What made railroads profitable?

[Anonymous]

Raising Freight rates to super high levels.
Allan.

[BNSFGP38]

Slow moveing long distance passenger trains will surely have made railroads more profitable. [}:)]

[MP173]

I bailed out of this thread a month ago, and wish I hadnt. Good stuff.

Michael, I have to disagree with your assessment that there has been more growth the past 5 years than the decades of the 50's and 60's combined.

Look at the numbers:

1950 - 16.23% of 2000
1969 - 25.7% of 2000

That is a 58.3% increase over a 20 year period

2000 - 100
2005 - 110.89

which is a 10% increase over 5 years.

The economy in the early part of the decade was in the can, then 911 completely shut things down.

I cannot figure the compound rates of return at this time...cant find the owners manual to the calculator, but I am sure someone out there will supply the percentage.

ed

[Anonymous]

I must say this has been one very informitative Topic Line, I picked this up a Month after the first thread. And read through three pages of text, to only find that Rail Roads are profiitable when the Nations Economy is doing well. Go figure :-)

[edblysard]

QUOTE: Originally posted by futuremodal

QUOTE: Originally posted by ValorStorm

True, there is no one answer. There are three. And Mark Hemphill enumerated them:
1. Deregulation
2. Deregulation
3. Deregulation
Other answers were quite informative, like a 100 level accounting class. However, "Thank you Data, that will be all."

Bottom line: Railroads are the 600 lb gorilla, too big to die but not ingenious enough to serve the public in any meaningful manner.

Railroads are not run to "serve the public in a meaningful manner"; they are run to serve the paying customer.
Why do you still seem to believe that railroads are public utilities?
Because they are not, they are businesses, designed and run to pay their shareholders a profit on their investments.


Ed

[bobwilcox]

QUOTE: Originally posted by futuremodal
4. Expanded pricing power over captive shippers, aka differential pricing, aka monopoly power.

Gee Dave railroads were doing differental pricing by the time the B&O rolled into Harper's Ferry. That was about 150 years before Staggers was passed. Must have been those purple oligarchs hiding under the rocks in the Potomic.

[Anonymous]

QUOTE: Originally posted by ValorStorm

True, there is no one answer. There are three. And Mark Hemphill enumerated them:
1. Deregulation
2. Deregulation
3. Deregulation
Other answers were quite informative, like a 100 level accounting class. However, "Thank you Data, that will be all."

1. Wrong
2. Wrong
3. Wrong

Of course, the question is rhetorical, since the railroads are still struggling to cover costs of capital, ergo they are not all that "profitable". However, they do have certain advantages they did not have before that keeps them in the mix like the proverbial 600 lb gorilla:

1. The partial deregulation of Staggers, which allowed....
2. The mega mergers of the 1990's, which resulted in......
3. Substantial retrenchment of trackage , which allowed....
4. Expanded pricing power over captive shippers, aka differential pricing, aka monopoly power.

Contrasted against this is the continually shrinking customer base (a problem not addressed by Staggers), faulty claims of "efficiency gains" promised by the move to heavier cars and longer slower trains (an unintended consequence of Staggers[?]), and no market based incentive to innovate (a concept omitted from the Staggers legislation).

Bottom line: Railroads are the 600 lb gorilla, too big to die but not ingenious enough to serve the public in any meaningful manner.

[ValorStorm]

True, there is no one answer. There are three. And Mark Hemphill enumerated them:
1. Deregulation
2. Deregulation
3. Deregulation
Other answers were quite informative, like a 100 level accounting class. However, "Thank you Data, that will be all."

[selector]

There is no one answer, I'm sure, but industry has improved their material deliverables, both out and in, by improving logistics (e.g.-just-in-time supply). It could be that, while trucking satisfied customer needs in the 80's-90's due to their relative speed, rail has overtaken them with their low unit cost per ton moved. in these times of increased fuel costs.

[MichaelSol]

QUOTE: Originally posted by JimValle

Once the Interstate Highway System came on line, the railroads lost the vast bulk of their premium freight to the truckers. Nevertheless the size of the economy grew at a good clip from 1960 to the present so there was still plenty of work for the railroads to do.

The 1960s were pretty flat.

The following index numbers show the Gross National Product size, based on year 2000 as the 100 mark.

