Wednesday, June 06, 2012

Profitability, beyond coal. Imagine

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Give Norfolk Southern CEO Wick Moorman due recognition for his courage to be contrarian. Applause from this observer follows.

Wall Street canyonMoorman rang the closing bell at the New York Stock Exchange June 5, marking 30 years of the NS ticker symbol NSC on the NYSE. But more important than that, he offered a measured viewpoint on the current coal volume slump and its effect on Class I railroads in general, as well as NS in particular.

And—borderline heresy, perhaps, to some, but certainly not conventional wisdom—Moorman intimated that while coal is important, and any volume slump is worth monitoring, the commodity might not be the end-all/be-all for the industry's health or its future.

"Coal is such an important part of our business that it obviously gets a lot of focus, but I do tend to think that today people are probably looking a little too hard at coal and not seeing all of the other good things that are going on," Moorman said.

Let's revisit that valuation of coal, just to be clear: Important, yes, certainly. Overarching, maybe not so.

For old-time railroaders wedded to the slogan "king coal," this might be seen as a radical shift in thinking. But the industry's first-quarter 2012 earnings numbers were suggesting this kind of delinkage, something most Wall Street analysts appear to have ignored, or simply dismissed, as a one-off, a fluke.

Following the release of those 1Q earnings, I had the internal fortitude to question this assumption, this one-for-one linkage between profit margins and coal. But (by definition) I kept that question largely to myself (cowardice, perhaps?), sharing it later only with Railway Age staff. By contrast, Mr. Moorman's public pronouncement deserves high praise. It is a bold stance which, if nothing else, should get people thinking.

Because it's bad fiscal policy for any industry or business or individual to put too many of one's eggs in any one basket. And that's true even if coal still is the one indispensable commodity, the dominant eggs in that basket—it's true even if Wick Moorman's take is not the current reality I myself think it already is.

The coal card was understandable pre-Staggers Act, when strictly playing defense at least was defensible and coal was the ace in the hole for over-regulated railroads. But it's a questionable strategy as a standalone measure now that railroads have come roaring back, competing for a wider range of commodities by price, by ride quality, and by proactive marketing efforts (and sometimes competing over shorter distances, at that).

Actively exploring ways to actually reduce coal's dominance may seem to smack of sacrilege. But it's not a negative, or at least shouldn't be—not for coal transport and certainly not for freight railroads. It's sound strategy, regardless of the surprises of export trade, balance of payments, environmental rulings, or climate fluctuations.

Again, just to be explicitly clear: No one is saying railroads should walk away from coal; it is a mainstay, and should remain so far into the future. And no one can move coal the way a railroad can. But that doesn't mean other market opportunities should be ignored or accepted passively. It's a new railway age. Diversification offers quite the lucrative payback.

Railroads big and small have seen this as they pursue all those natural gas opportunities arising. But now a Class I CEO has had the courage to say so.

Way to go, Mr. Moorman. Let's hope your clarion call June 5 rang more than one bell, reaching far beyond New York or the New York Stock Exchange.

Douglas John Bowen

Douglas John Bowen is Managing Editor of RAILWAY AGE. He also served as Editor of Intermodal Age from 1989 to 1991, and has held various positions at Inbound Logistics magazine, High Speed Transport News, The Journal of Commerce, and CNN/Money. Bowen began his journalism career at the Asbury Park Press, a New Jersey daily newspaper. A graduate of Rutgers University, Bowen resides in Hoboken, N.J. He served as president of the New Jersey Association of Railroad Passengers (NJ-ARP) from 1987 to 2000 and again from 2004 to 2010, serving on the NJ-ARP board from 1984 until 2012; he remains a member of the statewide organization.