The Railroad Week in Review:
Week ending September 9, 2000

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As with networked markets, people are also talking to each other directly inside the company-and not just about rules and regulations, boardroom directives, bottom lines. Such conversations are taking place today on corporate intranets. But only when the conditions are right. Cluetrain Clues No. 42, 43

Carbuilder Trinity Industries Inc. (NYSE: TRN) has issued a press release to say Carl Icahn intends to buy a stake of more than $15 mm but less than 10% of the company. At a recent share price of $22 the market cap is $832 mm, so he has quite a range.

Recall it was about two months ago that Icahn announced his intention to buy a large chunk of CSX. According to a Fortune magazine article a while back, "He's constantly on the prowl for situations he can exploit profitably. His chief MO is to scoop up bonds of companies that are either bankrupt or close to it. Then he may use his clout as a major bondholder to extract terms that will ensure that he makes money. (see www.fortune.com/fortune/1997/970217/rjr.html).

Shares of TRN are off 43% YTD, the Zacks consensus has the car builder's earnings off 47% for the FY ending March 2001, and up only 3% for FY2002. It's selling at less than six times earnings vs. the S&P's multiple of 26. So the possibility exists that "The game's afoot." (Henry V, Act III, Scene 1, or Sherlock Holmes, various -- take your pick).

On Sep 11 BNSF expanded its guaranteed on-time service to six lanes from three and remains the first freight railroad to offer a full money-back guarantee for on-time service. Recall that in May BNSF announced its service guarantee for domestic intermodal shipments in three lanes: Chicago/ Seattle, Chicago/ Southern California and Chicago/ Dallas-Fort Worth. BNSF is now expanding its on-time service guarantee to include three new lanes: Southern California/Dallas-Fort Worth, Kansas City/Southern California and Chicago/Portland.

According to BNSF, shippers have the option to purchase, for a premium, a guarantee for three intermodal service levels that BNSF offers in all six lanes. With the guarantee, BNSF offers a 100-percent refund for each load that does not meet the scheduled availability time for customer pick-up. It's no wonder customers, including formerly all-road shippers, have responded enthusiastically. There's no risk.

Non-rail companies for years recognized that asking a prospective customer to change vendors entails risk and the best way to meet that risk is to share it. Offering compensation if the new product or service is not up to scratch always helps. That BNSF is betting on its own ability to perform speaks volumes. Moreover, I wouldn't be surprised to see the concept extended to carload service at some point, either.

Meanwhile BNSF has ordered 700 high-tech refrigerated boxcars from Trinity for delivery starting late 2000 and continuing over the next two years. These will be 72-foot long Plate F cars with more than 8,000 cu ft capacity, almost double that of the existing fleet. BNSF says, "The boxcars feature a more reliable, fuel-efficient refrigeration system that runs only when necessary. In addition, the new cars use a global positioning system (GPS) to provide precise location information. Further, a separated two-way satellite communications system is able to detect temperature fluctuations and make necessary adjustments." Says to me BNSF sees a future in the perishables market. And that's good.

RailAmerica sold two more railroads for $4.65 mm in its continuing process of winnowing out non-core rail assets. On the block were the Minnesota Northern, a 240-mile property handling more than 10,000 revenue carloads a year, and the St. Croix Valley, 60 miles and 2400 carloads. Readers will recall our contention that shortlines ought to average at least 100 carloads per mile per year, and since these two lines fall short of that measure, it's easy to see why they may have been gaveled down.

But there's more. According to the 12/31/98 SEC Form 10-K, MNN carried mainly agricultural products, coal, sugar products, fertilizer, and aggregates. SCXY handled ag products, ferts, and plastics. Mixes are unknown, however given the service area ag products and aggregates probably dominate. Something like $250 car would be in order.

Conclusions: $4.65 mm for $3.25 in revenues is 1.4 times sales. Not high as shortlines seem to go in the 1.5 to 2x sales range. However, the light density in terms of carloads and revenues per mile, the potential track maintenance exposure (who knows about bridges, etc.?), and the low value commodities predominating combine to make this -- from the outside at least -- a challenging pair of properties to operate. RailAmerica has better places to spend their money, and we all must wish the new owners well.

A most unsettling item appeared in the WSJ Wednesday. Railroad writer Daniel Machalaba reports that DuPont is suing Norfolk Southern for damages as a result of rail serviced failures following the NS takeover of its new Conrail properties. Says Machalaba, "Rail-service snafus caused DuPont to slow production lines, use more-expensive substitute transportation and acquire substitute materials at higher costs." A DuPont spokesman said as a result the company "incurred expenses and suffered losses amounting to millions of dollars."

The view from here is that neither NS nor CSXT gave as good as advertised in their first year of operation following Split Date. Fortunately, both carriers have acted honorably and swiftly to rectify problems as identified, however in some cases the service interruptions were too many and too wide spread to go after every one hammer and tongs. Moreover, problems have been institutional as well as systemic. Cars would flow well to service yards only to be delayed or misrouted in local service. The paperwork always seemed to lag the car, causing still more delay.

A consistent theme in shipper remarks has been one of "Why can't a railroad be more like a truck?"(shades of Henry Higgins). Happily some, like BNSF above, are beginning to apply the model of customer-driven pull and place. The mail apropos of short frequent trains has been resoundingly in favor of the concept, and even some railroaders acknowledge there are some lanes where it could work better than others. As one seasoned rail pro wrote, "It's a single-track system out there, with a few notable exceptions. Intermodal continues to gain at a rapid pace because it allows us to run big rains and avoid most yarding. The public highways handle pickup and delivery."

So, do the same in the merchandise carload biz. Let somebody else handle pickup and delivery (and car supply), delivering complete trains to the class 1s for delivery to somebody else on the other end to do the same. The class 1s can then stick to what they do best: hook and haul from yard to yard.

Union Pacific says it plans to start raising freight rates about 3% next month thanks in part to higher fuel prices, increased health benefit expenses, and rising labor costs. Diesel fuel prices have more than doubled over the past year, from 65 cents a gallon to an average of more than $1 a gallon. Moreover, market analysts for the petroleum industry see still higher prices that are likely to stick for the foreseeable future.

Of course, rising fuel prices affect all fuel users. Consider UP has an operating ratio in the mid-80s while truckers operate at margins about ten points less. The question becomes how much will each industry eat before passing the fuel costs on to the shipping public. Time will tell.

Finally, CSX announced this week that it will spin off its CTI logistical services business for about $650 mm. The sale is expected to close later this month with the proceeds going to pay down LTD, roughly 10% of the $6.3 bn outstanding on 6/30. There is no mention of whether this relates to the Icahn involvement.

--Roy Blanchard

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