Analyst Sees Improved Rail Profits

[Anonymous]

S&P analyst sees rail profitability "closer to acceptable"

Standard & Poor’s transportation analyst Anthony West is now forecasting a 4.5% increase in railroad ton-mile volume in 2004, a 2.7% rise in rates, and a 22% increase in rail profits. In his latest report, posted Aug. 30, West noted that while earnings continue to lag the cost of capital, "the railroad industry is moving closer to acceptable profitability as its cost of invested capital has fallen to 10%, from 17% in 1981."

From Railway Age Site

[Junctionfan]

I wonder if that is what Hunter Harrison is doing. He has a large amount of territory but only runs about 400 trains a day. This means he is not at capacity. Answer-get rid of workers, stop a few trains, get rid of a few customers, download customers on to shortlines so they switch for you, abandon some track here and their, get rid of property like their workshops and that after all that, CN is at capacity. Wouldn't it have been more profitable to leave everything alone and build up from existing infrastructure, operate more trains by barrel sraping for customers until you reach capacity? Wouldn't it mean more money form with a higher operation at capacity than a lower operation at capacity? A good example is doesn't a class 2 railroad at capacity make nothing compared to a class 1. Does BNSF or UP make a bigger profit than CN?

[Junctionfan]

I think they would care if he showed up at a board meeting wearing a grass shirt and coconuts. They would think he was cocoNUTS.

[gabe]

I understand the paradigm Mark refers to in his analysis of excess capacity and understand how it works with regard to Class 1s.

However, I often contemplate whether this paradigm applies to regional and short line railways: how the Class-1s' achievement of this status will affect regional and short line operation, and whether the achievement of this paradigm will increase or decrease the number and viability of regional railroads (will Class 1s be more likely to buy regional and short line railways in the future or will they be more likely to spin more off, or will feeder lines disapear all together).

Because the capacity game is so different for regional railways, does this mean that short line and regional railways will never be adequately profitable? Or, because short line and regional railways don't work in a vacume, will short line and regional railways be able to use the narrow capacity of Class 1s to justify higher rates? Or, will the excess capacity of Class 1's force them to turn away short line and regional feeder traffic?

Then, add the State's interest in maintaining the viability of short line/regionals, I think the calculations become interesting.

Just a thought,

Gabe

[Junctionfan]

I was thinking about profit margin. You have to understand that my thinking is based on logic so if a railroad isn't making enough profit than I ask the following questions.

1/ Is there any lines that are not pulling their weight in accumulating the necessary revenue to pay for its upkeep and still make an adequete profit?

2/ Could question 1 be solved by finding more customers along the line? and/or is there any bridge operation demands that could be added to the line? and/or is there any other railroads or rail operations that would like to lease time on the rails like a landlord wanting more tenants. To expand on the landlord thing-isn't it more profitable for a landlord to try to find as many tenants to fill a 12 story building as possible?(capacity). I know it is different business but you doesn't it work the physical structuring for profit similar?

3/ Is my operation scheduling not adequite enough for potential customers to use? In other words, do customers get fed up because it takes to long to load the train or get it started; do I have enough workers to operate the kind of service that customers demand? Do I operate enough trains? Do I operate too many trains that are so short that they could be merged with another? Are my trains too long thus decreasing the speed of the train which can occupy multiple blocks also thus making it difficult for dispatch to "stack" trains therefore slowing down the system?

4/ Is management doing their jobs right? Are all the departments doing their job right? Are they being rude to potential customers who would like to use rail? Is the board of directors being unreasonable in forecast demands?

5/ Can the government do some funding? Is there anyway the government can help them? Since the railroad is a necesity in improving the economy of the people and the government represents the people, why shouldn't the government help the railroads?

6/ Are they charging alot of money but not supplying alot of service? I they charging too little and giving little service? What is going on with the service vs rates?

7/ What is the motives of doing the things that decision makers do? Are their idea's short sided and temperary or is there a more envisioned long-term solution to be gained? What is more important to investors; short term growth or long term? Would they rather do alittle o.k in the first 3 quarters and than do 3 or more times better in the last quarter and thus allowing a larger allowance to increase a reasonable forecast or would they rather do well in all 3 quarters and get less than 3 times better in the last quarter an thus not allowing a decent increase in forecast without doing something to decrease the workforce through layoffs or buyout for example?

Thease are the questions that plague me in attempting to figure out what seems to be illogical and unnecessary. I am not a businessman nor am I a manager at a railroad so I find it particularly irratating when I am chastised because things don't sound right to me. I am trying to be a good sport but for God sakes, I am learning; a little more patience and understanding would be appreciated.

