BNSF was created 17 years ago by the merger of the Burlington Northern Railroad and the Atchison, Topeka & Santa Fe Railway. Two men with sharply different backgrounds have served as its chief executive officer—Robert D. (Rob) Krebs and Matthew K. (Matt) Rose. Krebs was an operating executive with the reputation for being one of the most focused executives in the railroad industry. The younger Rose had a marketing background and was not nearly as well known outside the rail industry.
It was Krebs who identified Rose as the best choice to succeed him when he retired. Krebs has said that he realized that railroads were going to go through some tremendous changes, and the traditional route to the corner office would not be sufficient. Railroads traditionally were led by men who were within four or five years of their own retirement when they achieved the top job.
Krebs had been named president of the former Southern Pacific when he was just 38 years old. “I knew my successor should be someone who would be around long enough to deal with the changes,” he said some years ago. Rose was a marketing vice president and Krebs said his biggest attribute was that he was young, adding that if Rose had been older, he probably would not have recommended him to the company’s board.
Krebs and Rose both laugh when talking about the meeting at which Krebs informed the younger man that his promotion to CEO would be presented to BNSF’s board of directors. Rose said, “That’s great, Rob, but I have absolutely no operating experience.” Krebs replied: “I knew there was something I forgot. Effective tomorrow, you are the chief operating officer.”
Giving Rose the operating exposure worked out well. At 52, Rose still is the youngest of the seven men heading up North American Class I railroads. He has been BNSF’s chief executive for a dozen years, and is the dean of the seven in years of service.
Travel to BNSF’s campus headquarters just outside Fort Worth, Tex., and two things strike you right off the bat. First, the company is a railroad and proud of it. The entrance to the executive building is flanked by two silver-sided business cars on concrete pedestals—the Cyrus K. Holliday and the James J. Hill, named for the founders of the Santa Fe and the Great Northern, respectively. The reception area features railroad memorabilia. Second, people go about their business quietly and efficiently. BNSF presents a no muss, no fuss image.
BNSF is unique among major railroads in that it is not a public company. It is a wholly owned subsidiary of Berkshire Hathaway Inc., the huge holding and investment company controlled by legendary investor Warren Buffett. Buffett, who had been on the BNSF board of directors and who already was the largest stockholder, paid $44 billion for the original and subsequent blocks of BNSF. The deal closed in February 2009.
Rose now reports directly to Buffett and has no board directing him. Buffett, he says, makes no effort to micro-manage the railroad, being content to hear Rose’s plans and requests for investment capital. While Rose had good relations with securities analysts who cover railroads, he does not miss having to answer their many questions at quarterly earnings reports and analyst calls.
Rose spends considerably more time meeting with BNSF customers and public officials whose actions can affect the railroad. He also has demonstrated a talent for dealing with public policy issues, particularly when it is his turn to hold the rotating chairmanship of the Association of American Railroads.
For example, while most railroad executives adamantly oppose efforts by trucking companies and major shippers to increase the maximum weight and length of trucks allowed on federally funded highways, Rose presents a more modified view, focusing on the user fees and fuel taxes truckers pay. Big trucks do not now pay their allocable share of the cost of highways, their user fees coming about 21% short, according to independent cost allocation studies.
A trucking industry effort to take maximum weights from the current 80,000 pounds to 97,000 pounds, and to allow multiple trailers up to 120 feet in length, was part of the surface transportation reauthorization released earlier this year. That would have increased the effective subsidy of trucks to 50%. Rose has said that if trucks paid their fair share, then he would have no problem with allowing any weight on the highways.
It should be noted that some of the largest corporations in America operate huge private trucking fleets. That puts those shippers on the side of truckers and in opposition to the railroads. Railroads also have a need for more highway expansion and maintenance as intermodal is the fastest growing business they have and congestion today affects rail drayage in the same way that it affects all-highway freight movement. Rose believes that “we need all the infrastructure we can get,” advocating for more authorized spending on highways. At the same time, he is quite content to fund BNSF’s growing capacity.
Investing capital in his railroad is Rose’s principal focus. The railroad he took over when Krebs retired had been through a period of inadequate investment that was followed by a spending binge that made it a well-invested company. Burlington Northern had gone through a period when it invested less capital than it probably should have. When BN merged with the Santa Fe, Krebs embarked on a large capital investment program that securities analysts dubbed “build it and they will come,” after the popular movie “Field of Dreams.” Analysts tend to look askance at capital spending when they think railroads should return capital to stockholders through stock buy-backs and dividends.
