THINK ABOUT REDEFINING YOUR CLASS I RELATIONSHIPS e have the outline for a network as forward-looking as the Internet. I call it the transportation net -- a carefully linked network to move the goods. " - Norfolk Southern Chairman David Goode, before the Salomon Brothers Transportation Conference, November 11, 1997 As you'll read elsewhere in this issue, the Norfolk Southern vision is concerned with relationships - customers, communities, other class Is, and certainly its shortline connections. Relationships drive the network in terms of which elements are called into play, which are fed and nurtured, and which are allowed to wither and die. Which path each short line railroad takes is entirely local option. What follows are some thoughts on how to remain in play. One of the most unique and challenging aspects of this merger is the unscrambling of the Conrail egg to make each part fit with the successor roads' networks. Even more challenging is creating a viable strategic network in the three places you can't unscramble the egg - Detroit, Northern New Jersey, and in the Philadelphia/South Jersey market. One approach involves improving short line results at no (or little) cost to the Class I to benefit all parties. That's what gave rise to the concept of a Shared Asset Area (SAA) in which both merger partners would have equal access to all shippers - and shortlines. Of course, the SAA concept carries both good news and bad news. The good news for players on the SAA map is that your shortline now connects with two class Is, especially helpful for those moves between the northeast and the deep south. The bad news that is you have to live with not knowing right now exactly how things will work out later. Enter strategic partnerships. Not having every possible option locked in up front means that shortlines connecting with the SAAs can begin to think about how to redefine their class I relationships. They know their traffic flows, they know what CR does well and not so well. And they can anticipate where NS or CSX might be able to make things better. However, getting from "might" to "will" requires doing the homework and selling the economic value of the redefinition to the class Is. Sometimes there will be paper barriers to be removed, or there may be opportunities to open interchanges or even expand on existing trackage rights. But in every case making these strategic changes means putting your shortline benefits in terms of strategic (financial) benefit to the prospective class I partner. A general rule seems to be that if a shortline proposal adds value to the relationship without harming the class I mission the scheme has a chance. A shortline on one side of the SAA wants to interchange local traffic on the other side. Neither class I has anything to lose by permitting it, so odds are the concept will be approved. Another shortline wants to "connect the dots" with trackage rights between the unconnected pieces of its property. There's no loss to the class I and the shortline is strengthened, enhancing the value of the partnership. The common thread is improving shortline results at no (or little) cost to the class I so that all parties benefit. Most such arrangements are pretty informal: there's an agreed fit and the parties take steps to make it work. BNSF, on the other hand, has gone a step further, actively seeking strategic partnerships with its shortline connections. Henry Lampe, AVP for interline development in Fort Worth, told me they'd like to have each shortline take a specific role in the BNSF Strategic Plan and conversely they'd like to see BNSF included as part of the shortlines' plans. For example, BNSF has a "Commercial Strategy for Mexico." It was presented at last fall's ASLRA annual meeting in Dallas and is geared to improving 1998 financial results. The newly-formed Mexico Business unit is charged with carrying out this commercial strategy and is building a network to do just that. From this it follows that a BNSF shortline with carload origins or destinations in Mexico should be part of the larger road's Plan down to carload and revenue budgets by commodity, car type, customer, and O-D pairs, thus becoming an integral part of a transportation network. Of course, Mexico is but one example of what can be done with strategic partnerships. The shortline which is part of a logistical service process has more value to offer everybody in the loop. This is especially valuable when it's time to grow the business by "growing the franchise" - buying more track, in other words. As a network participant the would-be buyer is a known quantity, and big railroads are no different than anybody else when it comes to choosing between vendors and customers. The ones who provide the best value will win every time. BNSF has been quite candid about its desires in this regard. Underperforming light density branches will be quickly sold to "quality operators" (their term) who can become extensions of the BNSF franchise and enter into strategic partnerships with the larger railroad. But this means the shortline partners have to be prepared to grow the business, develop local markets, and make the financial commitments to run a winning property. The competition is fierce, however. There are more than 500 shortlines and regionals all courting nine class I railroads, seven if you don't count CN and CP, six after Conrail. Clearly, the winners in this arena will be the class II and III lines bringing the most strategic benefit to the remaining class I railroads.