Bring back Al Perlman

Posted by Fred Frailey
on Thursday, June 16, 2016

I keep looking for a major railroad to break away from the pack. Railroading today is beset with problems, starting with the collapse of its coal franchise, which had been the industry’s number-one commodity. Equally troubling, the carload business in general continues to slowly erode. We could be on the verge of driverless trucks, which would destroy the cost advantage of rail over road, at the very time that the federal government prepares to mandate two-person crews aboard locomotives.

            I could keep going, but let’s stop. Here are three major issues, all of which challenge the relevance of railroading as we go into the Twenty-First Century. And what is the focus of most chief executives these days? Why, it’s to drive their operating ratios to the low 60s (the operating ratio being the percentage of operating revenues consumed by operating costs). Talk about misguided vision. It’s as if your home were on fire, while the firemen stand around bewailing the high cost of fire trucks. In the immortal words of Matt Rose, the executive chairman of BNSF Railway, the operating ratio should be whatever the operating ratio is, because in the greater scheme of things the OR is meaningless. What matters is to please the customers and to grow the business. Instead, we’re headed in the other direction.

            So I miss Al Perlman and those like him — people who inspired others, sometimes by fear but often by the examples they set. Perlman wasn’t perfect. As the number-two at Penn Central, he was incapable of preventing its rapid descent into bankruptcy. When forced out at PC, he was 67 years old. But rather than call it quits, Perlman went right back to work at yet another sick railroad, Western Pacific, and nursed it back to good health. How did he do that?

            Perlman surrounded himself with young talent. No, let me put this a different way: Talented young people wanted to be around Perlman. He was a one-man university of railroading. Think of the people who worked for him at New York Central and WP who made names of themselves elsewhere — in no particular order, John Kenefick and Mike Flannery (Union Pacific), Harry J. Bruce (Illinois Central), Richard Hasselman (Conrail), Jim McClellan (Norfolk Southern), Tom Hoback (Indiana Railroad), David DeBoer (Southern Pacific), Jay Ostrow (Western Pacific), and Wayne Hoffman (Flying Tiger).

            He was detail-driven but not a micro-manager. Perlman easily delegated responsibility to subordinates, but demanded that people meet his expectations of them. If they didn’t, he fired them. Contrast this with the management culture of Southern Pacific during the 1970s, where if you failed as vice president of whatever, you were shuffled off to a different vice presidency, there perhaps to fail again.

            The man was stingy with his praise, which seemed to make his underlings strive all the more to hear it. In “Perlman The Magnificent” (Trains, March 2002), Bruce describes the “special region of bliss reserved for that small army of railroad men who had pleased Alfred E. Perlman. . . something more akin to a new level of self-assuredness. It was like setting off on an expedition knowing you’ve got adequate fuel, provisions, and warm clothing.”

            What makes Perlman relevant to today is that last job of his, at Western Pacific, which operated only between Oakland and Salt Lake City. “Think of the risks here,” Hoback reminded me the other day. “A new executive is brought in to turn a railroad around that was the weak sister, surrounded by Southern Pacific, Union Pacific, and Santa Fe. But Perlman was convinced there were new opportunities to increase market share—and he was right.”

            Perlman didn’t cost-cut WP’s way back to profitability, although he could cut costs as well as anyone. Rather, he went after new business. “It was a remarkable success,” Hoback noted. “Our revenue grew from around $65 million in annual sales when I began in 1970, to more than $100 million by 1976. This was the direct result of someone who had a vision shared by like-minded people. They made it happen. And by the way, I don’t recall any lectures about getting our operating ratio down to X.”

            The loss of coal traffic is blowing a huge hole through railroad revenues. The operating people have done a fine job of pleasing shareholders by reducing costs by a like amount. But now the pie is noticeably smaller. Everyone seems to think intermodal business will increase to fill the void, maybe because it’s easy to sell—you pick up the phone and talk to a trucker. Count me as a skeptic. As I write this, intermodal units are down 2.3 percent for 2016, compared to the same period of 2015, and down 6.3 percent for the most recent week. Meanwhile, I am told (by someone who makes it his business to know such things) that only Canadian National and Norfolk Southern are ambitiously going after new carload business.

            So I keep looking for one railroad to break away from the pack and show us a better way to run this business. That way won’t be just to keep raising rates and ridding the railroad of people. At three different railroads, Hunter Harrison wrote the book on controlling costs, but he hasn’t done so well finding new business. Nor do I mean to pick on railroads alone as being poorly led. In almost every walk of life, good leaders who make a difference are hard to find. But every so often such people appear, and the rest of us learn and are made better for it. Railroads today could surely use another Al Perlman.—Fred W. Frailey

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