What would Warren do?
OK, we just cleared $24 billion in net earnings in 2016, on the heels of clearing $24 billion net earnings in 2015 and $20 billion in net earnings in 2014. BNSF contributed $3.6 billion or 15% of our net earnings in 2016, and regularly contributes between 15% and 18% of our net earnings. We know we have a premium intermodal franchise in BNSF - Santa Fe practically wrote the book on it. We know the US Department of Transportation is projecting that rail freight is going to grow 25% over the next 30 years, net of losses in coal loads. We know that the American Trucking Association is projecting a shortage of 175,000 drivers by 2024. Is this the time to strike to create the premier transcontinental railroad and intermodal franchise, and if so, which eastern railroad is the best fit for us?
We know CSX closed the markets at just under $45 billion market capitalization, and NS is just under $35 billion market capitalization. If we have to pay a 30% premium, CSX will cost about $59 billion and NS will cost about $46 billion. Assuming intermodal must be the wave of the future for growth in the USDOT projections, which network gives us the best opportunity to develop network speeds to pull traffic off the highways?
With approximately 75% of the US consuming population living in the Eastern and Central time zones, which routes will allow us to get consumer products to markets quickly from the West Coast and the maquiladora plants in Mexico? (Assuming "better trade deals" will still allow for significant imports from Mexico and Asia.)
One opinion - it would appear that Norfolk Southern would be a better fit with BNSF to grow its intermodal franchise. Norfolk Southern routes from Kansas City and St. Louis plus the Streator connection provide multiple bypasses off the Southern Transcon of the greater Chicago area to the upper Ohio valley and the upper Mid-Atlantic population centers. In addition, the Avard connection to Springfield, Birmingham and the former Atlanta and West Point to Atlanta, along with the former Southern from Memphis to Chattanooga and Atlanta give multiple routes that could almost function as paired trackage between Memphis and Atlanta. In fact, if an expanded BNSF could extend the Meridian Speedway to Dallas with a deal with Kansas City Southern, it would provide yet another route from California to the Southeast. Finally, the Crescent Corridor would also provide single line service for imports coming from Mexico through Houston to New Orleans to the southeast and the Mid-Atlantic states.
Granted, there is much more to such an evaluation of a theoretical merger than just those types of "how the routes fit together" exercises. But if railroading is an all-in bet on the American economy, the right strategic move at the right time as the economy seems on the cusp of expansion would allow for further growth in the bottom line. Right now seems to be a time when there is an opportunity that is in the BNSF wheelhouse - intermodal - to both haul new business and pull business off the highway.
The big question is if the economics will make sense for such a deal to take place - is the potential for growth sufficient to justify purchasing the NS property at a premium over the current stock price, which is at a P/E ratio of 21?
Is a merger coming or is Mr. Warren trying to decide who should BNSF interchange with?
CSX's price is artificially high with all the Mantle Ridge speculation. No matter how that situation turns out CSX will return to it's traditional trading level.
Never too old to have a happy childhood!
I still do not see intermodal as the silver bullet to railroading's future. Until margins per int. unit handled get closer to the margins of of loose-car railroading, they will continue to give money away in the marketplace. This is the same logic the (Erie?) had when they lost money on every car they handled, but thought they would make up for it with volume.
Why doo they keep selling their soul to low-margin traffic while running off the more profitable single-car customers? Are load-aggregation vs drayage costs that out-of-whack?
To an acquiring railroad like BNSF, I don't think other business would be foresaken for a strict "intermodal only" focus. They would be buying the whole franchise after all, but it seems they would have an equal emphasis on revenue growth in addition to expense minimization, rather than just a total focus on expense minimization.
Interesting conversation already!
Short-haul domestic intermodal is a huge potential market, far more than carload or any other revenue source in sight. That's why there should be more pursuit of it.
The rail disadvantage is added time as much as costs. Yes, the aggregation costs are out of whack - those huge terminals cost a lot of money, which can be justified and recovered only in the few common segments of high-volume traffic lanes between some original-destination pairs. To grab more market share will require more distributed terminals - which will reduce drayage costs - and necessitate more efficient / lower cost operations. See John Kneling's articles and books on how to do that. The equipment has changed, but the principles haven't.
- PDN.
