BNSF said Tuesday it was “extremely disappointed” by a news media investigative report questioning freight train security measures, as well as operations, in Washington state.

The report, issued Monday by Seattle’s KOMO News 4 TV and KOMO Newsradio, said its “Problem Solvers” team in essence found “so many Burlington Northern Santa Fe Railway trains for the taking,” some idling for hours without any security presence nearby. KOMO also relied on two BNSF anonymous engineers who expressed concern over current operations and supposed lax safety measures.

KOMO also reported the “Federal Railroad Administration … has now opened a formal investigation into what the Problem Solvers found.”

In response, BNSF on Tuesday chastised KOMO for its “sensationalized accusations and exaggerated hypotheticals to attack rail safety and security. BNSF takes safety and security very seriously.

“The report failed to recognize that there are numerous ways to immobilize aparked train such as removing essential equipment, tying down handbrakes orisolating electrical fields on the locomotive.,” BNSF said in a statement.

BNSF said a voluntary audit for last Friday “found that every lead locomotive in the area was properly secured.” In addition, it said, “Most of BNSF’s high volume main line track is controlled by what is called Centralized Traffic Control (CTC). On CTC track, a train cannot move on the track, nor can a switch from a siding be thrown to allow a train to move onto the main line without the dispatcher seeing it on their computer screen.”

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If a ship springs a leak, it's a problem. If the passengers all run to one side thinking to save themselves, the ship will capsize. Now it's a disaster.

You'd think, from reading or viewing the general media coverage of economic issues, that bankers are a bunch of fools, crooks, greedy so-and-so's, or all three. Bankers are a convenient and popular target. Even in the best of times, bankers are rarely seen as heroes. Not collectively, anyway. So you have to steel yourself-or put on a Teflon shell-during this difficult period, and take satisfaction from the good things you help accomplish.

Somewhere along the line most of us were advised to brush regularly, floss, avoid too many sweets, etc. Whether we heeded that advice was, and is, our choice, and the consequences of not doing so are ours as well.

By Tony Kruglinski, Financial Editor

If you are like this writer, during the past weeks and months you have been pummeled by kith and kin concerning Warren Buffett’s BNSF strategy and what it may mean “for” and “to” you. It’s pretty clear that we are getting these questions because our friends and family don’t understand exactly how we make a living in this industry and now (they think) they have something to discuss with us! God bless them. But I would suggest that we need to go beyond the easy “Buffett” answers that we give friends and relatives . . .

“It’s a vote of confidence for the American economy and an important industry that supports it.”

“He recognizes the long term role railroads play and the long term growth that is possible for the knowledgeable investor.”

. . . and ask some serious questions that need asking, which have nothing to do with Mr. Buffett’s investing wisdom.
We should ask, for instance, how Warren Buffett’s very public endorsement of the future of the railroad industry in North America will, in-and-of-itself, affect us? Let’s start with some basics:

• Savvy industry participants know all about the vibrant future freight railroading will have when the economy rebounds.

• Investors in railroad stocks are now benefiting from the “rising tides lift all boats” result of Warren Buffett’s BNSF strategy.

• Railroad industry wannabe investors have been sitting on the sidelines looking for opportunities to jump into a depressed market for rail equipment (in particular), but have found their options severely limited due to the absence of sellers willing to take a haircut on prices.

Will the spotlight Mr. Buffett has put on our industry suggest to potential investors (who have been on the sidelines, studying the industry for months or years) that waiting for better opportunities may just cause them to miss the proverbial train? We think that’s a good possibility. Everything in life needs to be taken in context with what’s happening and what can be perceived as likely to happen.

For instance, in the second half of 2008, several large railcar operating lease portfolios were (formally and informally) offered for sale. We are told that none sold because potential buyers were unwilling to offer pricing at or close to the sellers’ book values. The only sale that occurred was a small 3,000-plus fleet that sold (for a discount of about 25%) when its parent entered liquidation.

Every indication is that one or more operating lease fleets could be on the market in 2010 if the interest and pricing rebounds in the marketplace. Both CIT and AIG are possible candidates for sale. There could be others. If buyers continue to hold back, waiting for a “deal” on discounted assets, these potential sales will only occur if the seller hits a wall of some sort and absolutely has to sell.

