Run a google on the topic of "privatized profit and socialized losses" and you will better understand
Convicted One Run a google on the topic of "privatized profit and socialized losses" and you will better understand
Well, several things came up on the google. Is this what you mean?
http://www.prophetwithoutprofit.com/tag/tarp/
To me, Phillips can not possibly honestly write on how increased regulation will not harm the railroads because the specific purpose of such regulation will be to divert money from the railroads. That would be "harming the railroads."
The US railroads are a true industrial success story. The "Union Guy" who is the current head of the Federal Railroad Administration has called the US rail freight system "The Envy of the World." The FRA has called the US freight rail system the most efficient and safest in the world.
The railroads are a largely a self supporting and self financing industry that pays its own way, generates wealth for the nation's people, requires no significant subsidies (despite what Zardoz says), pays a union work force well, and pays taxes instead of using taxes. So, naturally, Phillips wants the government to mess with that and he will make excuses for such government aciton.
Here it is as I see it. Anything that is produced, mined or manufactured must move through a channel of distribution to the end users. This channel can consist of the manufacturer, miner, grower, whatever; the "middlemen" who handle the product along the way, and the final retailer who delivers the finished thingy to the ultimate consumer. Each of these guys gets a cut of what the ultimate consumer pays. The railroads are often a part of this channel and they get paid for what they do.
Channel members are always, always, always fighting over who gets how much. When they can't get their way they run to the government and cry "No Fair, the other guy is getting too much and I'm getting too little." A wise government would say: "Go away boys, you bother me." A politician seeking votes will promise to divert the money to whomever will give him/her the most votes. If the politician is successful it will make things worse, except for the fact that he/she may get reelected.
Phillips "believes" in government. So he'll seek to justify their actions. But more regulation will hurt the railroads and the nation's economy (that B us). It can't help but hurt.
dakotafredDon has been promising periodically for at least five years to tell us why railroads have nothing to fear from relentless Democratic efforts in the Congress to re-regulate.
Question:
Has Phillips been telling us that the railroads have nothing to fear from the relentless Democrat effort to re-regulate the railroads because the relentless effort will not succeed, or because new regulation will not hurt the railroads? I am guessing it is the latter, but if it is, I then need to know why Phillips believes that.
When one understands that the name of the game in politics is power and NOT governance per se, then one will understand the situation we find ourselves in. OTOH, if we did not have at least some kind of regulatory body, we would likely have total confusion in the economy with equally discordant side effects in other sectors. The trick is having that government that governs and doesn't spend its time worrying about re-election. Term limits, anyone?
uphoggerWhen one understands that the name of the game in politics is power and NOT governance per se, then one will understand the situation we find ourselves in. OTOH, if we did not have at least some kind of regulatory body, we would likely have total confusion in the economy with equally discordant side effects in other sectors. The trick is having that government that governs and doesn't spend its time worrying about re-election. Term limits, anyone?
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
BucyrusdakotafredDon has been promising periodically for at least five years to tell us why railroads have nothing to fear from relentless Democratic efforts in the Congress to re-regulate. Question: Has Phillips been telling us that the railroads have nothing to fear from the relentless Democrat effort to re-regulate the railroads because the relentless effort will not succeed, or because new regulation will not hurt the railroads? I am guessing it is the latter, but if it is, I then need to know why Phillips believes that.
oltmanndI get the sense he thinks it will be "not that bad" and that the RRs are just inflaming the issue to draw a line in the sand a this point, lest it get worse later.
That is what I would expect Phillips to believe. I think the railroads’ current success story renders them to be a very juicy plum, just ripe for picking in a way that invites government regulation and “partnering” in many new ways. When you read what the FRA wants to do with railroading through the public sector, it seems to total more than what the railroads are doing now in their private role.
I agree with Greyhound’s point that everybody in the supply chain wants a bigger piece of the action and would like the government to step in and redistribute the revenue. But the government itself has a powerful self-interest that constantly seeks fulfillment as well. So they are motivated to step in even if nobody wanted them to.
greyhoundsThe railroads are a largely a self supporting and self financing industry that pays its own way, generates wealth for the nation's people, requires no significant subsidies (despite what Zardoz says), pays a union work force well, and pays taxes instead of using taxes.
How did I get dragged into this? I have no knowledge about subsidies, railroad or otherwise.
But if I had to choose, my uninformed opinion would be that the railroads deserve MORE in subsidies, at least equal in percentage to the level that the airlines and highways get subsidized.
Bucyrus Has Phillips been telling us that the railroads have nothing to fear from the relentless Democrat effort to re-regulate the railroads because the relentless effort will not succeed, or because new regulation will not hurt the railroads? I am guessing it is the latter, but if it is, I then need to know why Phillips believes that.
Yes, it is the latter -- in so many words a couple of years back. Yet the explanation has always awaited "a future column."
I'll admit the purpose of my post was to tweak Don. If I had to explain the logic for re-regulation to the railroads and to TRAINS readers, it would take me five years, too.
My mistake...Sorry. I gues it was the right church, but the wrong pew!
You're thinking of John G. Kneiling, aka "The Professional Iconoclast". Those were good columns even if one didn't agree with all of them. It would be interesting to go back over them and see how accurate he was.
samfp1943 Does anyone else, besides me remember the Columns that appeared monthly in TRAINS back several years by Don Phillips? The column was called the 'Professional Iconoclast' He always seemed to have a contrarian position on his subjects. They were always thought provoking , but to my mind mostly from a negative perspective...
Does anyone else, besides me remember the Columns that appeared monthly in TRAINS back several years by Don Phillips? The column was called the 'Professional Iconoclast' He always seemed to have a contrarian position on his subjects. They were always thought provoking , but to my mind mostly from a negative perspective...
Sam,
That was not Don Phillips, it was John Kneiling. I usually found John's columns and articles interesting and refreshing, even though I was in my teens and early 20's when I read him. Don's columns seem to be affected by his time spent in Europe, a little to much exposure to a society where government is looked at as the end-all, be-all in the lives of its citizens.
Jay
greyhounds Several things came up on the google. Is this what you mean? http://www.prophetwithoutprofit.com/tag/tarp/
Several things came up on the google. Is this what you mean?
Tarp is just the latest (albeit a good one) example of how big business owns our government, this problem goes back quite a ways.
As it applies to dakotafred's curiousity, in a nutshell the government has allowed the railroads to combine to the point that they've become "too big to fail" ...all in service to greed.
Anything the gov't might try to do that would "harm" the viability of the railroads would just precipitate another bailout. Perhaps the gov't should have seen this coming back when approving all those "mergers of efficiency"...the stockholders enjoy the savings of expense elimination, and then when it finally unravels.... guess who gets to pay to put Humpty back together again?
Convicted One...................in a nutshell the government has allowed the railroads to combine to the point that they've become "too big to fail" ...all in service to greed..............
Thanks to Chris / CopCarSS for my avatar.
Murphy SidingConvicted One...................in a nutshell the government has allowed the railroads to combine to the point that they've become "too big to fail" ...all in service to greed.............. How would the government, the railroads, or any business for that matter, be able to tell what is the *right* size for a business to be? What's the difference between "all in service to greed", or increasing the return to stockholders, while remaining competitive in the market? Isn't this just a case of 20/20 hindsight?
And, wasn't PC "too big to fail"? That's how we got Conrail! First, the government chokes the industry to the point of passing out and now once they've let go and the industry has managed to a take a breath or two, we should choke them again?
In reply to samfp1943 above, a much-younger Phillips did in fact run contemporaneously with Kneiling a million years ago. His column was called "The Potomac Pundit." Then editor David P. Morgan dumped both columnists on the pretext of freeing up more space for "news." I always suspected this was simply cover for getting rid of Kneiling, who was certainly angering many readers, maybe to the point of non-renewed subscriptions. Phillips was thrown out with the bathwater.
Would anybody besides me rather see another columnist or two at the expense of (often-old) "news" and all those departments? (If you're not interested in the department itself, that page is a monthly waste.) I personally miss Ed King and Larry Kaufmann.
dakotafred "I'll save the details for a future column." -- Don Phillips, in Sept. Trains. [snip]
Don has been saying that for many years about several topics, usually related to Amtrak, passenger trains in general, USRA, Conrail, politics and other government involvement/ interference of various kinds with the railroad industry, etc. By my recollection, he has usually failed to deliver, at least in a recognizable link to my dull mind - other topics seem to come up that grab his attention instead for those future columns.
Note that buried in the middle of Don's subject column this month is an recounting of the FRA's current unilateral (= ex parte) attempt to establish new rules for higher speed passenger trains on freight railroad tracks, such as maximum delays, financial penalties for same, forcing the railroads to pay for corrective improvements, etc. All of that seems to have kicked open a hornet's nest with the Class I managments, judging by even Don's account. To me, there seems to be an inconsistency here - the same government that Don expects to be reasonable about re-regulation was caught of being manifestly unreasonable - both in 'process' and 'result' - on the issue of passenger rail rules. Sure, they're different agencies - FRA vs. STB - but the political and legal masters of both is Congress . . .
I wonder if a worthy counter as 'damage control' to the re-regulation movement is to concede and grant 'open access' for the 'captive' shippers' I don't have the time this morning to write the economics essay that underpins my thought, but it essence it is that in an oligopoly = only a few competitors, which would be the case even with open access, the slightly higher level of competition won't depress prices much - it would be either BNSF vs. UP, CSX vs. NS, or CP vs. CN in most cases. But with serious re-regulation, the regulators could govern all rates - not just those pertaining to the captive shippers. Further, regulators are not constrained by the self-interest of survival to the extent that a competing railroad would be. For example, UP is not going to cut it's own economic throat to compete with BNSF for a particular move - but a regulator doesn't have to care about that as much, and might go lower than either would. Hence, conceding 'open access' might be a worthwhile negotiating ploy. Or not . . .
uphogger - your point about going back to JGK's old columns and articles and seeing how right he was is one that I share. Maybe some day . . . In general, I believe that he was more right than wrong, and some of his predictions/ recommendations have yet to come to pass or to be given an honest trial. He didn't forsee everything correctly by any stretch, but on this issue, he was right. If you go back and read the ''Railway Post Office''/ Letters To the Editor column in Trains from back in the late 1960's and early 1970's, you'll see that he - together with Prof. George Hilton - were widely ridiculed when they each started advocating abolishment of the ICC and especially its rate regulation function. Well, that essentially occurred with the 1980 Staggers De-Regulation Act, and formal abolishment of the ICC occurred in the early 1990's when it was replaced by the STB and its new rules. Gotta run now . . .
- Paul North.
dakotafredWould anybody besides me rather see another columnist or two at the expense of (often-old) "news" and all those departments? (If you're not interested in the department itself, that page is a monthly waste.) I personally miss Ed King and Larry Kaufmann.
Yes, especially Ed King (I'm not that familiar with Kaufmann's work). I used to really like listening to the scanner when King was dispatching on the CP C&M sub--he had a unique way of talking on the radio, and he really knew his stuff!!
Although I can imagine quite a 'lively' discussion regarding which features could be replaced.
Paul_D_North_JrNote that buried in the middle of Don's subject column this month is an recounting of the FRA's current unilateral (= ex parte) attempt to establish new rules for higher speed passenger trains on freight railroad tracks, such as maximum delays, financial penalties for same, forcing the railroads to pay for corrective improvements, etc. All of that seems to have kicked open a hornet's nest with the Class I managments, judging by even Don's account.
I have been expecting this. I think the imposition of public HSR onto the private freight railroad corridtors will lead to major friction, and tend to blur the line between public and private.
Murphy Siding What's the difference between "all in service to greed", or increasing the return to stockholders, while remaining competitive in the market? Isn't this just a case of 20/20 hindsight?
What's the difference between "all in service to greed", or increasing the return to stockholders, while remaining competitive in the market? Isn't this just a case of 20/20 hindsight?
I'll be frank here and confess that my first choice of words in place of "all in service to greed" was instead a more simple "designed to line the pockets of the stock holders" but had second thoughts because I knew there were a few stockholders here who I didn't want to risk offending.
Thanks Murph, you "caught" me on that one.
As far as your "remaining competitive in the market" observation, perhaps you AND oldtmann should sit down with a few of the shippers that were made captive by the mergers and seek their POV on the concept?
And "20/20 hindsight"?....(?) I think not. there is ample past precedent both inside (don't forget the contemplated marriage of SP/UP has come up before, then also there was PC) and outside (Chrysler) the industry
Perhaps beyond the scope of this thread, but since you ask, maybe a good litmus to be considered at such times would be weighing the potential cost of failure agaist potential stockholder gain before allowing mega mergers to happen? Perhaps require that a percentage of the "rosey nosed" projected savings (availed by such a merger) be placed in escrow for a period of time...to offset any unforseen down side.
Do you agree or disagree that UP, BNSF, NS, and CSX are "too big to fail", in the classic sense?.
Perhaps an apt "red flag" might be when you see viable, parallel railroads merging, then ripping up one of the lines just to prevent any future competitor from ever getting their hands on it (and at the same time proving that the acquired capacity was not even needed)
Convicted One Perhaps beyond the scope of this thread, but since you ask, maybe a good litmus to be considered at such times would be weighing the potential cost of failure agaist potential stockholder gain before allowing mega mergers to happen? Perhaps require that a percentage of the "rosey nosed" projected savings (availed by such a merger) be placed in escrow for a period of time...to offset any unforseen down side. Do you agree or disagree that UP, BNSF, NS, and CSX are "too big to fail", in the classic sense?.
oltmannduphoggerWhen one understands that the name of the game in politics is power and NOT governance per se, then one will understand the situation we find ourselves in. OTOH, if we did not have at least some kind of regulatory body, we would likely have total confusion in the economy with equally discordant side effects in other sectors. The trick is having that government that governs and doesn't spend its time worrying about re-election. Term limits, anyone?They might spend their time preparing a cushy landing zone after their term is up. Perhaps some industry board positions in return for favorable legislation? They would be lame ducks at the beginning of their last term - constituents be "darned". ...devil and the deep blue sea....
The term limits would probably take a Constitutional amendment. So just throw in there that once a person has been in the legislative branch, said person cannot go into the executive branch, and vice versa. It would probably be a good idea to extend that restriction to the judicial branch to avoid judgeships as a reward.
"No soup for you!" - Yev Kassem (from Seinfeld)
Murphy SidingConvicted One Perhaps beyond the scope of this thread, but since you ask, maybe a good litmus to be considered at such times would be weighing the potential cost of failure agaist potential stockholder gain before allowing mega mergers to happen? Perhaps require that a percentage of the "rosey nosed" projected savings (availed by such a merger) be placed in escrow for a period of time...to offset any unforseen down side. Do you agree or disagree that UP, BNSF, NS, and CSX are "too big to fail", in the classic sense?. Wouldn't you need a cystal ball, of the calibur not yet invented, to be able to weigh the potential cost of failure agaist potential stockholder gain? As far as your last sentence, how, or who, would decide what is to big to fail? If a guy was to be honest about it, aren't corporations formed for the express purpose of being "designed to line the pockets of the stock holders" ?
But, I don't think corporations looking out for their owners best interest are any more greedy than I am - which is not at all. The only difference is the scale.
