The Railroad Week in Review:
Week ending July 22, 2000

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Brand loyalty is the corporate version of going steady, but the breakup is inevitable-and coming fast. Because they are networked, smart markets are able to renegotiate relationships with blinding speed. Cluetrain Clue No. 30.

For the benefit of readers trapped in a snow bank in the high Himalayas last week, BNSF and CNI called off their merger late Thursday. Said the two CEOs, the delays isn't worth it and they will be getting on with the business of making the two companies work better merger or no. Both companies have begun to demonstrate what can be done with 19th century railroad operating practices and 21st century technology.

A second shoe dropped Friday when CN and CP announced a joint two-part agreement for better results in the Northeast. On the one hand CP will handle CN forest products to DCs in NYC, Albany, Phila, and Scranton. CN also get interchange with "major railroads" in the NE as well as the NY & Atlantic for Long Island. It's a five-year deal.

On the other hand is a three-year agreement providing CP with access to CN's efficient Toronto-Chicago main line. CP will route a minimum of 14 merchandise and/or intermodal trains per week over CN's line between Canpa Junction in West Toronto, or Komoka, west of London, Ont., and Chicago. Labor agreements will not be affected. This for three years.

As we approach Earnings Week it's important to look back a moment and see where we are, where we seem to be going, and where we ought to be going. The health of an industry is pretty well reflected in YTY revenue changes relative to the competition. As for the railroads, is there a doctor in the house?

The Big Railroads grew sales by 10% YTY full year 1998 to 1999. That included the final absorption of Conrail into CSX and NS, where revenues YTY increased 9% and 23% respectively. The midsize rails did slightly better, fueled by offshore interests at WCLX and property sales at FLA. Shortlines were up 30%, with the RAIL purchase of RTEX the big change. Strip out these institutional changes and the revenue picture was hardly robust. The quarterly changes look very much the same absent acquisitions.

The truckers did a lot better. To gauge the industry, I used a market basket comprised of Arkansas Best (Nasdaq: ABF), J. B. Hunt (Nasdaq: JBHT), Yellow Freight (Nasdaq: YELL), and Werner (Nasdaq: WERN) based largely on their ubiquity on the Interstates. As a group, revenues were up 9% YTY and 14% for the first quarters. Mind you, this is dry van business - boxcar business, if you will. With the economy humming along at a 3+% growth rate, it's safe to say where the trucklines' new revenues come from.

The merchandise carload business accounts for more than half the railroads' total revenues. However continuing service complaints from shippers with missed delivery dates and shortlines going days with no interchange are not doing much to enhance the vital carload side of the house. We will be watching change rates in carloads and revenues very closely.

In just one year the telecommunication arm of Florida East Coast has become a veritable powerhouse among telecom companies. FLA renamed its telecom business EPIK in March and since then has been signing up companies for to the tune of a $73 mm backlog. By way of background, recall that EPIK describes itself as a "wholesale provider of wholesale bandwidth and dark fiber," which essentially means they put the optical fiber in the ground and others rent use of it. As Bob Anestis, FLA's President explained to me, "We're still in the transportation business, only here it's bits instead of railcars.

Granted, this is kinda old news. However, I was chatting about this with FLA's Heidi Eddins, an old friend from her PWX days, at a conference the other day. I think this is going to be a major opportunity for FLA, so watch this space for further developments.

The consolidation among suppliers continues. GE will acquire Harmon for $30 a share, a nice bump for those who have been holding HRMN in the $15-20 range forever. Payment will be in GE stock and should be tax free to HRMN holders. Total value of the transaction is $425 mm against last year's sales of $425 mm. Upon completion of the transaction, Harmon will become part of GE Harris Railway Electronics, a joint venture between GE Transportation Systems (GETS) and Harris Corporation and the deal is expected to close in 3Q00.

Just how big has GETS gotten? It is a world-wide firm that leases and maintains all manner of railroad rolling stock. It offers "global railroad services such as remote monitoring and diagnostics, railway control and communications systems, propulsion and auxiliary power systems for transit vehicles. and motorized drive systems for mining trucks. It employs approximately 6,700 employees worldwide and has sales in excess of $2 billion.

Actually, the biggest lessor of railroad cars in North America is GATX (NYSE: GMT) and the company thinks the biggest growth opportunities will be off-shore as more countries move to de-nationalize their railroad systems. According the World Bank's Lou Thompson the railroads in China, Russia, and India, are among the biggest in the world yet freight car utilization is far from ideal. In Europe, Poland is well on the way to railway privatization and GATX expects its recently inked agreement there will be "a bellwether for business in Eastern Europe."

Is the Internet the magic potion that will restore the railroad industry to health? Among e-commerce types, the answer is YES. Among sales types the answer is NO, and it appears they do not share the optimism because they see their jobs at risk. Not necessarily. In fact, judicious use of the Internet can actually help sales reps make more money by using it to develop and refine leads and cut down cold-calling. According to a recent study, company websites can let a sales rep cover more accounts faster and increase sales by a third. Try putting that on your Rolodex.

Elsewhere, CN's Internet-based supply chain management supplier i2 (Nasdaq: ITWO) announced blockbuster earnings this week. Revenues hit $243 mm for 2Q00, which is 30% ahead of the first quarter's sales and 84% ahead of 2Q99. Net income tripled YTY to $19 mm before one-time merger charges. Readers will recall CN retained i2 for its supply chain planning and management software and services to run its intermodal business better.

Recall too that BNSF has an understanding with freightwise.com. If you'll go to the site and take The Tour you'll see it's very truck-centric right now, even though there are some sample Triple Crown moves. At first, says BNSF, the plan is to use freightwise.com for intermodal transactions with an eventual roll-out to the carload business as they go up the experience curve. It would certainly seem that capacity-based pricing in a scheduled railroad environment is a worthy goal. That would certainly fit in with the scheduled format of freightwise.com.

A closing note for coffee lovers: The long-dead Oregon Railroad & Navigation Company was founded in 1881 by an official, one W.H. Starbuck, who gave the name to a tiny town in Washington. How small? Well, there is no Starbucks, the only place with coffee in Huwe's Café, the community school has all of ten students, and the only church in town is dark. So where'd the trendy latte store get its name? From the java-addicted first mate in Moby Dick.

--Roy Blanchard

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