Production of next-generation Acela Express fleet underway
Stadler unveils TEX Rail Flirt DMU
Siemens invests in remote monitoring specialist Wi-Tronix
DB consortium selected for California high speed rail
Judge puts the skids on state’s proposed rail trail
Amtrak's CEO shares his vision for rail's future
Flight Rail: a new type of train?
America’s short lines play the long game
New York rail operator bolsters security after London bombing
Activist hedge funds such as TCI abhor the status quo, of which railroads too typically are an embodiment.
Among too few railroad iconoclasts was Alfred E. Perlman, an assembly line of creative thinking—a MIT-trained engineer with a Harvard Business School master’s degree in railway transportation and a sterling reputation earned in leadership posts at Northern Pacific, Denver & Rio Grande Western and Chicago, Burlington & Quincy. In 1954, Perlman was recruited by activist investor Robert R. Young to modernize moribund New York Central Railroad (NYC), but it was too late.
Al Perlman and Stuart Saunders when the Penn Central merger was announced. Saunders reportedly despised Perlman, and if you doubt this, just examine the body language.
Perlman was quoted in the Jan. 3, 1958, New York Times, “If you’ve done a thing the same way for two years, look it over carefully. After five years, look at it with suspicion. And after 10 years, throw it away and start all over.”
PRR head Stuart T. Saunders, who razed the original, iconic Pennsylvania Station in New York City in 1963, and is widely criticized as running Penn Central into the ground.
Perlman’s subsequent efforts as president of successor Penn Central, a combination of two already technically bankrupt carriers—NYC and the Pennsylvania Railroad—were dashed by Penn Central’s chairman, Stuart T. Saunders, an attorney more invested in politics and the arts than the essentials of boots-on-the ground railroading, as was Perlman. (Curiously, Saunders, when head of the PRR, was named Railroader of the Year by Modern Railroads—later acquired by Railway Age—twice, consecutively, in 1965 and 1966, when “The Standard Railroad of the World” was descending into bankruptcy.)
Railway Age’s 2002 (CN/Illinois Central) and 2015 (Canadian Pacific) Railroader of the Year, the late E. Hunter Harrison.
A more modern and equally rare iconoclast was E. Hunter Harrison, celebrated for attacking the status quo through implementation of Precision Scheduled Railroading (PSR) and introduction of hourly pay for train crews in place of an outdated mileage-based pay system dating to when trains traversed 100 miles in eight hours. Yet even Harrison was a Johnny-come-lately, as a decade’s earlier introduction by automobile manufacturers of Just-in-Time inventory management—the arrival of raw materials and parts to coincide with a precise manufacturing schedule—sooner begged for PSR.
Mike Haverty, Railway Age’s 2001 Railroader of the Year when CEO of Kansas City Southern. Today, among other endeavors, he’s part owner of the Kansas City Royals.
Another of the rare-breed of railroad innovators is former Atchison, Topeka & Santa Fe Railway President Michael R. Haverty (later Kansas City Southern Railway CEO), who partnered with trucking innovator Johnnie Bryan (J.B.) Hunt to develop the first dedicated premium-service, premium-priced intermodal service called Quantum. From 20 loads in late 1989, the number of J.B. Hunt trailers moving on Santa Fe topped 600,000 by 2005. In pre-pandemic 2018, Class I railroads collectively hauled a record 14.5 million containers and trailers.
Warren Buffett and Matt Rose. BNSF photo.
There were other creative railroaders, of course, but too few. Warren Buffett’s Berkshire Hathaway investment fund wouldn’t have paid a $22 billion premium above market value for BNSF had it not recognized pockets of managerial inventiveness, in particular, those of Matt Rose. In 1988, BNSF predecessor Burlington Northern introduced a marketing innovation—the auction of Certificates of Transportation (COT) for moving grain in unit trains, with shippers permitted to trade COTs among themselves; and BNSF coal shippers in 2001 were encouraged to purchase options to “buy” future trainload capacity.