The RR mergers that went badly at the start all had good reasons to be done. What went poorly was the RR's ability to integrate the two properties. This was not because it was intrinsic in the nature of the merger. It was because the operational complexity of doing it exceeded the abilities of the employees to manage it - and this was unforeseen. You can rightly call this poor management, but it ain't greed!
RRs are not, and never have been "too big to (allow to) fail." Everything a RR does can be replaced by a truck, wire or pipe. There would be little economic disruption if done slowly, but there would be an erosion in standard of living as the RRs lower costs were replaced by higher cost arrangements. But, wanting lower costs is just greed talking, I guess.
In the free-market system, there is no such thing as, “too big to fail.” It is a made-up term that is used to advance a political agenda. As such, too big to fail means that the public should accept the premise that the government must use public money to bailout a particular entity that is on the verge of financial failure. The public will be told that the failure of the entity will be more painful to the public than the expenditure of public money to save the entity—hence the entity is “too big to fail,” which actually means “too big to let fail.”
But this, of course is economic nonsense. It is a government-advanced ruse on the public trust. Failure is exactly what should be allowed to happen. It is a law of free market economics. It is also a law of nature.
Take General Motors, for example. The public was told that GM was too big to fail because of all the job losses that would occur. In conjunction with this premise, the public was led to believe that a failure of GM would mean that all of the physical capital of GM manufacturing and sales would simply vanish with the bankruptcy of GM.
But the truth is that the physical structure would have continued on much like before. Employees would have continued going to work, making and selling cars. The bankruptcy would have merely rearranged the organization of the company by causing sufficient financial sacrifice of employees, unions, pensions, investors, and management to make it solvent.
Bankruptcy would have been a healthy adjustment. But it would have required financial sacrifice, and the ones who would have suffered the sacrifice ran to the government and complained that they were too big to fail, and the government bailed them out. It is precisely in that transaction where the term, greed is best applied.
Interesting discussion so far.
Note that Section 77 of the very old - pre-1978 - US Bankruptcy Act pretty much presumed that all railroads were indeed too big and important to fail - although exceptions were made for smaller railroads from time to time - up until it ran into the reality of the multiple NorthEastern US railroad financial collapses of the early 1970's. The principle held there and then, though - that's how we got ConRail, but in comparatively quick succession afterwards the Rock Island and the Milwaukee were liquidated. Note also that as Bucyrus says, in each of these instances the physical operations and finances of the organizations were heavily modified - the worthwhile operations were kept, the unprofitable and marginal ones were discarded, the investors and creditors took serious losses, the union contracts were modified over the next decade, etc.
Even now, the policy and processes of Chapter 11 - Corporate Reorganizations of the current US Bankruptcy Act prefers to try to salvage the business as a 'going concern' for the benefit of all involved, if possible - but none is viewed as "too big to fail". Although, somewhere in it the "public interest" is given special consideration and added weight in the context of the financial reorganization of railroads.
"Too big to fail" merely ossifies and perpetuates the existing entity, and all that's wrong with it - be it management, markets, employees, equipment, location, business plan, etc., etc. Allowing a business to fail and then salvaging the viable pieces - regardless of whether that is accomplished by or called a "reorganization" or a "liquidation", or something else - is the business world's/ ecosystem's rational method of recycling and renewing itself - kind of like how in in the natural world, death and decay gives birth to new life by reusing the constituent materials.
Convicted One Perhaps an apt "red flag" might be when you see viable, parallel railroads merging, then ripping up one of the lines just to prevent any future competitor from ever getting their hands on it (and at the same time proving that the acquired capacity was not even needed)
Paul_D_North_JrNote also that as Bucyrus says, in each of these instances the physical operations and finances of the organizations were heavily modified - the worthwhile operations were kept, the unprofitable and marginal ones were discarded, the investors and creditors took serious losses, the union contracts were modified over the next decade, etc.
Conrail ultimately would up being a successful resurrection of PC. If GM becomes a solid, profitable automaker at the end of this, and the gov't stock can be sold at a decent price, it may have been worth the bailout. It just may have kept the recession from deepening and quickened the recovery. I think the jury is still out, though. I also wonder if Ford looks at this the same way.... They were the "ant", not the "grasshopper" and they've been watching the "grasshopper" be fed. Were they completely rewarded for their prudent behavior?
Paul_D_North_Jr "Too big to fail" merely ossifies and perpetuates the existing entity, and all that's wrong with it - be it management, markets, employees, equipment, location, business plan, etc., etc. Allowing a business to fail and then salvaging the viable pieces - regardless of whether that is accomplished by or called a "reorganization" or a "liquidation", or something else - is the business world's/ ecosystem's rational method of recycling and renewing itself - kind of like how in in the natural world, death and decay gives birth to new life by reusing the constituent materials. - Paul North.
Paul,
That is very well stated, and sums up my way of looking at it. It is what I meant when I said that failure and re-organization is a law of nature.
oltmanndIf GM becomes a solid, profitable automaker at the end of this, and the gov't stock can be sold at a decent price, it may have been worth the bailout. It just may have kept the recession from deepening and quickened the recovery. I think the jury is still out, though. I also wonder if Ford looks at this the same way.... They were the "ant", not the "grasshopper" and they've been watching the "grasshopper" be fed. Were they completely rewarded for their prudent behavior?
I agree that if GM becomes profitable, the bailout may have been worthwhile. Hopefully we will be able to judge the result. But with GM seeminly pinning their hopes on the Volt electric car, we ought to get a rather striking result one way or the other.
Ford's refusal of public bailout money is just as interesting GM's begging for it. I would love to hear what Ford executives say to each other about the Volt.
oltmanndThe RR mergers that went badly at the start all had good reasons to be done. What went poorly was the RR's ability to integrate the two properties. This was not because it was intrinsic in the nature of the merger. It was because the operational complexity of doing it exceeded the abilities of the employees to manage it - and this was unforeseen. You can rightly call this poor management, but it ain't greed! RRs are not, and never have been "too big to (allow to) fail." Everything a RR does can be replaced by a truck, wire or pipe. There would be little economic disruption if done slowly, but there would be an erosion in standard of living as the RRs lower costs were replaced by higher cost arrangements. But, wanting lower costs is just greed talking, I guess.
I've had the good fortune over a long period of time to be able to discuss merger theory with both railroad and non-railroad managers involved in merger efforts. And that points instantly to the general weakness in mergers in general: they are management initiated.
And, while merger theory isn't my general cup of tea, and my life isn't going to rise or fall on anyone else's incomprehensible exposition of what they think it all means, here's my understanding:
Cynics charge that the motives for mergers are obvious: ambitious people tend to be empire builders, and managers of larger companies can command higher compensation than managers of smaller companies. Around those motives are built highly artificial constructs of purported merger benefits marketed by management insiders to shareholders who generally don't have the insider's knowledge of their own company, let alone the other company involved in the merger.
And railroads, by and large, have followed the results of the business world in general: up to 80% of mergers fail -- absolutely fail -- to meet the primary "announced" goals or metrics justifying the merger effort.
http://www.allbusiness.com/buying-exiting-businesses/mergers-acquisitions/104661-1.html
Union Pacific is a reasonable example. Taking 1965 as a representative year prior to merger efforts, in a relatively lackluster economy as far as railroads were concerned, UP had an operating margin in 1965 of 26.5%. Today? 26.9%. Profit margins? 1965: 14.4%. Today: 14.8%. Given the huge productivity increases since 1965, that's not an improvement. Debt to Equity ratio, 1965: 9%. Today? 55%. That isn't good; risk has increased substantially. Return on Equity, 1965: 5%. Average Return on Equity, Union Pacific, 1996-2007 (from memory, here), 4.8%; so far in 2010, it is a little over 6%. Considering how debt has replaced equity in UP's capital structure, the return on equity should have improved dramatically. It hasn't.
In general, the Union Pacific has substantially increased its risk, with little if any real improvement in key operating statistics. Using averages, overall, UP has reduced its return on equity as a result of its mergers. And who bears that risk? The shareholders, not management.
And, in 2010, we are talking about a Union Pacific Railroad 28 times the size of the 1965 Company in terms of revenue. What, really, "improved"? Well, you could argue that in today's climate, the 1965 UP wouldn't be viable, but that underscores the comparison of 40 years later, with nearly all railroad mergers which resulted in deteriorated financial metrics, to at least some extent, within five years of the merger. In that context, the economic environment appears to me to have little significance, short term or long term, since the results are consistent. KCS is arguably better on most metrics, notwithstanding its lack of mergers on the scale of other US roads, than it was 40 or 50 years ago. The fact that it isn't 28 times larger than it was 40 years ago seems to have worked in its favor, rather than supporting the alternative view. And the fact that it isn't "too big to fail" arguably positions its attitude differently.
"Too big to fail," isn't a service concept. Nothing is going to be replaced by a truck or a pipeline. What it means is that the relative size of a corporation, and the relative political influence of its owners, unions and bankers is such that government can be "persuaded" to "bailout" those at risk. It has little or nothing to do with the ongoing activities of the corporation itself; which generally continue in bankruptcy under a "debtor in possession" plan.
"Too big to fail" is a political concept and it is a real one.
It's economic damage is what is called the "moral hazard" in which ultimate risk is transferred from investor to the government and instead of being able to rationalize physical plants, operations, or change managements, instead inefficiency, poor management, bad investment-making, including mergers, are rewarded by the bailout, instead of punished by being allowed to "fail" invoking a bankruptcy reorganization.
"Too big too fail" is the worst thing that can happen in a genuine free enterprise system.
Are railroads "too big to fail"? You bet they are.
If and when the good times are no longer rolling as a reasonably permanent feature of the landscape, there is not a politician in the country who would not feel compelled to offer a life preserver to his friends, his Wall Street campaign contributors and his constituents by insulating them from the risk of their private enterprise: risks which, as in the case of the Union Pacific, are far, far greater than they were in the old days before its merger era.
ICLandUnion Pacific is a reasonable example. Taking 1965 as a representative year prior to merger efforts, in a relatively lackluster economy as far as railroads were concerned, UP had an operating margin in 1965 of 26.5%. Today? 26.9%. Profit margins? 1965: 14.4%. Today: 14.8%. Given the huge productivity increases since 1965, that's not an improvement. Debt to Equity ratio, 1965: 9%. Today? 55%. That isn't good; risk has increased substantially. Return on Equity, 1965: 5%. Average Return on Equity, Union Pacific, 1996-2007 (from memory, here), 4.8%; so far in 2010, it is a little over 6%. Considering how debt has replaced equity in UP's capital structure, the return on equity should have improved dramatically. It hasn't. In general, the Union Pacific has substantially increased its risk, with little if any real improvement in key operating statistics. Using averages, overall, UP has reduced its return on equity as a result of its mergers. And who bears that risk? The shareholders, not management. And, in 2010, we are talking about a Union Pacific Railroad 28 times the size of the 1965 Company in terms of revenue. What, really, "improved"? Well, you could argue that in today's climate, the 1965 UP wouldn't be viable, but that underscores the comparison of 40 years later, with nearly all railroad mergers which resulted in deteriorated financial metrics, to at least some extent, within five years of the merger. In that context, the economic environment appears to me to have little significance, short term or long term, since the results are consistent. KCS is arguably better on most metrics, notwithstanding its lack of mergers on the scale of other US roads, than it was 40 or 50 years ago. The fact that it isn't 28 times larger than it was 40 years ago seems to have worked in its favor, rather than supporting the alternative view. And the fact that it isn't "too big to fail" arguably positions its attitude differently.
You can make similar comparisons of NS before and after Conrail, but the alternative at that point was to let CSX have all of Conrail and risk becoming a "large regional" railroad with much eroded shareholder value. NS paid a super-premium price and it sure didn't go well for a few years, but I'd bet they are in a better spot today than if they hadn't pulled the trigger.
oltmanndICLandI think the comparisons are unfair and you hint that... A fair comparison is impossible to make. That would be "Where would the UP be w/o the merger(s)?" Since you can't rewind history - it's not possible to give a good answer.
ICLand
Well, I would have to kind of laugh if an honest merger prospectus said: "if we do this, this will allow us to stay just about where we are", or even better, "all comparisons to our pre-merger condition will be unfair because comparisons will be impossible to make."
That view gets everyone off the hook nicely, no matter what happens.
oltmanndYou can make similar comparisons of NS before and after Conrail, but the alternative at that point was to let CSX have all of Conrail and risk becoming a "large regional" railroad with much eroded shareholder value. NS paid a super-premium price and it sure didn't go well for a few years, but I'd bet they are in a better spot today than if they hadn't pulled the trigger.
I don't think you can make comparisons to NS before and after Conrail on the basis of conventional merger theory. Perhaps you could between Norfolk & Western and Southern which would be more apt comparisons.
NS today is the result of a government-created entity, Conrail -- a bailout pure and simple -- which created enormous risk to the remaining private investors in adjacent railroad properties. A good example of government intervention creating unintended consequences.
Conrail controlled 29.4% of the Eastern rail market, but it was a veritable monoply in the Northeast. Conrail’s operating ratio of 79.9% was only slightly higher than the industry average of 78.04%, almost the same as the Union Pacific Railroad, 78.9%, and below the largest railroad in the industry in terms of revenue, BNSF, at 81.2%. BNSF's OR is yet another example of a deteriorated OR of a merged railroad company compared to the smaller preceding systems.
Insofar as how NS viewed the Conrail situation, if CSX got the bid, the resulting company would control somewhere between 61% and 68% of the Eastern rail market. If CSX prevailed, not only would NS lose $345 million in direct traffic losses in the first five years after the proposed merger, the CSX-Conrail combination would offer shippers greater flexibility. Ominously, the new company’s monopoly over a substantial portion of the Eastern market would allow it pricing power, which it could then leverage against Norfolk Southern where the two railroads offered competing services. Norfolk Southern would be in a price war it could not win.
The discounted cash value of savings from the proposed transaction were worth approximately $1.6 billion to CSX, but only $1.423 billion to Norfolk Southern. However, the future price competition looked to be ultimately disastrous to Norfolk Southern. NS could justify on the basis of conventional merger valuations a stock offer of $70.19 per Conrail share. Underscoring the fact that this was far, far from a conventional merger scenario was the fact that Norfolk Southern had tendered $115 per share, cash.
The NS was not a conventional merger that looked at independent synergies of alleged merger benefits, it was a self-defense move that had little to do with conventional merger motivations.
ICLand [snip] And railroads, by and large, have followed the results of the business world in general: up to 80% of mergers fail -- absolutely fail -- to meet the primary "announced" goals or metrics justifying the merger effort. http://www.allbusiness.com/buying-exiting-businesses/mergers-acquisitions/104661-1.html [snip] . . . but that underscores the comparison of 40 years later, with nearly all railroad mergers which resulted in deteriorated financial metrics, to at least some extent, within five years of the merger. In that context, the economic environment appears to me to have little significance, short term or long term, since the results are consistent.
[snip] . . . but that underscores the comparison of 40 years later, with nearly all railroad mergers which resulted in deteriorated financial metrics, to at least some extent, within five years of the merger. In that context, the economic environment appears to me to have little significance, short term or long term, since the results are consistent.
Hey - you quit that now ! Saying that "The Emperor has no clothes . . . " Whaddya trying to do - disrupt the American way of life ?!?
