How would you like to have mentors like Lou Menk, Dick Grayson, John Lanigan Sr., Hunter Harrison, and Mike Haverty?
They are all rail industry icons, and three—Menk, Harrison, and Haverty—are part of Railway Age’s hall of fame, the Railroader of the Year. They are among the people who helped shape the career of our 2012 Railroader of the Year. Dave Starling follows in the footsteps of Mike Haverty, our 2001 Railroader of the Year. Haverty and KCS in the mid-1990s won the concession to privatize and operate the prime trunk line of Ferrocarilles Nacionales de Mexico, the main line linking the U.S. border at Laredo, Tex., with Mexico City. Combined with KCS’s U.S. operations and strategic alliances with other Class I carriers, Haverty envisioned what he called the “NAFTA Railway,” a north-south main line rich with cross-border intermodal traffic and manufactured parts and products. Today, under Starling’s leadership, Haverty’s vision is coming to fruition. There has been rapid growth in U.S.-Mexico cross-border intermodal traffic. As of late 2011, volumes and revenue were up an astounding 55% and 71%, respectively.
The growth of what KCS calls the International Intermodal Corridor is one of several major accomplishments that that have taken place under Starling’s watch. In 2011, KCS achieved record carloadings and revenues. Revenues in last year’s third quarter were 24% higher than in 2010, exceeding pre-recession levels. The railroad has been able to absorb additional volume with a stable workforce—a key indicator of productivity. Capital spending in 2011 amounted to 23% of revenues. KCS is clearly in a growth mode.
Starling is also leading development of the next major Pacific coast port—Lazaro Cárdenas, Mexico, which is now the fastest-growing major container port in North America. Volume and revenue at the port are up 31% and 35%, respectively.
KCS stock recently reached a 52-week high. One leading investment analyst told clients: “The railroad industry has been one of the best-performing industries of the market, with an 11% one-year gain, despite the fact that the transportation sector is one of the most underperforming sectors within the market. One of the best stocks within the railroad industry is Kansas City Southern, which is trading at all-time highs after record earnings, and a 40% gain since August 19 (2011). I believe the stock is just getting warmed up and the best gains are still yet to come. During the company’s most recent quarter, it posted record revenue of $545 million, a gain of 24% year-over-year after carloadings were at all-time highs. The company nearly doubled its net income and increased its cash position by 300%. Therefore, I believe that KCS could become one of the best stocks to own, with higher margins and increased revenue driving its valuation higher.”
KCS continues to be a remarkable success story, and Dave Starling is the man who leads the team that’s making it happen. Starling is Railway Age’s 49th Railroader of the Year. Starling will be honored on March 13, 2012, at Chicago’s Union League Club.
Railway Age: I would like to congratulate you on being awarded Railway Age’s 49th Railroader of the Year award. The award goes back to 1964 and as you know a lot of luminaries have been honored.
Dave Starling: My thanks to you and Railway Age. I am very honored to accept this on behalf of the Kansas City Southern management team and all the employees at KCS that have made our company more successful and allowed us to be able to accept an award like this. We truly have a good organization and a good company and we’re very proud that Railway Age has recognized KCS.
RA: The transition from Mike Haverty, who was our 2001 Railroader of the Year, to you has been quite smooth. And from taking a look at how KCS has done as a company, the continuity has just been outstanding.
Starling: We are very fortunate to have Mike here as Executive Chairman. Mike has done a yeoman’s job of putting this system together. I know it has been very difficult, and I’ve heard some of the war stories. I know he has had a lot of bumps and bruises and a lot of stress over the years but he finally got the franchise put together. It’s my job and that of our management team and the entire organization to execute the plan and finally make all those dreams a reality. That’s what we are doing now.
RA: You have been in this industry 45 years. How did you get started?
Starling: I started in 1967. I was from a small town in Arkansas. It was a crew change point on the Rock Island between Little Rock and Hartshorne, Okla. So it was truly a railroad town. I had no intention of being a railroader but the yard was two blocks from my house. Of course in those days, you didn’t have air conditioning. You slept with the window open so I could hear the cars being coupled in the night, and we were always very familiar with the railroad and railroaders. I never intended to go to work for a railroad. But after some years of college in 1971 in Fort Smith, Ark., I went to work for the Frisco as a clerk telegrapher. I worked the extra board for a number of years and was fortunate to get accepted in the dispatcher training program in 1973 in Springfield, Mo. Our dispatching office was consolidated, so you got to dispatch the entire system. That was my first real taste of railroading and taking on the responsibility of having a territory and being able to run your own railroad. In those days, we didn’t have the corridor managers and some of the supervision that we have in the offices today. On nights and weekends, we young bucks felt like we were running the railroad. It was a great job, and you got a scorecard every day, so you knew what kind of day you had and how successful you were and what kind of problems you had.
