Friday, March 19, 2010

BNSF’s Rose: Another leader who counts

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BNSF Railway Chairman, President and CEO Matthew K. Rose (top photo, with Railway Age Publisher Robert P. DeMarco) accepted Railway Age’s Railroader of the Year award rroty4.jpgbefore a capacity crowd at Chicago’s Union League Club on March 16, 2010. Rose, the magazine’s 47th Railroader of the Year, said he was “accepting this honor for the nearly 40,000 members of team BNSF, who in my eyes are all railroaders of the year—every year, 24 hours a day, seven days a week.” Rose added that he has “been blessed to have a tremendous leadership team [whose] vision has led us through some very challenging, but also very rewarding, times.”

 

Rose recalled that when he first became CEO of BNSF, he asked Railway Age Contributing Editor Larry Kaufman to interview many of the railroad’s previous chief executives. “I did this because I do believe that we have so much to learn from history,” he said. He asked Kaufman to write their stories and reflections of leadership for a book called “Leaders Count.” One of them was Rob Krebs, Rose’s mentor and immediate predecessor, and Railway Age’s 1996 Co-Railroader of the Year (with Gerald Grinstein). “When [Rob] became the head of the new BNSF, he had the challenge of blending two companies and two cultures,” Rose said. “Rather than let two different cultures battle it out to see which one prevailed, Rob saw it as an opportunity to create a new culture for a new company, incorporating the best of each culture into a new vision. I’m also grateful that, despite significant criticism, he recognized the need to reinvest and expand the railroad, even when volumes were soft. This later proved to be invaluable for BNSF’s ability to handle record volume. I know that BNSF and I later benefited greatly from the capex commitments Rob had made years before. It was such an instructive lesson to me that to this day I always tell people that the investments made today won’t really be felt for a number of years and potentially decades.”

 

rroty7.jpgKrebs attended the Railroader of the Year festivities, as did fellow honorees L. S. “Jake” Jacobson (1994), William E. Wimmer (2007), and Edward A. Burkhardt (1999). Second photo from top: Wimmer, Matt Rose, Burkhardt, and Krebs.

 

The past decade “is the one where railroads hit their stride,” said Rose. “One of the things that I’m most proud of is our ability to continue a strong capital spending program. A hallmark at BNSF is that we’ve been able to anticipate demand and invest in the needed capacity at the right time. Even as we faced economic uncertainty, we opted for balanced capital spending—recognizing the importance of investing in our locomotive and car fleets and physical plant to set the stage for service, reliability, velocity and, ultimately, growth.” Rose pointed out that, since 2000, BSF has acquired more than 2,500 locomotives at a cost of $4.2 billion, invested $2.6 billion to improve its car fleet across business units, with acquisition of more than 25,000 new freight cars. “Total capital that we have invested in the physical plant from 2000 to today, and including this year’s plan, is $24 billion,” he said. “Even in the face of the greatest recession in three-quarters of a century, as an industry, we will be investing about $9 billion in capital this year alone. This kind of investment really speaks to what has been called a ‘rail renaissance.’ Even in a downturn, the railroad industry’s management is continuing to invest at record levels, maintaining networks of unprecedented quality and safety, and expanding capacity. This is all being done on the basis of market decisions. It’s not about nostalgia for the peak traffic levels of 2006 and 2007.”

rroty6.jpg“With the investment we continue to see, BNSF and the industry are prepared,” Rose said. “I can promise with first hand knowledge that BNSF and the entire railroad industry is stronger and better-running than I’ve ever seen it. Investments are being made in the absence of any federal policy to incentivize them, or even to plan for them. We haven’t been waiting for ‘public partners’ or incentives to undertake this investment, haven’t built our business model around energy or environmental policy—[one] that should promote moving truck traffic to the rails to reduce emissions and the use of fossil fuels. Even with all of the talk you have heard about public-private partnerships, high speed rail funding and TIGER grants, the industry will still pay almost 99% of capital required. In fact, this continued investment and resulting capacity is taking place despite public policy—or at least its absence.”

 

The National Surface Transportation Policy and Revenue Study Commission on which Rose served “underscored the expanded role freight rail can play in surface transportation policy,” he said. “While my fellow commissioners knew what I supported, it was encouraging to see 10 other people from a variety of backgrounds espouse principles to grow the rail industry. In fact, the report specifically called for policies which would grow freight rail market share by 10 and even 20% to achieve not just transportation goals, but environmental and energy objectives. It called for an investment tax credit to incentivize capacity expansion, and a multimodal vision for goods movement that measures transportation funding against transportation network performance goals. I believe this would favor public projects with freight rail, and make freight rail’s requirements a national priority, for such things as project [location] and permitting. These issues are ground zero for expanding freight rail.”

