Railroads: A Reader Writes
Posted: January 29, 2023 Filed under: railroads Leave a commentIn the pile of mail that strained our transom after our post on why high speed passenger rail is a madman’s dream or an idealist’s delusion here in the US, this from Andrew Alexander stood out, we print it in full:
Public Railroads Monopoly
Some of the best investments in history have been railroads. Buffet had a masterstroke in buying Burlington Northern, paying $26B. Ackman’s made billions off these types of investments and Hunter Harrison is lionized as a railroad operator. He would take railroads and get them to 40% operating margins. For some reason, every railroad network with sufficient scale in America is fabulously profitable, except for Amtrak. The only real difference is the type of load they carry and the ownership/management quality. Let’s compare Amtrak and Burlington Northern Santa Fe.
BSNF’s network is about 32,500 miles of network, and they have 35,000 employees. In the quarter ended 9-30-22, Burlington had $6.6B of revenues against $4.6B of expense for a 30% operating margin. So today, on a conservative multiple, BSNF’s annual $10B earnings is worth about $100B, or 4x what Buffet paid. They are a financial powerhouse.
Amtrak, by contrast, is a financial disaster. On revenues of $3B, they have $4.8B of expenses, losing almost $2B a year. They have 21,400 miles of network and 17,100 employees.
So, just roughly speaking, what explains this? Is it due to poor management? Was Amtrak just cursed with a poor railroad network and BNSF’s is better? Is it really better to carry freight as opposed to people? I guess you could say that since humans are much more valuable on a per tonnage basis than freight, they are a better customer for railroad, but at the same time, because it’s much more valuable on a per tonnage basis, its less expensive on a per unit basis to fly, so the railroads have to compete with airplanes and cars. That could be one explanation.
It is also possible that a pound of coal is just a better customer because it does not care when it arrives at the power plant and does not need to be cared for and fed while enroute to be burned up.
I don’t think that these dynamics explain the shocking disparity in productivity per employee. It is tough to compare the activity levels of freight vs passengers, but just on a high level, it seems like Amtrak has roughly the same number of employees per mile of track, but BNSF has revenue of about $800,000 per employee and Amtrak has about $175,000 of revenue per employee. BNSF’s cost per employee is about $600,000 and Amtrak’s are about $300,000.
I think the most plausible explanation is that BNSF simply has better management. My instinct is that if competent management took over Amtrak, they would have it profitable within months. For example, the CTA in Chicago should be super profitable. There is no way that a monopoly of the commuter train lines in a city of millinos should run operating losses. If you look at Japan rail, my cursory review is that it is printing money.
No reason for the Amtrak, or CTA, to be losing money. They should be fantastically profitable. Prove me wrong.
We had some jovial back and forth with AA. We think it’s pretty hard to make Amtrak “fantastically profitable,” that’s just not how it’s built, nor should it be the goal. Is there enough rail demand in the USA to make passenger rail profitable, or is it just not our vibe? We drive. We’re not Japan, in geography, culture, or organization. In the NE Corridor rail makes sense (and is often packed). Not sure what other routes we could guarantee. Even LA to Vegas or LA to SF might not pay out: it’s cheap and fast to fly. Burbank to OAK to BART and you can be in the Mission in time for lunch.
Profit aside though, for the rail fan who feels the spiritual power of the train, power not captured on the P/L statement, a few more reliable routes might create connection, and value immeasurable.
Do write if you have fire or insight to offer: a diablog is better than a monoblog.
Railroads
Posted: January 22, 2023 Filed under: railroads 2 Comments
What distinguishes America’s railroads from those railroads elsewhere in the world is that American railroads were constructed and owned by entrepreneurs. It was a rare American railroad that was owned by local or state government – exceptions being the Alaska Railroad, once federally owned, but now owned by the state), Amtrak (officially, the National Railroad Passenger Corp.), and Conrail (which was created out of numerous bankrupt railroads, but subsequently returned to the private sector and then divided between CSX Transportation and Norfolk Southern Corp.) …
By 1906, some 85 percent of the bonds and 50 percent of the stocks traded on the New York Stock Exchange were those of railroad companies.
