THE BLANCHARD COMPANY

The Railroad Week in Review:
Week Ending October 9, 1999


One of the benefits of being a newsletter publisher is getting to stir up trouble. Recall that last week I took up Dave Parkinson's point about railroad competitiveness and the shortlines' role therein. The response was almost overwhelming. And because there was so much good and original thought, this week's Review will be almost totally devoted to reader comment.

Starting things off Sunday evening was this no-nonsense note from a senior rail marketing exec in Canada. He writes, "Your endorsement of Dave Parkinson's comments truly shows a lack of understanding of the rail marketplace. You really seem to blame class 1 rails for the non-performance of shortlines. Anyone close to the business has a clear understanding that shortlines are an impediment to rail business and not a benefit. Most of these carriers -- through no fault of their own-- lack the economy of scale and/or sufficient line haul revenue to provide competitive rates.

"You see a class 1 could actually lose money on the final 8 mile delivery to the customer (i.e. shortline delivery) yet still make money on the entire trip. However, when a shortline is involved, they quite rightly have to make money on the 8 mile trip. Unfortunately, the $900 they charge for these last 8 miles makes the whole move uncompetitive. Hence, truckers eat the rails alive in these situations. Shortlines simply are NOT competitive."

A second class 1 marketing exec, a friend for nearly 20 years and with as good an understanding of the shortline business as you'll see, writes, "It's time for the shortlines to stop blaming all their problems on the class 1s. We have serous problems in this industry and the small carriers may have more at stake than the large roads in finding a solution.

"Your point about the class 1s and the revenue impact of joint line traffic with shortlines likewise stops short of a critical question. No large carrier is going to walk away from traffic just because it comes from a shortline unless the joint line traffic absorbs so much of the available resources that it crowds out more attractive traffic. What's at issue here is the value of the traffic to each of the participants including the cost of reinvestment in the track, locomotives and cars needed to cover the movement. I suspect that the large and small railroads are far apart; that which is very important to the shortline has a much lower priority with the large railroad.

"The single car network is not doing well. Gains in productivity are coming through large-scale activities -- unit trains of all types, high capacity cars, high volume terminals, etc. Customers are changing to reflect this. To me, this suggests that the rail industry will, in the future, play an increasingly important role for an ever smaller number of customers. I want to encourage the small carriers to think about how the part of our industry that effects them the most, the single car network, can be enhanced from the customer's perspective. This will require some global rather than parochial thinking."

Yet a third class 1 type, formerly in Conrail's marketing group, notes, "Whether the presence of a shortline depresses the Class1 carrier's revenue statistics depends on how the shortline gets paid and on how the class 1s computer accounts for that payment. There are at least three ways to incorporate a shortline's revenue into a through rate: division, switch, and junction settlement. When a shortline receives a linehaul division, that certainly reduces the revenue in the class 1 market manager's statistics, which reinforces the perception that the shortline is taking away revenue, and I suppose by implication, profit. However, when a shortline is paid as a switch or junction settlement carrier, the class1 collects all the revenue and pays the shortline its portion later.

"If the class 1s computer reporting system counts this as a cost rather than a revenue debit, then the presence of a shortline does not depress revenue per unit at all. This gives the perception that a shortline is not taking away revenue and is just part of a "make-or-buy" decision made by the class 1: the big railroad's cost of running a branch was removed and replaced by the shortline's (presumably lower) cost. This is a more flattering way of looking at things, and probably more realistic, too."

A southwestern shortline operator doing business with both BNSF and UP reports an experience shared by many of his peers. "Your comments of Big RR reps don't do shortlines well is right on. Our class 1 rep told a prospect looking at a site served by our road that the freight rate to us would be $300 more than to his site due to our fee being an add-on. Upper management of big railroads push to rid themselves of unprofitable branch lines, then their marketing departments work against shortlines in developing new business.

"Big railroad marketing personnel are graded heavily on their margins for their products as you surmised. Also, what's amazing to me is that big roads take selective increases on the through rates including amount of division paid to shortlines, but are continuing to insist that shortlines take RCAF-based escalators. I know this practice is not restricted to shortline operators, but also to transload operators, intermodal contractors including drayage companies."

All of which tells me the two groups, shortlines and class 1s, for all their talk of partnerships, aren't talking all that well. As you can see from the above, there are class 1 folks and shortline owners who are in fact working hard to make partnerships work. However as long as there is one individual on either side of the fence not playing by the rules the system fails. Dollars in the till at the end of the day and operating cash flow are the only measures.

Burlington Northern Santa Fe (NYSE: BNI) has named Greg Fox to the new position of vice president, E-Business. The position is designed to bring together the range of E-Commerce efforts within the company into a common strategy and a set of actions that will make it easier to do business with BNI. In a related development, BNI has begun a six-week series of 30-second public education spots on CNN and CNN HN. This series, plus the on-going Norfolk Southern series, are sorely needed to tell the story. See the full press release at www.bnsf.com. It's a must read. Then tune in to CNN and see the commercial. Intermodal music by Vivaldi.

RailTex (Nasdaq: RTEX) continues to refine its shortline portfolio with the sale of its Salt Lake City Southern Railroad to the Utah Railway Company for $675,000. Proceeds from the transaction will be used to reduce RailTex's senior credit facilities and for general corporate purposes. RailTex will record a gain of approximately $500,000 (or $0.03 per share) on the transaction.

Fallout from merger-related service failures continues in north central Pennsylvania. According to the Williamsport Sun-Gazette, "The Lycoming County Commissioners may lodge a complaint [with the STB] on behalf of 21 area manufacturers whose rail-freight service has suffered since Norfolk-Southern Railroad took over part of the Conrail system several months ago." Williamsport is served by the Lycoming Valley Railroad, a shortline created when Conrail spun off the former Reading and New York Central lines some years ago. Thankfully, the paper reports the commissioners "understand it's not the fault of" the shortline. I should hope so as LVRR is one of the shortlines NS President David Goode has praised for helping NS through the crunch.

The car building business continues to flourish as Greenbrier (NYSE: GBX) has announced a new order from TTX Company for 1,000 89-foot flatcars to be built at the company's TrentonWorks facility in Nova Scotia, Canada. The flatcar order extends the total production run of this railcar type for TTX to 3,500 units, a portion of which have already been built. Be sure to check out Greenbrier's new website, www.gbrx.com.

The Wall Street Journal reports (10/7) that the Thames Train may have run a red block signal in the horrific crash earlier in the week outside London's Paddington Station. The Great Western train supposedly had a clear track indication. A correspondent in Chicago reports the media attention has largely been on the privatization issue. The Financial Times says "The UK government shunned the burden of responsibility and said the rail industry would have to foot the 1bn ($1.66bn) bill to improve rail safety." To my mind, the accident points to the legitimate need to have dispatching in the hands of the track owner and principal user as in the US.

--Roy Blanchard


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