RA: You came into the industry at a very tough time, the early 1970s, a time of upheaval.
Starling: We hadn’t been deregulated yet. We still had full crew laws. We couldn’t close our unprofitable branch lines. We didn’t have the efficiencies that we enjoy today. All we did was lay people off and try to cut costs. I remember on the Frisco for a few months we were selling scrap to make payroll. We were a regional railroad, so we didn’t originate or terminate a lot of freight. We were a bridge railroad between the Southeast and the West and the North. We connected with the Union Pacific in Kansas City, and the Santa Fe in the Avard gateway. The traffic was coming out of Birmingham and Memphis so we were a bridge and we had to operate efficiently. But yes, those were difficult times. We weren’t laying a lot of new rail. We were just trying to keep the system together and have as few derailments as we could and were while constantly downsizing.
RA: A lot of people who have been around in this industry for a long time tend to associate the tough times with the eastern railroads and all the bankruptcies and the Penn Central collapse, but the hard times were affecting every railroad throughout the country.
Starling: There were a lot of regionals, and we identified ourselves with the Missouri Pacific. We looked at ourselves as trying to be cost-efficient like they were. We called ourselves this lean mean machine because we could control costs and control our derailments. But it was a difficult time. It wasn’t the Railroad Renaissance or the Golden Age of Railroading that we are enjoying today.
RA: Did you have any sense that the things might get better?
Starling: We recognized early on that for the real long-term success of the railroads, there was going to have to be some consolidation. When I was in the dispatch office, if you looked at the seniority roster, the No. 1 person on the roster was [Burlington Northern Chairman] Lou Menk. A lot of people don’t know that Lou Menk was from the Frisco. No. 2 on the seniority roster was Dick Grayson. He was our chairman and CEO. And for a young guy in a dispatching office, to see the chairman of the BN having come out of your own dispatch office and to become a chairman of a railroad the size of the BN, you suddenly realize that the only limits you have are the limits you are putting on yourself, because those guys both came out of the dispatcher’s office. They were both CEOs and chairmen, Menk from a much larger railroad. That was the first time I started to think of the railroad as a career, and realized that even though there were difficult times, they could get better, that the rail industry was going to be very important to the U.S. in the future. It took a lot of years but it did.
RA: So your first management job was assistant trainmaster in Memphis, at the ripe young age of 26.
Starling: We had an aging management group. We knew there was going to be a lot of turnover. I came out of the dispatch office, went into the management training program, and was in it for 60 days. Then I was offered a position in Memphis as assistant trainmaster. So I went down to our largest, busiest hump yard, where we had our largest intermodal operation. I met an individual who would help shape my career. He was my new boss. He had just been promoted to assistant superintendent. His name was Hunter Harrison. And I am sure, as many people have learned over the years, he was a pretty good operating guy. And Hunter was a teacher. He took me under his wing as new assistant trainmaster, and I had not switched a car in my life. I had always been on the dispatch side. Hunter taught me a lot—how to switch cars and make blocks and improve the efficiency of a hump terminal. So those were good times. I enjoyed working for Hunter; we still have a lasting friendship. I’m very fortunate that I had that kind of guidance starting my career as an assistant trainmaster.
RA: Hunter is an interesting guy. Any stories you might want to share?
Starling: Hunter was very colorful. He always had a lot of ideas; he always seemed to be a little ahead of his time. But he produced. And in those days, when you produced the results, the promotions came. I left Memphis after just 12 months and was division trainmaster in Enid, Okla. And then 12 months later, I get a call from Hunter. He had just been promoted to terminal superintendent in Memphis. So he asked me to come back as assistant superintendent. I gladly accepted the position. We did a lot of good things together on the switching and blocking side, and made improvements in the terminal. Just like Dick Grayson and Lou Menk, here was Hunter Harrison, who had previously been a midnight carman at that yard in Memphis changing brake shoes, now a terminal superintendent. So, with hard work and determination, the railroad is a good career and you can have a good life with the railroad and there are opportunities. All you have to do is just work. And if you enjoy it, all the better. But you soon realize, as my wife will tell you, transportation is not a job. It is a way of life. Most railroaders understand that. And if they do, they last and are successful. If they think it’s just a job, they probably aren’t going to be in the rail industry very long.
