Mediation for Railroad Support

Along with several railroad Presidents, the President of NITL and the Chairman of the STB, Tom O'Connor is quoted in this Traffic World article, advocating railroad support for mediation by the Surface Transportation Board.

New NS chief to face challenges

By John Gallagher
Traffic World
October 7, 2005

When Norfolk Southern recently named its Atlanta office building after Chairman, President and CEO David Goode, it marked a turning point for an old industry whose newest leaders will face challenges not seen in 50 years, according to this report by Traffic World magazine.

Goode, who took the NS reins in 1992, led the railroad through a period of economic downturns that required the railroad to ratchet back its rate of investment to meet lackluster demand. But Charles "Wick" Moorman, 52, who will take over as Goode's successor Nov. 1, will be trying to satisfy demand for space on his system that is so high that NS and the rest of the rail industry can use price to adjust the amount of business they take on.

"For railroad CEOs in the past, the principal question was how to get more business on their systems," said Surface Transportation Board Chairman Roger Nober. "Now the question is how to get the most valuable business on the railroad while maintaining the emphasis on service, costs, inventory and supply."

Moorman and other members of the industry's "new guard" -- namely Union Pacific Railroad President Jim Young, 52, who's expected to succeed Chairman Dick Davidson; Mike Ward, 55, who rose quickly through the ranks at CSX to become chairman in 2003, and BNSF Railway's Matt Rose, who at 46 is the youngest railroad chairman -- are facing an industry short on capacity while being pushed to load increasing amounts of freight.

Deregulation of the rail industry has been a significant factor in forming today's rail landscape. After 25 years of declining rates and railroads struggling to generate enough revenue to justify more investment, it now seems most railroads will make enough money this year to become "revenue adequate" in the eyes of the STB. They're burgeoning on a level of profitability not seen in decades.

"The biggest change is that the railroads are faced with traffic growth, which hasn't been an industry driver for several generations," said Henry Posner III, chairman of Railroad Development Corp., a Pittsburgh-based short line operating company. "It takes a different type of manager to deal with that, or at least a focus on different skills than in the past."

Posner says the railroads' focus has been shifting from the operations side of the business to sales and marketing -- "from cost control to the proper allocation of capacity coupled with selective investment in new capacity," he says.

"This has been underway for a long time, but the pace has accelerated dramatically in view of the capacity constraints in the last half decide. Rail executives now need a combination of marketing and financial skills, because they have two choices: ration capacity by increasing price, or invest in more capacity. Both are based on the market, not rail operations."

Such skills have become more the norm among top rail executives -- or those expected to get there. CSX's Ward and UP's Young both have strong financial backgrounds. BNSF's Rose, who majored in marketing and minored in logistics, worked in the trucking industry before getting into railroads. He has led what was has been considered a progressive charge in the rail industry to accept more government money through public-private partnerships to help fund capacity expansion. Canadian Pacific Railway Chief Operating Officer Fred Green, considered by many to be the successor to CP President and CEO Rob Ritchie, has presided over both sales and marketing.

Like UP's Davidson, Canadian National Railway President and CEO Hunter Harrison spent the early part of his career as a brakeman. But Harrison has also been an early and aggressive advocate of scheduled railroading, a concept he began rolling out on CN in 1998 which has proven critical in right-sizing rail networks to accommodate excess demand. Other railroads have since felt compelled to adopt varying levels of scheduled operating systems to adjust to the current operating environment.

NS's Moorman, who currently serves as president, was senior vice president of corporate planning and services from 2003 to 2004. But his background before that included a strong emphasis on technology. He was president of NS's Thoroughbred Technology and Telecommunications business from 1999 to 2004 and earlier was information technology vice president at the railroad.

Moorman will take over a railroad that generated more than $7 billion in revenue for the first time last year, and improved its operating ratio, a key measure of railroad efficiency, to 76.7 percent, the best in six years.

Last year, NS set record revenue in coal, intermodal and general merchandise. Intermodal revenue increased 24 percent on a volume increase of 17 percent or about 425,000 loads. Rail business grew 15 percent for international traffic, 21 percent in domestic, 15 percent in premium and 8 percent for Triple Crown Services, its intermodal trailer service.

"NS is a good example of a railroad with a strong culture that has historically been operations driven, but has been able to make the transition to a market-driven railroad largely without major and dramatic changes to the organization," Posner said. "In contrast, BNSF always had been market driven, so it has been relatively easier for them to adjust to the new environment."

Posner and others believe corporate culture plays a significant role in a company's ability to adjust to a changing marketplace. UP, which has had a reputation in the rail industry as being slow to change, has provided evidence that the new leadership is willing to dust off that image. Earlier this year, railroads in Houston, principally UP, were assailed by city officials for trains left blocking at-grade rail crossings. In the past, railroads' attitudes towards these issues might have been that, while such things are unfortunate, they're part of the railroad business.

But UP management, led by Young, responded by opening a high-level dialogue with city officials that led UP to change its operational protocols in ways that have eliminated the problem.

"It was an example of UP realizing there's value in addressing community concerns," said a government official familiar with the situation but who declined to be identified. "That's a positive change for the industry and one that will increasingly be required of railroad management."

While the latest group of railroad CEOs enjoy record profits in an industry used to crying poor to Wall Street and federal regulators, their customers are finding it increasing difficult to adjust to an environment that requires being more proactive with their carriers in order to get good service.

"In the past you could leverage modes or carriers to hold down costs -- those days are over," said National Industrial Transportation League President John Ficker. "Now shippers have to work harder with their carriers to assure that the value they get for moving their goods with them is commensurate with the price they pay."

Tom O'Connor, a principal at Snavely King, a Washington-based economic consulting firm, does not advocate increased regulation but does advocate more rail-to-rail competition that some shippers say would also lead to better service.

"Deregulation has generally performed well, and the additional freedoms the railroads have enjoyed have been helpful," O'Connor said. "I would not advocate re-regulation of railroad pricing in general, but I do see the repeated occurrence of very aggressive pricing in situations where the railroad perceives that the shipper doesn't have a competitive alternative."

To help solve the problem, O'Connor says railroad management should support the STB providing mediation in rate case disputes. "I think it's important for the new breed of railroad CEOs to recognize that there's still a valid role for the STB to play in resolving disputes that, if left unresolved, could draw them into prolonged litigation or result in legislation that they'd find even less appealing."

Moorman said naming a building after Goode was a "gesture of appreciation" from NS employees. "The fact is that David's contributions will far outlive bricks and mortar," he said. "His focus on making rail a dependable and sought-after transportation partner has helped shape Norfolk Southern and the rail industry for the new century."

With strong evidence that infrastructure will continue to lag behind demand in the foreseeable future, the question becomes how far the railroads will be willing to go to assure that profitability remains strong while at the same time avoiding alienating their customers.

"Railroads need to behave more like 21st century service providers and less like old line utilities," Nober said. "They will have a difficult balance to maintain: that of a private business but one that is also regulated and accountable to the public."
(The preceding report was published by Traffic World magazine.)
October 7, 2005