Paul_D_North_Jr Short-haul domestic intermodal is a huge potential market, far more than carload or any other revenue source in sight. That's why there should be more pursuit of it. The rail disadvantage is added time as much as costs. Yes, the aggregation costs are out of whack - those huge terminals cost a lot of money, which can be justified and recovered only in the few common segments of high-volume traffic lanes between some original-destination pairs. To grab more market share will require more distributed terminals - which will reduce drayage costs - and necessitate more efficient / lower cost operations. See John Kneling's articles and books on how to do that. The equipment has changed, but the principles haven't. - PDN.
I agree. But the reason the profit margins are low is the low operating costs of trucking.
C&NW, CA&E, MILW, CGW and IC fan
What would Warren do? He's already done it: reportedly, he recently bought up a bunch of airline stocks.
If I recall correctly, before he bought all of BNSF, Mr. Buffet had taken large stock ownership positions in BNSF, UP and NS, perhaps even larger than Mantle Ridge is proposing to take in CSX.
What are the odds of reducing transit times for all freight if in a merger everything going northeast on the Southern Transcon did not have to end up in Chicago?
Or if Amarillo-Dallas-Meridian Speedway-Atlanta and Avard-Springfield-Memphis-Atlanta could be operated as widely-spaced paired track?
Or if everything coming off the chemical coast in SE Texas did not have to go north through Chicago for interchange but could instead go east at other former BNSF-NS interchange points?
One has to think that while BNSF cleared $3.6 billion in net income this year and NS cleared $1.7 billion in net income this year, the combined system with the great management teams would figure out a way to clear much more that $5.3 billion from the combined networks. I guess that would be the bet that Mr. Buffett would be evaluating.
schlimm Paul_D_North_Jr Short-haul domestic intermodal is a huge potential market, far more than carload or any other revenue source in sight. That's why there should be more pursuit of it. The rail disadvantage is added time as much as costs. Yes, the aggregation costs are out of whack - those huge terminals cost a lot of money, which can be justified and recovered only in the few common segments of high-volume traffic lanes between some original-destination pairs. To grab more market share will require more distributed terminals - which will reduce drayage costs - and necessitate more efficient / lower cost operations. See John Kneling's articles and books on how to do that. The equipment has changed, but the principles haven't. - PDN. I agree. But the reason the profit margins are low is the low operating costs of trucking.
Thanks to Chris / CopCarSS for my avatar.
Murphy SidingTrue, but that has the potential to go up as the labor costs for people to drive those trucks is on the rise.
Or they start buying driverlesss trucks?
It's been fun. But it isn't much fun anymore. Signing off for now.
The opinions expressed here represent my own and not those of my employer, any other railroad, company, or person.t fun any
rrnut282I still do not see intermodal as the silver bullet to railroading's future. Until margins per int. unit handled get closer to the margins of of loose-car railroading
Two thoughts about intermodal:
The margins are probably better than you think. BNSF does just fine being primarily intermodal.
The margins will improve with volume.
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
zugmann Murphy Siding True, but that has the potential to go up as the labor costs for people to drive those trucks is on the rise. Or they start buying driverlesss trucks?
Murphy Siding True, but that has the potential to go up as the labor costs for people to drive those trucks is on the rise.
Murphy Siding zugmann Murphy Siding Or they start buying driverlesss trucks? Then they'll be competing with driverless trains. It will be a whole new adventure when a driverless train hits a driverless truck.
zugmann Murphy Siding Or they start buying driverlesss trucks?
Murphy Siding
Then they'll be competing with driverless trains. It will be a whole new adventure when a driverless train hits a driverless truck.
And be investigated by policeless police cars. It'll be YUUUGE!
BaltACDAnd be investigated by policeless police cars. It'll be YUUUGE!
I, for one, welcome our robot overlords.
I'd be happy with a robot that could cook me dinner and clean my house.. for some reason no one is working on that. Driverless trucks and trains yes... but no robot to do those mundane domestic chores.
Ulrich I'd be happy with a robot that could cook me dinner and clean my house.. for some reason no one is working on that. Driverless trucks and trains yes... but no robot to do those mundane domestic chores.
zugmann I, for one, welcome our robot overlords.
Points for working in a Kent Brockman reference.
An "expensive model collector"
UlrichI'd be happy with a robot that could cook me dinner and clean my house.. for some reason no one is working on that. Driverless trucks and trains yes... but no robot to do those mundane domestic chores.
My wife would appreciate it if I could find her a wife to relieve her of those duties. But I appreciate all the work she does and I let her know it so I remain a happy husband. I remember when automatic washing machines (1950) became the trendy new appliance. But instead of relieving women of work, people expected to not wear clothes for three or more days beteen washings. Be careful what you wish for.
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