More common has been complacency among railroaders. It took the prodding of steamship operator American President Lines in 1984 to propel railroads, beginning with Union Pacific, into the double-stack business using lower-center-of-gravity, multiple-unit-articulated well cars.
Intermodal was almost smothered by status-quo-clinging railroaders. During the early 1950s, as railcar manufacturer Pullman-Standard was introducing a flatcar to carry rubber-wheeled highway trailers, terming it “piggyback,” Edgar V. Hill, chairperson of the Traffic Executives Association of the Eastern Railroads, was quoted in the Nov. 19, 1953, Wall Street Journal:
“Railroads would be at the mercy of the whims of the trucking companies, who might decide to stop using the flatcar service anytime they wished. To be economical, the flatcars would have to be assembled in trains of about 100 cars, requiring all four trunk lines competing between New York and Chicago, for example, to invest in big car fleets. Thus, total capacity might very likely be beyond the available market for such traffic.”
Future President Harry S Truman said on the Senate floor on June 16, 1938, “There are great rail systems in this country now being operated by lawyers and engineers and accountants who could not sell gold dollars for 95 cents. Rail management can only see straight down the right-of-way as it was laid out in 1890, and all the help is of the same frame of mind. What the rails need is some young blood with imagination.”
Activist investor Snehal Amin, who in 2008 led TCI in gaining control of a minority of CSX board seats, later opined in a Railway Age interview that “an independent, industry-knowledgeable chairman, responsible to shareholders, should be challenger-in-chief of the CEO.” He faulted railroads that do not separate the posts.
On the other side of the ledger was Surface Transportation Board (STB) predecessor Interstate Commerce Commission (ICC). An advocate for stagnation, the ICC smashed numerous railroad attempts at innovation, contributing to a perpetuation of the status quo, an exodus from the industry of those unwilling to be stultified, and diversion to industries more hospitable to inventiveness of the best-and-brightest engineering and business school elite.
In 1957, coastwise vessel operator Sea-Land partnered with truckers to move containers between North Atlantic, South Atlantic, and Gulf ports at rates lower than all-rail boxcars. In response, New York, New Haven & Hartford Railroad and its connections established competitive trailer-on-flatcar (TOFC) rates between Eastern points and Dallas-Ft. Worth. But the ICC said “no,” ordering the rail TOFC rates raised 6% higher than the Sea-Land rates—a differential the ICC said was necessary because the ocean carriers could not compete with railroads at those lower rates and remain in business.
Southern Railway President and CEO Bill Brosnan, circa 1964, when Modern Railroads named him its first “Man of the Year” (now Railway Age’s Railroader of the Year). In addition to introducing the 100-ton Big John covered grain hopper, Brosnan adopted widespread use of mechanized track gangs, greatly reducing m/w labor costs.
In 1965, Southern Railway, under the leadership of President and CEO Bill Brosnan, introduced a 100-ton jumbo covered hopper car (Big John) to regain market share of feed grains lost to barges operating on the Mississippi, Ohio and Tennessee rivers. Big John held twice the capacity of a boxcar, was lighter in weight and more quickly loaded and unloaded. The ICC again said “no,” yet acknowledging Big John as “a major breakthrough in the control of costs, and a notable advance in the art of railroading.” In ordering lower Big John tariff rates cancelled, the ICC said such innovative lower-cost service, coupled with lower rates, would build a “wall” along the banks of rivers to the detriment of barge operators.
In 1967, Illinois Central Railroad introduced an innovative “Rent-a-Train” service for volume grain shippers between points in Illinois and Gulf ports, offering corn and grain shippers an 8,000-ton-capacity unit train—including 100-ton-capacity covered hoppers, motive power and crew, along with a guaranteed minimum average train speed—for a flat annual fee, plus a per-mile additive (loaded or empty). Again, the ICC said “no,” ruling the innovative tariff unjust and unreasonable.