RA: I have found that to be true with all the top management I have spoken with the past few years. All the Railroaders of the Year have a different story, but they all have this common thread where they started out young in the business and it just got into their blood.
Starling: There is a thrill of that locomotive rumbling down the track. And when things happen, they’re big. Derailments, things we don’t like to talk about, flooding, fires, washouts. Those are all big events. Railroading is not for the faint of heart.
RA: Let’s talk about your personal life. Moving a lot must be tough.
Starling: I wasn’t married when I was in Memphis, which was probably beneficial to my career at the time because I could spend more time at work. I was promoted to division superintendent in 1979, and was in Springfield, Mo. I had the territory from St. Louis to Wichita and Monette to Fort Smith, and that is when I met my wife. The Frisco sent me to an MBA program at Emory University in Atlanta, and I met my wife, Candace Christensen, there. We were married in 1980. We have two sons, now 28 and 26.
She learned about the railroad very quickly. As a division superintendent, I had to be able to answer the phone at any time of night—you know, three o’clock in the morning. The phone would ring; I would generally catch it on the first ring. I could have an in-depth conversation and talk about the problem and come up with a solution, talk about what we’re going to do the next morning, hang the phone up, and be back asleep by the time my head hit the pillow. Now, our terminology, our language, is unique. One night, we had a crew dying on the hours of service rule. The chief dispatcher calls and as we’re talking about it, I say, “If the crew is dead, go ahead and tie them up and take them to the hotel and I’ll talk to you in the morning.” So at 3:30 in the morning, I fall back asleep. I don’t think anything about it. I wake up at 5:30 and my wife is lying there staring at the ceiling. She says, “We’ve got to talk.” I say, “What are you talking about? She says, “I understand that things happen on the railroad, and it’s very unfortunate that this crew has died. But why would you tie them up and take them to a hotel? I just can’t figure that one out.” We have a unique vocabulary on the railroad. That was my wife’s first experience of trying to understand it.
RA: And she’s learned it over the years?
Starling: Yes. She doesn’t get quite as upset now as she used to on those phone calls!
Dave Starling brings a wealth of global experience to Kansas City Southern from container shipping to operating a profit-making passenger service (yes, you read that right). His worldwide journey, which started in Chicago, took him literally around the world, to the Far East, to Panama, and finally, Kansas City.
RA: When did you really feel that your career was more than just “a local railroader?”
Starling: It was during those days in the dispatching office, and then finally getting out into my first assistant trainmaster job in a hump yard. It was really gratifying to see how many cars you could pour over the tipple at night and how many cars could be switched and trains trimmed out and how many trains you could make up on your shift. It was a great feeling.
When the BN purchased the Frisco in November 1980, I was assigned to the director of trains and terminals and was the liaison to the BN transportation office for our region. We were the sixth region of the BN. Not long after that I was asked to go to Chicago in 1981 as division superintendent from Chicago down to Streator, Ill., and there we had commuter trains. For an ex-dispatcher to have a commuter line, that’s just great stuff—triple track with high speed crossovers. The number of trains we ran was just amazing. We also had our largest, busiest intermodal facility in Chicago. I started to feel I was part of something larger, that this industry was going to have a future, and it was going to do a lot better, that there was a bright future for the railroads. About that time, I met another individual that would become important later in my career: Mike Haverty. I was an operating guy, so I could talk the operating language. Mike and I spent some time together. I left there with a really good feeling. Mike had a very senior position in Santa Fe. I didn’t know what role he would play in my career later.
RA: You left transportation in 1983 and went to the MidAmerica Commodities exchange. That’s an interesting shift.
Starling: I had a brief period of insanity! I wanted to be a commodities trader. I had traded a little on the side and thought it was fascinating. Of course in Chicago, you’ve got the Board of Trade and the Mercantile Exchange, and there is a small exchange called the MidAmerica. I purchased a seat on it and found myself in the corn pit a month later with a trading jacket and a stack of cards in my hand trying to trade corn. I soon discovered that railroad camaraderie didn’t exist in the trading pit. There were winners and losers and everyone wanted me to be a loser. No camaraderie, few friendships. Everyone was just trying to make a living, and it really didn’t seem to have much of a future to me. I did that for 14 months.
During that time at the Burlington I had met the Mi-Jack group. I met Jack Lanigan, Sr.; we had purchased some intermodal cranes from Mi-Jack. They had a terminal operating business with only three terminals. At that time the railroads were trying to save money, so they were contracting out their intermodal facilities. It was really just a start-up business, but it was really starting to become popular as a good way to save money, so we formed a company called In Terminal Services. I went to work for Jack Lanigan, Sr. as the general manager of that group and I did that for four years. ITS still exists today, a very successful company, one of the leaders in the industry as far as terminal operations. A lot of the managers I hired to run it are still there, so that always gives me a good feeling. Jack was the third person in my career I really learned a lot from.