Despite that, the 'conventional wisdom' seems to be that more mergers are inevitable. See Fred W. Frailey's TrainsTalk Staff Blog post of July 24, 2010 on this, entitled "Why railroads will keep merging" at:
http://cs.trains.com/trccs/blogs/trains-talk/2010/07/23/why-railroads-will-keep-merging.aspx
ICLand [snip] KCS is arguably better on most metrics, notwithstanding its lack of mergers on the scale of other US roads, than it was 40 or 50 years ago. The fact that it isn't 28 times larger than it was 40 years ago seems to have worked in its favor, rather than supporting the alternative view. [snip]
Maybe it isn't "notwithstanding its lack of mergers", but instead because of "its lack of mergers", as you seem to imply . . .
A more intellectually honest exercise than the above snapshots 40 years apart - and worthy of a college-level term paper, at least - would be to tabulate and graph the financial results of each of the major merged railroads from - say, 5 or 10 years before their respective M-days - right up to the present, and then compare that with the projections and their peers, both merged and non-merged, or at least many years post-merger. Still, I believe it would support ICLand's general assertions above. That's why I'm not in favor of any more Class I mergers in the US - such as even when I owned stock in both BNSF and CN and they were captained by 2 very sharp guys, Rob Krebs and Paul Tellier. The downside risk of the merger not working, the concessions to the influential shippers' groups, and the STB oversight hassles, just wasn't worth it. If the benefits of a merger are desired, I advocate doing it on a 'creeping' basis instead of 'one big crunch' on M-day. Those changes can be negotiated and implemented through various service arrangements, one route or market at a time, and the inevitable 'brush fires' put out as they arise, instead of involuntarily having to face and deal with a merger-sparked conflagration and 'melt-down' as we have often seen in the past. And what we're seeing now is lots of service-sharing, particularly in the NorthEast US with various combinations of CSX, CP, NS, and Pan Am, NS with CN and BNSF in the MidWest US, and CP and CN in Canada, etc. What cannot be done directly can often be done indirectly . . .
ICLandoltmanndICLandI think the comparisons are unfair and you hint that... A fair comparison is impossible to make. That would be "Where would the UP be w/o the merger(s)?" Since you can't rewind history - it's not possible to give a good answer. Well, I would have to kind of laugh if an honest merger prospectus said: "if we do this, this will allow us to stay just about where we are", or even better, "all comparisons to our pre-merger condition will be unfair because comparisons will be impossible to make." That view gets everyone off the hook nicely, no matter what happens.
oltmanndICLandoltmanndICLandI think the comparisons are unfair and you hint that... A fair comparison is impossible to make. That would be "Where would the UP be w/o the merger(s)?" Since you can't rewind history - it's not possible to give a good answer. Well, I would have to kind of laugh if an honest merger prospectus said: "if we do this, this will allow us to stay just about where we are", or even better, "all comparisons to our pre-merger condition will be unfair because comparisons will be impossible to make." That view gets everyone off the hook nicely, no matter what happens.Not always and not completely. But to compare UP in 1965 with UP post mergers is really tough. There was a sea-change in regulation and in the industrial base of the country during that period. The merger effect might be noise among these changes...
Well, if you read the papers, the post-regulation railroads were supposed to be burning up the rails with their vastly improved financial statistics. Recall? Regulation was supposed to be a huge burden. The UP story, if enhanced by the post-regulatory environment, certainly was put into the dumpster relatively speaking by something: what else changed besides the regulatory environment, likely affecting UP more than anything else besides deregulation? Instead of taking off in the post-regulatory environment, something affected it adversely, and it stayed nearly the same on key metrics, with substantially higher risk. What happened?
Mergers.
I've been eagerly waiting for my Sept. issue to read what Don Phillips said. I get home and my copy is here.
I read the column, looking for where Mr. Phillips says the railroads have nothing to fear, and don't see it. I do see one where Rep. Jim Oberstar, D-Minn, thinks the railroads are over-reacting and have nothing to fear and then details in a future column.
I know Mr. Phillips is a big supporter of Government operated passenger rail. Does that necessarily mean he automatically supports re-regulation of the industry in general, the current proposals specifically?
I've read in other places that some think the railroads don't have as much to fear. Not because they think the current proposals won't harm them, but because they don't think the legislation can pass in it's current form. That any re-regulation that does pass will be tolerable to the industry. I hope they are right.
Jeff
OK, let's not do 40 years; let's do the first five years. Or is that yet another exception?
As a note, since NS was brought up and I happened to have done a study back then that I can actually lay my hands on:
Norfolk Southern's proposed improved net operating income INCREASES as a result of the Conrail Merger/Acquisition, used to justify the acquisition to shareholders (and the government):
Proposed Increases:
1997:$175 million
1998: $184 million
1999: $305 million
2000: $419 million
2001: $385 million
Well, compared to what? That's the good question on these kinds of studies. In the year that Norfolk Southern did the project, 1996, it earned $1.2 billion. The average of the five years prior to the merger was $1.012 billion, net railway operating income.
The projections, then, based on the five year average prior to the merger, which is a little more conservative approach, should have shown these results:
Prospective (Pro Forma) NROI after Conrail Acquisition Proceedings:
1997: $1.2 billion
1998: $1.2 billion
1999: $1.3 billion
2000: $1.4 billion
2001: $1.4 billion
Actual Results?
Actual NS NROI after Conrail Acquisition:
1999: $499 million
2000: $494 million
2001: $836 million
The average NROI for the five years prior to the Merger/Acquisition: $1.012 billion
The average projected NROI for the five years after the Merger/Acquisition: $1.3 billion
The average actual NROI for the five years after the Merger/Acquisition: $817 million
The total loss of projected earnings vs. actual earnings: $2.4 billion.
And the Norfolk Southern guys, according to the popular literature, were the smart ones!
This, to me, represents something relatively typical for railroad mergers. I haven't seen an exception.
ICLand -
I commend you for your intellectual honesty - that's exactly what I had in mind
And for your filing system/ document retrieval ability.
But I believe your presentation of the statistics and case have a significant factual error: the ConRail split-up and merger with NS may have been proposed/ approved in 1997 - but the actual operational changes did not take effect until mid-1999, if I recall correctly.
Now go back and review your statistics with that in mind - and you'll see that's exactly when the NS NROI fell off the table, from $1.2 billion to under $500 million for the next 2 years, then transitioning into what may have been a gradual rebound - do you have another couple of years of stats available ?
So your case appears to be much stronger than you thought . . . Q.E.D !
Paul_D_North_JrICLand - I commend you for your intellectual honesty - that's exactly what I had in mind And for your filing system/ document retrieval ability. But I believe your presentation of the statistics and case have a significant factual error: the ConRail split-up and merger with NS may have been proposed/ approved in 1997 - but the actual operational changes did not take effect until mid-1999, if I recall correctly. Now go back and review your statistics with that in mind - and you'll see that's exactly when the NS NROI fell off the table, from $1.2 billion to under $500 million for the next 2 years, then transitioning into what may have been a gradual rebound - do you have another couple of years of stats available ?
The dangers of pulling out 15 year old studies that I haven't thought of in years. But, partly, my feeling is that significant merger efforts take management's eye "off the ball." The five year period including and after 1999 reduces the five year average income even further, to $799,000 -- even further below the five year average of the period of time prior to the merger proceedings.
Similarly, the BN/SF merger projected synergies of $560 million, the UP/CNW $250 million, and the UP/SP merger $660 million. Projections by experienced railroad managements; nearly entirely wrong.
jeffhergert I've been eagerly waiting for my Sept. issue to read what Don Phillips said. I get home and my copy is here. I read the column, looking for where Mr. Phillips says the railroads have nothing to fear, and don't see it. I do see one where Rep. Jim Oberstar, D-Minn, thinks the railroads are over-reacting and have nothing to fear and then details in a future column.
Jeff, you are absolutely correct. I was assuming -- jumping to the reasonable conclusion? -- that Don meant the same thing as in earlier columns when he said Oberstar saw no threat ... and he, Don, agreed. (With explanation to follow in future columns.)
ICLandOK, let's not do 40 years; let's do the first five years. Or is that yet another exception? As a note, since NS was brought up and I happened to have done a study back then that I can actually lay my hands on: Norfolk Southern's proposed improved net operating income INCREASES as a result of the Conrail Merger/Acquisition, used to justify the acquisition to shareholders (and the government):Proposed Increases: 1997:$175 million1998: $184 million1999: $305 million2000: $419 million2001: $385 millionWell, compared to what? That's the good question on these kinds of studies. In the year that Norfolk Southern did the project, 1996, it earned $1.2 billion. The average of the five years prior to the merger was $1.012 billion, net railway operating income.The projections, then, based on the five year average prior to the merger, which is a little more conservative approach, should have shown these results:Prospective (Pro Forma) NROI after Conrail Acquisition Proceedings: 1997: $1.2 billion1998: $1.2 billion1999: $1.3 billion2000: $1.4 billion2001: $1.4 billionActual Results?Actual NS NROI after Conrail Acquisition: 1997: $1.2 billion1998: $1.2 billion1999: $499 million 2000: $494 million2001: $836 millionThe average NROI for the five years prior to the Merger/Acquisition: $1.012 billionThe average projected NROI for the five years after the Merger/Acquisition: $1.3 billion The average actual NROI for the five years after the Merger/Acquisition: $817 millionThe total loss of projected earnings vs. actual earnings: $2.4 billion.And the Norfolk Southern guys, according to the popular literature, were the smart ones! This, to me, represents something relatively typical for railroad mergers. I haven't seen an exception.
Run your numbers thru 2007, or at least thru 2004, and see what you get.
Also, I haven't been able to dig it up, but I believe the industry's return on capital on the whole has gone from the 3-4% range up nearly 10% in 2008. In the same span, rail rates dropped over 50% (infl. adjusted). Most of it is productivity improvements but some at least is due do merger efficiencies, though I wouldn't begin to want to try to untangle which was which.
Murphy Siding Wouldn't you need a cystal ball, of the calibur not yet invented, to be able to weigh the potential cost of failure agaist potential stockholder gain? As far as your last sentence, how, or who, would decide what is to big to fail?
Wouldn't you need a cystal ball, of the calibur not yet invented, to be able to weigh the potential cost of failure agaist potential stockholder gain? As far as your last sentence, how, or who, would decide what is to big to fail?
Well, I really think that the both of you have stomped on a flaming bag deposited on the front porch when you brought up PC.
That example probably proves my point better than any other. If saner heads had prevailed and denied the merger, forcing the weaker of the two into a classic capitalistic implosion, then the other would have emerged stronger without all the government influx of resources.
Neither PRR nor NYC were "too big to fail" in their own right... but after washington caved in to the money mongers that wanted merger, then the inevitable followed
ICLand Union Pacific is a reasonable example. Taking 1965 as a representative year prior to merger efforts, in a relatively lackluster economy as far as railroads were concerned, UP had an operating margin in 1965 of 26.5%. Today? 26.9%. Profit margins? 1965: 14.4%. Today: 14.8%. Given the huge productivity increases since 1965, that's not an improvement. Debt to Equity ratio, 1965: 9%. Today? 55%. That isn't good; risk has increased substantially. Return on Equity, 1965: 5%. Average Return on Equity, Union Pacific, 1996-2007 (from memory, here), 4.8%; so far in 2010, it is a little over 6%. Considering how debt has replaced equity in UP's capital structure, the return on equity should have improved dramatically. It hasn't. In general, the Union Pacific has substantially increased its risk, with little if any real improvement in key operating statistics. Using averages, overall, UP has reduced its return on equity as a result of its mergers. And who bears that risk? The shareholders, not management.
OK, correct me if I'm wrong about the formula, but it looks to me that the calculation for what you're calling an operating margin is "1-(operating expenses/gross revenue)". That would be what is commonly referred to as the operating ratio subtracted from 1.
Because the operating margin (determined by the operating ratio) didn't change significantly you seem to be drawing a conclusion that the UP mergers (and deregulation) didn't produce any significant efficiency. You need to remember that the ratio involves two numbers; one for expenses and one for revenue. If they both change the "operating margin" can remain reasonably constant in spite of a huge increase in efficiency/productivity. That is just what happened.
The Union Pacific, and other railroads, operate in a competitive freight environment. They certainly do not generate monopoly profits. The UP is a major coal mover. After deregulation, and during the UP merger period (1985 through 2004) railroad rates for moving coal fell by 35%. And that 35% figure is in nominal dollars unadjusted for inflation. Allowing for the reality of inflation, and adjusting for it, coal rates fell by at least 50% after the mergers and deregulation. During this time, rail rates fell across the board. (Grain went up in nominal dollars, but adjusting for inflation, it experienced a rate decline too.) To keep that margin constant the UP (and other railroads) had to tremendously increase their efficiency, and they did that in spades. And they did it through mergers and deregulation.
What happened is just what was supposed to happen and what was predicted to happen. The railroads simultaneously became much more efficient and financially healthy. The margin stayed pretty much the same, but the volume went up as the prices came down. Profitability = margin x volume. Any company wants a larger margin, but wanting and getting are two different things. The market sets the price. What happened was that competition forced prices down, as it's supposed to do. This was offset by improved efficiencies (lower cost per unit moved) UP may be operating at the same margin, but its profitability is way up because of the volume increase.
I've written enough, but I could go in to just why that operating margin was bound to stay about the same. Suffice it to say that the mergers and dereg worked as advertised. The most important result is that the US economy got a more efficient, lower cost rail freight system. In fact, I've read that much of our economic good times in the past were due to lower logistics cost. A second, very important, result of the rail consolidations and dereg was that the US railroad industry changed from a basket case to a financially healthy, growing, part of the economy.
Focusing on any one metric, such as an “operating margin”, or even a series of metrics, without understanding their context is a very good way to misunderstand a situation. The numbers are what they are; the key is to understand why they are what they are.
Convicted One Murphy Siding Wouldn't you need a cystal ball, of the calibur not yet invented, to be able to weigh the potential cost of failure agaist potential stockholder gain? As far as your last sentence, how, or who, would decide what is to big to fail? Well, I really think that the both of you have stomped on a flaming bag deposited on the front porch when you brought up PC. That example probably proves my point better than any other. If saner heads had prevailed and denied the merger, forcing the weaker of the two into a classic capitalistic implosion, then the other would have emerged stronger without all the government influx of resources. Neither PRR nor NYC were "too big to fail" in their own right... but after washington caved in to the money mongers that wanted merger, then the inevitable followed
oltmanndAlso, I haven't been able to dig it up, but I believe the industry's return on capital on the whole has gone from the 3-4% range up nearly 10% in 2008. In the same span, rail rates dropped over 50% (infl. adjusted). Most of it is productivity improvements but some at least is due do merger efficiencies, though I wouldn't begin to want to try to untangle which was which.
Prior to the merger frenzy of the mid-1990s, the ROI for the purposes of determining revenue adequacy were not in the 3-4% range, but as follows:
1995:
NS 12.1%
UP 11.7%
CSX 6.5%
BN: 6.3%
ATSF: 5.3%
After mergers, synthesis:
2003:
NS: 9.1%
BNSF: 6.2%
CSX: 4.0%
2004:
NS: 11.64%
BNSF: 5.84%
CSX: 4.4%
It is difficult to frame an analysis around the moving goalposts of "it can't be 40 years, it can't be 5, or 7, it has to be whatever years proves the point." That approach will always prove some point, rarely the one at issue. The fact is, most synergies are achieved in a railroad merger by year 3, at the latest year 5.