[Anonymous]

I'm with you, Junctionfan, I don't understand it at all, and I have over 40 years of working in and around businesses of various kinds.

In my view, what most of the railroads are doing is the equivalent of a hotel demolishing a wing of their building because their occupancy rate has fallen off a little. What then happens is that it falls even more because people who call and can't get reservations don't call again. So they demolish another wing. And on and on. Does that scenario sound familiar?

This is not unique to railroads though. It is common knowledge that the management and stockholders, especially in the US, have a fixation on the short-term profits which does not bode well for the long-term health of the enterprise.

[Junctionfan]

Mr. Hemphill; I hope I'm not repeating myself but would you recommend if you were on a government inquiry that government pass a bill protecting the railroads from being forced by investors into making forecast promises that is impossible to keep. Is there anyways the true railfan managers can be protected from the board of directors? I am almost wondering and I stress almost, that maybe the railroad management should form a union or guild protecting them from greedy investers somehow. Wall Street vs the railroad though is a little much. It brings back the reason why it might be advisable for the government to own at least 50% +1 of the shares; not so the government can fiddle and fart around and mismanage like what happened with CN and Conrail, but so that if the CEOs need to take a stand against the investors in order to protect the company, the government/ main investor, would back them up and thus for that reason the CEOs wouldn't be eligable for dismissal for their non-compliance by the investor butt-smoching board of directors.

[Junctionfan]

Just to add to this; if the government owns all those share from the railroads and it does well on the stock market because the rules have been implimented not allowing the shares to go down based on non-compliance of unrealistic expectations; would't the government make alot of money that they could reduce taxes and afford to?
Just a thought.

[Anonymous]

Mark-

You are incredibly polite and tolerant. Glad I'm not...

JF-

Duuuuuuuuuuuuuuuuuuuuuuuude I WANT some of whatever it is you are smoking...

This is reminding me of the 60s all over again, like, you know....

If you decide to change all the rules anything is possible, just remember, there are always CONSEQUENCES...and they are very unforeseeable...

I do agree that you'll have to figure out what system you are living under, 'cause reality, it aint.

There is a BIG difference between trying to learn your way in the real railroad world and trying to arbitrarily alter the rules of how the corporate world works. You could work a lifetime and make nary a dent there...

LC

[edblysard]

Dude,
What part of "railroads are a for profit business" did you miss?
Board of directors and Wall Street are not the enemy, we work for them, just like the railroad managers do...projecting future business volumes and cost is what they are hired to do.

What do you think, when there is a upward flow of traffic, you just head out and tripple track the transcon?

Unless you can justify the cost to the board, it wont happen, and rightly so...
its their, and the investors money your spending.

Railroads are not public utilities, quit expecting them to act like one!

That said, I can let you in on this, I work for a "state owned" railroad, actually, a joint venture between BNSF, UP, KCS and the City of Houston, and Harris county.
We are a netural carrier, we show no preference to any one carrier's cars, or any one customer.
We service 450 customers along the Houston Ship Channel,

Harris county owns the plant and buildings, the Navagation District ownes the right of way, the City owns the locomotives, and they, along with the Class 1s provide our operating budget.
A board of directors, one each from all the enties, head the railroad, decides on improvements, hireing volume, all the administrative duties you expect a board to handle, which leaves our superintendent free to run the railroad.

We have been around for 75 years, at one time with over 18 different Class 1 roads bringing us cars.

So you'd think we would have somewhat of a free ride, after all, its "state money" we are spending...
Not a ice cubes chance in .....
We have to meet, and return, our operating budget to the class ones and the City/County, before we can decide to spend one cent oursleves.

Makes for a lean, mean switching machine.
Profit driven, you bet, just the way it has to be, otherwise, you just running trains for the pleasure of watching them move.
Run at capacity?
Have to, otherwise the Navagation District willl decide to lease the land to a business that makes them profit, or at least a even return on the property.

Unless you are the sole owner of a railroad, you stuck doing business pretty much the way Mark and LC explained.

Now, if you owned the whole shooting match, all by your lonesome, then run all, or none of the trains you wish, its your money.

On the other hand, I want the board of directors at UP and BNSF to poke their nose into the business, I invested a lot in both of those roads, and want to know how my money is spent.
Projecting future growth, or lack of growth, allows the board to make decisions on what to invest in, and what not to.

Just because today, UP has more cars on their system that ever before, dosnt mean that it cant all change in a month...
this business can be that fluid, that quick.