1950 16.23
1960 20.98
1968 24.48
]1969 25.7
1970 27.03
1980 52.17
1990 80.37
2000 100
2005 110.89

You can see inflation ratcheting up in 1968 and 69, and the 70's, but the real growth after the inflation clamp down under Reagan in the early 1980s has been very good. We've had nearly as much economic growth in the past five years alone, as we had during the two decades of the 50s and 60s combined.

You can see why there wasn't much for railroad growth in those two decades, between stagnant economic expansion, and Interstate Highway construction. Railroads blamed everything under the sun, but the overall statistics clearly explain why railroading was anemic, at best, and it really didn't have all that much to do with railroading.

But, you can also see the dramatic economic expansion since then. Why shouldn't railroads be doing great? Perhaps the question is why aren't they doing much better than they are.

Suppose Staggers hadn't happened at all?

Do you suppose that this economic growth pattern would have been reflected by the industry? Historically, it would have.

On a more micro scale, the railroad industry very closely tracked the national economy in terms of profitability during the 50s and 60s. The industry was perhaps a kind of economic "canary." When the economy did well, railroads did well. When it did poorly, railroads did poorly. The Decade of the 70's was not so much a crisis of railroading as it was a crisis, period. Railroading reflected that.

There seems to be some -- some -- evidence that this connection is not as strong as it was during that earlier era, that in some ways the industry has become disconnected from national economic trends on the positive side, while extremely sensitive to it on the negative side.

The Billion dollar question is why railroading is not more profitable and the financial condition of the companies much stronger, based on the historical connection to national economic conditions?

Taken alone, the positive benefits of Staggers should have propelled these companies to very positive positions. They should be rolling in ca***aken alone, that is without the Staggers changes, the vast improvement in national economic conditions should have propelled these companies to very positive positions. They should be rolling in cash.

Taken together, that really didn't happen. They are not rolling in cash, but rather the opposite, very large negative working capital positions and generallly negative cash flows.

Well, there is an interesting story in there somewhere, and I have a feeling the answer may be found in the Staggers Act. since that represented a key change.

Best regards, Michael Sol

[oldyardgoat]

Man, did this topic range far afield!
To answer the original question: the Staggers Transportation De-regulation Act of 1980. This Act of Congress changed all the rules of ground transportation in the USA. The failure of the famous Rock Island (1980) directly changed the outcome of this bill, which was "in committee" (and headed for oblivion) at the time. The death of the Rock Island, an "an American Institution" got the attention of congress, like very few things outside of a war could.
All the other thins, dieselization, loss of passenger service, previous mergers, coal, trucking,ad infinitum, were ingredients for the stew that boiled over with the demise of the Rock Island.
Speaking of passenger service, it was not until the famous 20th Century Limited made its last run on December 2, 1967, that things began to happen that led to the creation of AMTRAK (NARP Corp.).
The slow deterioration of passenger trains bgan during WWII when the railroads were denied production of passenger cars in 1945. That left a bad taste in the mouths of thousands of returning servicemen at war's end. The ICC gave the initial push with the its order in 1947 that limited speeds to 79 MPH unless the railroads installed expensive ATC/ATS equipment. Only the major western roads made the invetment. Without that edict the railroads would have continued their competative edge, and we could have seen the kinds of trains found in the rest of the world that go 100+MPH.
Dieselization was an economic move by the railroads, and all the other stuff was the evolving course of business and technology.
Ardenastationmaster.

[JimValle]

Once the Interstate Highway System came on line, the railroads lost the vast bulk of their premium freight to the truckers. Nevertheless the size of the economy grew at a good clip from 1960 to the present so there was still plenty of work for the railroads to do. They carved out a niche for themselves long hauling bulk commodities, coal, grain, chemicals, and stone which trucks are not suitable for and that traffic is always increasing. Best of all it is completely safe. No other land carrier can do it profitably. With fuel prices on the rise and probably destined never to come down to traditional levels again, piggy-backs and double stack trains should be in line to reap a windfall of business. Of course, railroads are a "mature" industry which means profitability will never be dramatic and improvements will be incremental at best so there will always be some doubt as to their true earnings and potential.

[Anonymous]

I would second mudchicken. The Staggers Act of 1980 cut the rail systems loose from the ICC. Congressman Harley Staggers D-WV was born in the B&O railroad town of Keyser WVa.