Jack started his business in the basement of his house, and was a pioneer in the industry. He developed a lot of products, like twist lock assemblies, and really helped the industry more than people would ever imagine. He was one of the pioneers in intermodal cranes, and I think he actually put the first one in Corwith Yard in Chicago for Santa Fe.
Hunter Harrison taught me cost control and terminal and yard operations, how to be efficient. But Jack focused on the customer. Jack said, “Dave, you know how to control costs but you can’t save your way into prosperity. You’ve got to have customer growth, and you’ve got to have more revenue every year.” That is what I learned from Jack, and it stuck with me.
We would get into difficult situations. We’d have a door slammed in our face. Jack had a way of pulling everyone together and saying look, this is a disadvantage, let’s see how we can l make an advantage out of it. Don’t dwell on the failure; try to move it into a positive. And that also stuck with me.
I always wanted to work overseas. I had an opportunity to go to work for American President Lines. APL at the time was the leading innovator in the doublestack container market, which they had started, coming off the West Coast from the vessels into the U.S. and then marketing the backhaul of those containers domestically. I was the managing director of Chicago for a time. Then I went to Atlanta as managing director of the southern region. Mexico was part of the southern region, so that was my first exposure to Mexico. Little did I know that would become very important to me in the future.
We set up the dedicated trains, the auto parts coming out of Detroit and Chicago—from Detroit to Hermosillo for Ford; Ramos Arizpe for General Motors; Toluca for Chrysler. We set up a doublestack network that flowed into Mexico—great exposure to Mexico and a great opportunity. Tim Ryan, the chairman at the time, wanted some of the domestic people to go into international and some of the internationals to come in to domestic. So I got an opportunity to go to the Philippines as a managing director, one American among 101 Filipinos in our office. I realized very quickly that I was overseas, but that there was not a lot of mystique on the ocean side. The containers are the same size, the chassis are the same size, and there are still customers. You’re trying to fill a ship instead of a train. It’s still transportation. So I embraced it, and did that for 14 months.
A job opened in Hong Kong so I moved there as a managing director for Hong Kong and South China. Within a year, we were reorganized and they created a vice president’s position, so I became vice president of Central Asia. We all traveled as a family. My children went to international schools. They had an opportunity to learn a lot about different cultures and how to respect them. That helped my wife and me as well. We have a tendency sometimes as Americans to be a little arrogant, that our way is the right way. When you get into these other countries you see it differently. There is a lot we can learn, and when you take that attitude it really helps people; they can see it in your behavior. They know you respect them and their opinions. That is the way we try and operate our franchise in Mexico.
RA: You’ve said one thing every young manager should learn is to never to burn your bridges.
Starling: There were railroad consolidations and ocean carrier consolidations. I had been overseas about seven years. Neptune Orient Line, a Singaporean company, purchased APL. So we had a new owner. About this time the Panama Canal road show comes to Hong Kong. Working for an ocean carrier, I was called on by some old friends from Mi-Jack. Dario Benedetti came in and was doing a road show on potentially rehabilitating a railroad that ran across the Isthmus of Panama. It was going to connect the ports and not only did I get interested in the concept and thought it would work, but they started talking to me about the job. I had a rail background; I had an ocean background and a terminal operating background, so I was told I would be perfect for the job. Now I had the Lanigans and Mike Haverty reentering my life, as co-chairmen of the Panama Canal Railway. This was in 1999. My oldest son was getting very close to entering college. My youngest was a high school sophomore, so it was time to start getting back closer to the U.S. I knew they would both go to college in the states. Panama is only about three hours to Miami by plane. Mike’s a visionary and he looked at the Panama project and he saw things in it that others didn’t. It turned out that we were only one of two bidders. No Panamanian company bid on the project. The concession was granted in February 1998. I moved there in June 1999. We started construction in January 2000 and we finished it in July 2001.
There is another thing that nobody believed we could do: make money with passenger trains. In fact, I remember walking into a board meeting and presenting an idea for passenger service. Mike looked at me from across the board room and said, “Starling, do you know how long it took us to get rid of passenger service? And you’re going to try to bring it back? This better be very profitable.”
RA: That was your idea?
