service trains to pass the mineral trains which pay for more than their share of the overhead. Nor does it pay for the sexiest, most efficient engines which usually end up on the premium trains."

He has a point.

--Roy Blanchard

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