Santa brought me this book, published by Simmon-Boardman of Omaha, publishers of Railway Age, MarineLog, SignBuilder Illustrated and other “B2B” publications. This one is dense with information, much of it too technical for me, but it’s healthy to read above one’s level.
It’s illuminating when studying the Civil War to make reference to a map of the railroads of the Confederacy. Here’s West Points map thereof:
New Orleans, Pensacola, and Norfolk were in Union hands by the end of 1862, with Jacksonville disputed, so that left Wilmington, Charleston, Savannah and Mobile as sea-rail hubs. But Mobile wasn’t much use once Grant had cut the rail lines in northern Mississippi, and Sherman would tear up the tracks to Savannah soon enough. You can see the importance of Wilmington in supplying the Army of Northern Virginia.
Note too all those different gauges:
In the early years of United States railroading, several different gages were in use. In 1863, however, President Lincoln designated 4 ft 8 1/2 in. as the gage for the railroad to be built to the Pacific Coast. This, then, became the standard to which all U.S. railroads conformed. Thus, the railroads south of the Potomac and Ohio Rivers that were mostly 5ft gage until 1887 changed to a standard virtually over a single weekend.
Discussions of high speed rail in the USA sometimes ignore the crucial points:
1) The UK, Japan, Germany, France all at some point nationalized their rail lines. In the US track is still owned by corps who are not in the business of passenger traffic (in fact actively fight it)
2) we use our rail much more for freight than they do in Japan/UK/France/Germany etc. Our whole economic model based it being cheap enough to ship Asia to West Coast (Long Beach) and then train to wherever. Does just the vastness of the US helps why freight rail matters so much more here? Our trains are also hauling coal and stuff
A radical agenda for a president could be nationalizing the railroads, but that would never happen: imagine taking BNSF away from Warren Buffett/Berkshire Hathaway, or UNP away from the shareholders. KC Pacific is international.
BUT the federal government did subsidize all this building through land grants, why should all the benefits be in private hands?
Canada for awhile had an interesting hybrid system: federal Canadian National and private Canadian Pacific. Opponents of socialism can point to the inefficiencies of CNI, while opponents of aggressive capitalism can point to the costs put on rural Canada once CNI was made private (all of Newfoundland’s railways were shut down!). These are losses where the full impact can’t be measured, it might really erode the core of a nation.
CNI was privatized in 1995. Today the largest single shareholder is Bill Gates.
The political problems of building high speed rail are daunting, which is too bad. The nationalizations in Japan, the UK, Germany and France took place during crucial moments of national transition (in France it took the dictatorship of Napoleon III, in Germany Bismarck played a role, Japan was going through a radical modernization, etc).
The federal government has decent power to make life difficult for railroads. They could use that to squeeze out some new high speed lines along existing track. Would be great to have LA to SF, for example. But imagine the political will and might it would take to wrench that concession out from an enormous company that’s in the business of hauling freight, not people.
Big changes in the US seem to take place only during rare periods of crisis when opportunity and power is for a moment consolidated: Lincoln in the Civil War, FDR during the Great Depression and World War II. Maybe if FDR had lived we would’ve gotten to national health care; maybe if Lincoln had lived we would’ve nationalized the rails.
The Railroad: What It Is, What It Does further describes the Amtrak situation: in 1971, Amtrak was created by Congress to take over passenger services on freight railroads that were losing money. The bankruptcy of Penn Central in 1970 freed up some track along the Northeast Corridor, which Amtrak acquired.
Since its creation, Amtrak has struggled financially, owing to a congressional failure to provide Amtrak with a consistent source of federal funding. Annually, since Amtrak’s first year of operation, it has had to fight for a congressional appropriation that its officials and supporters consider insufficient. This inconsistent and inadequate funding has preoccupied Amtrak officials, adversely affected operational improvements, and slowed acquisition of a modern fleet.
The book concludes, somewhat glumly:
Under present conditions it appears that, whatever their overall ecological, congestion-relief, or other social benefits, proposals for high speed rail systems in corridors of North America must first demonstrate financial feasibility founded primarily (if not wholly) on credible private-sector support.
We have our Amtrakiest president in awhile, but time is running out on Railway Joe.
