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The Great Train Turnaround


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THE GREAT TRAIN TURNAROUND

When the economy loses steam, goes the conventional wisdom, railroads suffer. So freight carriers must be in sorry shape. Not so fast. Although airlines and shipping concerns are in trouble, railroads are powering along. After a very strong first half, shipments began slowing in August. But thanks to dramatic cuts in the size of freight crews, the paring away of unprofitable track, and more efficient use of equipment, 1992 may still be the best year in decades for many of the nation's railroads.

That hopeful news is only the first chapter in the railroads' comeback. Having cut costs about as much as they can, freight companies are now making moves to boost revenues and win back some of the business lost to truckers over the last two decades. The focus is on customer service, efficiency, new technologies, and innovative marketing. Many railroads are building special facilities for customers to ensure easy and smooth passage of goods. Many are also custom-designing cars to transport products from autos to lumber. And "intermodal" shipments are booming. By linking up with trucks for door-to-door deliveries, trains are tapping new business that had once belonged to trucks.

STACKING. Timeliness has won new respect, too. Where railroads once promised delivery on a given day, or thereabouts, many trains can now time arrivals to within an hour. New equipment and technologies are bolstering profits. In many regions, railroads are taking advantage of new car designs that allow shippers to stack containers on top of one another, doubling revenue. New computer systems are being used to better coordinate scheduling and operations. And sophisticated equipment can now keep track of customers' goods to provide just-in-time shipments.

Trains have already halted their decline against trucks. Now they're determined to raise their share, transporting more premium goods, such as electronics, that provide higher revenues than coal or grain. Then again, if the economy picks up, even without new market share, railroads can expect a jump of more than 30% in increased revenues over five years, say experts. Here's how three carriers are preparing:

SANTA FE PACIFIC

STRATEGY: Investing heavily in new technologies and computer systems. Linking with trucker J.B. Hunt Transport to offer customers door-to-door service.

Five years ago it was hard to say what Santa Fe Pacific Corp. even was. A railroad? A real estate venture? A mining company? The asset-rich company certainly didn't go unnoticed. Acquisitors, including Henley Group Inc.'s Michael D. Dingman, staged takeover plays, hoping to reap a fortune selling some of its disparate parts.

Today there's no question that Santa Fe is a railroad--and an innovative one at that. Chairman Robert D. Krebs, a lifelong railroad man, sent pursuers packing with a $5 billion recapitalization in 1988. He put noncore assets on the block to chop down debt. And he began building a lean, mean operation in the freight business. Krebs cut train crews in half and eliminated three layers of management. He also shed some 3,200 miles of track, keeping the 8,000 miles that follow Santa Fe's most profitable routes.

Cutting would get Santa Fe only halfway home, though. "We needed a product to sell," says Krebs. So back in 1990, Krebs struck a deal with J.B. Hunt Transport Inc., a Lowell (Ark.) trucking company. Together they created a novel use of intermodal transport: Hunt hauls trailers to Santa Fe, which carries them cross-country. Hunt's truckers then meet the train and make the delivery. Santa Fe overcame Hunt's resistance to the concept by proving that the two combined could deliver service faster and cheaper than either alone. Others, including Burlington Northern and Union Pacific, have since copied the idea, but Santa Fe's relationship with Hunt remains unique. The companies co-market their product and split profits, while other railroads charge the trucker a fixed amount. Santa Fe now hauls 1,800 trailers a week for Hunt.

AUTO CARRIER. Santa Fe has also spent heavily to improve its product. Over the last three years, it has invested $75 million in three computer systems that do everything from scheduling trains to controlling operations. Krebs says that has improved on-time performance, crucial to keeping Hunt as a partner. The company is also replacing some 25% of its aging locomotive fleet to slash fuel costs and increase reliability.

Krebs hasn't spared a penny to attract new business, either. To win over United Parcel Service Inc., which uses trains to ship many packages across the U.S., Santa Fe built a $70 million intermodal yard outside Chicago to serve the company. It also won General Motors Corp.'s heart, and $100 million a year in business, by designing a system that can deliver auto parts on a just-in-time basis. Santa Fe has also developed a new carrier that can transport up to 18 automobiles, while a truck-hauler can manage only about a dozen.

The moves are paying off. The company on Oct. 20 announced a special charge of $320.4 million, but without that, Santa Fe this year will earn $149 million, up from $96 million last year, predicts Susan Chapman, an analyst at New York-based Forbes, Walsh, Kelly & Co. Not bad for a company that a short time ago couldn't even decide what it wanted to be.