[nobullchitbids]

QUOTE: Originally posted by nanaimo73

Poor management waiting to merge with C&NW starting in 1954 and letting the railroad rot away beneath them.

I recall riding the City of Everywhere back in 1962 from Los Angeles to Cedar Rapids (Marion), Iowa; it did not have to be daylight for one to know he had crossed the Missouri River. U.P. throughout followed the wisdom of its modern founder, Harriman, and maintained its plant; Milwaukee by comparison made passengers think the road had been put together with a tack hammer. So much for the penny-wise approach.

I think much in the original thread needs to focus on WHICH roads were going belly-up: The Pennsy and the Central were saddled with hugh plants manifested often in four-track mains appropriate to a time when highways still had ruts; U.P. by comparison had a plant well maintained and more oriented toward modern traffic requirements. Smaller railroads like Nickel Plate fell not because they made no money but because economies of scale simply obliged their assimilation. Deregulation certainly helped with this process -- I recall how the ICC fought like devils to block Southern from using "Big John" hopper cars -- the regulators, themselves, were keeping the roads locked in iron underwear until Congress finally got wise and fired the pigs. Subsequently, roads poised to take advantage of the new atmosphere flowered, while those still saddled with megaplant died.

Computers helped a lot: With computers, at least with certain types of shipments, it is possible to schedule supply by train to within hours, and that makes a big difference to factories eager to limit their own physical plant. If your storage tanks can be a string of U.P. covered hoppers or privately owned tankers, and you also enjoy economy of scale, it becomes cheaper to use the railroad than it does to rely on trucks (which themselves can be pretty timely). The railroads in effect had to learn -- and be legally able to implement -- some of the business practices which others had used to eat into their business.

[Anonymous]

1954? Inter State Highway act? President Bush apparently being overridden by Congress to pour more dollars into Amtrak? Billions of tax dollars poured back into detirorating highway infrastructure to replace 50 year old bridges and highways. Darwin award belongs to the American people if they don't realize that the government shell game is not working in their favor!
Will

[Anonymous]

Well by 2020, *** Davidson, UP's chairman, and other brass, will be eating prison food

[alstom]

First of all, Amtrak basically took over all passenger service in 1971. Steamers were getting old and obsolete to other machines, so they invented "streamliners". These almost had a good 20 years of service until diesels got real popular in the 50s and 60s. Diesels took every thing over by 1960. Streamliners also went to diesels and then streamliners got ran with diesels on the front. What makes a railroad obsolete is when a bigger railroad company is able to overpower them and they are losing customers. From there, it basically goes down hill. Like Conrail for example. It had to abandon nearly 300 miles of track once because customers went out. If that keeps up, it's trouble for that company. Although, Conrails situation was different because it got split nearly an even 50/50.

[MichaelSol]

QUOTE: Originally posted by mudchicken

Changes In Work Rules: Still remember wondering what a fireman was doing on a diesel locomotive in the 1980's and Amtrak.

Last Friday afternoon, C.K. Dunning, Milwaukee Road's Intermodal manager, and Milt Clark, now retired as Director of Marketing, Montana Rail Link, stopped by my office for a social call.

Naturally --"naturally"-- the discussion turned to car cycle times on the Milwaukee compared to cycle times and average train speeds on railroads today, particularly the BNSF since it serves the former Milwaukee territory.

We recalled Milwaukee Road Trains #261 and #262 with average train speeds over large parts of their runs of as much as 49 mph, which included an hour yard time in Aberdeen to reblock, compared with todays "fast freights" averaging below 33 mph. Naturally, this requires more train crew labor to get a specific item of freight over the road than the faster average speeds.

One way of looking at it is that after railroads obtained very good savings on crew reductions, labor began increasing again as a component of transportation costs. It is almost as though the fireman is being put back on ... but at an engineer's wage.

While the question of "profitability" is an interesting one, "net profit" is also a somewhat artificial measure, when taken all by itself. In any given year, a company can create as much or as little net profit as it cares to show. However, it is in the overall consolidated financial statements that the true story can be found. The use of financial ratios permits comparisons between companies and the industry averages. It also permits measuring corporate performance according to known historical standards of a "healthy" company.