Rail listeners
Posted: October 9, 2022 Filed under: America, railroads Leave a commentTrains of cars were heard coming in and going out of Corinth constantly. Some of the men who had been engaged in various capacities on railroads before the war claimed that they could tell, by putting their ears to the rail, not only which way the trains were moving but which trains were loaded and which were empty. They said loaded trains had been going out for several days and empty ones coming in. Subsequent events proved the correctness of their judgment.
That’s U. S. Grant, in his memoirs, talking about skillful rail listeners outside Corinth Mississippi, 1862.
Railroader: The Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison by Howard Green
Posted: March 27, 2022 Filed under: business, Canada, railroads Leave a comment
Over his career Hunter Harrison ran four railroads: Illinois Central, Canadian National, Canadian Pacific, and CSX. His gospel was Precision Scheduled Railroading. He’s usually credited with the PSR idea, although we can’t overlook the role of “Pisser Bill” Thompson in formulating the concept. “Pisser Bill” was called that because wherever he was on the railyard, if he had to piss, he would take his dick out and piss all over the place. That’s what railroading was like when Hunter Harrison began his career oiling traincars.
Harrison kept score by one main metric: operating ratio. Operating expenses divided by revenue. He cared about other numbers of course, but only as to how they’d affect operating ratio. You want a lower operating ratio: less dollars spent for every dollar earned.
Harrison focused on the numerator: expenses. He was obsessed with smart use and purchase of assets. One of his sayings was that an unused asset is a liability. When he found unused assets he shed them. On the Illinois Central, which runs from Chicago to New Orleans, there were two parallel tracks. Hunter got rid of one of them. He wanted to save the cost of maintaining it. (Sidings were kept so two trains didn’t run into each other). He knew pricing would take care of itself because the railroad is almost a monopoly. He didn’t care much about customers. He saw some stickers once at a BNSF yard that said “the customer is always right.” He had them torn down. Ignoring customers caused him some problems politically, especially in Canada, but it didn’t stop him from getting the operating ratio down.
Harrison was a fanatic about trainyard efficiency. He rose up as a trainmaster in the Frisco yard in Memphis. Although he never went to college, Harrison had a pure mind for railroad management. When Sue Rathe introduced him to a new world of computerized data at Illinois Central, he immediately understood the potential and how to use it. (Although no one would argue Harrison could not be gruff, Rathe tells us not to miss the gentlemanly side. Harrison encouraged people with potential. His bookshelf was full of memoirs of great coaches, he viewed himself as a coach, he used coaching metaphors.)
As CEO, Harrison got the Illinois Central’s OR down from like 90% to mid 60s. The employees didn’t always like him for it. But they came to respect him. The alternative might’ve been bankruptcy.
What produced results was the approach he would preach for the next two and a half decades – what train velocity does for efficiency, what longer trains mean for efficiency, and on and one. He saw better processes for everything, base hit after base hit.
There’s not much about this point in the book, but I wonder if Harrison had one key world historical insight. Railroading had changed. The Staggers Act of 1980 deregulated railroads. After that there was some nominal oversight but really the railroads could charge whatever they wanted. (The Staggers Act was meant to be anti-inflationary, it was signed by President Carter).
The news that railroads were now, like, businesses hadn’t caught on. Railroads still acted like federal bureaucracies. Everything was inefficient. The labor force was notoriously lazy, naps and “leave earlys” were common, drunkenness not unknown.
That was in the US. Up in Canada mind, CN at this time was still nationalized! In fact not even nationalized, it was a “Crown corporation,” legally speaking it was more or less Queen Elizabeth’s personal plaything.
Harrison realized (if I understand the book right) that pricing would take care of itself. Don’t even think about it, charge whatever. Focus on cutting costs and moving cars (cars, not trains, a key point). You’d make huge gains in operating ratio. That would get reflected in the stock price, and ultimately in Harrison’s personal compensation. By the time he was done he’d personally made something like $500 million, which he used on estates for show horses in Connecticut and Florida, filling trophy rooms.
It wasn’t just having the insight though. Harrison had the combo of skills to execute. No easy job. There was a lot of what he called mud to scrape away. He was not shy about confrontation. During some lost years as a young man he once woke up in a pool of his own blood after a bar fight. He took that attitude into his railroads.
