Enron Type Mentality in Today's Railroading

[slotracer]

So much to discuss here, I'll throw out some insights derived from my experience in managemant and marketing at Uncle Pete. The things that go on inside would amaze you, I'll just throw out a few tidbits.

I somewhat have a hard time buying the BS that the railroads are revenue inadequate. I understand the profit margins they make on traffic and believe me, the margin on mediocre intermodal traffic, exceeds product lines we consider high profit in competitive industry. The railroads cry poor mouth, then a month later publi***hat they made record revenues and profits, it's enough to make one laugh....or drink.

One of the problems in the railroad industry is that it is mature and has somewhat limited growth potential. Some new bulk markets open up as others fade away and intermodal....the low profit margin buisness line is and will be in a great growth stage, but overall the railroad can' show growth rates that are attractive to wall street investment vs other hotter industries.

The railroads are more and more signaling each other price wise with increased use of public pricing and an unwilingness to transload or bid aggressively on traffic the competitor has. The realize that in many lanes, they have just one competitor and are tired of gaining 5% volume one year, then loosing 5% the next....just shifting traffic back and forth and constantly diminishing thier contribution. In my companies markets, we have "healthy competiton" where a number of competing products and competing producers are hungry, the customer gets the best value/service for the best price.

Tge railroads are still in the mindset that cost cutting is the saving grace. They realize there is limited opportunity for growth through mergers any longer and are not willing to aggresively grow business by getting it from a competitor, thus the cut cost beyonfd reason in many cases and either jack rates up as high as they can where they can, or they nickel and dime you with fees and charges.

UP, liike most other roads has cut costs by reducing the system (Track, locomotives, yards, crews, train starts etc) to the absolute minimum......they have a stellar service design department that makes a very complex beast run on the absolute minimum of assets. This is fine for normal demand and volume, but the economy has come back better and faster than most everyone anticipated and the surge capacity just is not there. UP also milked the lower labor costs obtained through a very large retirement exodus a bit over a year ago, and as they always do, tried to handle business surges with what they had, trying to make higher revenue with the same costs, and obviously they have not learned. It had to reach serious service difficulties and angry customers they could no longer BS with presentations and useless measurements to get them to hire crews and make other investments to handle the volume.

Again as they always do, they add assets too late and the shipping public suffers. The probelm with crews is that it takes a long spell to hire, train and qualify them so the service failings go on.

It's tough to oust entrenched RR management. At UP, almost everyone there refers to Davidson as a switchman in a suit. He was and probably still is not liked my most at the UP and the my way or the highway, and do it or else attitude is something that aids in getting UP in trouble, it was key in the meltdown 6 years ago. There was an attempted Coup to get Davidson out in the UP about 99 and the individuals involved were removed from the company. Customers warned UP up and down, that they bestter not have the kind of service issues with the SP merger that they experienced with the CNW debacle. Management assured them it would not repeat....it didn't...the SP merger meltdown was WORSE.

Railroads have always touted the benefits of single line service with the mega mergers, but in reality customers are willing to exchange a couple days cycle time and maybe an extra divison on a rate to have competitive options. The problem is the railroads cut deals to get shipper support for mergers or at least buy off shippers who protest to become nuetral. I realize that "bribing" support of nuetrality is illegal, but I saw loads of it when I worked with SP and UP after. It is very hard to prove, we were under instruction during the merger process to compete aggresively until the merger was approved, so who could say after the fact that a dal that was cut was not an aggressive move to compete, or was it a deal to buy support for the merger ?
The railroads are top notch in dividing the shipping public up, pitting factions against each other, nutralizing the effectiveness of shipper organizations and getting their way.

I think a large part of the problem si the rails have been allowed to merge too large, they are too hard to manage and they are run by wall street. Every year we went through a bottoms up forcast and reported to upper management what we felt our business lines were capable of performing for the comming year. They made their own promises to Wall street and told us what our budget lines really would be and they were a ridiculous stretch, for the most part, not a challenging goal but either a demoralizing outraegous stretch, or something that was virtually impossible.

And to top it all off, when they are behind in their financial performance in the begining of the third quarter UP used to (maybe still does) cut operating costs. This ussueally happened in an August to Sept timeframe, right when all your intermodal, coal, lumber and harvest traffic runs heavy. They would do it year after year and never learn from it. What's more they would deny doing it, even though it was apparent to shippers. We in marketing who knew operating personel, the the truth.

Want a funny story or two about irrational railroad decison making based on restrictive budgets and insane cost containment motives?