Starling: Yeah, that was my baby. There was a need. The highways were terrible. And it was a niche and it worked and it made money. It allowed us to start the railroad ahead of the completion of the intermodal terminals so we could train our engineers, and start to get an operating plan together. We started our passenger service in July 2001 and then opened for freight service in November. It was truly a field of dreams—build it and they will come, so we built it. It was 60-inch gauge that had originally been built in 1855. It was in total disrepair. The rail was junk. You could barely get over it on a motor car or high rail. We rebuilt it with 136-pound welded rail, concrete ties, and ballast granite from Nova Scotia. It’s a 70 mph railroad, truly a great railroad. The idea was to put in the capital up front. Operate articulated equipment, doublestack trains only, and not replace any of that for 50 years, the life of the concession. And so far, that has been the case. And they did come when we built it. The Panama Canal Railway has made Panama a huge rail shipment center because of the location and the number of ships in transit. But it really made all the ports look like one. You can bring a ship in, offload onto another ship, and move it across the ocean. You can move it across the isthmus across the Pacific to the Atlantic or the Atlantic to the Pacific, and load it back to a ship still in bond and do a trans-shipment. We call it a dual ocean trans-shipment, and as far as I know it is the only place in the world you can do this. So it became extremely successful and it continues to grow today. I remind Dave Ebbrecht, our EVP of operations, that the operating ratio is in the high 40s or low 50s so you still have a target out there. With all your improvements, you’re still not there yet; you still have a goal. I want to remind my railroad friends that it is truly the only transcontinental railroad. It operates from the Atlantic to the Pacific and KCS owns 50% of it. You’re still trying in the U.S., but in Panama there is a transcontinental railroad!
RA: The conventional wisdom is that passenger rail is not a profit making enterprise. How did you structure this so that it was profitable?
Starling: We were competing with an air service. Managers from Panama flew to the free trade zone in Colon, so we had a target price that we could beat. And there is a five-month rainy season in Panama that causes a lot of air delays. The planes were old, all prop jobs. We offered a service that would be one hour, from one side of the isthmus to the other, five days a week. The first day we had 22 people on the train. Three years later we had days with people sitting on the floor of the train because they couldn’t all get seats. So, it fit a niche but we competed against air. You couldn’t compete with the buses, so it was clearly a niche and that’s why it worked. It was also very popular with the government. They loved it. They suddenly had this first-class passenger service across the isthmus.
RA: On the KCS, you came on board in 2007.
Starling: Panama was maturing; the business plan was working, and volumes were growing. We had a good management team. Mike Haverty and I got to spend more time together. A lot of the ocean carriers that we served in Panama were the same customers KCS was trying to interest in Lazaro Cardenas, the Pacific Coast port in Mexico that KCS solely serves. These customers would ask us about Lazaro Cardenas. I’d share that information with Mike and Mike came up with the idea: Why don’t you help us with Mexico? So in 2007, I started spending time in Mexico with the KCS team, helping develop the intermodal side as well as the port. I was an executive representative reporting to Mike for about a year. Then in 2008, Mike asked me to come to Kansas City as President and Chief Operating Officer. He said, “I’ve got to groom a CEO; I’m not giving you a promise, but there’s an opportunity.” So I accepted the position and came up in July 2008. I joined the board in May 2010, and then became President and CEO in August 2010.
Mexico: The final frontier
Kansas City Southern’s growth in Mexico has been nothing short of astonishing. Under Dave Starling’s leadership, Mike Haverty’s vision of an integrated railroad with virtually seamless cross-border operations for intermodal, automotive, and other key traffic stayed on target. There’s more growth ahead, as our Railroader of the Year explains.
RA: Let’s talk about Mexico. You had had some experience dealing with Mexico when you were with APL. Between that time and now, there have been big changes.
Starling: Mexico is really our growth story. I could see that even back in 2007. That’s why I told Mike Haverty that Mexico is really going to be the catalyst for KCS’s growth. There’s more manufacturing moving to Mexico; even today the GDP is growing faster than in the U.S. And if you look at our railroad in Mexico, we run down through the industrial corridor from Laredo all the way down into Mexico City, and to Lazaro Cardenas. So about 65% of the population and about 60% of the GDP is in that corridor. It’s like real estate—we’re in the right place, the right location. And it’s growing like gangbusters. We’re getting more business; we call it near sourcing. We talked about it for two years. Now everyone else is talking about it. You know all the presentations we gave, everyone that we talked to. Worker wages between China and Mexico are converging. China is going up faster than Mexico. You’ve got an advantage with the strength of the peso vs. the yuan. It’s our transportation pipeline. China to Chicago takes about 25 days. If you manufacture something in Mexico you’re going to be there in five days. You’re going to ship from Asia in a 40 foot international container, but you’re going to ship from Mexico in a domestic 53-footer. So as Mike will say, it’s just common sense to just look at it. Some of our friends that have factories in Mexico go to Monterrey. They spend the day, meet with their managers, look at their manufacturing process, and they’re back home in the U.S. for dinner. You can’t do that with Asia.