The Krebs program was in what Rose referred to as “three buckets.” First, there was a near-desperate need for more high-horsepower locomotives. BN was short of power and the Wyoming Powder River Basin coal business was exploding as utilities rushed to get supplies of the low-sulfur coal. Moving huge tonnages over longer distances than coal ever had been shipped previously called for more available horsepower. BN’s coal business struggled to satisfy customers, but contracted tonnages frequently were delivered late.
Rose referred to the locomotive situation as the catch-up bucket. Next came the “maintenance bucket,” capital spending intended to enable the railroad to provide decent service for the customers and business it already had.
Finally, there was the “expansion bucket,” which was intended to help attract new business and to serve it to customers’ satisfaction. It was the latter “bucket” that sent analysts into orbit and brought the derisive “build it and they will come” down upon Krebs’ shoulders. The BNSF capital spending program eventually was scaled back. While analysts claimed to have forced Krebs to retreat, the actuality was that the catch-up spending had been accomplished.
Since he succeeded Krebs, Rose has focused on improving customer relations. BNSF had a reputation for adversarial relationships with major shippers, particularly in the Upper Midwest where BN had been the dominant carrier.
The BNSF merger combined Santa Fe’s wheat franchise with BN’s corn and soy bean business, making it the largest grain handler in the industry. Following deregulation in 1980, BN moved quickly to moving export grain by unit trains, now in “shuttle trains” of up to 130 cars that move huge tonnages to West Coast port terminals. Unit train growth led to abandonment of many branch lines, as there simply was not enough grain to fill the unit trains. Large elevators, usually located near main lines, were able to offer a premium for the greater tonnage of grain they needed. Local government officials saw farm-to-market roads crumbling as more trucks carried maximum loads over roads that never had been intended to handle them.
Rose recruited executives who had experience in the grain business rather than in the railroad industry. Today, BNSF has grain marketing officials resident in the growing areas it serves, and relies on arbitration for most price and service disputes, keeping them from regulatory litigation at the STB. Where BNSF once was considered arrogant and uncaring by many in the grain industry, Rose’s willingness to deal with shippers seems to have improved relations significantly. Relations in the grain business still can be prickly, but are significantly better than they previously were.
BNSF’s traffic mix is changing. Where coal and grain effectively were guarantors of the railroad’s survival during a period of industry consolidation, intermodal today is the driver of growth. Coal continues to be a vital commodity for the railroad, but environmental considerations and much lower priced natural gas make it unlikely that much additional coal will be used to generate electricity. BNSF is seeking to develop an export coal business, but local opposition is delaying development of an export terminal on the West Coast (following story, p. 17).
The principal growth driver for BNSF today is domestic intermodal traffic. BNSF has been a leader in international traffic, but it is not likely to grow much more than the growth of U.S. international trade. Improvements in service, coupled with rail’s advantage over trucking on fuel economy, pollution, and truckers’ driver shortages, allow railroads to compete successfully for domestic traffic that until recently was considered an unassailable truck market. Major retailers are developing regional distribution centers in locations that railroads can serve.
Where railroads once were at the mercy of the economy, and a recession would result in bankruptcy for the weakest carriers, there is a level of optimism today. The U.S. gross domestic product is expected to grow from $10 trillion to $14 trillion in the next decade. A growing population and economy means more “stuff” will have to be moved, whether it be food, manufactured goods, components, or energy.
BNSF, like the other Class I’s, is pouring capital into its system so it can handle the forecast growth. This year, BNSF expects to invest close to $4 billion in capital programs, a major part of the industry’s anticipated $15 billion in capital spending. BNSF will acquire cars and locomotives, lengthen sidings to enable it to operate longer trains, and will continue investing in Positive Train Control (PTC) and federally mandated technology to prevent collisions and trains exceeding their track and speed authorizations. Rose doesn’t like the mandate, but while other CEOs in the industry are outspoken in their opposition to PTC, he has been more muted.
Rose credits Krebs for putting BNSF on the road to capital security. “Rob was a visionary,” he says, pointing out that capital allocations stayed strong under Krebs and now himself. “Capital invested is always more valuable five years out.”
BNSF clearly is managed for the long term. There are no current rumblings of mergers in an industry that has been shaped by mergers and acquisitions. Rose says: “Consolidation came out of financial weakness.” All seven North American Class I’s are profitable and all are engaged in major capital spending programs. Where they used to invest to reduce operating expenses, BNSF and the other railroads today are investing for growth. “We need capacity,” Rose says, “and that’s a good situation in which to be.”