Railway Age, MAY 1997

Life After Conrail

The April 1996 gathering of Norfolk Southern shortlines in Virginia Beach was a landmark event on three counts. It was the first ever convocation of all NS shortlines. Before, outings had been limited to small groups invited to the NS hunting lodge near Charleston, SC. Second, NS invited all the shortlines it will "inherit" from Conrail. And third, it was the first shortline meeting anywhere following the joint CSX-NS decision regarding the division of Conrail.

As a whole, one must say the session was a resounding success. Norfolk clearly put its best foot forward for its guests, and the shortlines responded with intelligent dialog and sharp questions. The tone was set when NS Chairman David Goode arrived early for the opening reception, circulated among the guests for the entire two hours, and over the salad course of dinner gave as candid a welcoming speech as I've ever heard. What follows is a condensation of his remarks, what was said in the meetings, and some feedback from the shortlines.

To begin, it looks like the NS portion of Conrail will come to roughly six billion dollars. Moreover, the transaction itself breaks totally new ground. It is not simply a merger of two or three companies. It's first an un-merger of the Penn Central and the other bankrupts that formed Conrail twenty tears go. Once that's been done, it becomes two separate mergers as NS absorbs essentially the PRR, Reading, Erie-Lackawanna, and Lehigh Valley remnants while CSX absorbs the former New York Central assets.

Continuing on the financial aspects for a moment, both players will have a lot of money on the table before the actual sale process even starts. The STB filing fee is nearly a million dollars just to walk in the door. Add to that all the up-front legal and consulting expenses, settlements and protection for Conrail employees, plus a host of other items and it begins to look like real money.

Where's it coming from? Some prophets of doom say freight rates will have to go up. However, that doesn't follow. This transaction adds competition where there was none, so revenue compression will be the more likely effect. NS and CSX will have to find the money the old fashioned way -- by earning it. And that will require three things: newer, more profitable traffic, additional operating savings, and better, more efficient service. Of course, the $5 billion stock-buyback program NS just suspended to help this deal along ought to do that nicely.

By the time this article is published in May, the parties ought to be close to an initial filing with the STB, and an expedited schedule is earnestly desired. Conrail is really in what Norfolk's AVP for Strategic Planning Nancy Fleischman calls "a fragile state." Its managers are operating day to day waiting for the other shoe to drop and the agreement personnel are busily trying to figure out who will have seniority where and whose name will be on their paychecks. Customers, too, need to plan logistical streams and that requires knowing who will serve them, what will happen to schedules and routings, and which Conrail origins and destinations wind up with which railroad.

Once all that is decided, said Fleischman, NS will face four simultaneous and daunting tasks: servicing new markets, creating new services, making new investments, and finding new opportunities. Shortlines will play a critical role in all four since they already know their markets and what it will take to develop new business. However, Norfolk's culture of taking the long view will be new to many who have become accustomed to Conrail's shorter term perspective. And some shortlines have learned already that this preference for the longer look can be in direct conflict with their near term goals.

One of the usual shortline laments is that the class Is focus on long-haul intermodal traffic to the detriment of their carload business. A second lament is that the class Is have had little or no interest in shorthaul carload business. Yet in her remarks, Fleischman said there is "huge potential for unexplored carload business," especially north-south. Readers of this page will recall that more than a year ago none other than Henry Watts, recently retired NS Vice Chairman, remarked on missed carload opportunities in that lane. It's a different ball game now.

Norfolk's earnings projections were around ten percent before Conrail and are somewhat more than that with Conrail. What's driving this, said Walt Trollinger, AVP Marketing for NS, is a renewed focus on industry-specific sales growth fueled in part by diversion from truck and an intensified industrial development program. And a good chunk of that truck market is the two billion annual truck tons moving in the under-150 mile market.

If marketing is charged with creating products the sales force can sell, then surely the sales force becomes the voice of the customer when products are being created. This was writ large in Tom Lindsey's charge to the shortlines. Linsdsey is AVP sales for NS, and it was he who some five or six years ago helped introduce unit train service to one of the largest shortline-served feed mills in the south. The message, as they say, never changes, and his charge is to use the Conrail merger to expand sales opportunities.

Said Lindsey, "The merger will require a rejuvenated, more intense customer focus." This year's capital program includes more than $800 million for plant and equipment all targeted toward better customer service. Another $hundred million has gone for systems improvements. There were 120 more new locomotives on the property April 1 than there were January1. Crew starts for the first quarter were up by more than 3,000 over last year and 30% more than five years ago. In other words, NS is proof of the old saying, "If you want the business you have to run the trains." Grain, rock, kitty food, cars...same thing.

If companies grow by creating customers through innovation and marketing, NS has given its shortlines the seeds for their own success and has provided the fertile ground for those seeds. Harvesting the fruit is up to the shortlines.

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