So, Mexico has a great growth trajectory. It’s about 46% of our revenue today. I think it will be clearly over 50% in the future. With Mexico, we are already at our pre-recession traffic levels. I think we are the only Class I that is, and the main reason for that is Mexico and the growth coming out there. Our interchange partners are starting to see that. The railroads we work with on the different gateways want access to Mexico, and we’re working diligently with those other railroads to give their customers efficient access. We’re seeing phenomenal growth in the intermodal side as well as the automotive side.
RA: Like the Meridian Speedway?
Starling: That has been a big success for Norfolk Southern and for KCS. We’re actually in the last year of our capital expansion of the original investment that NS made. We should have all that done by mid year. We’re probably at 50% capacity today, so we have a lot of capacity on that line. It is the best and fastest route from the West Coast to the Southeast. And we now have our Mexico intermodal network connected with that speedway. It comes up to Shreveport and connects with the hot trains out of Dallas. And that is our avenue, our gateway, to the Southeast. We also have the gateway over Kansas City and St. Louis to the Northeast. And we have a good gateway with CN at Jackson, Miss. We are working with all of our partners to help them be part of the Mexican network and have access to Mexico.
RA: Mike Haverty really saw this coming when he put together a team that did the due diligence work and put in what at the time was thought of as a ridiculously high bid for the Northeast concession, but he was right.
Starling: You’ve got to give Mike credit. Mike had a lot of detractors in those days who thought it was a wild idea. But Mike had a dream, a vision. He knew the KCS would always remain a regional railroad if we couldn’t build out the network to the 6,000 miles that we have today. Today, because of Mexico, and because of the network we put together and amount of capital that we are putting into our main line now, we’re very relevant. Three years ago, from Kansas City to Shreveport, our densest line, we did a lot of ties, undercutting, and rail replacement. We got that line in good shape. No slow orders. And once that was done, we continued the march to Laredo. We finished that line this year. We’re now working on the Beaumont sub; we’re working on the Laredo sub. We’ve got a good railroad. We’ve put capital into it. The revenues have improved and we have fixed our balance sheet, and we’ve been able to smooth our debt. We now don’t have any significant debt due until 2015. We’ve gotten through our issues of having to go to market in difficult times. We’re turning this around and we are seeing the benefit of it now and this is why I am very proud of this team and the job they have done in pulling this all together and making it work. And I want to celebrate that. I want them to celebrate being successful.
RA: Like most of the industry has done during the tough times in the recession, you’ve kept up with investment. The Victoria-to-Rosenberg (Tex.) line is one example.
Starling: It is. In 2008, I went to my first analyst meeting, it was July in New York, and our stock was at an all-time high. I thought, this is great! This is going to be fun! Then we had Hurricane Ike in the Gulf; it came in first, and then we had Hurricane Gustav. We saw our volume start to go away; the chemical companies didn’t seem to be reopening like we thought they should. And then we saw all the commodity groups start to drop. And we realized we were in a recession. It was a difficult time for us, because we still had the Victoria-to-Rosenberg line to finish. That was the last piece of the puzzle, the last piece of the dream that Mike had, to get everything connected. We did not want to wait for the first quarter because we didn’t know if it was going to be available to us or not. So we went to the market and borrowed money at a very high interest rate. We finished the Victoria-to-Rosenberg line. We pulled a team together and we zero-based every cost center we had. Nothing was sacred. Political agendas went out the window. Personal agendas went out the window. Everybody worked as a team to really zero-base the company and take the cost out. It worked for us. The mantra was one network, one team. We needed to pull Mexico and the U.S. teams together and run this as one network from a cost standpoint and also from an asset side. We got our credit facilities in place. We are now in positive free cash flow. We’ve taken a lot of that high interest debt out; we’re still doing that, still restructuring, but we are in a good place right now. We have our Mexico and U.S. team working together like they have never worked before.