CONRAIL

STRATEGY: Changing hierarchical culture to decentralize decision-making. Investing to raise tunnel and bridge clearances for double-stacking.

A few years ago, managers at Hershey Foods Corp. would have scoffed at the idea of moving fresh liquid chocolate on rail lines between the company's factories in Hershey, Pa. Only trucks could be counted on for reliable service. But by mid-1993, Consolidated Rail Corp. will be moving temperature-controlled cars the 2.4 miles between the two plants. Says Scott E. Buesking, a transportation manager for Hershey: "I'm going to lay my reputation on the line and say we can do it with rail as good, if not better, than with trucks."

That's a phrase Conrail Chief Executive James A. Hagen has long ached to hear. Until recently, any plaudits have been more in connection with cost-cutting efforts. Although Conrail's revenues have tripped downward since 1981's $3.6 billion high, to $3.25 billion last year, operating income has gradually edged up as the carrier cut some 36,000 jobs. Analysts forecast a respectable $257 million in net earnings for 1992, against a loss of $207 million in 1991. To keep that line moving north, Hagen is focusing on improved service and facilities. "We've got to produce a better product," he says.

By many measures, the Philadelphia-based carrier is already doing that. Railroads have long been intensely hierarchical--even militaristic--but Hagen has loosened up the culture, allowing for more independent decision-making. In June, when the two-day national rail strike disrupted U.S. Postal Service shipments on Conrail, field managers chartered trucks to keep the mail moving--not telling Hagen until later. The speedy action put the carrier in such good graces with the postal service that it was spared having to rebid its contract for 1993.

Next, Hagen hopes literally to move mountains. With double-stacked container shipments growing ever more popular, he's working with Pennsylvania legislators to raise the clearances on about 100 bridges and tunnels across the state by 1995. To ensure action, Conrail has promised to shoulder nearly half the $88 million cost. Hagen says the profit will come in more intermodal traffic.

Such moves may well position Conrail for big gains. Hagen will continue to count on the coal business, which contributes 17.6% of revenues. But he predicts a rise in far more lucrative auto shipments, which account for 13.2% of revenues yet produce twice the cash per car that coal does. Even Hershey may chip in. The candymaker says improved timeliness may lead it to choose Conrail for intermodal shipments to retailers--for Hagen, a truly savory thought.

BURLINGTON NORTHERN

STRATEGY: On-site service coordinators at key customer locations. Using barges to get faster service to Mexico. Emphasis on timeliness.

In 1988, Burlington Northern Inc. spun off its energy and real estate operations as part of a plan to maximize shareholder value. Burlington was the country's biggest railroad, but "everyone joked that Burlington Resources got the gold and we got the shaft," says the railroad's CEO Gerald Grinstein.

Grinstein believes he will prove them wrong. He used refinancings and a public offering to reduce the company's debt. Difficulty in negotiating crew reductions for the northern third of its business will put a drag on profits in 1992. But Burlington's CEO, the former head of Western Air Lines Inc., is doing much to prepare for future gains.

PRECISION. For Burlington, too, timeliness has become a paramount concern. It won high marks from shippers last year for on-time performance. Still, its 63% on-time record doesn't match the 90% rating enjoyed by the top three trucking companies. So Grinstein has introduced "Precision Execution" to set new standards in consistency. The railroad strives to deliver cars to its customers' shipping or receiving docks within 30 minutes of the promised time.

Burlington has many other efforts under way. Its "network control center," open since August, monitors real-time information about traffic and weather patterns in its Northern, Central, and Southern corridors at its Fort Worth headquarters. That helps managers anticipate problems up to 24 hours in advance. Earlier this year, Burlington also became the first rail carrier to place an on-site service coordinator at customer locations, including Coors Brewing Co. and ConAgra Inc.

And Grinstein is looking down the track for new developments. Anticipating greater trade between the U.S. and Mexico, Burlington's CEO recently entered into a venture with Mexican barge company Grupo Protexa S.A. de C.V. to have rail shipments moved by barge from Galveston, Tex., to three ports in eastern Mexico. The new routes--to open in early 1993--will cut travel times by as much as a week and allow shipments to preclear customs. It's all part of Grinstein's plan to "substantially change the way we run this railroad."By Joseph Weber in Philadelphia, Seth Payne in Washington, Kevin Kelly in Chicago, and Stephanie Anderson Forest in Fort Worth


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