 

rroty5.jpgThe Commission also called for what Rose described as “rational regulation” as applied to environmental, safety, and economic issues. “While we have ‘coined’ these words, I am worried that few people understand what it means and the impact to investment,” Rose said. “There is a clear trend in recent years toward [government] making our business more difficult and costly. The best example that I can give you is the Positive Train Control mandate—a $10 billion expenditure by 2015. The cost benefit ratio is 22:1. The railroads will have to cut other expenditures to pay for it. We spent $9 billion last year on maintenance and expansion, and we’ll spend $9 billion this year, except $700 million of that will be on the first steps of PTC implementation. What will fall out of the budget? What will fall out when the PTC spend is $1.2 billion a year in 2011? Expansion? Certainly! But what about tie replacement and other things that make the railroad safer? It’s not a threat, it’s just the way it is. Something has to give. There needs to be a more reasonable deployment of PTC, and Congress has to help us pay for it. Congress should enact a railroad tax credit this year!”

 

rroty3.jpgLooking to the future, Rose pointed out that many in attendance “have lived in the best of times as well as the worst of times in our industry. Assuming we all agree that rail renaissance is better than rail bankruptcy, how do we move forward? Let me throw a couple of guiding principles that might be obvious but are very important. The first is this issue in regard to economic regulation. Quite simply, the Staggers Act has been a whopping success because 25 years of economic certainty ensued after it was enacted. The rules of the game were settled, and players took the field. As a result, this industry is so efficient that it represents a global competitive advantage for the United States. Our private investments take pressure off of the public’s pavement investment and take millions of trucks off of our nation’s crowded highways. Our rights-of-way facilitate the growing passenger traffic across the country. Our pensions, employees and liabilities are secure and are not in any way the public’s responsibility. And, we’ve opened new markets to rail. All of this can be directly laid at the door of the Staggers Act. Its various beneficiaries, who are not all railroads, would be wise to study it and speak out about it.”

 

“Over the past 25 years of developing the industry’s stability, there have been some who want to change the oversight of the industry,” Rose said. “Some of that can happen without endangering the economic fundamentals of the railroad companies. It can actually improve our customers’ trust in our business model, and therefore policy makers’ trust in us. This is necessary if railroads are to be at the table in other policy debates, such as climate change and surface transportation reauthorization, and to rationalize heavy-handed safety mandates. Warren [Buffett] puts all of this talk under what he refers to as our ‘social contract’ with the country. The railroads need to make enough money to fulfill their destiny to provide capacity to move more of the nation’s freight. Public officials are starting to ask ‘how do we get more rail capacity?’ While we always start with the concept of balanced regulation, we are also having much broader discussions around tax policy, i.e., the dilemma of the highway trust fund as well as investment tax credits.”

 

rroty1.jpgSpeaking directly to the many suppliers in attendance, Rose said he’s ‘keenly aware that your economic well-being is tied to ours. The economic downturn has been even harder on the supplier industry than the rail industry overall. I think back to the 1999-2000 period when I was Chief Operating Officer. It was a terrible time for our suppliers; we saw many of them go out of business. Repeating this could have a negative impact on not just critical component availability, but technology development. That is the future of productivity in this industry, and we cannot take it for granted; we must work with our suppliers to protect it.”

 

This will involve “maintaining a healthy Class I industry so that we can continue to reinvest, which spends money that goes to our suppliers,” “having a unified voice for the supplier industry on Capitol Hill that can join with the freight rail industry in advocating for—or against—policies and proposals consistent with our interests,” and “developing together a set of plans that help us both succeed. I feel certain that your industry will return that call to action.”

 

Although Rose’s general outlook is “very optimistic,” he sees potential threats beyond the immediate challenges of the regulatory policy environment. These, he said, are “climate legislation that discriminates against coal or hurts the underlying economy, continued taxpayer subsidization of heavy trucks, opportunities to be taxed and ‘fee’d,’ and more obligations and potential liabilities with regard to passenger rail—and nothing but ‘incremental’ public funding commitments in return.”

 

But, in spite of all of this, Rose believes that the rail industry “has such a compelling business value that public policy will eventually turn proactive and be rail’s biggest supporter. I will continue to work toward that optimistic vision—educating lawmakers, promoting the value of freight rail.”

 

Rose closed his remarks by reiterating that BNSF is “honored by the investment that Warren Buffett has made. Our leadership team is humbled by him asking us to operate our company. He has given me specific instructions on how to make decisions. Here they are: ‘Run BNSF like it’s your family business that you will lead for the next 100 years’ always erring on the long-term view and remaining focused on the right investments, operating decisions, and leadership. It’s a good set of principles that we tried to do before the purchase. On the day our transaction closed, he called me to tell me he was looking forward to the first century of ownership of BNSF.”

 

rroty-2.jpgIn addition to accepting Railway Age’s 2010 Railroader of the Year award, Matt Rose accepted a scholarship for a BNSF employee to attend the Michigan State University Railway Management Program (RMP), now in its second year. Third photo from bottom: Ed Burkhardt, namesake of the RMP’s Edward A. Burkhardt Chair in Railway Management, presented the scholarship. Second photo from bottom: Burkhardt, FCM Rail Ltd. President Trent E. Marshall, Rose, and MSU Director of Railway Management Programs Dennis Neilson. FCM Rail Ltd. Chairman and CEO chairperson and CEO Dennis Gilstad established the program in 2008 and endowed the Edward A. Burkhardt Chair in Railway Management with a $1 million donation.

 

Bottom photo: Railway Age Associate Publisher George Sokulski presents Rose with a portfolio containing the company names and logos of all the industry suppliers who supported the magazine’s January issue.