We had a problem on the marketing side where, if you were a salesperson in Mexico and you had a load to Laredo, there was cause for celebration. We said, look, we’ve got one 6,000-mile network, not three. So we wanted Laredo to look like just another point on the map. We did not want Laredo to be considered an interchange point. We were one system and we coordinated and ran it like one system. That’s when the efficiencies really started to come on the locomotive and car side. If you were switching at Laredo, you could do it less expensively in Sanchez right across the border. It was just common sense. So we started truly running it and coordinating it like one network. And the sales force in Mexico today understands that they have a 6,000-mile network and there is cause for celebration when they sell a load beyond Laredo. We now have about 25% of our business in what we call cross border. It originates or terminates in the U.S. or Mexico and crosses the border on a through move. The biggest success right now is with intermodal and automotive. There are 2.6 million truckloads that cross the border every year into territories that KCS serves. We have less than 2% of that market. So we call intermodal and Mexico the last frontier. That is the big opportunity for conversion. And that is what we are focused on now. We are growing at a very high percentage. We’ve got a lot of momentum. We’ve got a lot of the asset players in that market now. We’ve become relevant because of Mexico.
RA: Do you have a goal as far as market share? You said it was at 2% now. There is nowhere to go but up.
Starling: I don’t think we should set our goals too conservatively. When a trucker comes in and takes another trucker’s business because he has an intermodal solution and the other trucker doesn’t, then that really starts a snowball effect. The truckers that have the direct truck business start converting it themselves because they don’t want another intermodal carrier to take it. Today, the truckload carriers with an intermodal product are looking at their book of business saying, what can I convert? It really has a lot of momentum and I think it’s just going to continue. And it is a good product. We have had to teach the beneficial owners that Laredo is a point on the map and not a place to bill to. In the old days when you billed to the U.S., you billed to Laredo. And in Mexico, they bill from Laredo into Mexico. We are far more sophisticated with our customs process. Today, going through Laredo, it’s just the right thing to do. You shouldn’t pay a big customs fee in Laredo; you should just move that cargo through. Today, a Mexican trucker will truck it to the border. A shuttle trucker gets on it and crosses the border, and then a U.S. trucker gets on it and takes it to the destination. Why have this shuttle truck in the middle? And why have those opportunities for the freight to be tampered with?
RA: So there’s no through truck service?
Starling: That’s correct. There are too many handoffs. And in Mexico, the doublestack train is far more secure than a trucker out on the road. There are a lot of opportunities to tamper with freight. The conversion is really accelerating. We think that will be the growth story for KCS in the future. And on the automotive side, we serve nine different plants today in Mexico, and there are four new plants that are going to be built. Mazda and Honda have already chosen their location. Hyundai and Tata are looking for locations now. So we think Mexico is going to provide a solution on the cost side for the auto manufacturers. When you build a plant in Mexico, you not only serve the market in the U.S., but you can also serve the South and Central American markets, and we are handing a lot of exports and imports through Lazaro Cardenas. Mexico has an emerging middle class. Their growth projections look a lot better than ours. So Mexico is doing quite well.
RA: Lazaro Cardenas: How is that coming along?
Starling: The nice thing about Lazaro Cardenas is that, unlike the West Coast ports, you have a lot of real estate. There’s natural deep water, 50 feet plus. We’re handling grain and finished autos. A new facility will open in the first quarter called TPP, for ores and minerals. We’re also talking about exporting coal. So Lazaro Cardenas is a multipurpose terminal. And it has a lot more room for expansion. We have slab steel, concrete. Pemex has a big facility there. So you’re going to see a lot of commodities coming through Lazaro Cardenas that are traditional commodities that railroads handle besides containers. Hutchison Port Holdings facility is now in the second phase of a three-phase expansion. That phase takes them to about 1.2 million TEUs. When they finish the third phase, that will take them to about 2.2 million. A second concession has been awarded. If you draw a circle around Lazaro Cardenas, the Mexico City market and Guadalajara, there are about 55 million people. So it’s very similar to Los Angeles. When the ship docks you could generally get 40% or 50% of your freight going in the L.A. area. So your boxes would unload, turn quickly, and go back to the head haul. Lazaro Cardenas is very similar to that. A lot of that freight goes into Mexico City.
RA: You still use the term NAFTA Railway?
Starling: We now refer to KCS as the International Intermodal Corridor. We have spent more money in the past three years on intermodal than we had probably spent in the past 20 years. We’ve doubled the size of Monterrey’s intermodal facility. We bought the intermodal facility in San Luis Potosi, which is in the middle of the Mexico. It’s 267 acres and we will start expanding it this year. We purchased a facility on the west side of Mexico City called Puerta Mexico, and we tripled its size. That, coupled with the completion of the Victoria-to-Rosenberg line, has given us a fantastic corridor to operate these intermodal trains, and we’re now seen as an intermodal railroad. When I first came, people didn’t talk a lot about us having an intermodal product out of Mexico. And when you started looking at the network, we really didn’t. Now, it is a product that our customers can sell. Our truck line customers that are asset players are certainly playing in that space now and they see a big potential. One of the truckload carriers actually refers to Mexico as the last frontier.