We are entering the season where we will have grain trains, behind grain trains, on top of grain trains, with a few grain trains mixed in there too...
Because sales of grain were completed a year or two ago, and the Wall Street types did good math, we are ready, with out the Wall Street guys, we would have no business to be ready for...

They help drive our business, we base our purchases and projected cost on what they did, last year and the year before.

No Wall Steet, no investors, no board of directors and no projected costs = no railroad....

What you seem to be suggesting is a nationalized railroad....dosnt seem to work all that hot in the UK...

Ed

[Junctionfan]

A simple "no that wouldn't be a good idea" would have done it. I can't believe I am getting this just because I am brainstorming. I am rather disappointed.

[edblysard]

Sorry,
Wasn't trying to belittle you, just trying to explain...
Look, this business can become stagnent in a heartbeat, then, a week later, be fluid to the point it seems to run itself, a week later, we're knee deep in gators...
Some roads adapt, quick, some don't...
Point is, you have to have , for lack of a more descriptive word, a plan.
And you have to stick too it, with a degree of flexability, but still keep to your plan.
You have to have a idea how much money you can spend, and what you'r going to spend it on...you waste nothing, even though it seems some times that railroads go to excess.

Harrison is bad mouthed a lot, but guess what...
He took a railroad that was feeding off the public teet, and did exactally what he was charged with doing, made it into a profitable business.
Get rid of marginal customers, and marginal trackage, cut cost, get rid of the deadwood, and make money,
He did all of that, quite well...
Ed

[Anonymous]

QUOTE: Originally posted by Junctionfan

A simple "no that wouldn't be a good idea" would have done it. I can't believe I am getting this just because I am brainstorming. I am rather disappointed.

JF-

I guess I wouldn't use the word "brainstorm" in connection with this idea. I think "brainfart" is probably more accurate.

You need to seriously reflect upon the way things are done. Railroading is an old established industry. Such industries don't radically change course, but rather gradually shift much like a large ship.

I can tell that you are young by your approach to problems. The "get the gubmint to fix it" is a dead giveaway. You need to understand that the government is an entity composed of people like corporations, partnerships, limited liability companies, nonprofit organizations, schools, universities and others are. This means that the organizations are controlled by people and have the aspirations and expectations of people. Only by analyzing these aspirations and expectations can you hope to understand the hows and whys of things. The aspirations and expectations of any one person (for example E. Hunter Harrison) is but a small part of the equation.

The second thing you need to improve to analyze railroads is a good solid understanding of railroading basics. I recommend you buy and read a copy of the book entitled "The Railroad, What it is, What is does" available from Simmons Boardman books. Read anything else about railroads you think will help. Read about railroad mergers and labor laws, read personal accounts like "From the Cab", read books about operating people, MOW, signal, management, dispatchers, clerks, accounting and how they all work together to make the railroad run. All of these things will bring you toward the understanding you will need to make respectable arguments on railroad subjects.

Also, read a bit about investing. Learn how to read a balance sheet. Learn how companies are valued and bought and sold. This will help you not just in understanding railroads, but in making good investments and planning for your future and retirement.

Although I'm just a cranky old railroader, the reason I get to do this is that I have made good investments and I get to make choices for my future. If you get started now, you'll have a shot at doing the same.

Good luck,

LC

[oltmannd]

Gee, where's all the gloom and doom this month? Will we get investment or will "robber baron" mentality suck the money from the industry? (or did I miss the point altogether...)

Also, it's not just that running at capacity allows rate support, it's that a huge chuck of the revenue from incremental traffic increases on a fixed network falls thru to the bottom line. The majority of the increased profit so far this year come from volume and only a small amount from rates (and most of that is from fuel surcharges!)

[slotracer]

Not revenue adequate, can't make the cost of capital BULLLSH!!TT !!!!

Intermodal moves average 20-40% profit margin OVER COST

Low revenue aggregates move in the 35-45% profit range

Most chemical moves at at least 50% margin, some revenues are 2-3 times in froit what cost is.

Ag unit trains move 50-60% margins, coal is similar.

Us greedy shippers are lucky to see intermodal type profit margins on our high performaing profitable lines. We are tired of the railroads crying poor mouth one week, then publishing reports of record quarters the next.

We have railroads approachin fuel surcharges of 10%. I can tell you in fact that the surcharge cost exceeds the entire cost for fuel for an entire move, sometimes by double....this is based on the railroads own cost accounting models.

We are looking at Barge and any other possible mode or source of supply shifts to tell the railroads adios on moves where ever we can.

Oddly enough the 2 railroads that are currently listed as a stock sell are UP and CSXT...the ones who are most aggressive at jacking up rates and making a shambles out of their system. They sell service, but don't deliver it. My entire week has once again been keeping plant s from shutting down due mostly to these two carriers and theri antics.