But what if, keying on Mr. Buffet’s view of the long-term investment value represented by the railroad industry, some of these buyers decide that the time to invest is now before the train leaves the station? We think that possibility is a real one. Residential real estate sellers and buyers ultimately reach agreement based on mutual perceptions as to the state of a moving market. We believe it is very possible that efforts to market existing operating lease portfolios of equipment in 2010 may be more successful than in the past simply because Warren Buffett has started playing face-up poker regarding his long-term view of our industry. (A side issue: Debt markets need to rebound to lend into these potential acquisitions.)

Now, who will these likely buyers be? We think that many of the new investors that took a look—and a pass— at buying operating leasing fleets will be back and, perhaps, may be more willing to realistically consider the seller’s minimums. Remember, investors who invested side-by-side with Mr. Buffett in BNSF are now due to earn a premium materially larger than any discount sought by potential lease fleet investors in 2008!

Timing is everything.

What about the stocks of railcar builders that have been depressed due to the miserable market for new car sales? Here, we are not sure that any Buffett vote of confidence will be able to boost stock prices unless and until order books begin filling up. Unfortunately, hundreds of thousands of parked freight cars would suggest that is not about to happen.
How about investments in other rail industry suppliers? We believe that there will be increased investor interest due not only to Mr. Buffett, but also to passenger rail funding coming from Washington. (Arguably, federal largesse has already started M&A activity in this sector.)

I’ll steal a page from Marilyn Monroe’s serenade to JFK on his 45th Birthday (Sung to “Thanks For The Memory”):

“Thanks, Mr. Buffett.
For all the things you’ve done.
You’ve invested by the ton.
You’ve led the way.
You’ve sold the Street
To us you’re number one.
We thank you so much!”

 

By Lawrence H Kaufman, Contributing Editor

The Surface Transportation Board announced Oct. 21 that it will hold a public hearing Dec. 9 to consider whether continued exemption from rate regulation for hundreds of commodities and any boxcar or intermodal service is justified or necessary.

Coming at this time—while railroads are embroiled in a battle with Sen. John D. Rockefeller (D-W.Va.) over his proposed legislation that would bring railroads back under a degree of economic regulation they haven’t seen since the Staggers Rail Act of 1980—an STB administrative action, which would not require Congressional approval, would not be a positive for railroads.

Whether it is good policy or bad, there is no question the STB has the authority under the Staggers Rail Act to undo what its predecessor agency, the Interstate Commerce Commission, did. The commodity and service exemptions were granted initially by the ICC, and the STB can modify or eliminate them—or do nothing.

In embarking on its most significant policy exercise since the Board imposed a 15-month moratorium on mergers between Class I railroads almost a decade ago, the STB is playing things close to its vest. It has not proposed a new rule or specific action. The only thing the Board has done is schedule a hearing.

Washington and transportation industry observers don’t believe for a second, though, that the STB is simply conducting an inquiry. The decision to undertake the December hearing is consistent with testimony by STB Chairman Daniel Elliott III before Sen. Rockefeller in September, in which the Senator suggested that if he couldn’t get his legislation enacted the STB should undertake administrative steps to redress some of the ills he had identified. Elliott indicated then that he was prepared to do precisely that.

The existing exemptions were granted following positive findings by the ICC that continued regulation of rail transportation of the commodities and services affected was not necessary in the public interest. At the time, railroads were in a fierce competitive battle with motor carriers for the commodities, and the ICC action was intended to help the railroads. Most shippers supported exempting the commodities from further regulation.

Before regulation can be reimposed, the STB will be forced to make a positive finding that regulation now is required. That poses the question: What has changed?

One thing that has changed is that railroads are financially and operationally healthy today. Railroads now compete with trucks over shorter lengths of haul. The landscape has changed, and many formerly supportive shippers now contend that they are captive to railroad market dominance and need the reimposition of regulation to level the playing field.

The STB chairman has a lot of latitude and can structure a hearing to reach a predetermined conclusion. There is no evidence that Elliott is doing this, but the possibility that billions of dollars of revenue could be brought back under regulation is a serious concern for the railroad industry.

The scheduling of the hearing presents an interesting contrast between Elliott and Linda Morgan, who chaired the ICC and the STB in the 1990s. Where Elliott clearly is following the lead of Sen. Rockefeller, Morgan, on the other hand, was consistent in her regulatory approach. When she was accused of favoring railroads in her decisions, she maintained that Congress knew exactly what she and the Board were doing and could change the law whenever it chose, and she and the Board would follow whatever legal mandate was given.

There are short- and long-term aspects of the re-regulation issue. Will the hearing feature a parade of shippers seeking regulatory change that will serve their short-term interests? With rail rates increasing faster than inflation, shippers can be expected to argue that railroads have market dominance that they clearly did not have three decades ago, and that they should be given access to the regulatory redress procedures of the STB.

