Monday, April 08, 2013

Continental powerhouse

Written by  Roy H. Blanchard, Contributing Editor
Talk about far-flung: Genesee & Wyoming, Inc. (GWI) is, as you read this, running freight trains in three continents and five countries across nearly 15,000 route-miles of track in three gauge widths.
There are 11 operating regions and 111 discrete railroad names, most of which are in North America and which in 2012 accounted for 89% of the company’s 927,094 total carloads and intermodal containers. How does it all fit together and what does it take to keep the wheels turning, customers happy and, above all, employees safe?

GWI expects to bring in 2013 revenue of $1.6 billion, not bad for a company that went public in 1996 with a mere $78 million in revenue, especially when one considers the 20% compound annual revenue growth through 2013. The personal injury frequency rate at the end of 2012 stood at an industry-best of 0.48 injuries per 200,000 hours worked, besting all Class I’s (1.0) and all Class II and III roads (3.1). Since 2006, through November 2012, personal injuries are down 73%, grade crossing accidents are down 55%, and derailments have decreased 62%.

Timely acquisitions have been a key driver of GWI’s phenomenal growth, and the 2012 RailAmerica transaction was the latest and greatest. It will double GWI’s North American revenue stream to $1.3 billion, 80% of the worldwide total. In the bargain, GWI became the world’s largest operator of Class II and III railroads and the only publicly traded one at that.

Of course, running such a far-flung enterprise doesn’t come cheap. GWI revenues for 2012 were $875 million with a maintenance capital budget of $97 million, 11% of revenue (about 30% less than the current Class I capex run rate). And for 2013, with the RailAmerica properties now in-house, maintenance and project capex is slated to be in the $162 million range, about 10% of revenue.

But that’s not the whole picture. The 2013 capex program also includes some $110 million of government grants, of which GWI must pay $20 million in grant-matching spend, something unique to the short line environment and which the Class I’s don’t see. These grants take many forms, from Maine’s Industrial Freight Access Program and Pennsylvania’s Rail Freight Assistance Program to federal TIGER grants. Finally, GWI expects to spend $73 million of capital associated with new business wins, primarily in Australia, where it will be used to support the growth of an iron ore customer.

The Genesee & Wyoming operation in North America is unique. For a railroad, it is highly decentralized. The nine Regional Senior Vice Presidents run their own shows for everything from business development, marketing, and customer support to track maintenance, locomotive fleet deployment, and operating plans. To see how it all fits with a capital plan that calls for new locomotives, upgraded track, and a payroll of 4,600, last month Railway Age called on CEO Jack Hellmann and Chief Operating Officer Dave Brown at Genesee & Wyoming world headquarters in Greenwich, Conn.

Railway Age: Jack, let’s start out with a general description of GWI operations. You’ve mentioned before that Australia is the fastest-growing part of the company. Care to elaborate?

Jack Hellmann: We think of Australia as 20% of our business and the fastest-growing part of the company due to our shipments of commodities such as iron ore, copper, and manganese that are destined for Asia—China in particular. Australia used to be a third of our business; however, the RailAmerica transaction has caused the shift. The Australian properties have very different capital demands, principally because we have been making significant investments in equipment to support new mines and enhance the reliability of our intermodal service.

RA: What about track ownership? I’ve read that Australia has a unique open-access system where various entities own the track and train operators pay for operating rights.

JH: We’ve succeeded in Australia by owning most of the track we use, essentially having replicated the North American model. We’ve generally invested where we could own both above-rail and below-rail. We run on more than 2,000 route-miles where we own everything and are also able to operate over thousands of additional track-miles with an access fee. The backbone of our Australian track is the 1,400 mile Tarcoola-Darwin line that we bought out of the FreightLink bankruptcy in 2010. Add it all up and we’re maintaining and capitalizing capacity expansions on some 2,200 route-miles of railroad.

RA: In the U.S., it costs maybe $5,000 a mile to keep 25-mph track up to FRA specs. Is there a similar analogy in Australia? How about slow orders and the various track gauges?

