Rush Loving on Why Buffett Bought BNSF

Posted by Matt Van Hattem
on Friday, November 20, 2009

Guest post from Rush Loving

Two weeks ago, when Warren Buffett announced his purchase of Burlington Northern Santa Fe, a number of journalists seemed surprised that anyone would want to buy a railroad. "A railroad might strike many people as a bit old-fashioned-more 19th century than 21st," said The New York Times. Some TV network reporters referred to railroads as if they still were in the 1800s.

Nevertheless, they all were quick to explain that Buffett was gambling on the U.S. economy-and putting his money on U.S. workers rather than somebody in China or Pakistan, and they were right. Wick Moorman, chairman of Norfolk Southern, calls Buffett's purchase a vote of confidence in the industry. "It's the culmination of what's been going on in our industry for a number of years," Moorman said yesterday.

He's dead-on right, but, alas, the American public, like many journalists who do not cover transportation, has no comprehension of Moorman's point. Most Americans-and their legislators-are woefully ignorant of how vital the railroad industry is today and how big a role it plays in our daily lives. In fact, I'm not sure if some railroaders are totally aware of it.

Some of the blame-probably a lot of it-lies on the men who used to run the nation's major roads. Many of them did not believe in advertising, especially institutional ads where you tell the world who you are, what you do for the public and your many strengths. Except for Norfolk Southern, the industry stopped running institutional ads more than 20 years ago. In recent months CSX has taken up the cause again, and, under the leadership of Ed Hamberger, the Association of American Railroads launched a vigorous advertising and public relations campaign in the past few years to educate the American people and the men and women who make policy in Washington.

The have an uphill battle. The industry's image of backwardness and impoverishment dates from the 1970s when over-regulation was choking them to the point of bankruptcy.

The turnaround began when the Staggers Act was passed in 1980 and the railroads were deregulated. Since then the roads have been transformed into one of the most vibrant industrial groups in the land.

Since 1980 the seven largest railroads have merged into four major systems. Many of us privately lamented the mergers because it meant the end of some grand old names of railroading  like the MOP,  Norfolk and Western and Chessie. Yet consolidation strengthened the industry.

In the years since the carriers have eliminated thousands of miles of track and duplicate facilities and have made better use of their employees. Railroad productivity has shot up 144 percent since Staggers was passed. Employees are 439 percent more productive. And the railroads themselves are financially strong for a change.

Rail intermodal traffic now is a direct gauge of imports, retailers' inventory build-ups and consumer spending. Since Staggers was passed, intermodal business has quadrupled from 3 million trailers and containers a year to 12 million.

Trucks used to be the railroads' biggest competitors, but now companies like J.B. Hunt use high-speed express trains of rail flatcars to move their rigs between the Mississippi valley and the West Coast. UPS now is the industry's largest single customer. In fact intermodal shipments now account for nearly as much rail revenue as coal, which, since the industry's early days, has been the cornerstone of the railroads' wealth.

It's a good chance that almost everything in a home moves by rail at some point in its lifetime. In one year the railroads carry 1.3 million carloads of paper products and lumber, including the wood used to build homes and apartments.  They haul 1.7 million carloads of wheat and other agricultural products, and on top of that they carry 1.5 million carloads of food products, everything from beer and orange juice to French fries and frozen chicken.

Railroads transport more than 70 percent of the coal utilities use to generate our electricity, and they carry 70 percent of all U.S.-made motor vehicles, to say nothing of auto parts. Even clothes, electronic goods and appliances are shipped in containers that the railroads move.

It's the story of an incredible turnaround. Today the railroad industry is a solid, consistent earner that directly reflects America's economy. And that's why Warren Buffett is buying.

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See Rush Loving Jr.’s plan for Amtrak in the March 2009 issue of Trains. A former associate editor of Fortune magazine, he served as chief spokesman for the Office of Management and Budget in the Carter White House and has been a consultant to numerous transportation companies.

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