A plan for Mr. Squires

Posted by Fred Frailey
on Monday, December 21, 2015

It is becoming apparent that the chief executive of besieged Norfolk Southern wants just to wait out invader Canadian Pacific. If you clam up and do nothing, the thinking goes, CP and its leader, Hunter Harrison, will either become discouraged and go away or be soundly defeated in a shareholder vote for directors next spring. I say this because the plan Squires put forth when CP first made an offer to merge the two railroads is so feeble as to be laughable. Squires’ plan had two parts. First, that the sinking coal business will “stabilize” next year, meaning it won’t get worse (but probably won’t get better, either). Second, that starting in 2016, NS will solicit a tidal wave of new intermodal business to make up for the lost coal business. (NS intermodal business these days is shrinking, not growing, I might add.)

Whew! This is a plan? I beg your pardon, this is an invitation to be rolled over and kicked out in 2016, just as Fred Green was rolled over and kicked out at CP in 2012. Nine shares out of ten were voted against poor Fred, doing his ego no good at all.

So, Mr. Squires, let’s regroup. Let’s make a real plan. We can keep your two-part plan, if it pleases you. Now let’s add things that can make a difference. None of this is an original idea of mine. Every bit of what you are about to read is already out there in the internet and being read by NS executives.

1. Create the ultimate Chicago bypass. This would be the former Wabash Railroad between Kansas City and Butler, Ind., joining BNSF Railway and Union Pacific to the west with CSX Transportation and NS to the east (the CSX Garrett Sub being intersected at St. Joe., Ind., and the NS Chicago Line at Butler). The Kansas City line has been a weak line for NS, because BNSF and UP do not want to interchange there. Why should they give up line haul and the revenue that comes from reaching Chicago?

But what if NS were to spin off KC-Butler, by selling it to, say, the Belt Railway of Chicago or offering it as a joint venture with other three trunk lines, as well as Kansas City Southern? Owners would all have trackage rights over “new Wabash,” with interchange occurring in Springfield or Decatur, Ill., both straight south of Chicago, meaning divisions would not be affected.

This would drain so much traffic out of congested Chicago that the politicians would not allow CP to complete a merger with NS. It is a game changer, in other words, requiring only courage on the part of NS to do it.

2. Spin off the coal network. The best way to do this is by getting together with CSX and forming a sort of Appalachian version of Conrail Shared Assets, the switching company the two railroads own in New Jersey and Detroit. In this instance, the shared assets would include not just the coalfield properties of the two railroadings but also the CSX coal dock in Newport News, Va., and the NS pier in nearby Norfolk. You don’t need both. Pick one, scrap (or mothball) the other and concentrate the remaining coal volume. Loaded trains could run on CSX because grades are easier eastbound, empties over NS.

3. Junk the weak links. Divide the railroad into quartiles, starting with the routes that are most essential to your survival and ending with those that are least essential. From the bottom quartile, pick half of the route miles (that is, one-eighth of your railroad) to be spun off or mothballed. Other railroad gave done this, and so could Norfolk Southern.

4. Close headquarters. Norfolk Southern executive offices are in Norfolk, the operating headquarters is in Atlanta. For every other railroad, one headquarters is enough. So take your pick and close one or the other, offering jobs to everyone affected at the closed office building. Enough will take a buyout that the head count will quickly end up where it needs to be.

5. Find the redundancies. Norfolk Southern has more hump yards, locomotive backshops, fishing camps, recreational plantations and what have you than it needs. Bite your lip until it bleeds and close ‘em. If you don’t, Hunter will. Ever notice that while NS builds hump yards, CP closes them? And while you’re at it, take the 20 percent of locomotives that are oldest or closest to needing a rebuild and store them, and tell the boys in Transportation to make do with less. Again, if you don’t, Hunter will.

6. Revive the carload network. Empower your short line and regional connections, using incentive payments, to dig around for new business. It’s out there, and you have lots of room to grow. You could even divide your entire railroad among these smaller partners, putting their people to work on marketing at the local level and their locomotives and crews to work on trackage rights to switch your customers outside of major terminals. You’ve nothing to lose, because the business is seeping away as it is.

I’m reminded of the pickle Santa Fe Railway was in after the Interstate Commerce Commission rejected its effort to merge with Southern Pacific. Corporate raiders in 1987 tried to take the company over, saying Santa Fe had oodles of non-rail subsidiaries that they would sell, to the benefit of shareholders. The new CEO of Santa Fe, Rob Krebs, had a better plan. He very quickly remortgaged the company, declared an immediate $30 per share special cash dividend, and then repaid the mortgage by selling the subsidiaries. Like Krebs, Squires needs to rise to the challenge before him.—Fred W. Frailey

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