RA: Let’s talk about your leadership philosophy.
Starling: In my previous life at the Frisco, my general manager had a large picture behind his desk. When I would go into his office and sit across from him I would see this picture behind him. It was a picture of a headmaster with a riding crop in his hand. And he was slapping the riding crop down in his palm. And the caption below it was, “The motivational approach. Make them want to do it.” And I would always look at that and think, if I was ever in a position where I am in charge of a company or a significant number of people and I get the chance to set the tone, that is not what I want to do.
The railroads were tough environments. You knew when you went in that it was going to be difficult, that you were going to work long hours. There was a lot of fear in the organization. There was always an attitude of “make them want to do it” just like my former boss’s picture. That doesn’t work today; I don’t think it has worked for a number of years. People need to buy into what you’re doing. They need to understand that this is their company. They don’t need people to tell them what to do. Most of our people have been well trained. They’re experienced. Give them the vision, give them the objectives, and get out of their way. And don’t create an environment of fear. Allow them to make mistakes. I would rather someone be guilty of commission than omission. So get out there. Stretch yourself. Let’s try some things.
With some failures come greater successes. We try to create an environment where we have leaders, but we want everyone to be a leader in their own respect. We shouldn’t always look to the top for one person to be our leader and tell us what to do. The tone at the top should be to work on the strategy and the big picture. We need to make sure the company is focused in the right direction, that we’re supporting it from a financial side, from a planning side, but we shouldn’t micromanage. We should let people do their jobs. We should celebrate our successes. I think all the employees in this company feel good about where we are today. I think they feel good about themselves. They feel good about the success of their company. It is their company. I think it is reflected in the performance of the company.
I know it is reflected in our safety performance. We have won five Gold Harrimans in a row. This is a point of pride for any company and to me a reflection of how our company is being managed. So I feel very good about what we are doing today. And this one team, this one network, has caused our team in Mexico and team in the U.S. to work very, very well together. We have taken employees from the U.S. to Mexico. We’ve taken people from Mexico to the U.S. on exchange programs. They’ll work six months or a year in operations and they’ll go back. We are going to continue to do that. It is very important to make this company operate as one, for us to reach our full potential.
RA: So going forward, the company is in good financial shape, with excellent results this year. What do you see over the next two-to-three years?
Starling: You’re going to see continued growth in the automotive and intermodal segments. We have seen indications that more manufacturing businesses may relocate from China to Mexico. We think we are going to see more of that, and we see more near sourcing because of the currency, the labor force, and the converging wage rates. You’re talking about a much quicker time in the pipeline, which gets back to the cost of goods. We think that we are going to provide that service, that gateway that comes in through our network for all the shippers in the U.S., that go to our major gateways. We’re where the superpowers meet. We’re not a superpower, but if you look at our locations and you look at the success of NAFTA, we think NAFTA is just now getting into its growth curve, into the real benefits. We want to work with the superpowers; we want to work with the other lines. We want to open up Mexico to their customers, and to enjoy good relationships with other railroads.
RA: What would you say to the railway supply community?
Starling: We need to work more closely together. We need strong suppliers. We need multiple suppliers. One thing I learned from Jack Lanigan: Even though he controlled at the time a large percentage of the intermodal crane market, he never wanted his competitor to go away. You’ve got to have competition. You want to know that when you go out to bid you’ve got more than one bidder. One thing that makes me a little nervous today with all the consolidation is that it seems like we have a shrinking number of suppliers. They’re becoming mega-suppliers. And that’s fine if it’s done properly, but we need all sizes of suppliers, not just the big guys. We have to do a better job of planning and providing our capex plans to the suppliers so they feel comfortable that they can expand and continue to invest in their business. We’re looking at some creative things we haven’t done before, like forward buying into future years. I know some of the larger railroads have for some time done a baseload of certain components they know they are going to need. This gives suppliers the ability to invest in their business. So we’ve got to communicate better and we’ve got to treat them more like partners than we have in the past.
This is really a good moment for KCS, and I’m very pleased that our railroad is being recognized. I know it is the Railroader of the Year but I’m one person. It’s really the KCS employees that have made this happen, and I just hope that they feel very good about this recognition, and what it means to them. We have become relevant in this industry. We are no longer a regional railroad and I think we should all feel very good about that and very good about ourselves.