Activist investor Bill Ackman saw the possibilities. He took a big position in Canadian Pacific and fought to get Harrison appointed CEO. After some board room battling, Ackman succeeded.
When Harrison took over CP in 2012, he went up the offices in Calgary. It was the week of the Calgary Stampede. Hardly anyone was at work.
“It’s Stampede,” said one of the secretaries.
“Who gives a shit it’s Stampede? This company hasn’t made a penny and we’re worried about Stampede, having a few shooters at noon?”
Harrison turned CP around, starting with the mailroom, where he was disgusted to find a box being FedExed to a destination eight miles away. By then he’d run two railroads. He had a playbook. It was almost too easy for him. In eighteen months he brought the OR down from 81% to 65.9%. Two and a half years later, CP’s OR was 59.8%. He had the railroad using 40% fewer locomatives, he’d closed yars, he was increasing velocity and train length without sacrificing safety (although absolutely sacrificing love from the work force, which he reduced by about four thousand).
For this reader, the least engaging part of Railroader: The Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison by Howard Green came as Harrison was exiting CP to run CSX for a final act of his career. The details about board politics and compensation packages just weren’t as thrilling as turning around a railroad. I can see why Green devoted so much time to this period, however. He’s an anchor on Canada’s Business News Network, and he had access to Harrison during this time. There was some resentment of Harrison’s manner at CP. Harrison himself acknowledged to Green that he’d mistakenly assumed Canada was just like the USA, and Canadians just like Americans, but the business culture there was smaller, closer, and more sensitive, less blunt.
By the time Harrison left CP and went to fix up the “spaghetti-like” CSX*, his health was in rough shape. He took over CSX in March, 2017, and died that December. His ashes were scattered in the Memphis railyard.
Green sums up Harrison’s worldview on page one:
He reshaped an industry by literally making the trains run on time. While Sir Richard Branson advised executives to focus on employees first, customers second, and investors third, Harrison reversed the priorities: investors came first. For him the game was capitalism, pure and simple. You either played it or you didn’t.
Harrison’s legacy lives on. His protege Keith Creel is now CEO at Canadian Pacific. Bill Ackman is taking another bite of that apple. The question is: has Harrison’s Insight is already played out? The operating ratios for all the major railroads now are in the high 50s and 60%s. Some of those numbers include real estate sales. The railroads were given a great deal of land to induce them and help them build, much of it indigenous land, a continued resentment.
Are these railroads just now juicing their numbers by scrapping off their parts? Is that the ultimate end of capitalism, for a corporation to achieve ultimate efficiency and then begin consuming itself, or rather allowing the shareholders to consume it in a cannibalistic ritual?
I should confess/disclose I myself am long CP and UNP and (through Berkshire) BSNF. Good luck building another transcontinental railroad. Canadian Pacific was built in five years. California will take longer than that to go from Bakersfield to Merced, although in fairness we’re not importing 15,000 Chinese laborers nor will the deaths of 600 people be acceptable. Both CP and the UNP were built with the aid of corrupt schemes. Corrupt schemes may still be rampant but they’re less effective, at least in North American railroad building.
Throughout this book are accounts of high stakes dinners and meetings at places like the Mount Royal Club in Montreal or The Breakers in Palm Beach. I know I’m not cut out to be a railroad CEO because I was reading and thinking, sure, sure this is a faceoff over control of the board but: what’s the food like? What’re people eating? I wanted the flavor! One meal that got my attention was a hasty conference at a Chick-Fil-A near Atlanta. That was the kind of food Hunter Harrison liked.
Cheers to Alex Morris, @TSOH_investing on Twitter, I think that’s how I heard about this book. I read it because I wanted to learn a bit about running a railroad, and I did!
* an example of Harrison’s mind: he could look at the map for CSX railroad and see that “stripped down, CSX wasn’t spaghetti; to Harrison it was more or less a square” with the corners being Selkirk, NY near Albany, Willard Ohio (60 miles south of Toledo), Nashville Tennessee, and Waycross, Georgia.