1. A piece of Ag business competitve to a class one by direct access and a secoond class one by reciprocal switch access comes up. The buisness team for the carrier with direct access gets shot down on aquiring the new piece of business (60 carloads every 3rd day mini unit train business) as the operating department locally does not have it in their budget to switch the extra carloads in the originating terminal. Class one #2 bids on the business and is awarded same. The direct access carrier that walked away, still has to handle all teh cars on the local basis (the terminal who claimed it was not in theri budget) and the second class one gets all the lucrative line haul revenue from the move.

2. Operating budget cuts are forced on operating units in the 3rd quarter. One unit has no where to cut, so they show a reduction by reducing a switch job from two large engines to one small one and go from 7 day a week service to 5. On paper they report a theoretical reduction. In reality, the switch job that handles 35-40 heavy tank cars a day cannot manage the volume, so the local runs on 3 shifts instead of one, actually costing the carrier more in crew starts, fuel usage and overtime.

3. Abusiness manager turns in a reasonable forcast for the next year on a line of metals, it shows about 5% in growth, mostly from rate increases and some market shifts balanced with some mileage/linehaul increases. Executive comes back and demands a 12% increase on the budget. Market manager responds that the customers melters are running at nearly 100% of capacity and the traffic is captive to the railroad and pretty much 100% moves rial. Market manager asks executive if the customer should build additional smelters just so the railroad can make forcast.

[tree68]

Some railroad reading is in order. Pay particular attention to the Goulds, Fisks, and Vanderbilts.

Financial hijinks are hardly new to the railroad industry. Fortunes have been won and lost. Many a "little guy" lost a bunch of money in the early days because he invested in the growth industry of the day - railroads. Everyone wanted to build one, which ended up precipitating the huge amount of excess plant that actually did exist at one time.

Financial considerations ("Wall Street") have always driven the railroads. Blame today's "right now" culture for the instant ROI mindset.

As for "employee owned," I think we've discussed before who "owns" the railroads - you might be surprised to discover that a significant number of the stockholders aren't even US residents.... I don't think the employees have enough money to buy those folks out. And they are in in for the money. If they RR starts hemhoraging money, they'll bail...

[Anonymous]

QUOTE: Originally posted by rangerjim94

It is still possible that hijinks with the books are still going on at at least some railroads and they have not yet got caught like Penn Central was....
....Railroad employees can best empower themselves by buying enough stock in their companies.

Not sure that you are offering sound investing advice here. It was not service reductions that brought down Enron, it was illegal bookkeeping practices that covered up the looting of the company by company execs. You're title implies you have information concerning criminal action by executives in some railroad companies similar to that which brought down Enron. You might recall, Enron employees were also encouraged to purchase their stock, and as a result many lost their jobs, savings and retirement as a result.

I'd be interested in seeing some of the evidence of the illegal activities.

Wayne

[Anonymous]

It seems to me that 34 years after the collapse of the Penn Central Railroad, along with the Lehigh Valley, today's top railroad executives still don't get the lessons still to be learned from the collapse of Penn Central. Just look at the service meltdowns that Union Pacific is once again beginning to experience. That railroad's top brass does not seem to have learned the lesson from what happened when they digested Southern Pacific, a largely single track railroad into the Union Pacific. Result was a service meltdown that made those suffered by Penn Central during its first year of operation, seem minor by comparison. Well, UP wasn't losing entire trains or individual carloads of freight throughout its system, but shippers were plenty mad and some still are. UP, as well as the other railroads have cut staffing so much that they have more trains to run than they have crews for.. It seems to me that railroading is a profession for railroaders who KNOW THE BUSINESS, not some Wall STreet types or fresh MBAs who think they know it all. It is still possible that hijinks with the books are still going on at at least some railroads and they have not yet got caught like Penn Central was. It is time for the railroads to be put back in the hands of professional railroaders who know both the operational as well as the business aspects of the profession, something today's railroad executives seem to be missing, with a few exceptions. The Bottom Line should not be the only thing that matters, the safety and reliability of the service, the well being of the crews, proper maintenance all should be part of the equation. Too much corner cutting as now seems to be done has a way of coming up and biting you on your you know what, usually in the form of a catastrophic accident. Railroad employees can best empower themselves by buying enough stock in their companies and giving the Wall sTreeters now in charge the boot and replace them with professional railroaders who know the business. Then and only then can the meltdowns at Union Pacific that are affecting other railroads be brought to an end. Part of it is the result of too much track being torn up. Also lines that have been reduced from double to single track should never have been single tracked to begin with, given the growing demands on the rail system. There are some lines from which track is now gone that should be restored to service so that the affected railroad has alternative routes to fall back on in case a primary route is blocked by a derailment. The goal should be to keep the passengers and freight moving rather than cutting corners and mileage that may be needed later.