JH: Your $5,000 number is OK for light-density, short-haul, short-train moves, but Down Under we have a high concentration of large unit trains that move nonstop from origin to destination, making that number a bit light. As for gauges, yes, we have three, but the vast majority is standard gauge. Narrow gauge is limited to perhaps 300 miles of owned-track where we haul grain and gypsum, and we also operate over customer-owned narrow gauge track to several iron ore mines. Meanwhile, broad gauge is a rounding error and has become increasingly less important over our 16 years of doing business in Australia.

Dave Brown: We’ve also changed our track maintenance model. We had been doing inspections with our employees and then contracting-out track maintenance in Australia, but now we’ve brought our day-to-day maintenance work in-house. With the owned-track model, we believe it is safer and improves reliability and efficiency to do our own work. For large projects and capital maintenance, we contract with suppliers as needed.

RA: How does the traffic mix differ between Australia and North America?

DB: They are very different. In North America, we’re predominantly a single-car shipment railroad where car ownership can be the customer, a leasing company, or a railroad, and mixed freights are the dominant model. Australia, on the other hand, is mainly the intermodal and unit train model with commodities concentrated in grain, metals and minerals plus intermodal.

RA: What about ownership of rolling stock—cars (or wagons as they’re called in Australia) and locomotives?

JH: We see essentially three scenarios. For some customers, we own the entire trainset, locomotives and cars, and provide service under long-term contracts. For other customers—a start-up mine, for example—we may only own the locomotives while the customer provides the cars. And finally, we may have shorter-term customers where we may provide none of the equipment and simply offer track access. At the end of the day we’re not in the car ownership business unless we want to be. Purpose-built cars are not fungible; locomotives are. So the extent to which we get into the car business it will be a function of the customer relationship, the commodity mix, the potential for a long-term income stream, and our being comfortable with the credit risk.

RA: Let’s shift our attention to your operations in North America. (We’ll omit Europe because it’s a relatively limited switching operation in the Netherlands and Belgium where your capital exposure is relatively slight.) You now, with the addition of the former RailAmerica railroads, have 101 names in the U.S. and 7 in Canada. We’ve spoken often over the years about owned vs. leased power and now you find yourself with owned GWI units and leased RailAmerica units. How do you merge the combined fleets?

JH: We’re continuing with our preference to own our power. For financial reasons and for operational reasons, Genesee & Wyoming roads rarely lease power. Overall, owing the units gives us more flexibility to change out power as service requirements change and also incentivizes maintenance of what we own for the long run. As a result, you should expect that we will buy out the leases of the RailAmerica units that fit our system fleet requirements and will turn back to the lessors those that don’t.

DB: Thanks to our strong regional organization, our local managers have historically pretty much decided what locomotives they needed to do the job. Now, however, with twice as many railroad names, we have to be a lot more nimble in locomotive acquisitions and assignments. We’ve just hired our first system-wide Chief Mechanical Officer, Rich Regan, to help us sort out what we’re getting from RailAmerica and how best to merge the two fleets.

Rich has found over the years that owned locomotives tend to receive “a little higher standard of maintenance” because of pride of ownership. In our business, locomotive reliability is vitally important—we can’t afford to have extra resources sitting around “just in case.” So, the great job our mechanical team does with locomotives is the key to service reliability precisely because we have an owned fleet we can count on. Best of all, shop crews take much greater ownership of their work when they have their own power. You’ll note, for example, that all our locomotives are painted in orange and black with the line’s initials worked into the corporate logo. I really believe a painted loco runs better because somebody cares.

RA: As you merge the two fleets, are you looking to standardize by loco type or manufacturer?