Canadian Pacific and Kansas Southern
Posted: March 30, 2021 Filed under: business, railroads Leave a comment
Canadian Pacific Railway Limited and Kansas City Southern today announced they have entered into a merger agreement, under which CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately USD$29 billion1, which includes the assumption of $3.8 billion of outstanding KCS debt. The transaction, which has the unanimous support of both boards of directors, values KCS at $275 per share..
Following the closing into a voting trust, common shareholders of KCS will receive 0.489 of a CP share and $90 in cash for each KCS common share held.
so reports Business Wire.
Some thoughts:
- Kansas Southern has one of the most compelling color schemes in railroading, a field noted for compelling color schemes.
- Arthur Stilwell founded Kansas Southern.
His writing attracted attention because in them he maintained that he had based many of his life and business decisions on the whispers of what he called fairies or brownies. In his memoirs published in 1927 he reframed this as hunches.
He also founded Port Arthur, Texas.
- CP CEO Keith Creel is a protege of Hunter Harrison, the king of railroad executives. He seems to have a reputation as a very effective railroad runner.
- The map of the combined rail lines is so pleasing. Imagine one unified train line from Vancouver to Mexico City
- The merger has to be approved by the Surface Transportation Board, as well as Mexican regulators. I know very little about the Surface Transportation Board. From FreightWaves:
“The regulatory consideration is an important one because in 2016, during CP’s attempted takeover of Norfolk Southern (NSC), the attempt ended after heightened scrutiny from the Obama administration on antitrust issues,” said Deutsche Bank analyst Amit Mehrotra. “But we note at that time NSC rejected CP’s offer, whereas [this] announcement is a friendly deal, and KSU is only about one-fourth the size of NSC from a revenue standpoint — i.e., pro forma for the deal CPKC will still be the smallest Class I rail.” CPKC stands for the name for the new company.
from High Plains Journal:
Some rail analysts have said STB approval is more likely because in this case, there is no overlap in the route networks that would be merged. “Whenever a merger or acquisition is proposed, red flags are particularly raised among customers when the two companies have a similar geographical footprint. This does not guarantee that significant portions of service will be disbanded or eliminated, but it often portends that,” said Steenhoek.
However, he added, “As one can see from reviewing the current Canadian Pacific and Kansas City Southern network maps, the two railroads currently have very little service overlap. This provides some degree of encouragement among customers–including agricultural shippers—that this particular proposed merger may result in increased service options.”
I see here an estimate of the chance of the deal going through at 67%
- some financial analysis of the deal.
- Today, Tuesday March 30, you can buy a share of KSU for $258.76. If the deal goes through, you will get .489 share of CP plus $90, something like $275. An 8% gain after about a year and a half. That may not be especially attractive, with your money tied up for awhile, most of the investors I can find who analyzed it on Twitter pass. But, the puzzle of calculating and weighing the risk reward there and comparing to other alternatives is kind of interesting. If the deal doesn’t go through, you’d still own part of an obviously valuable railroad network. It’s hard for me to think of a better example of an economic moat than an enormous railroad with no competition. Anyway, I’m not giving financial advice, I just like thinking about this magnificent railroad!
Books I’ve been meaning to review for Helytimes
Posted: April 12, 2020 Filed under: books, music, railroads Leave a commentThere’s a big stack of books over here I’ve been meaning to write up.
This book is super good. Full of vivid detail.
Drums were banned everywhere in North America except French Louisian by the middle of the eighteenth century, and so were horns, which are made from wood or animal horns and played in hocketing ensembles in the slave coast and Congo-Angola regions.
There are excerpts from a long interview with Jim Dockery, of Dockery Farms. Stories retold and remembered. Sonny Payne tells of the Helena, Arkansas based radio show King Biscuit Time:
These are well-to-do white women listening. I listen, every day when I’m doing the show, for the simple reason that there’s something there. They’re trying to tell you something, and if you think hard enough and listen hard enough, you will understand what it’s all about.
The story this book tells is really about how blues music went from its origin point, where the Southern cross the Dog in the Mississippi Delta, to Chicago and then by record to the UK, where Eric Clapton and Jimmy Page and the Rolling Stones heard it and picked up on it. Along the way there’s so much juicy richness about race and America and music and history and everything. Palmer takes us to a meeting in Chicago where they tried to encourage black migrants to come back to Mississippi.