I'm sure the train loving public views us shippers as a neccesary evil that has to exist to provide traffic and revenue for the railroads they so adore to exist. The fact is, we provide goods and the railroads are just one of our vendors, we don't covet the oportunity to ship on choo choo trains for the joy of railroading. Tey are an extremely arrogant lot, and if they had to exist in a truely competitive environment like trucks do, or most comodittee markets they would be lost. They do everything they can to control, and box in their customers. One of the primary thing any industry looks at when building a new plant that requires rail is to make certain they locate where they can access multiple carriers....competition. without it you are fare game for the railroads serving you when and how and if they want, and rates that can be prohibitive if you are not a savy and creative freight logistics person.

[gabe]

I get the feeling you feel strongly about this subject Slotracer? Sorry for the sarcasm, in terms of competition, I am strongly sympathetic to your contention.

However, to be the devil's advocate:

Regarding the profit margins you speak of: are you including the amount of capital it takes to maintain the physical plant and does that include other incidental costs?

For instance, you mentioned the high profit margins of chemical trains. Does that include the liability for when these trains occasionally but inevitably derail? I would note the recent $68 million dollar (settlement!!) that UP suffered from such a derailment. Juries do not view these derailments as inevitable and I think this is one of several factors that account for the alleged profit margin you refer to.

Although I support your underlying message of competition (and will actively work to preclude further consolidation of the industry), I am somewhat in doubt of your numbers. If rail return was that good, their dividends would be MUCH higher than they are now. Would a business that made a 50% return on investment get a sell rating on Wall Street?!?! I think not.

I do not doubt that railroads are self interested and pursue wealth as best they can. However, I imagine that the company you work for is no different.

Hope you have better luck with the quality of your shipment though. Have you considered regional rail lines?

Gabe

[slotracer]

Thansk for your input. I am fortunate as I have worked both sides of th aisle. Railroad market managers almost always utilize Long Term Variable cost. There is a component in there that sets aside small portions of funds for improvement, as well as maintanance. RR cost models are extremely detailed and specific. A move ove mountainous territory costs for additonal crew starts due to lower average velocity, helpers,more requie HP per trailing ton, higher fuel sonsumption etc. Insurance and liabilities has a set aside as well.

Whar bothers shippers the most is they work in a different competitive world. If a customer si slow paying and we get to aggressive in collecting on account they can stop buying from us for a spell, they demand truck deliveries plus or minus a few minutes or they backcharge us, are margins are super thin etc. This happens as anyone can arrive a the dock with loads of the products we manufacture, just as esy as the next producer. Railroads in many cases have you captive and if you are not savy about truck, transload, source competiton, packaging rates etc, you can get royally scerwed.

I have had access to some detailed RR costs with full breakdown, and have seen tha the Fuels Surcharges they force on us don't just offset teh additional cost of fuel increases, they cover the entire fuel cost for the move and then some!

We, as many other shipper have begun to request RCAF Unadjusted escallation on contracts if we can have FSC's waived. FCAFU accounts for the railroads costs increases, fuel being one of them. They stand fast and say no....we want the index increase that accounts for fule, PLUS the FSC ! This is coming at a time when RR's are shutting down or nearly shutting down plants left and right, and if you file a claim for the cost of premium freight to cover an emergency shutdown, they refuse the claim, saying how they do not gaurantees service. They loose your cars for a month and you have to pay $500 plus a month on the car lease, but they don't want to hear about it. They bunch up your shipments, so you nearly run out, have to oder truck, then deliver your cars in a group, then charge you demurrage as you did not unload the cars quick enough. This is just the tip of the iceberg on why so many shippers hate the railroads. Railroads are very difficult and inconveneint to do business with. Frankly for me, this give people like me who understand them and how to work with them a decent job, trying to keep my company going and getting a decent deal.

[jeaton]

It is interesting to find that after 15 years away, the lot of the Traffic Manager (or whatever the title of the transportation service buyer) has not changed.

I found the stress level on the job would be highly dependent on the attitude my employer. If the company viewed in and out transportation expense as just another drag on the bottom line, stress was much higher than the company that found ways to use the service to enhance the busines objectives. I could cite examples of experiences at both kinds. Incidently, those in the former group tend to be "former" companies.

The old saw, "you get what you pay for". my not apply to transportation. "You are likly to get something less than you paid for" may be the guiding rule.

Getting the carrier to provide you something closer to what you paid for is why they pay you the big bucks, or well maybe, the bucks.

Hang in there.

Jay