WorldCom was a company somewhat akin to railroading, in that it operated networks of information flow, with a fairly high investment in far-flung assets, which required constant capital expenditure to maintain and update. It was notably a different corporate model than a manufacturing company.

At a time when its books were being thoroughly cooked, and both the stock market and investment rating services thought highly of it, Dr. Altman ran WorldCom's consolidated financial statements, as well as those of Enron, through the "Altman Z" analysis.

He was pleased to feel vndicated that the Altman Z scores were predictive for the eventual decline of the two companies, well in advance of the stock market, the rating agencies, or the SEC.

At a time when the companies were showing excellent "profitability."

Business is business. Financial ratios measure businesses. A company may be borrowing heavily for capital investment. While it may temporarily damage profitability, that won't hurt its balance sheet. Indeed, the weighting process of a financial model recognizes such trade offs and don't penalize companies, from a scoring standpoint, for making such important and necessary tradeoffs.

However, scoring models point out problems.

Given the suggestive nature of the scores for at least one Class I, any observation about "profitability," disregarding information about the remainder of the financial structure, would be facile.

As the Enron and WorldCom experiences show, "profitability" can obscure, rather than illuminate, the overall financial health of a company.

Best regards, Michael Sol

[MichaelSol]

QUOTE: Originally posted by MP173

I knew that 6 days couldnt be absolutely correct. Michael, what do you mean by "market to investors?" Are the receivables sold?

Reviewing the Notes to the Consolidated Financial Statement shows that the A/R are, in fact, carried as A/R even though transferred to SFRC. The turnaround time on accounts is apparently very good.

"Note 6. Accounts Receivable, net

BNSF Railway transfers most of its accounts receivable to Santa Fe Receivables Corporation (SFRC), a special purpose subsidiary. SFRC transfers an undivided interest in such receivables, with limited exceptions, to a master trust, and causes the trust to issue an undivided interest in the receivables to investors (the A/R sales program). The undivided interests in the master trust may be in the form of certificates or purchased interests. SFRC renewed $350 million of its $700 million accounts receivable facility, effective June 2004, for an additional 364 days. In addition, SFRC entered into a separate $350 million accounts receivable facility with a five year term in June 2003. As a result of amendments to the facilities, the commitments of the investors are currently scheduled to expire in October 2005 and October 2008, respectively. The Company’s total capacity to sell undivided interests to investors under the A/R sales program was $700 million at December 31, 2004. Outstanding undivided interests held by investors under the A/R sales program were $650 million and $625 million at December 31, 2004 and 2003, respectively. These receivables were derecognized by BNSF Railway in connection with the sale of undivided interests under the A/R sales program. The undivided interests were supported by$894 million and $808 million of receivables transferred by SFRC to the master trust at December 31, 2004 and December 31, 2003, respectively. When SFRC transfers these receivables to the master trust, it retains an undivided interest in the receivables sold. This retained interest is included in accounts receivable in the Company’s financial statements. SFRC's retained interest in these receivables of $244 million and $183 million at December 31, 2004 and 2003, respectively, less an allowance for uncollectible accounts, reflected the total accounts receivable transferred by SFRC to the master trust less $650 million and $625 million, at December 31, 2004 and 2003, respectively, of outstanding undivided interests held by investors.

Due to a relatively short collection cycle, the fair value of the undivided interest transferred to investors in the A/R sales program approximated book value and there was no gain or loss from the transaction. The Company retains the collection responsibility with respect to the accounts receivable. Proceeds from collections reinvested in the A/R sales program were approximately $11.6 billion, $9.8 billion and $9.5 billion in 2004, 2003 and 2002, respectively. No servicing asset or liability has been recorded because the fees the Company receives for servicing the receivables approximate the related costs. SFRC’s costs of the sale of receivables are included in other expense, net and were $10 million, $9 million and $12 million, for the years ended December 31, 2004, 2003 and 2002, respectively. These costs fluctuate monthly with changes in prevailing interest rates, and were based on weighted average interest rates of 1.4 per cent, 1.1 per c cent and 2. 0 per cent for the years ended December 31, 2004, 2003 and 2002, respectively. These costs include interest, discounts associated with transferring the receivables under the A/R sales program to SFRC, program fees paid to banks, incidental commercial paper issuing costs, and fees for unused commitment availability.

he amount of accounts receivable transferred by BNSF Railway to SFRC fluctuates based upon the availability of receivables and is directly affected by changing business volumes and credit risks, including dilution and delinquencies. BNSF Railway has historically experienced very low levels of default or dilution. If dilution or delinquency percentages were to increase by one per cent age point, the value of BNSF Railway’s retained interest would increase by approximately $8 million.

