The Railroad Week in
Canadian National (NYSE:CNI) says it has significantly reduced transit times and improved on-time delivery of carload freight since becoming a scheduled railroad. It's not surprising. Recall Hunter Harrison talking about increasing Illinois Central unit train cycle time to six trips a month on his watch there. More important, scheduling like this earned IC a 15% rate premium on this service.
In just one year CNI has achieved 81% on-time dock-to-dock, never mind yard to yard (a meaningless measure for customers anyway) with 95% of cars being placed with 24 hours of the scheduled time. In the process system yard dwell time is down to 21 hours, the loco fleet size cut by 33%, and the car fleet by 17%. Gross ton-miles per available HP are up by a third.
Like the man says, schedule everything and everything gets better. By becoming a scheduled railroad CNI also sees shippers gaining greater control over production and inventory costs, and car owners and lessors experience greater productivity and lower costs. At the same time CNI enjoys reduced costs, better use of assets and greater flexibility in capital spending. Says Harrison, "The service plan is a powerful management tool and a competitive advantage in the freight transportation marketplace." Ain't it the truth.
Dan Machalaba writes in Thursday's WSJ that trucking prices are going up. Rates are being driven up 5% or 6% by increased fuel costs and a driver shortage. Says Machalaba, "The rate increases affect the truckload industry, which generates revenue of about $107 billion a year." They may get away with it, too, as demand for truckload services now outstrips supply.
Still, it's a tough way to make money with operating margins flat or down from a year ago, even with fuel surcharges of a percent or two in recent months. The point to railroaders is -- and Machalaba makes it well -- that there "has been a recent shift of more freight from rail to trucks, because rail service has deteriorated as railroads struggle to implement a wave of mergers."
We seem to be seeing both good news and bad in rail freight marketing. On the one hand we see some really aggressive rail pricing. On the other, we see a reluctance even to talk to potential sources of new business due to the congestion problems of the moment.
For example, a client has identified two Philadelphia shippers interested in replacing truck with rail. In one case, CSX has offered a boxcar rate undercutting the truck by double digits. NS did likewise with a boxcar rate on another commodity and in another lane. In each case annual customer savings could be in the six-figure range. The time difference between truck and rail is immaterial as long as transit times are consistent.
And there's the rub, says one class 1 market manager. Given congestion and other problems, maybe it's not a good time to be out beating the bushes for new business. To which I must respond it'll take three months to get the mode change though the chairs, and by that time congestion should no longer be a problem. Better to work our way through the process now than to blow good opportunities tomorrow by focusing on today's problems.
Faster, simpler, closer to the customer. Sound familiar? It's the marketing cry of today's winning companies, and it's coming soon to a railroad near you. CSX Transportation, the railroad arm of CSX Corp. (NYSE: CSX) sounded that very theme throughout this week's annual shortline meeting.
CSX watchers of all stripes -- users and investors alike -- should be cheered by this message of consistency. We first heard it from CSXT President Ron Conway at the July analysts meeting in NYC. We heard again from Conway and his fellow "ex-Con(rail)" senior commercial officer John Sammon in October. And now in December that rallying cry permeated the entire two-day session.
Sammon says he wants to grow the merchandise (non-coal, automotive, or intermodal) business by 3.5% in 2000. Shortlines (which CSXT defines mainly as AAR class III carriers, defined as those roads with less than $20 mm annual sales) right now gererate about $600,000 of CSXT's $3.5 mm merchandise annual sales, itself roughly half of CSXT's annual revenue base. It is generally agreed shortlines can grow revenues faster than CSXT simply be being able to move faster creating new customer relationships, being simpler to deal with (one or two people at most), and closer to the customer.
CSXT is also putting more emphasis on e-commerce. For example, they are moving ahead with simplified pricing, and it will be available on the web soon. Essentially it is zone based and each commodity out of one zone will get the same rate to any another zone, regardless of whether a shortline picks up, delivers, or both. Tariffs will be replaced by "Retail Prices" which will be competitive and flow up and down periodically according to available space in the given corridor.
The parallel with airline capacity pricing is no accident. The accelerated process will eliminate the need to get a tariff rate and then call the railroad to negotiate a reduction as the rates will be lower to begin with. Moreover, shortlines will get a percentage of the CSXT rate with a stated minimum.
Overall, the presentations framed what CSXT is out to do organizationally to support the simpler, faster, closer to the customer strategy. To be sure there was the usual few shortlines carping about today's service shortcomings. But most agreed that too much energy devoted to fixing all of today's short term nits and lice detracts from winning the business that will feed us tomorrow. The framework is there.
RailTex (Nasdaq: RTEX) reports carloadings for November 1999 increased by 4% with strong traffic gains in railroad equipment and lumber and forest products. On a "Same Railroad" basis, carloadings increased by 6% YTY. The traffic gains were primarily a result of railroad equipment moves in Ohio and Indiana, and on the Missouri & Northern Arkansas Railroad. Strong lumber growth in the Northwest United States also contributed to the increase.
Genesee & Wyoming (Nasdaq: GNWR) posted November 1999 traffic volumes for its North American and Australian operations. As a result of increasing its stake in its Genesee-Rail One Canadian unit (GRO) from 47.5% to 95%, GNWR now consolidates the results of GRO and reports them as part of North American carloadings. Also included in North American carloadings are the results of the Mexican Compania de Ferrocarriles de Chiapas-Mayab (FCCM) which GNWR began operating on September 1, 1999. Thus North American carloads in November 1999 were 33,497, an up 82.3% YTY. Excluding GRO and FCCM, carloads increased 41.1% YTY. Nov 99 Australia traffic was off 31.8% YTY.
Kansas City Southern (NYSE: KSU) was upgraded to Strong Buy from Buy on Friday by CIBC World Markets. No reason was given, however it reasonable to expect that with the impending split of the railroad and financial arms there are bets the parts are worth more than the whole. At midday Friday KSU was up nearly two bucks on volume approaching the average daily volume.
Meanwhile KSU announced that it "has commenced cash tender offers and consent solicitations for the Company's outstanding $400 million in Notes and Debentures," all of which is rail-related. Moody's has placed KSU's Baa2 debt "under review," saying in a press release that "With the loss of cash flow from the financial services units, we believe that any bonds not tendered could be downgraded to the high end of the speculative grade range." Sort of reminds one that every sword has two edges.
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