After the flurry of very large mergers, 1996-1999, during the next five years, virtually the entire industry suffered declining abilities to be revenue adequate. The Clinton Recession was over by 2003. 2004 represents perhaps the most comparable year, as import/export traffic and coal reached significant new levels in 2005
The best of the bunch? The unmerged Illinois Central. The two biggest declines? The two largest merger railroads. Moral of the story? To some, none, or even, "worked as advertised."
Some advertisement.
With that, the research has given me a headache. Thank you for your time.
greyhoundsThe Union Pacific, and other railroads, operate in a competitive freight environment. They certainly do not generate monopoly profits. The UP is a major coal mover. After deregulation, and during the UP merger period (1985 through 2004) railroad rates for moving coal fell by 35%. And that 35% figure is in nominal dollars unadjusted for inflation. Allowing for the reality of inflation, and adjusting for it, coal rates fell by at least 50% after the mergers and deregulation. During this time, rail rates fell across the board. (Grain went up in nominal dollars, but adjusting for inflation, it experienced a rate decline too.) To keep that margin constant the UP (and other railroads) had to tremendously increase their efficiency, and they did that in spades. And they did it through mergers and deregulation. What happened is just what was supposed to happen and what was predicted to happen.
What happened is just what was supposed to happen and what was predicted to happen.
Well, if it was predicted to happen, I guess I missed the memo. The ones I got said that the rail industry needed the freedom to raise rates to provide adequate returns. On the other hand, I can truly say that I read it here first!
Regarding rates, there is something of a misconception presented here. The driver of higher rates in the 1970s was primarily inflation. Equipment, materials, capital itself was costing on the order of 14-18%. And the price of diesel fuel doubled, tripled, quadrupled. And this really kicked in, 1975-1979. Railroads couldn't increase rates fast enough. Literally. That was the point of Staggers: enable railroads to increase rates more quickly and flexibly. It was a savage four years.
Adjusted for inflation, this is shown quite clearly. The average railroad rate today is the equivalent of railroad rates in 1975. Rates prior to that time are lower than today's rates. Indeed, the long decline in adjusted rates since Staggers was only an unwinding of the fast run-up in rates that occurred in a very short time between 1976 and 1982. And it took 30 years to unwind those rates as railroads enjoyed on the one hand impressive improvements in productivity, and, on the other hand, increasing real costs in terms of physical plant and equipment. And, again, the adjusted cost of diesel fuel, electric power, computing power, communications have all been declining during that time, accounting for much of the claimed "productivity" when in fact it was nothing of the kind. Otherwise, productivity and substantial cost declines won the day, but it has only restored rates to what they were in 1975 in adjusted dollars, and that represents a historic high in railroad rates up to that time.You're comparing post-Staggers rates with a very select, narrow, period of history that labored under extraordinary economic circumstances. This is why nearly all presentations on Staggers rates do not show inflation adjusted rates prior to 1980. There's a public relations reason for that. Compared to a long period of relatively stable inflation prior to 1975, today's rates are higher and have been higher since Staggers was enacted. On the other hand, due to productivity increases, profitability has increased compared to those times, although sometimes detailed examinations, such as comparing UP then and now, makes you wonder where the improvement really is.
There is a chart here which partially shows this:
http://www.fra.dot.gov/downloads/policy/freight5a.pdf
Talk to old, established shippers. They'll let you know.
(link enabled by adding [] and 'url' fillers - selector)
uphogger Term limits, anyone?
Term limits, anyone?
Be careful when you ask for term limits, you might get them. Here in CA it hasn't worked out so well. One of the reason for CA's budget impasses is that we are constantly recycling the Legislature and Governor. It takes them a few years to figure out how things work and by then they don't have much time left before being termed out. This turns real power over to those who REALLY know how things work: the lobbyists.
Jack
ICLandoltmanndAlso, I haven't been able to dig it up, but I believe the industry's return on capital on the whole has gone from the 3-4% range up nearly 10% in 2008. In the same span, rail rates dropped over 50% (infl. adjusted). Most of it is productivity improvements but some at least is due do merger efficiencies, though I wouldn't begin to want to try to untangle which was which. Prior to the merger frenzy of the mid-1990s, the ROI for the purposes of determining revenue adequacy were not in the 3-4% range, but as follows:1995: NS 12.1%UP 11.7%Illinois Central 17.2%CSX 6.5%BN: 6.3%ATSF: 5.3% After mergers, synthesis: 2003:NS: 9.1%UP: 7.3%BNSF: 6.2%CSX: 4.0%2004:NS: 11.64%UP: 4.5%BNSF: 5.84%CSX: 4.4% It is difficult to frame an analysis around the moving goalposts of "it can't be 40 years, it can't be 5, or 7, it has to be whatever years proves the point." That approach will always prove some point, rarely the one at issue. The fact is, most synergies are achieved in a railroad merger by year 3, at the latest year 5. After the flurry of very large mergers, 1996-1999, during the next five years, virtually the entire industry suffered declining abilities to be revenue adequate. The Clinton Recession was over by 2003. 2004 represents perhaps the most comparable year, as import/export traffic and coal reached significant new levels in 2005 The best of the bunch? The unmerged Illinois Central. The two biggest declines? The two largest merger railroads. Moral of the story? To some, none, or even, "worked as advertised."Some advertisement.With that, the research has given me a headache. Thank you for your time.
I would agree that most mergers performed very poorly a couple of years in - mostly due to the inability to integrate operations well. I'm less convinced that they 5+ years out, they weren't doing what they were supposed to do. There are all sorts of confounding factors - for NS the ups and downs of export coal, for example - that can make straight accountant-style year to year comparisons somewhat less statistically significant.
I understand the point you are making, however.
Jack_S Be careful when you ask for term limits, you might get them. Here in CA it hasn't worked out so well. One of the reason for CA's budget impasses is that we are constantly recycling the Legislature and Governor. It takes them a few years to figure out how things work and by then they don't have much time left before being termed out. This turns real power over to those who REALLY know how things work: the lobbyists.
Lobbyists, yes, but even more to unelected government careerists -- the bureaucrats. In the end, there is no good way for voters to escape their responsibility to make good decisions every two years.
In thinking about this a little more overnight and while away from the computer, I may have 'beat up on' NS and its financial results post-merger with 58%-of-ConRail a little unfairly. As someone else cogently pointed out above, NS didn't really have a choice at that time but to attempt the merger - if it didn't get into that game right then, it was going to be left marginalized = "on the outside, looking in". It likely appeared to NS management at the time to be a classic involuntary "bet the ranch" scenario. Although, it might be fun to speculate what could have happened if NS had sat back and just let CSX plunge ahead and merge with all of CR - would that have then melted down and imploded, and later provided an opportunity to move in and buy some lines ? But that course of inaction would have left the results to fate, chance, CSX, and the government, so being pro-active about it and jumping in anyway was the prudent course of action.
That said, it was still a poor performance. Recall that almost as soon as the N&W-SR merger into Norfolk Southern was completed circa 1982, NS started attempting to buy all of CR from the US government. I believe there were 2 serious attempts at that - 1 in the 1984-85 time frame, and one in the early 1990's. So it's not as if merging with CR was a suddenly new idea to the NS management - they were plotting at it for around 15 years beforehand. You'd think with all that time, they'd have been able to plan the integration better . . .
With respect, I think Don's point about the tech bubble burst of the 2000 time frame is a non sequitur = irrelevant. That was about WorldCom, Enron, Tyco, Adelphia, etc., etc. I doubt if any of them ever shipped 1 boxcar of anything - well, Enron had some pipeline operations, but you know what I mean. They dealt mainly in paper and electrons, in one form or another, and were in a fictional universe of their and Wall Street's making. Aside from some personal tragic financial losses, I don't think that affected industrial output much. NS even ran a series of pointed ads at the time to the effect of touting how railroads hauled the real goods and things of the economy, which no Internet 'super-highway' could do, and so on.
Overall, mergers have a checkered history. The only 2 large ones of near-equals that seemed to work were 1970 BN formation and the 1995 BN-SF merger. There are many larger-smaller ones that seemed to work OK, too - MP and WP being folded into UP, SP into DRG&W, IC into CN, Soo and WC into CP, etc. The 'problem children' were of course a couple of 'mergers of equals' - PC, UP-SP right after UP-C&NW, and then of course NS-58%ConRail and CSX-42%ConRail.
The point above about looking at all of the financial statistics of the merged railroad and its predecessors - and competitors, peers, and the rest of the industry - for about 5 years before and after the merger, in order to accurately understand whether and how it worked or not, is a good one.
In fairness, I would not want to be professionally responsible for effectuating a railroad merger - it's just too complex, as Don also alluded to above. Keep in mind that back in the hey-day of railroading, even the PRR spent more on paper than it did on rail, per an article in Trains some years ago - that provides some clue as to the magnitude of the accounting and clerical functions that have to be integrated. Splitting up CR was like one of those surgeries to separate conjoined Siamese twins, and all of the many critical subsystems that make up the functioning, living breathing human body - or railroad. Actually, a merger is analogous to joining 2 people together, and all of their systems - far more complex than even a major organ transplant - it's no wonder so few mergers turn out well !
Finally, on this issue I am reminded of a line from one of Tom Clancy's books - Debt of Honor, I believe [EDIT 08/18/2010 10:05 AM: at page 415, if I recall correctly]. In it, the Jack Ryan character is analyzing and discoursing on the likely motives for the war with Japan that the US has suddenly found itself involved in. He concludes that in almost all modern wars, the nation that started the war wound up being defeated - ergo, starting a war is not a rational act. It seems to me that many mergers are of like kind - they turn out so poorly as compared to the expectations and promises, that it's not rational or sensible to attempt one. But mergers are nevertheless still proposed from time to time . . . see Fred Frailey's blog that I referenced above.
Paul_D_North_JrWith respect, I think Don's point about the tech bubble burst of the 2000 time frame is a non sequitur = irrelevant. That was about WorldCom, Enron, Tyco, Adelphia, etc., etc. I doubt if any of them ever shipped 1 boxcar of anything -
Paul_D_North_JrIn fairness, I would not want to be professionally responsible for effectuating a railroad merger - it's just too complex, as Don also alluded to above. Keep in mind that back in the hey-day of railroading, even the PRR spent more on paper than it did on rail, per an article in Trains some years ago - that provides some clue as to the magnitude of the accounting and clerical functions that have to be integrated. Splitting up CR was like one of those surgeries to separate conjoined Siamese twins, and all of the many critical subsystems that make up the functioning, living breathing human body - or railroad. Actually, a merger is analogous to joining 2 people together, and all of their systems - far more complex than even a major organ transplant - it's no wonder so few mergers turn out well !
Doing an operating plan is actually fairly simple compared to getting all your data ducks in a row to support that plan. The integration and reliance on data from multiple systems is ever increasing and makes integration of data from disparate RR systems really important - and really hard to do after a merger.
ICLandThere is a chart here which partially shows this: http://www.fra.dot.gov/downloads/policy/freight5a.pdf
By 2008, it had gradually grown to about 10%, dropping back to about 9% in 2009.
That fits what I seemed to remember....
oltmannd In that doc is this line: "Between 1990 and 2002, the Class I freight railroads have averaged 7 percent return on their net investment, up from the 2 percent average in the 1970s." By 2008, it had gradually grown to about 10%, dropping back to about 9% in 2009. That fits what I seemed to remember....
Union Pacific, in 1977,had a 16.6% return on net equity investment. This was before it embarked on its series of mergers beginning with the MoPac. Several mergers later, it has never again reached that rate of return even though 1977 was a "bad" year. I don't have the numbers in front of me, but I recall Norfolk & Western having rates of return of over 12% regularly during that time frame.
As I recall, accounting changes after 1977/1978 permitted accelerated depreciation against physical plant compared to prior years. This had its own synergistic effect of more rapidly reducing net capital investment compared to net income, and accordingly, continually increased the apparent rate of return compared to the 1970s and previously. A significant portion of any apparent improvement in railroad rates of return on net investment is due purely to accounting changes designed, in fact, to show higher rates of return with the passage of time. At the same time, nearly all surviving railroads report significantly higher debt than their predecessors, and that, again, results in higher apparent rates of return against net investment. And so several things have happened that would have changed, for the better, reported rates of return even if nothing at all had actually changed from a revenue/expense standpoint.
Coupling that with the surprisingly low rates of return actually reported in the past few years, compared to many of the pre-eminent predecessor railroads reporting better rates of return in the 1960s and 1970s, certainly raises questions about the supposed comparisons and particularly in reference to merger effects. It would be interesting if someone would do a real study on those impacts, taking into account the accounting and debt structure changes which permitted a showing, on paper, of higher rates of return irregardless of actual improvements.
Accounting methods were dictated by the ICC and one very significant factor was their rules specified that RAIL and OTHER TRACK MATERIALS were not depreciable. The Generally Accepted Accounting Principles used in other capital intensive industries finally convinced the ICC to change to depreciation accounting for these items in the 1970's (don't know the exact date) and therefore statistical comparisons before and after that significant change need to be looked upon with question.
ICLand [snip] As I recall, accounting changes after 1977/1978 permitted accelerated depreciation against physical plant compared to prior years. [snip] And so several things have happened that would have changed, for the better, reported rates of return even if nothing at all had actually changed from a revenue/expense standpoint. Coupling that with the surprisingly low rates of return actually reported in the past few years, compared to many of the pre-eminent predecessor railroads reporting better rates of return in the 1960s and 1970s, certainly raises questions about the supposed comparisons and particularly in reference to merger effects. It would be interesting if someone would do a real study on those impacts, taking into account the accounting and debt structure changes which permitted a showing, on paper, of higher rates of return irregardless of actual improvements.
My recollection is that the the principal change then was to the income tax laws only (= IRS, not the ICC's traditional "additions-improvements-betterments" accounting system) so as to allow the railroads to depreciate their historic (= un-adjusted for inflation since then) fixed and hence otherwise irrecoverable investment in the right-of-way such as the land itself, and the grading, tunnels, bridges, etc. I believe those items could be deducted from income as depreciation on a straight-line basis over 50 years, which is 2 % per year. That doesn't sound like much, but even 2 % of a huge number was still a very big number, especially when compared with the comparatively small incomes of the railroads back then. At the time I owned some BN stock, and from these considerations it seemed that the huge historic investments of those predecessor railroads to cross the Great Plains and the Rocky and Cascade Mountains, etc. and the then-current spending on the Powder River Basin line would likely lead to a 'windfall' increase in income and dividends . . .
I'm inclined to think that such a study has likely been done, though perhaps never published widely, and not available 'on-line', either - it probably pre-dated the Internet age. My reasoning is that there have been several notable economists/ professors of finance who have been quite interested in those aspects of the industry - George W. Hilton of UCLA and Robert B. Shaw of Clarkson University in Potsdam, NY come to mind, and likely others as well. There are so many academics and their students, graduate students, and Master's/ Ph.D.candidates, each with papers to write, theses to research and defend, and/ or to otherwise "publish or perish" - and the data on the industry is so public and transparent - that it would seem to be an inevitable subject for such a study. But likely it is in a filing cabinet or on a bookshelf someplace, not on the Web. Before I would undertake such an effort myself, first I would perform a "literature search" and inquire of the eminent scholars in the field - such as the above - to be certain that it hasn't already been done in one form or another. But I suppose it's possible that it hasn't . . .