DB: Let me say right off that the SD40 is a great locomotive for most of our short lines. Now, you can’t run six-axle power everywhere, so we will keep a basic fleet of four-axle locomotives as well. We have about 1,000 units, roughly a quarter of what each of the eastern Class I’s have, to put things in perspective. We’re essentially an EMD shop with many units upgraded to Dash-2 standards and some that have been repowered or rebuilt—and we have in our strategic plan to upgrade those that need it. We’ve also inherited some genset locomotives from RailAmerica’s operations—such as in San Diego, Northern California, the San Joaquin Valley, and Dallas—though, like the rest of the industry, we’re seeing mixed results from them because of reliability challenges.

As an aside, I ought to mention we’re getting new GE power in Australia. Over the past couple of years, we’ve probably invested about $150 million split evenly EMD/GE, but in Australia that doesn’t go very far. We call Australia “The Land of 2X”—everything costs twice as much. These new units are unique and run $4-$5 million per locomotive, partly because they have to be customized for lighter track loading and some were remanufactured for narrow-gauge operations.

RA: What about PTC?

JH: We don’t have a large exposure because of where we operate. It’s really a non-issue for freight-only operations where there is limited TIH exposure, for example. On those few lines where we have co-mingled traffic (Oregon, for instance), the passenger authority will fund the requisite PTC infrastructure to protect their trains. [Note: PTC could put some short lines out of business because of the magnitude of the expense. On non-microprocessor first-generation power, the cost of adding PTC can easily run more than the unit’s scrap value—RHB.]

RA: So the power you’re getting from RailAmerica will be sorted out according to need with additions and deletions as required. How about track condition?

DB: RailAmerica did a good job of maintaining track to the level required for the service. If 10 mph would do, that’s what they did. We’re the same way. And now that we’re twice the size, we’re adding a Corporate Chief Engineer, Scott Linn, to oversee track expenditures and capital programs and to coordinate them with the regions. As a result, each Regional Senior Vice President now has a corporate overseer for best practices—a consultant, if you will, who can spread the good ideas around, among and between individual railroads.

In our contiguous model, all our regions are comprised of lines that in a few cases physically connect but in most cases are reasonably nearby. This supports very nicely our desire to centralize purchasing. As you might expect, buying in bulk yields certain economies, so having one purchasing department—reporting to me—lets us leverage our 108 North American railroads’ purchases to good advantage.

Track speed is key to all our infrastructure capital expenditures. For example, our $17 million Arizona Eastern project is raising track speed, resulting in a redesigned, improved, and more reliable service plan, in turn resulting in higher traffic levels as the improved service encourages our principal customer to put more business on the rails. It’s a classic case study of how the short line industry has matured: better track, improved locomotive reliability, faster transit times, and lowered supply chain expense for the beneficial owners of what’s in the cars.

Reliable infrastructure and locomotives give us the means to run to plan. Even on a short line, time is money and doing things the same way every day is crucial to the success of the organization. On-time is on-time, not on-time plus two hours because if that’s your measure, trains will run to that. We’re taking down the interval between interchange-on and interchange-off and have even developed our own report card to keep our connecting Class I’s apprised of our progress.

Our regional managers have zeroed in on equipment rents. They know exactly what their car costs are and when cars have to be back at the interchange. Controlling car-days is crucial to short lines; one more day’s car hire is a big deal. Good track, good power and running to plan save money as well. That’s why we’re putting this kind of money into our 2013 capital plan.

JH: Our track infrastructure has never been in better shape. We have strong cash flow from operations to fund our own program maintenance and capital programs. In addition, “external” funds such as government grants and the 45G short line tax credit give us the opportunity to accelerate track programs to the benefit of all our constituents.

RA: Our conversation would not be complete without a nod to your continuous record of successive safety improvements. How do you do it?

JH: Our number one priority each day is to ensure that our 4,600 employees are getting home safely to their families and loved ones. Our success has been based on a culture where all of our people know that we are completely committed to a zero-injury environment. Our people are intently focused on taking care of themselves and taking care of each other. The fact that we’re planning to spend $345 million (including the previously mentioned government grants and the new Australian project) on gross capital investment this year also underscores our long-term commitment to our people, our railroads, and our customers.