The Railroad Week in Review:
Week Ending June 12, 1999

Week Two of a World without Conrail was somewhat more eventful. Whereas a Norfolk Southern contact said there were "pockets" of problems, each of the dozen shortlines I called in NJ, Penna, Maryland, New York, and Virginia reported some sort of slippage, mostly data-related. And over coffee in DC yesterday Frank Turner of the ALSRRA told me he'd gotten much the same story. The main difference seemed to be in the way the various shortlines were reacting. The overall sense was that by-and-large it was going off remarkably well. Once the initial wobbles are done the northeastern railroad picture will be quite conducive to increased business.

In Philadelphia, Henry Holcomb (who has been covering the merger since the opening salvo) writes in the Inquirer, "Potential gridlock is feared but NS said remedies are coming quickly. CSX has been faring better." Judging from what I've seen driving around the area's yards and other facilities, tracks do seem to be more fully occupied than usual, and clearly some trains have been running late. The good news is that there is little sense of any imminent meltdown. As an industry we may just have learned out lesson.

NS Chairman David Goode said Friday in a Message to employees, "We will experience some peaks and valleys in handling both the expected problems and the surprises that come up along the way. We have a way to go yet, but I am confident we'll be OK. None of our issues are systemic, and all can be fixed. Keep up the good work - we'll all be better for meeting this challenge."

Elsewhere, Henry Wolf, the Norfolk Southern CFO told the assemble multitudes at the Merrill Lynch Global Transportation Conference, "We are taking quick and decisive action to respond to remedy these situations quickly. In one case, for example, we chartered a plane to ensure a customer's freight arrived on time. In another, we had to do some trucking to avoid plant closings. And we've had to run specials to meet critical customer needs." The full text of his message is available at, click on "What's New."

In related news, the Port Authority of New York and New Jersey ( reports that cargo volume through the port rose sharply in 1998, increasing its share of North Atlantic port volume to 55.7% from 54.6% in 1997. The dollar volume of cargo handled was up 5% to $65.9 billion. The port also registered a 17.5% increase in cargo volume from the all-water route from Asia, which could have implications for the rail land-bridge intermodal business if the increase becomes a trend.

Locally, the PA says 80% of the port's cargo moves within a 260-mile radius with "virtually all" handled by truck. Still, that leaves $13 billion worth of goods moving longer distances and rail intermodal volumes to the Midwest were up 22% in 1998. One would expect that with two robust carriers vying for this growing business that the rail share will continue to increase.

Emons Transportation (Nasdaq: EMON) will hold a special stockholders meeting June 29 for approval to exchange each outstanding share of its $0.14 Series A Cumulative Convertible Preferred Stock for 1.1 shares of its Common Stock. Under the current terms of the Convertible Preferred Stock, each share is convertible into 0.9 shares of Common Stock. The proposed exchange represents an inducement premium of 0.2 shares of Common Stock in excess of this amount, or approximately 297,000 additional shares of Common Stock. After consummation of the proposed merger, approximately 7.85 million shares of Common Stock would be outstanding.

Emons believes the existence of $4.7 mm worth of outstanding convertible preferred shares and dividends "creates a significant obstacle to its ability to raise additional equity capital" to fund future growth and expansion. Said Robert Grossman, Chairman and President, "Emons is about to complete a very successful fiscal 1999, highlighted by internal growth and acquisitions. The Company seeks to continue to grow through internal activities, startup of new services, and selective acquisitions. We believe elimination of the existing preferred stock through the proposed recapitalization will better enable us to continue to finance our growth.'' I couldn't agree more.

Brokerage Firm CFSB has initiated coverage of seven railroads giving three "Strong Buy" recommendations (BNI, CNI, and UNP) while rating the rest "Hold" (CSX, CP, NSC, WCLX). By way of comparison, Zack's ranks 16 rail-related companies including both carriers and suppliers. In this list, based on the average numerical ranking (1 is buy, 5 is sell) the recommendations are CNI-1.50, UNP-2.21, BNI-2.24, CP-2.33, WCLX-2.33, CSX-2.43, and NSC-2.50. For the week there was little movement in stock prices, except for CSX which dropped three points on no news.

Continuing the thread on intermodal margins, an equipment lessor in San Francisco writes, "Just a quick response on the comment re: premium trains hauling intermodal freight. At the risk of stating the obvious, the truck competition dictates that intermodal freight moves on high-speed premium trains. From inside the railroad, this may look a bit silly since the higher margin rail traffic often gets bumped, but the rails have to do this given the quick door-to-door service provided by trucks. However, I think the conundrum is that the customer already sees the rail option as less-than-premium (versus truck) and at the same time, the railroad views it's own intermodal service as premium."

To which a CSX marketeer adds, "Naturally rails will always make higher margin in bulk commodities that load 100+ tons per car and are not service sensitive. It is the difficult stuff like Intermodal and Boxcar that will spell success and growth for the industry." And a former class 1 SVP notes, "At our road, we briefly tracked traffic by segment against national production for the same segment. I am convinced that such measurements are the ONLY way to measure true economic usefulness. Your share of the segment goes up, you are more useful. It goes down, you are less useful. There is some work being done put together similar measures in the class 2 and 3 railroad field, although the practical problems for a small company are daunting."

Daunting, perhaps. But that's why the hardest task should yield the best risk/reward results.

--Roy Blanchard

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