Will the STB consider longer-term issues like railroad access to capital markets, necessary if they are to have the funds required to add capacity that will be required in the years to come? Rail capacity is relatively tight now, one reason why some shippers are willing to sign longer-term contracts, trading service and rate certainty for guaranteed volumes.

Any action seen as increasing regulation is likely to force rail rates down, and if earnings are affected, capital will become harder and more expensive to obtain.

Commissioner Charles Nottingham, himself a former STB chairman and the only Republican on the Board, recently announced that he will not seek reappointment to another term when his current term expires at the end of the year. A lobbying battle can be expected over the appointment of his successor.

By Tony Kruglinski, Financial Editor

In this industry you become famous—or infamous—as a result of the way you conduct yourself in business. Railroaders have long memories for those who have helped and hurt them in business dealings over the years.

On Sept. 6, Lawrence Beal, one of the most memorable rail professionals in North America and President of National Railway Equipment Company, passed away after a short illness.

He will be remembered by thousands of rail professionals—the way Jimmy Dean put it in that song about “Big John,” as a big, big man in our industry.

The funny thing is, he could have been remembered quite differently. You see, Lawrence spent a lifetime in the rough and tumble business of buying and selling used locomotives and their components. And that is a career rife with opportunities to teach the guy on the other side of your deal the real meaning of caveat emptor!

But that’s not the way Lawrence did business. Lawrence built a career on customer service and satisfaction. That’s not to say that he didn’t make money. He did. It’s just that he never made it by doing a hatchet job on the people with whom he was dealing.

When asked a direct question, Lawrence always told the truth. And when he gave his word on something, if a problem developed, as can occur with used locomotives and used components, he stood behind that word and made things right. As a result, Lawrence Beal had more friends in the rail industry than anyone else I know.

I first met Lawrence when he was running Chrome Crankshaft in the 1980s. A few years later, when I was financing the Wisconsin Central, Lawrence and NREC were in the process of selling some rehabilitated SD45 locomotives to this new regional railroad. The problem was that the WC had been delayed in starting business by regulatory issues and was about to lose the 45s because they had no money, pending the closing of my financing upon the start of operations, to pay for them. Lawrence arranged a quick short-term lease to a Class I to bridge the time gap and as a result the WC had locomotives to start business when they received the go-ahead to begin operations.

There are literally hundreds of stories like that about Lawrence in the North American railroad industry. If you have known him and worked with him, you probably have your own.

Readers who have attended one or more of Railroad Financial’s Rail Equipment Finance Conferences will remember Lawrence as the folksy fellow with the “down home” southern Illinois accent who, whenever he was asked the value of a particular type of used locomotive, always responded by smiling and asking: “Am I buyin’ or am I sellin’?”

He was a beautiful man. He was also an innovator. Lawrence led the industry in building “new” locomotives out of existing locomotive components. I don’t have any stats, but I believe NREC has built and delivered more genset locomotives to the industry than any other builder. When he wasn’t happy with what was available in the marketplace—for instance, train control computer hardware and software—he developed his own product.

There is a saying that the guy that dies with the most “stuff” is the winner. Well, if you measure Lawrence Beal’s achievements by the amount of non-railroad North American locomotive and locomotive component rebuilding capacity he controlled upon his death, he was certainly the winner. In fact, I don’t think anyone else in the industry even comes close.

For those of you who did not have the benefit of knowing Lawrence Beal and of doing business with him, let me tell you what he taught me: There is always a way to make something that appears impossible, work. You might have to take the transaction’s structure apart and reassemble it countless times, but unless someone or something is completely off the wall commercially, there is always a way to close a deal that appears impossible. It just takes some hard thinking, and, perhaps, some compromising, to get it done. Finally, you can wring every nickel of profit out of a deal and still do it honestly and ethically.

If you think and plan ahead, as Lawrence did regularly, investing in used locomotives when the market for them was a horror story, you can ride the markets up and down to a significant gain. You just need to have steel in your backbone and an unwavering confidence in your own view of the marketplace—something Lawrence had in spades.

Lawrence, we are going to miss you. We know your son Steven and his team at NREC and its affiliates will continue to do business in the way you taught them and that everyone you touched professionally recognizes that they are better off for having known you.

I know I certainly am.

Editor William C. Vantuono's interview with 

Railroader of the Year, Wick Moorman

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