The enabling legislation started in 1978 (43 FR 26314 June 19, 1978 & 42 FR 35017 July 7, 1977)....Effective date June 1, 1983. related to, but separate from Staggers...one of the things that hobbled the industry for decades previous.
ICLand Well, if it was predicted to happen, I guess I missed the memo. The ones I got said that the rail industry needed the freedom to raise rates to provide adequate returns. On the other hand, I can truly say that I read it here first! Regarding rates, there is something of a misconception presented here. The driver of higher rates in the 1970s was primarily inflation. Equipment, materials, capital itself was costing on the order of 14-18%. And the price of diesel fuel doubled, tripled, quadrupled. And this really kicked in, 1975-1979. Railroads couldn't increase rates fast enough. Literally. That was the point of Staggers: enable railroads to increase rates more quickly and flexibly. It was a savage four years. Adjusted for inflation, this is shown quite clearly. The average railroad rate today is the equivalent of railroad rates in 1975. Rates prior to that time are lower than today's rates. Indeed, the long decline in adjusted rates since Staggers was only an unwinding of the fast run-up in rates that occurred in a very short time between 1976 and 1982. And it took 30 years to unwind those rates as railroads enjoyed on the one hand impressive improvements in productivity, and, on the other hand, increasing real costs in terms of physical plant and equipment. And, again, the adjusted cost of diesel fuel, electric power, computing power, communications have all been declining during that time, accounting for much of the claimed "productivity" when in fact it was nothing of the kind. Otherwise, productivity and substantial cost declines won the day, but it has only restored rates to what they were in 1975 in adjusted dollars, and that represents a historic high in railroad rates up to that time.You're comparing post-Staggers rates with a very select, narrow, period of history that labored under extraordinary economic circumstances. This is why nearly all presentations on Staggers rates do not show inflation adjusted rates prior to 1980. There's a public relations reason for that. Compared to a long period of relatively stable inflation prior to 1975, today's rates are higher and have been higher since Staggers was enacted. On the other hand, due to productivity increases, profitability has increased compared to those times, although sometimes detailed examinations, such as comparing UP then and now, makes you wonder where the improvement really is. There is a chart here which partially shows this: http://www.fra.dot.gov/downloads/policy/freight5a.pdf Talk to old, established shippers. They'll let you know. (link enabled by adding [] and 'url' fillers - selector)
I guess you really didn't get the memo. As I clearly stated, the purposes of deregulation and the mergers were to improve the financial health of the rail industry and improve efficiency. That happened. Did the memo you received state that deregulation and mergers would cause the financial health of the rail industry to deteriorate? Did it also say dereg and mergers would make the railroads less efficient? No, I don't think it said that. The only reason for deregulation and the mergers would have been to promote efficiency and financial health. Nobody would have supported dereg and the mergers othewise. Please go see if you can find the correct memo.
The rate levels in 1975 and the relatively equal rate levels created by the 20 year decline in rates after deregulation produced a very different result. In 1975 the industry was an inefficient financial basket case. In the 21st Century those very same rate levels support a financially heallthy industry that is, according to the FRA, the most efficient and safest in the world.
You've made my case by showing that the rail freight industry is far more efficient after dereg and after all the mergers. According to your chart, it's charging the same as it was in the early 1970's, but those same rate levels produce a far different result now. If they're charging the same prices, then the only reason that the railroads can be financially healthy is that they've improved efficiency.
They get more output from less input. The fact that they can successfully exist at a price level that was previously inadequat proves my point. Thank you.
greyhoundsYou've made my case by showing that the rail freight industry is far more efficient after dereg and after all the mergers. According to your chart, it's charging the same as it was in the early 1970's, but those same rate levels produce a far different result now. If they're charging the same prices, then the only reason that the railroads can be financially healthy is that they've improved efficiency.
Railroads such as Union Pacific and Norfolk & Western were charging the same rates then, and earning higher rates of return. Since I have no idea what your case is, I have no idea how that specific measure of declining efficiency supports it.
And how the historically high rate levels of 1975 are a good thing because we've reached them again today, supporting the notion that a healthy Union Pacific and N&W in 1975 represented some kind of failure, but that lower rates of return for them today represents some kind of exalted triumph over their condition in 1975 is a conundrum I will have to leave to someone more qualified to analyze, as I have a feeling it has little to do with economics one way or another.
ICLand greyhounds You've made my case by showing that the rail freight industry is far more efficient after dereg and after all the mergers. According to your chart, it's charging the same as it was in the early 1970's, but those same rate levels produce a far different result now. If they're charging the same prices, then the only reason that the railroads can be financially healthy is that they've improved efficiency. Railroads such as Union Pacific and Norfolk & Western were charging the same rates then, and earning higher rates of return. Since I have no idea what your case is, I have no idea how that specific measure of declining efficiency supports it. And how the historically high rate levels of 1975 are a good thing because we've reached them again today, supporting the notion that a healthy Union Pacific and N&W in 1975 represented some kind of failure, but that lower rates of return for them today represents some kind of exalted triumph over their condition in 1975 is a conundrum I will have to leave to someone more qualified to analyze, as I have a feeling it has little to do with economics one way or another.
greyhounds You've made my case by showing that the rail freight industry is far more efficient after dereg and after all the mergers. According to your chart, it's charging the same as it was in the early 1970's, but those same rate levels produce a far different result now. If they're charging the same prices, then the only reason that the railroads can be financially healthy is that they've improved efficiency.
In 1975, the N&W and the UP were two of the rare exceptions to the generally dire financial conditions for railroads. At the time, the N&W had the benefit of being able to serve Appalachian coal mines with their very big domestic and foreign markets. The UP thrived because they usually received a division of revenue on interline traffic much higher than their portion of the cost for handling the business.
Had these companies not become part of larger systems, they would now be relegated to dust bins.
"We have met the enemy and he is us." Pogo Possum "We have met the anemone... and he is Russ." Bucky Katt "Prediction is very difficult, especially if it's about the future." Niels Bohr, Nobel laureate in physics
jeatonIn 1975, the N&W and the UP were two of the rare exceptions to the generally dire financial conditions for railroads. At the time, the N&W had the benefit of being able to serve Appalachian coal mines with their very big domestic and foreign markets. The UP thrived because they usually received a division of revenue on interline traffic much higher than their portion of the cost for handling the business. Had these companies not become part of larger systems, they would now be relegated to dust bins.
If recognizing what happened is 20/20 hindsight, as one poster wrote, I suppose attempting to explain what didn't happen qualifies as 20/20 nosight. I posted the 1996 ROI results: the smallest railroad posted the best results by far: Illinois Central. Does it mean anything? Apparently not. CN is, adjusted for inflation, relative in size to the C&NW in 1975 to the larger railroads of its era. What RR dust bin do you invest in these days?
A merger wave engulfed US railroads in the late 90s. In virtually every single case, rates of returns fell. No rate of return improved within the time frame that impacts would be reasonably measured. To the point: the failure of these mergers to generate predicted returns is consistent with results of mergers outside the rail industry. So you have two sets of consistent facts: failure to show positive results across several comparable mergers, and consistency with other merger efforts outside the industry. No one can show facts to the contrary, until and unless some intervening factor changes the overall economic environment, in which case merged and unmerged benefit alike, or even more favorably to the unmerged. And let me be a Missourian for a moment: if mergers benefit RRs preferentially to non-merged railroads under the same conditions: show me. It should be easy, reading some of the comments; as easy as showing how the Staggers Act predicted rates would go down.
Proof? No, not to people for whom these are some kind of sacred political cow. There will never be a proof adequate.
I understand, to a lot of people, actual evidence doesn't matter much. The narrative is more important.
As to the "rare exceptions" in the 1970s, I sense that, at least here, a narrative has been constructed of unmitigated economic crisis. To the extent that what did happen was set in motion by the failure of an unprecedented merger attempt, I find the current allegations somewhat ... interesting; ironic considering comments attempting to support the efficacy of "mergers."
But, for those who enjoy reality instead of speculation, here are some comparisons of the leading railroads, by ROI, between the eras of 1976 and 2008:
Railroad (Class I) ......... ROI, 1976N&W .......................... 7.6
Elgin, Joliet & Eastern ...... 6.7% Chicago & Illinois Midland ... 6.5%Southern Ry .................. 6.3%Missouri Pacific ............. 6.1%Union Pacific ................ 5.9%Richmond, Fredricksberg & Pot. 5.9% ---------------------- The average of the top seven Class I railroads (in terms of ROI) in 1976 (a very bad year) was 6.43%. The average 2008 (a reasonably good year) of the top seven Class I railroads (Return on Assets*) was 6.14%. Canadian National ... 6.9% Norfolk Southern .... 6.81% BNSF ................ 6.49% Union Pacific ....... 6.28% CSX ................. 6.26% KCS ................. 4.70% Canadian Pacific .... 4.54%
* ROI and ROA are terms of art. They are not necessarily directly comparable between railroads depending on depreciation policies, and not necessarily directly comparable between 1976 and 2008 because of accounting changes in 1984 shifting from betterment accounting to depreciation accounting for roadway items. However, they offer ballpark perspectives.I understand that some will say that very small roads skewed the numbers unfairly upward in 1975.
Yeah, they did. They are not around to skew it upward today, although one of the smallest surviving Class I's does, in fact, skew the average up. It is interesting to note how smaller railroads keep skewing the results upward over broad periods of time. "Nothing to be seen here, move on." But, UP was only fourth of the large Class I's showing good returns -- its uniqueness isn't quite that unique and that rationale, that there were "just two" unique railroads, breaks down compared to MoPac and Southern, which not only had different circumstances, but taken together, represent an Eastern road, a Southern Road, a Midwestern Road, and a Western Road. That's as diverse as it gets.
And if you take the four largest from each list, their rates of returns at 6.475% are identical. The fact is, "most" railroads were not in trouble in the 1970s, but memory even among experienced railroaders is rewriting that fact in favor of the very large fallout that did affect important roads as a result of the biggest merger failure, at that time, in world history. There's a balance in there; "most" railroads were not in bankruptcy court, but were doing as "OK" as today. And the factual record clearly shows that.
As was pointed out on this thread earlier, very rarely has any Class I even reached "revenue adequacy" under 30 years of deregulation and after extensive mergers. And I see that touted here as evidence of "outstanding success." Others might argue, validly I think, that failure to achieve even "adequacy" represents at least some level of failure, hardly evidence of success. I guess people have different standards.
I will admit, it is interesting to see how people think. I'm not sure its worth the effort since there isn't much in the way of facts in return.
Why is this a sore spot? Well, it wasn't until I thought about it. But, a friend of mine, a retired Chief Dispatcher, was reminiscing a couple of months ago. His office in 1975 was two blocks from mine. Three years later, it was 350 miles away. By 1985, it was 2,000+ miles away. And he related, "every time you got a chance to catch your breath and put your feet up, it meant that the Company needed to add another territory to your jurisdiction. So, there was this relentless pressure, and every time there was a merger, a new set of geniuses, who had never done this before, came in and upset the apple cart in the name of efficiency. And they removed sidings, closed down yards, consolidated dispatchers, and couldn't figure out why things didn't work as well as they did before. We lost fluidity, had tired crews, tired dispatchers, nobody was happy. They announced that it wasn't their job to make anyone happy. Considering that costs went up, and returns went down, they succeeded."
jeatonICLand greyhounds You've made my case by showing that the rail freight industry is far more efficient after dereg and after all the mergers. According to your chart, it's charging the same as it was in the early 1970's, but those same rate levels produce a far different result now. If they're charging the same prices, then the only reason that the railroads can be financially healthy is that they've improved efficiency. Railroads such as Union Pacific and Norfolk & Western were charging the same rates then, and earning higher rates of return. Since I have no idea what your case is, I have no idea how that specific measure of declining efficiency supports it. And how the historically high rate levels of 1975 are a good thing because we've reached them again today, supporting the notion that a healthy Union Pacific and N&W in 1975 represented some kind of failure, but that lower rates of return for them today represents some kind of exalted triumph over their condition in 1975 is a conundrum I will have to leave to someone more qualified to analyze, as I have a feeling it has little to do with economics one way or another. In 1975, the N&W and the UP were two of the rare exceptions to the generally dire financial conditions for railroads. At the time, the N&W had the benefit of being able to serve Appalachian coal mines with their very big domestic and foreign markets. The UP thrived because they usually received a division of revenue on interline traffic much higher than their portion of the cost for handling the business. Had these companies not become part of larger systems, they would now be relegated to dust bins.
In a Stanley Crane speach (that's out in the internet somewhere...) he explains how he was persuaded to support legislation that would help Conrail get a fair division of interline revenue. The divisions of revenue that were far outside of the cost split were propping up the western and southern roads at the expense of the Conrail. The point is, you have to look a the industry as a whole to have any chance of seeing any merger effects.
oltmannd In a Stanley Crane speach (that's out in the internet somewhere...) he explains how he was persuaded to support legislation that would help Conrail get a fair division of interline revenue.
In a Stanley Crane speach (that's out in the internet somewhere...) he explains how he was persuaded to support legislation that would help Conrail get a fair division of interline revenue.
Just how much persuasion did that take?
There may be some confusion here - let me attempt to sort it out. I believe Don is referring to back when L. Stanley Crane was President and CEO of the Southern Rwy. - which was before he became CEO of ConRail - and had all those glossy color 2-page ads in Trains each month wherein a selected Southern blue-collar employee would say a few good words and then have Crane explain how the Southern was great and moving forward, etc.
Anyway, as I recall it sometime in the late 1970's CR declared an embargo - esp. on inbound boxcar traffic from the southern US railroads - claiming chronic and structural "revenue inadequacy" for the high terminal costs CR incurred in handling them. A good part of the problem was that with the decline of manufacturing in the NorthEast US, there were few outbound loads, so that traffic was highly unbalanced. Of course, that CR embargo provoked a furor and a commercial, interchange and regulatory crisis, which was eventually resolved by granting CR a bigger slice of the rate division as approved by the ICC - the details of which I don't know.
John Kneiling once wrote roughly this about the Penn Central merger: "Al Perlman of NYC and Stuart Saunders of PRR got this idea, and couldn't let go of it, even when it got burdened down to the point of impracticality by all sorts of conditions - like including the New Haven, maintaining all kinds of passenger services, etc. - demonstrating that they were amateurs, because they couldn't walk away from it. A pro is a guy who knows when to and can say 'No' to a deal."
I'll observe that 'walking away' was not unheard of in the industry, even back then - the UP had sense enough to walk away from its attempted acqusition of the Rock Island after the ICC hearings and appeals had dragged on for like 10 years before a lukewarm approval was granted - by which time the Rock was pretty widely recognized as the granger railroad equivalent of a 'dead man walking'.
ICLand oltmannd In a Stanley Crane speach (that's out in the internet somewhere...) he explains how he was persuaded to support legislation that would help Conrail get a fair division of interline revenue. He was persuaded? Just how much persuasion did that take?
Thanks for that link, Don. I'd not known of that speech or its publication before - a fascinating read.
ICLand What happened?Mergers.