Receivables funded under the A/R sales program may not include, among other things, amounts over 90 days past due or concentrations over certain limits with any one customer. At December 31, 2004 and December 31, 2003, $77 million and $78 million, respectively, of accounts receivable were greater than 90 days old. …. During the years ended December 31, 2004 and 2003, $8 million and $7 million, respectively, of accounts receivable were written off."

Best regards, Michael Sol

[Anonymous]

Back to topic: I made this point on a different post, but the indirect gov't subsidies that passenger trains enjoyed thru the mid-Sixties thru use of RPO's was certainly a dependable source of revenue and could have made the diff. between profit and loss (?).

[MP173]

I knew that 6 days couldnt be absolutely correct. Michael, what do you mean by "market to investors?" Are the receivables sold?

ed

[Anonymous]

"Aw, c'mon. "Operating ratio" is simply operating revenues divided by operating expenses. The smaller, the better. Motley Fool explains this every time they run an article about a railroad co.

[dinwitty]

QUOTE: Originally posted by squeeze

What hurt the railroad was trucking, they can go most anywhere, but trains need tracks. Amtrack helped out by taking over the passenger service, but they are in big trouble because they are forever in debt.

1 engineer 100 car train

100 trucks, 100 drivers.

do yer math.

[bobwilcox]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by MP173
[This is day's receivables, which measures how many days of revenue is in accounts receiveables.
BNSF (2004) 6 days
McDonalds 14 days
Proctor Gamble 29 days

BNSF routinely transfers receivables to a subsidiary, Santa Fe Receivables Corp, to market to investors. The low receivables number may be a transactional artifact due to the transfer of receivables.

Best regards, Michael Sol

Railroad receivables are considered high grade. Railroad customers are the types who pay their bills once everyone agrees the freight bill agrees with the contract or tariff. It's one advantage of dealing with the Fortune 500.

[MichaelSol]

QUOTE: Originally posted by MP173
[This is day's receivables, which measures how many days of revenue is in accounts receiveables.
BNSF (2004) 6 days
McDonalds 14 days
Proctor Gamble 29 days

BNSF routinely transfers receivables to a subsidiary, Santa Fe Receivables Corp, to market to investors. The low receivables number may be a transactional artifact due to the transfer of receivables.

Best regards, Michael Sol

[nanaimo73]

Powder River coal and welded rail also helped.

[mudchicken]

Staggers Act: How many other industries could be denied the advantages of depreciation for 70+ years and still survive? (Addition & Betterments [A&B] made you value everything as "new" until you retired and scrapped it...rough) Railroads finally got a breather to start investing in plant again. (Surprised the re-regulation and open access losers aren't advocating a return to this)

Changes In Work Rules: Still remember wondering what a fireman was doing on a diesel locomotive in the 1980's and Amtrak.

Computers & Mechanization

The price of oil . Finally starting to level the playing field with the taxpayer supported truckers.

[MichaelSol]

QUOTE: Originally posted by MP173

Is there a source for MILW financial data on line? If not, I could probably find something in the local university library in a Moody's.

The only source that seems to be generally available is Moody's, although Transport Statistics of the United States (ICC) has far more detailed data in terms of operating costs, but less otherwise. Best regards, Michael Sol

[bobwilcox]

The mind boogles with the financial ratios. If you really want to see the financial people mumble ask them to come up with a measure for the cost of capital on the equity part of a balance sheet. Debt is straight forward, you know how much you will save if you pay off the loan early. With the stock they get fuzzy with the answer. I did not follow the ICC hearings to figure the railroads cost of capital but it must have been something as divorced from reality as some of their merger decsions in the 1960s.

I was impressed with the the age of the BNSF's receivables. This is from the fellow how ran up his over 30 day receivables with a customer to something just over $1,000,000. The CFO was not happy since it had been at that level for six months.

The CFO went on to better things and so did I. Retirement is wonderful!