Et tu, DL? (Letter to the editor David Lester of Railway Track & Structures)

Tony Hatch

David:

“Railroads are companies, not utilities nor charities” /
me, as quoted in your sister publication, Railway Age

As you know I value your work in the rail space, and I read RT&S regularly. But I find your last editorial (“Something is Not Right”), read while at the NRC Conference last week, to be troubling. The Business Roundtable efforts to push for more balance, stakeholder value rather than just shareholder value, is very interesting indeed – but not uncontroversial. How do you measure “stakeholder” results? And, note, almost none of the signatories have changed their compensation plans one iota. But, I take great exception to your espousing the tired old cliché about companies being “held hostage by Wall Street”. For “investors”, one should read “owners” – is your house held hostage by you? It is true that rail financial results have continued to improve, even as volumes are challenged. The latter is bad – but is the former? Some other points in order of your presenting:

  • “Railroads should go after traffic that is profitable but may not have the margin of intermodal”….My first response is, on the nature of profit margins in intermodal, – from your lips to God’s ears. But assuming what you meant was go after lower margin (higher OR) business – it isn’t profitability that matters so much as it is ROIC – return on invested capital. Rails spend so much (on average over the last decade some 19% versus the average industrial ~3%) that they need a good return to justify that expenditure. See the quote above – they aren’t charities. They need to avoid short term thinking, to be sure (some lower-margin business should be nurtured rather than abandoned)n but they need to get that margin….

  • PSR! Remember, the railways that turned to PSR of late did so because their service reliability and consistency was lagging – it was a proactive move to improve operations as well as margins!

    • “BNSF, as a private company, does not buy into much of the (PSR) program” – baloney! BNSF has resisted full PSR adoption because they feel that they have taken in elements of it already, and that ~70% of its business is in unbalanced unit train (coal, still, and the world’s best Ag & intermodal franchises). And reading Warren Buffett’s comments over the last year, it is clear that Berkshire Hathaway (a publicly-traded stock, by the way) is highly aware of the OR improvements made by their arch-rival, Union Pacific, undergoing PSR immersion therapy”.

    • As for PSR and growth (and capital investment) look no further than the two pioneers of the process in Canada, CP and CN, who both spend the most (as a percentage of revenue), both grow the most (over the last 5 years) and who both post the best ROICs. PSR if done well leads to growth!

    • The question of railroads holding down costs in a traffic downturn and possibly being ill-prepared for the inflection into the volume upturn is a legitimate one – railroads (like all of us) have proven futile at predicting the future with precision (and therefore pf matching capacity with demand) – the surprising rise and fall (and smaller rise) of CBR is but one example. Again, the Canadians provide a positive example – even if CN was caught short when western Canadian (especially BC ports) volumes exploded in 2017 have been repeatedly on record (such at RailTrends in November) stating that they must carry some “surge capacity” (including crews) to be ready for change….

  • Finally, “do we need….federal government legislation….to address the issue?” NO, WE DO NOT. Railroads must fight the urges of that portion of their shareholder base that is short term oriented all of the time, and do so most often quite successfully (they have averaged spending about 19% of their revenues on Capex versus the average industrial company spending at the ~3% level). They are successful because the returns generated from that (massive) investment have, at long last, begun to exceed the cost of that capital. Government intervention would be the destroyer of that value creation. To assume otherwise would be suicide for the rail renaissance of the 21st century.

Best,
Tony

 

Anthony B. Hatch
abh consulting
www.abhatchconsulting.com
abh18@mindspring.com