What happened?
Paul_D_North_JrThanks for that link, Don. I'd not known of that speech or its publication before - a fascinating read. - Paul North.
YoHo1975ICLand What happened?Mergers. Stack and Pig trains? Powder River Coal? The entire profile of what the railroad carried changed over the last quarter of the 20th century. Intermodal is a low margin high reliability business to be in, but its one of the few games in town. Having access to markets likely drives mergers as much as anything else.
LCL? REA Express? Flexi-van? Pocahontas coal?
Oops, I meant, Hanjin, JB Hunt, UPS and Powder River coal.
If one of the questions here is whether or not mergers have led to greater efficiency for railroads, wouldn't operating ratio be the best metric, rather than ROI or ROA?
C&NW, CA&E, MILW, CGW and IC fan
schlimm If one of the questions here is whether or not mergers have led to greater efficiency for railroads, wouldn't operating ratio be the best metric, rather than ROI or ROA?
No. A lower operating ratio is a good thing, but it's not the real goal.
It measures the operating margin - how much does a railroad have to spend to get the revenue. (operating expenses/revenue) Higher margins are good, but they are only part of the equation. Profitability = margin x volume. Proitability is maximized when the last unit of production is sold exactly at its cost of production. (marginal cost = marginal revenue) Obviously, this is hard to do in the real world, primarily because things keep changing and it's very hard to nail down the exact cost of hauling that final load of freight. But that's the general idea.
If the marginal costs go down due to greater efficiency the railroad will seek freight at lower revenue while attempting to maintain prices on existing business. That lower revenue will still cover the lowered costs. i.e. they can reach out further from an intermodal terminal, incurring higher dray costs while getting lower rail revenue and still come out ahead.
This will improve their profitability but mess with the OR because both the numerator and denominator will go down Because they both decline, the OR can stay constant while profitability goes up. Greater efficiency allows lower rates to be profitable and profitability is the real goal, not a lower OR.
And that is just what happened.
While operating ratio is a rail industry-specific metric, operating margin (operating income divided by revenue), which takes into account profit, might be the best indicator of how well-run a rail is and allows for a direct comparison of how efficient it is pre-and post merger.
schlimmWhile operating ratio is a rail industry-specific metric, operating margin (operating income divided by revenue), which takes into account profit, might be the best indicator of how well-run a rail is and allows for a direct comparison of how efficient it is pre-and post merger.
ICLandYoHo1975ICLand What happened?Mergers. Stack and Pig trains? Powder River Coal? The entire profile of what the railroad carried changed over the last quarter of the 20th century. Intermodal is a low margin high reliability business to be in, but its one of the few games in town. Having access to markets likely drives mergers as much as anything else. LCL? REA Express? Flexi-van? Pocahontas coal? Oops, I meant, Hanjin, JB Hunt, UPS and Powder River coal.
oltmanndschlimmWhile operating ratio is a rail industry-specific metric, operating margin (operating income divided by revenue), which takes into account profit, might be the best indicator of how well-run a rail is and allows for a direct comparison of how efficient it is pre-and post merger.It's really too squishy for that. Conrail drove it's OR to new lows in the last year before the NS/CSX merger by throwing every thing that wasn't nailed down into the boiler to make steam. It didn't reflect the OR of being an ongoing concern. I can also change based on a road's operating philosophy. If you decide you don't want to own any freight cars (and not lease any long term), the the cost of ownership of the car fleet you are using is an operating cost. If you own all your own cars, it's a capital cost. You could make nearly the same profit and have a radically different OR.
Then just use: net income/revenue. That would get around your concerns while allowing direct YTY comparisons by using a ratio rather than simply comparing net profits. If, for example, NS -n 2009 has 4X the revenue as in 1975, but only 2.5X the profit, it would appear to be a much less efficient operation and the mergers have led, as some economists theorize (Freiburg School), to more inefficiency.
YoHo1975 Are you really trying to suggest that the percentage of traffic and the margins on carrying it are the same?
Are you trying to suggest that railroad traffic hasn't always been changing and that margins haven't always been changing? When have they ever been "the same"?
Union Pacific carried 16% of its tonnage in coal in 1925; it's about 23% today. Powder River up. Norfolk & Western had 70% coal tonnage in 1925, it's 22% on the NS today. Pocahontas down.
Hint: percentage of traffic never stays the same. Margins never did, they never will, but you can get a sense of how well a company is doing or a management is doing by using standard financial metrics that make reasonable comparisons possible over time and between companies or managements.
The traffic profile is one gigantic undeniable difference. the question to ask is how would say, the UP of the mid 70s do with the traffic mix of the 2000s?
Of course, that's not a very easy comparison to make, but then, that's the point.
greyhoundsIf the marginal costs go down due to greater efficiency the railroad will seek freight at lower revenue while attempting to maintain prices on existing business. That lower revenue will still cover the lowered costs. i.e. they can reach out further from an intermodal terminal, incurring higher dray costs while getting lower rail revenue and still come out ahead. This will improve their profitability but mess with the OR because both the numerator and denominator will go down Because they both decline, the OR can stay constant while profitability goes up. Greater efficiency allows lower rates to be profitable and profitability is the real goal, not a lower OR. And that is just what happened.
If the OR stays constant, profitability on lower revenues goes down, not up.
80/100= 80%
Profit= 20
Revenue declines to 90; costs decline to 72. 90/72. Operating Ratio = 80%
Profit = 18.
And that is just what happens.
schlimmoltmanndschlimmWhile operating ratio is a rail industry-specific metric, operating margin (operating income divided by revenue), which takes into account profit, might be the best indicator of how well-run a rail is and allows for a direct comparison of how efficient it is pre-and post merger.It's really too squishy for that. Conrail drove it's OR to new lows in the last year before the NS/CSX merger by throwing every thing that wasn't nailed down into the boiler to make steam. It didn't reflect the OR of being an ongoing concern. I can also change based on a road's operating philosophy. If you decide you don't want to own any freight cars (and not lease any long term), the the cost of ownership of the car fleet you are using is an operating cost. If you own all your own cars, it's a capital cost. You could make nearly the same profit and have a radically different OR. Then just use: net income/revenue. That would get around your concerns while allowing direct YTY comparisons by using a ratio rather than simply comparing net profits. If, for example, NS -n 2009 has 4X the revenue as in 1975, but only 2.5X the profit, it would appear to be a much less efficient operation and the mergers have led, as some economists theorize (Freiburg School), to more inefficiency.
ICLand Norfolk & Western had 70% coal tonnage in 1925, it's 22% on the NS today. Pocahontas down.
YoHo1975 The traffic profile is one gigantic undeniable difference. the question to ask is how would say, the UP of the mid 70s do with the traffic mix of the 2000s?
You're trying to argue something, but I don't know what. That "something" happened that may have caused something else to go up, down, or sideways? Interest rates change too. The whole economy has gone up and down at least once during that time.
How is the traffic profile "one gigantic, undeniable difference"?
The fact is, financial metrics don't care. They measure what is there, in dollars, and if it improves, the financial metrics improve; if they deteriorate, the financial metrics show the deterioration and it doesn't matter if UP carries fewer cows and more coal or more cows and less coal. If the mix generates a poor financial result, well, shouldn't that show up? Wouldn't it? So what if the mix changes? That's the whole point of the financial metrics, measuring a company's financial position as a result of the business it is doing.
oltmanndICLand Norfolk & Western had 70% coal tonnage in 1925, it's 22% on the NS today. Pocahontas down. And less than 1/2 is Poky coal - but tonnage is similar. But...NS = Sou + NYC&StL, + Wabash + 1/3 PRR plus a good dash of NYC. So, how do you untangle that in the analysis?
Well, it was kind of my point in response to the observation: " Are you really trying to suggest that the percentage of traffic and the margins on carrying it are the same?"
The answer is clearly no, and one good reason is that the companies being measured are likewise in a state of long term flux, as are the industries, the economy, technology and civilization. But, to find reference points for comparison ... ah, yes, financial metrics.
YoHo1975 Are you really trying to suggest that the percentage of traffic and the margins on carrying it are the same? That moving from a traffic profile that was Boxcar loads, Coal and some intermodal, to a traffic mix intermodal, Unit trains and some mixed freight along with the inherent change in fees for such services doesn't present a major shift and a change in the way railroads must be operated? Is that really what you're saying?
I've read this over, and I still can't figure out where you are going.
UP had a profit margins in 1965 of 14.4%, 1976: 5.9%, 2008: 6.28%.
Don't you think those take into account "traffic mix"?
How could they NOT take into account, automatically, "traffic mix"?
Are you suggesting that because the profit margin is so much lower after deregulation than it was in the doldrum days of the 1960s, and not that much better than the crisis days of the 1970s that "something" must be wrong with the way it is measured?
And that traffic mix changes must explain it?
Of course they do! And beyond that, deregulation and mergers must play a role because they are partial drivers of traffic mix. The point is, the claims of deregulation and merger benefits were supposed to give railroads more control over their mix, and hence, their profitability, i.e. make them more profitable.
And that's what we look at for results. And, were they successful at what they said would be the natural results of deregulation and mergers?
A railroad of 1975, with it's route profile and commodities hauled is not a railroad of 2010. This change is independent of success or failure, but it does make a big difference on what is possible. The business model that got UP it's 1975 financial figures, at least as far as I can tell simply does not exist. In other words, they can't do what made them that money in the 1970s.
Part of that change is internal, in the form of mergers, new minds, fresh ideas. Part of it is external, the service that shippers want has changed. Moving containers from California to the midwest is far and away more important for a western road in 2010 as compared to 1975. How would 1975 UP handle such traffic? They have essentially one route in to California and one into Portland. They don't get revenue from the WP/SP or C&NW portions of the routes. They have extensive competition. In fact, ATSF is the ONLY railroad from 1975 that would probably have a viable California Intermodal route in 2010.
By bringing in WP, SP and C&NW, UP has created a viable end to end network to move containers from all of the west coast. They have a network that is tailored to the traffic patterns that currently exist. Or at least, that's the implicit goal of those mergers.
So, I guess to make it simple, what I'm trying to suggest is that the context of those financial figures is not the same. Why did they make all these changes and not "apparently" improve their bottom line? Because going out of business would result in an even worse bottom line.
ICLandx. The point is, the claims of deregulation and merger benefits were supposed to give railroads more control over their mix, and hence, their profitability, i.e. make them more profitable.And that's what we look at for results. And, were they successful at what they said would be the natural results of deregulation and mergers?
x. The point is, the claims of deregulation and merger benefits were supposed to give railroads more control over their mix, and hence, their profitability, i.e. make them more profitable.
In other words, sure, their situation hasn't improved financially, but if they hadn't deregulated and hadn't merged, would their situation be even worse? Because the circumstances under which they're trying to make money have changed, and that will affect what they are capable of making.
It's entirely possible that you are right, that deregulation didn't help at all and that they could be the same or better if Staggers never happened, but I don't see anything in this thread that would illustrate that, because all that was discussed up to the point I clumsily jumped in was numbers without context.
YoHo1975ICLand But the question is, how capable would they have been without the supposed benefits of deregulation and mergers?
No, that isn't the question because the question isn't about things that didn't happen, such as nationalization, levitation, or a permanent depression.
You are venturing deep into hypotheticals without offering any proof of anything, either way. You seem to be proposing that deregulation and merger allowed railroads to voluntarily do worse by choosing their traffic mix under deregulation, than they did under regulation when they couldn't? They wanted to do that?
Or they would have done better under regulation ... than they did under regulation? Or worse under regulation than ... they did under regulation?
Reflect on what you have seen. The ICC permitted railroads to command the highest rates ever charged for railroad service. The ICC had little control over railroad expenses. The flaw seen at the time was that the ICC did not permit higher rates fast enough. You are suggesting that the ICC would have then required railroads to carry new traffic at far lower rates? What causes you to think that? Rates were set by rate bureaus. Why would they have done that? And why would that prospective result be different than the actual result of lower rates compelled by competitive forces?
Perhaps humility should cause me to suggest I have been more baffled than I am right now at exactly what the logical point is, but I cannot recall when that might have been.
I'm not suggesting any of that.
I'm suggesting that looking at only the financials tells you nothing of interest unless your only interest is as a stockholder.And even then, only a really poor investor wouldn't look deeper into the industry.<p>
You seem to be saying that "railroads are not doing better now financially than they were then, therefore the entire concept was a failure."
I'm saying that while it may be a complete failure, relying on purely the numbers while ignoring all the manhours that went into being a railroad will tell you nothing of interest about the past 30 years of railroad history.
So, the railroads aren't doing better than they were. Why? What's different?
I gave you a thought on what's different. You seem uninterested in thinking about it and simply wish to blame Staggers and mergers as if they occurred in a vacuum where only the greedy demands of investors and management can possibly have an effect. It couldn't be because the entire market changed around them and they needed to adapt. Certainly not that.
And lets be clear, Staggers was about giving Railroads the freedom to act as the market demanded and act quicker. It was presumed that would mean nothing but higher rates. That clearly wasn't the case, but that doesn't mean that the agility that deregulation offered didn't improve the situation. You seem to think that the railroads can choose their traffic mix the way NBC sets up their Thursday Prime Time lineup.
Your logical point seems to be that because financial figure A has not improved over 35 years, Staggers failed.
My point is that is only one measure of the business absent of the myriad different things that affected the railroad business over these last 35 years and is therefore meaningless.
YoHo1975 I'm not suggesting any of that.I'm suggesting that looking at only the financials tells you nothing of interest unless your only interest is as a stockholder.And even then, only a really poor investor wouldn't look deeper into the industry.<p>You seem to be saying that "railroads are not doing better now financially than they were then, therefore the entire concept was a failure."...My point is that is only one measure of the business absent of the myriad different things that affected the railroad business over these last 35 years and is therefore meaningless.
Well, you must think you are on to something here. Staggers was designed to restore the economic viability of the rail industry by permitting rates to rise unfettered. Don't get too invested in Staggers, per se, it was the last of a series of deregulatory actions that covered all transportation, banking, savings & loans, and communications. This followed a decade of extraordinarily poor economic performance of the US economy in general and what was beginning to spur a hyperinflation resulting from the bright idea that the government could spend on a war, and heavily on social programs as well.
"One measure of a business," as you put it, happens to be the way society measures business success. Unless you are into the fuzzy metrics of organic gardening or raising bunnies, there are ultimate measures of business performance and they happen to be financial since that is what business is all about. In fact, profitability is how to measure just how management responds to "the myriad different things" that change and affect businesses.
You say it is "meaningless." Oh, so then the dire economic straits of some railroad companies in the 1970s based on lack of profitability was just a meaningless exercise. It really meant nothing. Staggers was an overreaction because financial metrics are just plain meaningless so why change the system?
Between asserting a premise that is as nearly indefensible as I have ever seen, and putting words in my mouth, I still don't know where you are going. The fact is, and I have nothing to do with the conclusion, is that most mergers fail. Why railroads might be an exception, you have not said, but the metrics available suggest that mergers have, by and large, over a forty year span beginning with the Penn Central, harmed rather than energized the financial position of the merged companies.
And the fact is, in virtually every case that I can lay my hands on, the management that promoted the merger and justified the proceeding based upon specifically identified economic improvements failed dismally to deliver on those economic benefits, over and over.