Not until 1978 did the ICC invite railroads to explore with shippers the writing of rate and service contracts, previously ruling them—long a statutorily protected staple of rival motor carrier operations—“a destructive competitive practice.” Not until Congress partially deregulated railroads in 1980 were contract rates made expressly lawful, confidential and judicially enforceable.Today, some 78% of all rail shipments move under arms-length negotiated confidential contracts, free from regulatory scrutiny.
STB Chairman Martin J. Oberman
Even today, the STB occasionally threatens railroad innovation, such as Chairman Martin J. Oberman inserting himself into railroad operations by questioning PSR. Imagine were he to question Precision Scheduled Airlines.
The economic theory of creative destruction—incessant innovation by which new ideas and methods replace outdated ones—especially thrives outside the railroad industry. Activist investors are not railfans. Most notably, they have no fealty to the status quo. They are change agents with an insatiable hunger to squeeze out waste, improve productivity—and earn for shareholders in the process, marks, yens, Euros, pounds and dollars.
Activist challenging of the status quo is messy—blood in the streets messy. So was replacement by the internal combustion engine of horse-drawn buggies, the introduction of Just-in-Time manufacturing, the replacement by word processors of legions of clerk-typists, and a myriad of other technological innovations that successfully challenged the status quo. On the horizon and a looming competitive challenge to railroads are automated trucks whose artificial intelligence will, in many instances, replace human truck drivers.
Indeed, bless the risk-taking innovators, as there likely would be no private-sector railroad industry today were there not risk-taking change agents willing to challenge the status quo. It took aggressive change agents to remove stultifying and outdated economic regulation, replace of the caboose with end-of-train devices and wayside fault detectors, and develop Positive Train Control.
Satchel Paige—age 59— of the the Kansas City Athletics fires the ball to the plate, September 25, 1965 in Kansas City, vs. the Boston Red Sox, whose roster included future Hall of Famers Carl Yastrzemski and the American League home run leader Tony Conigliaro. In there innings, Paige gave up one run and zero hits. (ASSOCIATED PRESS)
Baseball pitching legend Satchel Page warned, “Don’t look back. Something may be gaining on you.” In the rearview mirror of railroads—and closing fast—are automated trucks; 3-D printing that reduces manufacturing steps and, in the process, intermediate transportation; and climate change that is annihilating demand for the railroad’s once-bedrock coal traffic.
“The future is already here—it’s just not evenly distributed,” wrote science fiction novelist William Gibson. Think of activist investors as seeking to increase for railroad investors the slice of the economic pie, and, in the process, protect and build railroad market share, make the rail industry more hospitable to creative minds, and build job security for the productive. If it can’t be improved, they might just throw it away and start all over again. Activist investors know full well what Pogo cartoonist Walt Kelly meant with the words, “We have met the enemy, and he is us.”
Frank N. Wilner is Railway Age’s Capitol Hill Contributing Editor. His seventh book, “Railroads and Economic Regulation,” will be published in early fall by Simmons-Boardman Books. For two decades, Wilner was the principal drafter of rail industry policy positions and congressional testimony at the Association of American Railroads. He later held a White House appointment as a chief of staff at the STB and was director of public relations for the United Transportation Union and its successor, the Transportation Division of International Association of Sheet Metal, Air, Rail and Transportation Workers. A former president of the Association for Transportation Law, Logistics and Policy, Wilner also edited its law journal and has written for the Heritage Foundation and was a columnist for the Cato Institute’s Regulation magazine. He earned undergraduate and graduate degrees in economics and labor relations at Virginia Tech. Among his other books are “Understanding the Railway Labor Act,” “Railroad Mergers: History, Analysis, Insight,” and “Amtrak: Past, Present, Future.”
The post Status Quo the Enemy, Not Activist Investors appeared first on Railway Age.
This article first appeared on www.railwayage.com
About this website
Railpage version 3.10.0.0037
All logos and trademarks in this site are property of their respective owner. The comments are property of their posters, all the rest is © 2003-2022 Interactive Omnimedia Pty Ltd.
You can syndicate our news using one of the RSS feeds.