RILROAD INDUSTRY AGREEMENT:
SALVATION, OR MORE OF THE SAME?
lice Saylor, Peter Gilbertson, and Steve Eisenach had the audience held in rapt attention. The topic was the Industry Agreement and the occasion was the annual meeting of the American Shortline and Regional Railroad Assn. in Atlanta last month.
This long-awaited accord between the Association of American Railroads (AAR) and the American Shortline and Regional Railroad Assn. (ASLRRA) has some pretty high stakes for all players. The view from here is that it will work as hard as the parties want it to, and that both sides will have to share in the initiatives and follow-through. The three panelests should know. They were the negotiators who represented ASLRRA, shortlines, and class 1s respectively, and for this event alternately framed and explained the document which has its roots in last summer's Ex Parte 575.
The Agreement signed September 10, 1998 is truly a work of art. It does a masterful job of setting the tone for future discussions between and among shortlines, regionals, and class 1s on everything from car supply to paper barriers to reciprocal switch charges. It is clear from the language that the parties to the agreement realize that it would be impossible to cover every eventuality. What they have laid out is a document that seeks to set a standard and spirit for cooperation.
The document comes at a perfect time, too, as shortlines are looking increasingly for ways to open new markets between themselves and new class 1 origins and destinations. In just the first three days following the issuance, there were myriad calls to this office from shortlines on how to apply its provisions to specific situations on each of the class 1s. The common thread among the calls was (a) whether the class 1 middle managers will be able to implement the provisions, and (b) whether both sides will be creative and flexible, invoking the spirit as much as the letter of the Agreement.
For her part, Saylor highlighted the elements and gasve some background on how each was developed. Said she, "this is a one-way document with no shortline downside." And though some say this is a pro-shortline document, the class 1 benefits are clear, too. Shortlines represent right around ten percent of total revenues to each class 1 railroad. Moreover, shortlines aren't so short anymore; some are more than 300 miles in length and turn 50,000 carloads a year. There are nearly 600 shortlines and so-called regional lines (typically more than 300 miles and AAR class 2 operations) and, if one ranked them among commodity groups, fall right up there with agriculture, metals, and forest/consumer.
Charles Marshall, President of shortline holding company Genesee & Wyoming (Nasdaq: GNWR) tells me that the typical shortline acquisition raises the traffic volume 30% on any given package. He knows whereof he speaks, having been a Senior VP at Conrail for years and closely identified with that firm's shortline program. Just this year, Dave Parkinson's Arizona & California is up nearly 40% to date thanks to aggressive marketing and a perfect fit with merger-enhanced market access for ex-owner Burlington Northern Santa Fe.
Eisenach's presentation was part class 1 viewpoint, part Norfolk Southern's proposed implementation, saying it's going to be a major educational challenge, especially within the class 1s, which squares with Gilbertson's remarks. Perhaps the hardest sell will be the very concept: that the target is truck traffic, not the other railroads' business, the latter being traditional railroad thinking for the past hundred years. Eisenach's caveat: that it's up to the shortlines to divise applications that fall within the spirit, if not the letter of the agreement. Well said.
A this point is important to note shortline revenues accrue to the class 1s at relatively little cost. Robert Jankowitz, head of the surface transportation group at Moody's, feels that railroads are very good at managing the hard aspects that don't talk back -- engineering, expenses, waybills, etc. Yet they fail sometimes miserably at managing the soft aspects that do talk back, mainly customer concerns.
One reason shortlines grow business on lines that class 1s have spun off is the former are better with the soft aspects of business. Yet when you note the shortlines account for as much as 10% of class 1 revenues it is hard to believe the back-of-the-hand treatment they have sometimes gotten. Especially when it can be a $billion of revenue the class 1s need little or no capital cost to realize. The bottom line, says Jankowitz, is that better revenue management could take points off the operating ratio quickly and in a highly visible manner. And that in turn could be worth anywhere from 50 to 200 basis points on a 30-year loan.
The stakes for the Industry Agreement's success are high for both shortlines and class 1 roads. Senior managers on both sides will have to lean on junior staffers to get that message across. And it will be up to shortliners to get the dialog going and see projects through to completion.