And beginning in 1998, industry efficiency as a whole has flattened remarkably. That is consistent with merger experience outside of the rail industry. Rates are beginning to rise again to maintain margins; margins are going to begin to fall for those traffic elements with elastic markets. It's an old story and a continuing cycle. Staggers couldn't, can't and won't change that.
What you are suggesting, of course, is that there is no way to measure success or failure. If true, we would not have the Staggers Act in the first place. Someone could always blame "myriad changes" or "traffic mix" or some other odd excuse for lackluster economic performance. Management certainly would: "h***, it's not our fault, it's the TRAFFIC MIX!" And that is exactly what you are saying.
The best I can offer is that, when you say "that looking at only the financials tells you nothing of interest unless your only interest is as a stockholder," you are just dead wrong. Management performance is judged entirely by financial measures because the ultimate purpose of business enterprise is to successfully convert investment into profit.
YoHo1975 Your logical point seems to be that because financial figure A has not improved over 35 years, Staggers failed.
My point is that "Staggers" really doesn't have much to do with anything. What it did do was wake managements up to the harsh reality of competition and the need to watch expenses more carefully because the ICC was no longer around to grant rate increases to protect poor managers. But, Managements could do a good job prior to Staggers. There is abundant proof that well-managed railroads did as good or better than their post-Staggers counterparts. Managements could do a rotten job before and after Staggers. There is proof of that. Staggers did nothing to change the fact that management abilities are highly variable, in highly variable business environments.My point is, turning "Staggers" into a kind of religious experience by misrepresenting both its purpose and effect, distracts entirely from the important purpose of analysis, which is to assess the effectiveness of management performance using recognizable and well-understood measures of that performance.
Just about 50% of railroad tonnage today was completely unaffected by Staggers. Coal was deregulated in 1975. And by the way, things got worse after that. Another 30% of tonnage remains regulated under the R/VC clause of the Staggers Act. That just doesn't leave that much to get too excited about.
Cost benefits? Nothing related to Staggers, per se. Diesel fuel costs, in real terms, declined 30% between 1982 and 1999. Electric power industrial rates nationally declined 40% over the same period; in some areas, 50%. Those account for nearly half of "railroad" productivity increases after "Staggers" and those benefits had nothing to do with either railroad management or Staggers. A stuffed goat would have looked like a good manager with those kind of cost declines rolling across the income statement, year after year.
Accounting for nearly all of the remainder of "productivity" is employee productivity. In general, that was extraordinary, but in some details, horrible. That is, to me, in those instances when it was a penny-wise, pound foolish approach to raising productivity. It had nothing, again, to do with Staggers whatsoever but rather crew law/contract changes, major advances in industrial technology and, ironically, the desire of management to improve their financial metrics!
The result, financially, was extraordinary. The result on the ground was tired crews, tired dispatchers, sometimes expensive congestion, and sometimes deadly mistakes. Applied without some common sense, the drive to improve employee productivity resulted in many instances in less, not more, productivity.
Had the fuel and power costs not declined so dramatically, railroad rates today would be just about where they were in 1979; nearly a historical high. Accordingly, Staggers has little to do with current rates "declining" to the earlier historical high reached in 1975. And it took thirty years to peel the rates down from their 1979 levels to their 1975 levels? Based in large part on utility and fuel cost declines? Tell me again what Staggers actually did?
I think Staggers was an important piece of legislation. I don't think it equates with Genesis or Exodus. But, when the mere mention of the word "Staggers" is supposed to substitute for ordinary common sense comparisons of how companies perform, well, I think that's where the line has to be drawn, and I've drawn it. You don't like the comparisons, I still can't tell why because you don't use any metrics whatsoever, and I still don't know what your point is, but I've done my best to make mine clear by specific examples, specific measures, and offering historical context surrounding those measures.
And that will have to do because this is far more time and investment in what amounts to a pointless and relatively aimless discussion than it deserves.
ICLandYoHo1975 Your logical point seems to be that because financial figure A has not improved over 35 years, Staggers failed. My point is that "Staggers" really doesn't have much to do with anything. What it did do was wake managements up to the harsh reality of competition and the need to watch expenses more carefully because the ICC was no longer around to grant rate increases to protect poor managers. I think Staggers was an important piece of legislation. I don't think it equates with Genesis or Exodus. But, when the mere mention of the word "Staggers" is supposed to substitute for ordinary common sense comparisons of how companies perform, well, I think that's where the line has to be drawn, and I've drawn it. You don't like the comparisons, I still can't tell why because you don't use any metrics whatsoever, and I still don't know what your point is, but I've done my best to make mine clear by specific examples, specific measures, and offering historical context surrounding those measures.And that will have to do because this is far more time and investment in what amounts to a pointless and relatively aimless discussion than it deserves.
My point is that "Staggers" really doesn't have much to do with anything. What it did do was wake managements up to the harsh reality of competition and the need to watch expenses more carefully because the ICC was no longer around to grant rate increases to protect poor managers.
This is what I wanted. I didn't feel you were offering historical context. You asked what changed, I offered a specifc thing that changed. I don't give a rat's behind about Staggers. I felt reading this thread that I got a data point with no context and I offered some and was told my comment was pointless and aimless.
Treating any piece of legislation as if it was biblically important is pretty silly. My posts have been to raise the question of "was staggers an enabler?" You've given some context suggesting perhaps not. Context you didn't provide before I did a bellyflop into this thread.
I'm sorry you feel my posts were pointless, but I managed to get you to provide what I wanted, so thank you anyway.
Murphy Siding ICLand- If I'm reading this correctly, you're saying that railroad mergers, since PennCentral at least, have been failures(?)
ICLand- If I'm reading this correctly, you're saying that railroad mergers, since PennCentral at least, have been failures(?)
And what is the CEO of Unied Airlines earning - excuse me, being paid - these days as well ? After how many bankruptcies, as compared to your former employer ? At least 1, for sure . . .
No, I don't really want an answer about the UA CEO . Instead, my point is that your old boss and his successors have likely done a better job at preserving their business and bringing money back to the stockholders than UA's - you've likely seen or heard Warren Buffet's line about the aggregate unprofitablity of the airline business since the Wright Brothers - so I don't begrudge the railroad CEO his pay as long as he performs, notwithstanding the disparity with the rank-and-file. If all his pay was taken away and redistributed equally among - say, 10,000 employees, then they would each get an additional mere $2,400 - before taxes. Think that would benefit the company as much as not having that CEO or one as capable ? Evidently the Board of Directors doesn't, and a majority of the shareholders apparently don't think so either.
Paul_D_North_Jr No, I don't really want an answer about the UA CEO . Instead, my point is that your old boss and his successors have likely done a better job at preserving their business and bringing money back to the stockholders than UA's - you've likely seen or heard Warren Buffet's line about the aggregate unprofitablity of the airline business since the Wright Brothers - so I don't begrudge the railroad CEO his pay as long as he performs, notwithstanding the disparity with the rank-and-file.
No, I don't really want an answer about the UA CEO . Instead, my point is that your old boss and his successors have likely done a better job at preserving their business and bringing money back to the stockholders than UA's - you've likely seen or heard Warren Buffet's line about the aggregate unprofitablity of the airline business since the Wright Brothers - so I don't begrudge the railroad CEO his pay as long as he performs, notwithstanding the disparity with the rank-and-file.
My original comment on 8/3: "Cynics charge that the motives for mergers are obvious: ambitious people tend to be empire builders, and managers of larger companies can command higher compensation than managers of smaller companies. Around those motives are built highly artificial constructs of purported merger benefits marketed by management insiders to shareholders who generally don't have the insider's knowledge of their own company, let alone the other company involved in the merger."
I don't begrudge anyone what they "earn". When they claim they earn it because of fuel prices dropping, costs dropping, and the general economy doing for them what they couldn't do otherwise, I'm sorry, I'd choose to pay the stuffed goat exactly what he's worth.
And of course, that's the point of metrics. When a railroad under deregulation and a good economy cannot earn the return that the company earned under the onerous burdens of regulation and a bad economy, I'd look for a better standard of proof.
I hear ice cracking.....
YoHo1975I'm sorry you feel my posts were pointless, but I managed to get you to provide what I wanted, so thank you anyway.
And I have to apologize. I "grew up" under a railroad president with an engineering background, went into operations, served in nearly every important supervisory role, including finance, and expected, when you walked into his office, you to know exactly what you were talking about. His background on the railroad gave him an intimate knowledge of virtually everything on the railroad, and when you couldn't answer his questions, the room got very cold. Especially when he already knew the answers.
My lesson has always been, prepare, prepare, prepare. I understand that this is a different environment, but old habits die hard. The Staggers Act is nothing to get bent out of shape over either way. It's a long time ago frankly and the world moves on. However, I would note that for those who believe that Staggers was designed to foster competitiveness, and think that was a useful goal, it should be noted that mergers are always essentially anti-competitive transactions and insofar as they have reshaped the rail industry, they were in many ways designed to undo the market reforms advanced by the Staggers Act.
Murphy Siding I'm not sure I agree with that. Had one of the two been forced into bankruptsy, it would probably have ended up in receivership, as most bankrupt railroads did back then. That would have given that railroad a leg up on the other road...which probably would have ended up in bankruptsy. At that point, both PRR and NYC would have been looking for a merger, or government help.
I'm not sure I agree with that. Had one of the two been forced into bankruptsy, it would probably have ended up in receivership, as most bankrupt railroads did back then. That would have given that railroad a leg up on the other road...which probably would have ended up in bankruptsy. At that point, both PRR and NYC would have been looking for a merger, or government help.
Stealing a line from the great Fred Frailey: "Squish-squish-squish"...
Convicted One Murphy Siding I'm not sure I agree with that. Had one of the two been forced into bankruptsy, it would probably have ended up in receivership, as most bankrupt railroads did back then. That would have given that railroad a leg up on the other road...which probably would have ended up in bankruptsy. At that point, both PRR and NYC would have been looking for a merger, or government help. Stealing a line from the great Fred Frailey: "Squish-squish-squish"...
Paul_D_North_JrAnd what is the CEO of Unied Airlines earning - excuse me, being paid -
Johnny
ICLand [snipped] As was pointed out on this thread earlier, very rarely has any Class I even reached "revenue adequacy" under 30 years of deregulation and after extensive mergers. And I see that touted here as evidence of "outstanding success." Others might argue, validly I think, that failure to achieve even "adequacy" represents at least some level of failure, hardly evidence of success. I guess people have different standards. [snip] Why is this a sore spot? Well, it wasn't until I thought about it. But, a friend of mine, a retired Chief Dispatcher, was reminiscing a couple of months ago. His office in 1975 was two blocks from mine. Three years later, it was 350 miles away. By 1985, it was 2,000+ miles away. And he related, "every time you got a chance to catch your breath and put your feet up, it meant that the Company needed to add another territory to your jurisdiction. So, there was this relentless pressure, and every time there was a merger, a new set of geniuses, who had never done this before, came in and upset the apple cart in the name of efficiency. And they removed sidings, closed down yards, consolidated dispatchers, and couldn't figure out why things didn't work as well as they did before. We lost fluidity, had tired crews, tired dispatchers, nobody was happy. They announced that it wasn't their job to make anyone happy. Considering that costs went up, and returns went down, they succeeded." [emphasis added - PDN]
[snip]
Why is this a sore spot? Well, it wasn't until I thought about it. But, a friend of mine, a retired Chief Dispatcher, was reminiscing a couple of months ago. His office in 1975 was two blocks from mine. Three years later, it was 350 miles away. By 1985, it was 2,000+ miles away. And he related, "every time you got a chance to catch your breath and put your feet up, it meant that the Company needed to add another territory to your jurisdiction. So, there was this relentless pressure, and every time there was a merger, a new set of geniuses, who had never done this before, came in and upset the apple cart in the name of efficiency. And they removed sidings, closed down yards, consolidated dispatchers, and couldn't figure out why things didn't work as well as they did before. We lost fluidity, had tired crews, tired dispatchers, nobody was happy. They announced that it wasn't their job to make anyone happy. Considering that costs went up, and returns went down, they succeeded." [emphasis added - PDN]
I meant to note this before, but it got set aside in the press of other matters . . . that day job thing, you know . . .
Not sure how significant it is in this context, but I believe NS is the only post-merger Class I that has not consolidated its dispatching into One Central Facility, as all the others have done (that info courtesy of oltmannd/ Don in another thread here about a year ago). Although, I do see indications of frequent shuffling of the segments of NS territory covered by each division/ DS. I don't know how or whether a direct correlation can be traced from this unique characteristic to NS profitability, but there it is, at least to keep an eye on in the future.
And I still like the contrarian thesis advanced above in this thread by ICLand - very briefly, that railroad mergers are usually not all they're cracked up to be. If nothing else, keeping that thought in mind ought to help us ask some very tough questions the next time such a mega-merger is proposed.
Paul_D_North_Jrbut I believe NS is the only post-merger Class I that has not consolidated its dispatching into One Central Facility,
oltmannd NS is also in the process of converting their dispatching systems to a common platform which means any desk anywhere could dispatch any territory anywhere.
Deggestyoltmannd NS is also in the process of converting their dispatching systems to a common platform which means any desk anywhere could dispatch any territory anywhere.Does this mean that every dispatcher will know all the ups and downs and ins and outs of every line and will move all the trains with dispatch?
Paul_D_North_Jr [snip] Instead, my point is that your old boss and his successors have likely done a better job at preserving their business and bringing money back to the stockholders than UA [United Airlines]'s - you've likely seen or heard Warren Buffet's line about the aggregate unprofitablity of the airline business since the Wright Brothers - so I don't begrudge the railroad CEO his pay as long as he performs, notwithstanding the disparity with the rank-and-file. [snip]
Here's the Warren Buffett quote that I was referring to, from Great Aviation Quotes at - http://www.skygod.com/quotes/airline.html near the top:
"As of 1992, in fact—though the picture would have improved since then—the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero."
— Warren Buffett, billionaire investor, interview 1999
But since that assertion by Buffett in 1999 to date, I suspect that the airline profit picture has been mostly seriously negative, such that the net result now is still less than zero.
And also - same source and location:
"The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."
— Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008
Anybody else see at least a superficial similarity to the railroad business at times in that 1st sentence ?
DeggestyDoes this mean that every dispatcher will know all the ups and downs and ins and outs of every line and will move all the trains with dispatch?
I doubt it. Some of the efficiencies the RRs have achieved thru mergers, automation and revision of work rules are squandered in other ways, such as centralized dispatching.
I remember an article by Doyle McCormack not that long ago, in either TRAINS or CLASSIC TRAINS, mentioning that his dispatcher father on the NKP had to requalify EVERY YEAR by making a run over his 100-mile district.
Now I regularly hear dispatching horror stories from my engineer friend on the BNSF, whose 30,000-mile RR is all dispatched from Texas. He says his dispatchers constantly make stupid calls because they have never seen the territory and cannot match their trains to the topography. He also gets deadheaded 200 miles a lot ... then deadheaded home again.
BNSF may be making 9-10 percent return these days, but how much money are they leaving on the table?
oltmanndPaul_D_North_Jrbut I believe NS is the only post-merger Class I that has not consolidated its dispatching into One Central Facility,Yes, but CSX is in the process of "unconsolidating". NS regularly examines how many desks are needed and what territory they should control, so you should see some shuffling from time to time. NS is also in the process of converting their dispatching systems to a common platform which means any desk anywhere could dispatch any territory anywhere.