This book is almost like a response to the fetishizing or the legend-building surrounding the Mississippi Delta and blues music. Says Wald:
If someone had suggested to the major blues stars that they were old-fashioned folk musicians carrying on a culture handed down from slavery times, most would probably have been insulted.
I didn’t know that Mississippi was dry until 1966.
It is startling to thank that all of the evolution from the first Bessie Smith record to the first Rolling Stones record took only forty years. When Skip James and John Hurt appeared at the Newport Folk Festival, they were greeted as emissaries from an ancient, vanished world, but it was only three decades since they had first entered a recording studio – that is, they were about as ancient as disco is to us today.
One point both these books make is that the Mississippi Delta at this time was actually kind of a dynamic region, crisscrossed with railroads, you could quit your job and move and get another one.
Wald tells of an anthropological team from Fisk University and the Library of Congress that visited the Delta in 1941 and 1942. They reported:
There are no memories of slavery in the delta. This section of the delta has little history prior to the revolution of 1861
The research team asked people what their favorite song was. What a question! (My Country Tis of Thee and The Star-Spangled Banner among the answers).
Gotta love a book where this is a footnote.
When I was a kid you couldn’t go to a library book sale or a book store without seeing some paperback Tony Hillerman mysteries, about the Navajo Tribal Police. I never got into books like that, not sure why. But when it comes to New Mexico writers, Tony Hillerman is a name to reckon with. (And there are a lot of New Mexico writers, just see The Spell of New Mexico, edited by Tony Hillerman).
So, as I was gonna be in New Mexico, I got Tony Hillerman’s memoir.
Man. Tony Hillerman was a combat infantryman in World War II. Before he was twenty or so he’d fought his way through the Vosges, killed German boys yards away from him, gone on night raids and been shelled in the dead of winter. Finally he stepped on a landmine, and his war ended in a military hospital. There was a guy in the hospital, a tank gunner, who was called “Jug” because of the way his injuries had mangled his face. Jug considered himself lucky compared to what happened to Colonel Delaney.
All this happened to Tony Hillerman when he was a teenager, before he’d ever really had a girlfriend.
When he got back home, he got a job driving a truck in the New Mexico oil fields. In the Chaco Canyon country, he happened to come across some Navajos on horseback. They were going to an “Enemy Way” ceremony, a ritual for those returned from war.
The healing power and religious idea of this ceremony impressed Tony Hillerman. It was just what he needed. (It sounds like the kind of ceremony Karl Marlantes describes the need for in his book).
Hillerman became a newspaperman in New Mexico, and the rest of the book is mostly funny and interesting stories about that life, and his family, and his decision to attempt some mystery books. On a writing class he taught at UNM:
my premise was that power to persuade lies in the ability to make people see – sometimes literally – the situation as the writer sees it. Instead of telling readers the city should improve its maintenance programs, walk them down the street with you and show them those same details that drew you to that conclusion – the roaches around the drains, the trash collecting on the fences, and so forth. Based on that argument, I’d send them forth.
A good book by a man who seems tough and tender, humble and wise, I read most of it on an overnight train ride.
Speaking of trains, how about Hunter Harrison? A first ballot Hall of Famer for sure if the Hall of Fame is “railroad CEOs.” Hell they’ll probably name the hall after him. Hunter Harrison from the time he was a teenager only ever worked for one kind of company: railroad company.
Harrison’s thing was “Precision Scheduled Railroading,” which apparently revolutionized a kind of sleepy industry.
Harrison created approximately $50 billion in shareholder value in his time as a CEO.
says the book jacket, telling you something about how we’re keeping score. Harrison was an absolute fanatic about railroading. He ran Canadian National, Canadian Pacific, and died on the job running CSX.
I’m not sure if I’ll finish this book, it’s interesting and I’m learning a lot, but I’m just not sure I’m that interested in this guy. So far the part that sticks out in my mind is Harrison’s semi-mentor, Thompson.
Thompson was William F. Thompson – a.k.a. “Pisser Bill”
says the book. I thought the nickname might be kind of a metaphor or something, but no, a few pages later Pisser Bill was at the trainyard and saw something he didn’t like so he pissed all over the place.
This book was worth the price for that alone.
Helytimes 
