Dec 11, 2018
That's a fascinating article! Thank you for the link. Matt Rose was the right man for the job at BNSF and not having to answer to Wall Street every quarter continues to give BNSF a clear advantage. Rose said that "... the value proposition of the railroad as a three-legged stool … and if you think about a three-legged stool, if one of those legs gets a little out of whack, things don’t work very well.". The legs are Shareholders, Employees and Customers. CSX's precision railroading stool seems to have only one strong leg - Shareholders.
I also like Matt Rose's thoughts on rejecting hauls, saying, “There’s really no such thing as a bad load of freight. We need to find the right operating expense to haul it, but we’ve also got to find the right price to haul it." Well put.
An excellent read. Countercultural, with the precision scheduled railroading concept being rolled out across the country. Rose and his leadership team seem to be leading BNSF against the grain, but to be stronger and investing in the future, rather than divestment for short term gains. It will be interesting to see if Carl Ice diverts from this path as Rose transitions out.
I get the impression that BNSF/Berkshire Hathaway is saying that Wall Street doesn't know how to run any industry, let alone a railroad. Wall Street is only interested in making profits short term, 3-6 months or less. As long as BNSF remains a privately held company, doesn't bow to Wall Street, they will continue to be the healthiest railroad in the country.
I worked for GE when they were the second largest company in the World, next to ESSO, now Exxon. GE produced Gold Standard products based on long term, 25-50 year, strategic planning. In the early 1970's the MBA's took over, bowing to Wall Street and its narrow vision. GE slowly went downhill because Wall Street demanded immediate profit postings for the shareholders, 3, 6, 9 months at most. GE responded and restructured their long term planning to 5 years maximum, 6-9 months for short term. Look where GE is today...in the gutter, struggling to stay alive. Even sold off the Locomotive Division, once their second/third most profitable division, after space and electric power generation.
Well said Hytec. It's been said that we should buy stock only in companies "that any idiot could run". The excellence that GE's Jack Welch built, Jeff Immelt and GE's Board completely destroyed. GE's shares are now trading where they were 10 years ago and the dividend has been cut to a penny. I worked with a number of excellent GE power generation people in my career and it's sad to see what their once fine employer has become.
Wall Street knows how to tear companies down to their last nickel. They have no knowledge about how to build and operate a profitable company for the long term.
PSR is a manifestation of the Hedge Fund mentality of 'liberating' every possible cent from a company's coffers in the name of 'shareholder value' - ie. clean out the cash and leave a smoldering corpse when the hedge fund has stolen all they can.
'I tell people this country is bigger than Wall Street. And if they don't believe it, I show 'em a map!'--Will Rogers
Times are changing. Precision is coming to BNSF. First up, many local switch jobs are heading for end of track.
NS's President and CEO Jim Squires wasn't an ardent supporter of PSR, perhaps in view of CSX's slash-and-burn PSR deployment and customer alienation. NS instead chose to disregard Wall Street nagging and worked a slower, more thoughtful approach by first reworking yard operations (aka "Clean Sheeting") and then reviewing systemwide operations (aka "Top21") which will roll out on July 1st 2019.
UP too has followed it's own path to PSR. BNSF is blessed with private ownership, so may be able to work the transition better than anyone. It should all be interesting to watch.
The biggest problem BNSF will have is the death of Warren Buffett.
The big elephants in the room are the murder of coal and the ongoing disastrous (20% of original cost) yearly maintenance of the PTC systems. Railroads are no longer making “sufficient profit”.*
*Sufficient profit is when your company makes similar profit, given the risk level, as any other company.
So far, railroads are trying Precision Railroading, and it’s working. BNSF is trying double length trains, and it failed so far. Next step is one, or zero, person crews.
BNSF is in no way a privately held company, as it is owned by the very public Berkshire Hathaway.
Yes, Berkshire Hathaway is publicly traded. BNSF Railway is a subsidiary company of Berkshire Hathaway. All of the BNSF shares are held by B-H. None are publicly traded.
The Denver & Rio Grande was a totally owned subsidiary of Rio Grande Industries. Union Pacific Railroad is owned by a holding company called Union Pacific Corporation.
This weird setup is left over from the USRA take over of the railroads. The railroads own the physical plant and debt, the corporation keeps the profit and any non-railroad assets. Think how a lizard loses its tail under attack.
BNSF is odd because people *like* Warren, whose terrible returns (generic basket of S&P beats Warren) are masked by this patina. There are many stories about maneuvering to tear apart the corpse of BH once Warren is gone.
I don't own shares of Berkshire, so don't have a dog in the hunt, but BRK has outpaced the S&P 500 per the graph below. Though if I were a BRK shareholder, I too would be concerned about BRK's destiny post-Buffet. I am a shareholder of Norfolk Southern, which has decidedly outperformed both the S&P 500 and BRK over the same term. With PSR and PTC, who knows what the future holds for our favorite business. We've certainly seen a number of industry upheavals over the years.
Yes, if Matt keeps the helm, BNSF stays the course. Then again, BNSF is curtailing local switch jobs as we speak. Amusing new contract ideas being proposed too, to bring BNSF into the PSR fold.
Warren said he was open to the idea, if they could figure it out.
Sad, as this is happening outside of the railroad/transportation sector as well. In a supposedly booming economic cycle. Why are businesses needing to squeeze every last drop these days? There is something we cannot see, yet, through the murkiness. And it is more than just profit motivation.
Actually, for the railroads the successful resolution of the war on coal in the environmentalists favor plus the 20% per year of the total system cost to maintain PTC has caused the problem. Everyone wants their 401K to grow, and railroads no longer offer a competitive investment possibility.
Most analysts say that rail shares are richly valued without much room to grow, but after 22 years of NS ownership I'll hang in there, especially in view of the dividend. Yep, the war on coal hit the railroads hard. Utility coal provided revenue that could be depended on even in bad times, and in an industry like railroading with heavy fixed costs, coal revenue was the golden goose that kept lines maintained. Railroad earnings are now tied to economic cycles much more so than ever before.
Regarding locals, one mantra of PSR is reliable, repeatable service that shippers can depend on. From what I read, CSX fumbled this primary requirement by rejiggering train schedules without shipper consultation. It's still a work in progress, especially with intra-Division trains, with new train numbers and new routes often being experimented with. Cars now seem to be handled like a baton in a relay race, handed off from one train to another within divisions. My home was once served by six CSX Q-Trains (through trains) and today has none, all replaced by an expanded roster of F-Trains (Florence Division local trains).
Scheduling changes have brought ire from railroad customers throughout the nation because demurrage charges have been increased as well, leaving them with allegedly inconvenient switching schedules and higher expenses. The Surface Transportation Board is currently working hearings on this.
Sadly, railroad corporations too often forget that they are a SERVICE industry, if they ever acknowledged that in the first place.
Initially in the early 19th century railroads were like the space program, a Gee Whiz, Look What We Can Do culture. Consequently people and companies flocked to their door to get on the band wagon. Railroads thrived on the adulation and believed they ruled the transportation world.
Since WW-II competition has sprung up in cars, trucks, and airplanes. Unfortunately railroad management culture doesn't seem to grasp the reality that they are merely providing a service that their customer uses only if it's convenient. There are viable alternatives, guys, pull your head out of the sand.
It’s amusing that the railroads main competitor, the Federal government, is looked to for improvements to their competitors companies.
Did you know that a court case in California about tenants rights did more damage to railroads than the refusal to permit new coal power plants?