This is important that if a dispatch desk(s) goes down for whatever reason other desks can take up some slack but of course will not operate as efficiently as the regular desk. CSX has in the past had Jacksonville center go down and almost the whole system went to a crawl.
During one hurricane passage over JAX passenger trains (MARC<VRE, AMTRAK among others were stopped. Too many eggs in the JAX basket. So the reason CSX is unconsolidating. Ex: Now an Atlanta terminal CSX dispatcher that works with the NS dispatcher.
I believe BNSF and UP each did something similar - set-up a local dispatching operation - in the Houston area to jointly solve the late 1990's "melt-down" there after the SP-UP merger. Ed Blysard has mentioned it once or twice here in passing - perhaps he or someone else familiar with that area can add more details.
Murphy Siding Maybe you could steal an explanation from him as well? What does that mean?
Maybe you could steal an explanation from him as well? What does that mean?
Well, the way he used it was coupled with the word "vague", and was postured as the anti-thesis to the concept of "tangible" as it pertains to any real benefit that the public derives from public fund investment in private industry
Paul_D_North_Jr I believe BNSF and UP each did something similar - set-up a local dispatching operation - in the Houston area to jointly solve the late 1990's "melt-down" there after the SP-UP merger. Ed Blysard has mentioned it once or twice here in passing - perhaps he or someone else familiar with that area can add more details. - Paul North.
Your thinking of the joint dispatching center in Spring, Texas, a suburban town just north of Houston .The Spring Joint Dispatch Center, housed in the old MoPac dispatch center in Lloyd yard
Staffed jointly by BNSF and UP dispatchers, the concept has worked wonders.
With more railroad track inside three counties, Harris, Montgomery and Ft. Bend than exist in a lot of states, getting trains in and out of here back in the days required at least one crew just to get a train out of yard onto the mains, often hogging out before ever reaching the city limits.
With the UP meltdown it became apparent that having each railroad trying to dispatch not only their own trains but handling trains from other Class 1s over trackage rights would never work.
UP guys would hold up the BNSF and KCS just to let a yard crew run a transfer, not out of meanness but because they were paid to keep UP fluid, not BNSF....and each train that died out on any main created a ripple effect that wrecked everything.
Part of the solution was to create the Spring Dispatching center.
It has 3 "desks" ..TD1 (train dispatcher 1) routes all main line traffic into the metroplex, TD2 handles all the outbound, and TD3 takes care of all the traffic inside the metroplex, yard to yard moves, yard transfers, clearance or headroom moves out of yard limits into CTC, things like that.
The concept is built around the agreement that no dispatcher will give preference to one carrier over another, and it matter not which dispatcher is handling whose train, which means you find a BNSF dispatcher expediting a UP train across the city to meet a crew's time window, or a UP dispatcher holding a UP yard to yard transfer in a siding to allow a BNSF grain train onto the PTRA in time to get the power turned back to South yard..
With all the dispatchers running all trains as soon as they are ready to move, things have become a lot more fluid here.
It doesn't matter whose train it is, or whose track it runs on, the idea is to find the most efficient route for all trains to their destinations.
Reading that last sentence made me realize something...right after the UP meltdown, it was quite common for a train to leave a yard, run up to the first or second signal, get a red board, and hog out right there with their rear cars still in the yard they just left.
I saw many a Class 1 outbound crew get on a train at the PTRA North yard, and hog out with out ever turning a wheel.
Just sit there for 12 hours.
Today, waiting more then 20 minutes for a signal is rare, most of the time your lined up all the way out of town.
23 17 46 11
Thanks, Ed, for jumping in and providing those details, as well as the clear and comprehensive explanations of the "before", the "after", and the "fix". I've not seen that in print anyplace before, and coming from you - a guy 'on the ground' - it has huge credibility with me. I know that operation is perhaps "the exception that proves the rule" as Railway Man sometimes said - but it also illustrates the real-world weaknesses in the 'One Dispatching Center' theory and application.
And to the point of this thread and ICLand's comment, that mergers don't always - and maybe hardly ever - provide the hoped-for efficiencies. This is undoubtedly one outcome and method of reaching it that no one in the SP-UP or BN-SF mergers ever anticipated. As the guy who wrote Rich Man, Poor Man said, something to the effect of "Pay attention to what Life is trying to teach you".
And isn;t it just amazing what can be done when the petty turf wars and empires are set aside, and people are united to perform a well-defined mission . . . even better than when they tried to protect their own employer. "What goes around comes around . . . "
Now I'd like to someday meet the tough, single-minded, hard-nosed, thick-skinned SOB who had to actually set-up and implement the Spring Dispatch Center and get all those different people working together over 3 'tricks' and 7 days a week, and persuade and perhaps even overrule all the Vice Presidents and Superintendents, etc. . . .
Thanks again, Ed.
Thanks, Ed, for this information. I remember reading about the meltdown, but I do not recall any detail on this part of the solution of the problem.
Now, for a question about the operation.
"Part of the solution was to create the Spring Dispatching center. It has 3 "desks" ..TD1 (train dispatcher 1) routes all main line traffic into the metroplex, TD2 handles all the outbound, and TD3 takes care of all the traffic inside the metroplex, yard to yard moves, yard transfers, clearance or headroom moves out of yard limits into CTC, things like that."
Three desks x three tricks a day x seven days a week = 63 tricks a week–and no DS works more than five tricks a week. Nine DS’s work the same trick each day they work (45 tricks); three DS’s each work five tricks, swinging from time slot to time slot (I knew an agent-operator in Brookhaven, Miss., who had four days off every week while he was working 40 hours–he worked 7-3 on Saturdays and Sundays, had a day off until 3:00 Monday afternoon, worked 3-11 Mondays and Tuesdays, had a day off until 11:00 Wednesday night, worked 11-7 Wednesday night-Thursday morning, and had two days off until 7:00 Saturday morning–and another operator worked that station 11-7 Thursday night-Friday morning; I do not know where this fifth man worked the other four tricks in his work week, perhaps in McComb or in four other continuous stations). Following this pattern, you have twelve DS’s covering all but three tricks (12 x 5 =60), and another DS fills the week out, working three tricks. Does this last DS cover for vacations and sick time; are there other jobs nearby that he covers?
It is unusual for two companies to cooperate in such a manner–but these two companies realized that it was either cooperation or death.
I still wonder as to why Amtrak #2 was held for about three hours a little bit east of Houston on this past 8 June (I could not tell just where it was); the conductor knew nothing except that there was a red signal.
Johnny,
Each "desk" is actually several dispatchers...like ATCs there is a bunch of them in there at any given time with a division of responsibilities, although I am not privy to how they divided it all up.
I do know that on certain days when we call for a signal to say, cross into CTC at 5A and head to Pasadena, or call for the Market Street signal to get headroom out of the yard we get the same person, and their shifts seem to end right about 3 pm.
If your in Pasadena and trying to get to Strang, you get someone else....but they all respond to "TD3 Spring", so my guess is the Metroplex is divided into sections handled by different folks.
There is a young lady with a terribly sexy voice who works Saturday through Wednesday, and she seems to be there from around 6 am to 3pm, and has this place down pat.
If you call her on the radio, she is all business, but we like to call her on the phone first, because we don't use or run in CTC often, and because it has to be precisely word for word repeat, we call her and get her to walk us through it while we write it down.
Things like breech protection and such, track and time, things like that are not normally used on the PTRA as we are "dark territory" and run under RTC...most of the time when we call her on the phone she will tell us she was expecting our call and takes all the time we need to make sure we have it right.
I don't know how exactly the chain of command runs, but I do know both Ft. Worth and Omaha can request a train be expedited in and out of Houston.
We build a diesel fuel train for BNSF every day, the empty inbound hits our yard, the crew swaps out and gets on the outbound load with power BNSF has left here just for this train and they are gone as soon as they call TD3.
UP has a pet coke train from Sweeny that has dedicated power sets, they pull in, the UP crew gets off the loaded inbound and gets on the empty and they are gone just as fast.
When we run the windmill trains up out of the docks and hand them of to the class 1 crews, its kinda neat to watch.
As soon as they can, the dispatchers will line these trains up all the out of the city...and these things must be worth a pretty penny to the Class 1, because every switch we pass over in our own yards are locked and spiked for the movement, and nothing meets these trains inside the Metroplex...pretty cool to look down the Belt sub and watch all those signals pop green.
Ed, it's really good to see that your crew and that dispatcher both firmly believe in Safety First, especially since you would be operating under rules that are not part of your everyday routine.
The safety aspect is first and foremost, but there is a secondary consideration, you have to repeat it back word for word, and you only get three tries per crew!
Screw it up, and the FRA says all of you get a 90 day vacation!
We listen in a lot because we share that channel often, and sometimes the dispatchers will allow a little fudging, but it depends...from what I can tell, as long as the train crew gets it close enough for the DS to know they have a clear and concise understanding of what they are allowed to do, it usually gets by...but if a crew gets too sloppy, they want it word for word, number for number.
I prefer to get it right the first time simply to minimize any chance of a problem cropping up, plus writing it down gives me a hard copy for later reference, or proof that what we did is what we were told to....even though that channel is recorded, having a paper copy can't hurt.
Murphy Siding Convicted One: Murphy Siding: I'm not sure I agree with that. Had one of the two been forced into bankruptsy, it would probably have ended up in receivership, as most bankrupt railroads did back then. That would have given that railroad a leg up on the other road...which probably would have ended up in bankruptsy. At that point, both PRR and NYC would have been looking for a merger, or government help. Stealing a line from the great Fred Frailey: "Squish-squish-squish"... Maybe you could steal an explanation from him as well? What does that mean?
Murphy Siding: I'm not sure I agree with that. Had one of the two been forced into bankruptsy, it would probably have ended up in receivership, as most bankrupt railroads did back then. That would have given that railroad a leg up on the other road...which probably would have ended up in bankruptsy. At that point, both PRR and NYC would have been looking for a merger, or government help. Stealing a line from the great Fred Frailey: "Squish-squish-squish"...
Murphy Siding: I'm not sure I agree with that. Had one of the two been forced into bankruptsy, it would probably have ended up in receivership, as most bankrupt railroads did back then. That would have given that railroad a leg up on the other road...which probably would have ended up in bankruptsy. At that point, both PRR and NYC would have been looking for a merger, or government help.
Pardon me for resurrecting a thread from 2 months ago - and some now deeply-buried posts within it - but you'll see why in a moment:
I believe that later on we clarified that Frailey's "squish" referred to the 'soft' and blurry line between the public funding of those railroad capital improvement projects or operations with a well-defined and legitimate public interest on the one hand, and those where that link is a whole lot more tenuous and nebulous on the other hand - perhaps to the point where the public interest is minimal or remote, and the funding seems to be primarily benefitting the railroad (only). At least, that's how I understood Fred's column.
Well, last night during organizing and sorting out my Trains collection after our recent move, I ran across a column by former Trains editor Mark W. Hemphill in an early 2005 issue* on the exact same topic. His main point was that the railroads can either accept public funding whole-heartedly and all that comes with it, or not - there's no middle ground, such as a tax or fee on rail operations that would then be used as government-managed reinvestment. His secondary point was that any such tax scheme must inherently be less efficient and effective than the railroads managing such reinvestment by themselves, as they see fit. It's good reading and to the point, so I thought it was worth mentioning in connection with the concerns and debate over Fred Frailey's "squish".
(*I don't have that issue with me at the moment, and forget the details - but I'll post the citation tonight, for those of you who might care.)
EDIT: January 2005, Vol. 65 No. 1, "Subsidies for All or Subsidies for None - If You Think Railroads Are Worth Having, You Must Choose One of the Above", pp. 20-21.
Paul_D_North_Jr Murphy Siding: Convicted One: Well, last night during organizing and sorting out my Trains collection after our recent move, I ran across a column by former Trains editor Mark W. Hemphill in an early 2005 issue* on the exact same topic. His main point was that the railroads can either accept public funding whole-heartedly and all that comes with it, or not - there's no middle ground, such as a tax or fee on rail operations that would then be used as government-managed reinvestment. His secondary point was that any such tax scheme must inherently be less efficient and effective than the railroads managing such reinvestment by themselves, as they see fit. It's good reading and to the point, so I thought it was worth mentioning in connection with the concerns and debate over Fred Frailey's "squish". EDIT: January 2005, Vol. 65 No. 1, "Subsidies for All or Subsidies for None - If You Think Railroads Are Worth Having, You Must Choose One of the Above", pp. 20-21. - Paul North.
Murphy Siding: Convicted One: Well, last night during organizing and sorting out my Trains collection after our recent move, I ran across a column by former Trains editor Mark W. Hemphill in an early 2005 issue* on the exact same topic. His main point was that the railroads can either accept public funding whole-heartedly and all that comes with it, or not - there's no middle ground, such as a tax or fee on rail operations that would then be used as government-managed reinvestment. His secondary point was that any such tax scheme must inherently be less efficient and effective than the railroads managing such reinvestment by themselves, as they see fit. It's good reading and to the point, so I thought it was worth mentioning in connection with the concerns and debate over Fred Frailey's "squish".
Murphy Siding: Convicted One:
But can we look at the government own RR ROWs. 2 quick examples the Cincinnati owned NS route from Cincinnati to Chattanooga and the NC DOT owned Charlotte - Morehead City route? Both routes have had the user fees reinvested with outstanding results.
1. The Rat-Hole thru very difficult terrain is now a 1st class operation with the restricted tunnels gone and many cuts and bridges reducing grades.
2. NC Dot has started reinvesting the user fees (but also putting in funds originally given to state over the years into the general fund). Results? curve mitigation and grade crossing elimination.
I am sure there are other examples.
I believe the management of the "Rat Hole" route - the Cincinnati, New Orleans & Texas Pacific, or CNO&TP - by the City of Cincinnati is pretty passive, and at least back then was essentially limited to merely approving what the railroad wanted to do and put up the money for.
The North Carolina State Railroad is a different story. I attended a 1/2-hour presentation on the Norfolk Southern - NSDOT partnership at the AREMA Conference in Orlando in August - the NS presenter was Brad Kircher (who used to be an Asst. Division Engineer on the Middle Division between Harrisburg and Altoona, PA). That's a much more collaborative endeavor with the 2 entities cooperating on the planning and the funding of the improvements. While some people are concerned over the government's 'came'l poking its nose into the railroad's 'tent', these people and organizations seem to have found a way to make it work at the practical and operating level - perhaps because they're small enough to know each other on a personal basis, and also "off the radar screen" of national political dogma. Also, NCDOT's Rail Division gets something considerable back for its money - use of the tracks for its passenger trains, at higher speeds/ shorter transit times than before, plus less grae crossings, etc. - so that doesn't seem to be quite either the pure subsidy that was the subject of Mr. Hemphill's essay, or the kind of "squish" that Mr. Frailey is concerned about.
Mr. Hemphill's 2005 essay also mentioned what he thought was a legitimate use of public money that wasn't a subsidy - the traditional "terminal district" with joint access, reduced grade crossings, rationalization of duplicate tracks, etc. So not all public funding involvement needs to be inherently evil.
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