RAILWAY AGE, JANUARY 2020 ISSUE: The 57th annual recipient of Railway Age’s Railroader of the Year Award is Kansas City Southern President and Chief Executive Officer Patrick J. Ottensmeyer, a leader in positioning North American railroads as a critical part of the globally competitive, integrated supply chain.
Ottensmeyer’s tireless efforts on behalf of the North American rail industry have supported mutually beneficial trade and robust economic growth. He chairs the U.S. Chamber of Commerce U.S.-Mexico Economic Council, ensuring the rail industry has a voice by working with public- and private-sector leaders to strengthen bilateral commercial ties. At Kansas City Southern, his leadership has produced efficient and fluid operations on the railroad’s cross-border and northern Mexico corridors. Ottensmeyer has also been instrumental in KCS’s adoption of advanced technologies.
Ottensmeyer was elected as KCS President and CEO July 1, 2016. From April 2015 to June 2016, he served as President of KCS. From October 2008 through March 2015, he served as KCS Executive Vice President Sales and Marketing. He joined KCS in May 2006 as Executive Vice President and Chief Financial Officer and served in that role until October 2008. Ottensmeyer has a broad range of railroad experience from the various senior executive positions he has held at KCS over the past 13 years, and also with BNSF. During his time as Executive Vice President Sales and Marketing, he developed a deep understanding of KCS’s strategy as well as its customers and growth opportunities. He has an extensive understanding of financial matters, which helped him lead KCS’s Finance department during his time as CFO. He came to KCS with substantial experience in financial matters from serving in various executive roles, including treasurer and chief financial officer positions. Ottensmeyer holds a Bachelor of Science in Finance from Indiana University.
“Pat joined Kansas City Southern as CFO in 2006. With his banking and finance background, and his time in the railroad business as Vice President of Finance and Treasurer for BNSF, he was the individual we needed as CFO,” now-retired KCS Executive Chairman and 2001 Railroader of the Year Mike Haverty told Railway Age. “Just prior to his arrival, KCS had taken over 100% of the Mexican Northeast rail concession, was preparing to rebuild the acquired old Southern Pacific ‘Macaroni Line’ between Rosenberg and Victoria, Tex., and to completely rebuild the line serving the critical Port of Lazaro Cardenas that was being upgraded by the Mexican government and Hutchison International Terminals to be a competitive North American port on the Pacific Coast. These were all critical investments that have led to the success that Kansas City Southern enjoys today, but the company needed a financial leader at that time who could help craft these major capital investments during a time KCS was struggling financially. Pat was that person.
“Eventually, Pat became Executive Vice President Sales and Marketing for Kansas City Southern and led the team to grow the revenue benefits of the strategic investments that he had helped to finance. He clearly understood the importance of these investments in developing the value of the KCS franchise and, as the current CEO, he continues to lead the management team in executing plans to improve that value.
“Free trade in North America is critical to the success of Kansas City Southern, its customers, employees, shareholders, and communities and states that it serves in the U.S. and Mexico. The survival of Kansas City Southern as a rail transportation holding company can be attributed to its successful investment in the privatized Mexican rail network in 1996 that was developed following the passage of the North American Free Trade Agreement (NAFTA) in 1994. That is why it was so gratifying to see that Pat was chosen by the U.S. Chamber of Commerce in January 2017 to serve as Chairman of the U.S. Chamber’s U.S.-Mexico Economic Council, as NAFTA was being renegotiated as the new United States-Mexico-Canada Agreement (USMCA) to replace NAFTA.
“What impresses me about Pat’s role as KCS CEO today is that while he has developed a team to help improve operations and reduce the operating ratio, just as important, he has them focused on revenue growth as well. There has been an overemphasis, in my opinion, on focusing too much on reducing the operating ratios in the railroad industry today, but Pat clearly understands that growth is essential to the success of the company, and you cannot just concentrate solely on cutting costs. In other words, he understands that a company cannot save itself into prosperity, and must have growth.”
In early December 2019, Ottensmeyer sat down for an extensive interview with Railway Age Editor-in-Chief William C. Vantuono at KCS headquarters.
RAILWAY AGE: Pat, on behalf of Railway Age and Simmons-Boardman Publishing Corporation, I’d like to congratulate you on your selection as our 2020 Railroader of the Year.
OTTENSMEYER: Thank you, Bill. It is really an honor. I’ve been in and around the railroad business, working for railroads for more than 20 years. I’m very familiar with the people who have won this award. And, I’m extremely honored to be part of that group.
RA: You are from Indiana originally.
OTTENSMEYER: I am a Hoosier. I grew up in a small town in southwest Indiana called Vincennes, right on the border of Illinois and about 50 miles North of the Ohio River and the Kentucky border.
Okay. My alma mater is Indiana University. I graduated with a bachelor’s degree in finance from Indiana. I started my career in the commercial banking business in Detroit, where I went to work as a trainee and credit analyst at National Bank of Detroit, which is now part of JP Morgan. I left to go to Chicago about five years later to work for a West Coast bank, Security Pacific National Bank. I moved to New York City for a few years.
RA: Your first experience with the rail industry is rather interesting. This goes a long way back, to the 1980s, to Santa Fe Southern Pacific.
OTTENSMEYER: Santa Fe Southern Pacific was one of my clients when I was in Chicago in banking. This was after the holding companies had merged, but the two railroads were separated, and Southern Pacific was actually owned and controlled by a trust awaiting Interstate Commerce Commission approval. The ICC rejected the merger, the company appealed, but the rejection was finalized in 1987, effectively putting the company in play. It became the target of a hostile takeover attempt. Security Pacific and JP Morgan were the co-leaders of a $4.8 billion leverage recapitalization in 1987 to defend the company from a hostile takeover attempt. The years after that became literally like a banker’s dream—a lot of deals, a lot of restructuring. And I worked very closely with the finance staff and the CEO, Rob Krebs. It almost became a full-time job for me for about four or five years, with a lot of restructuring activity, a lot of refinancing. And at the end of all of that, it became a pure play railroad. Shortly after that, they struck the deal with Burlington Northern and merged to become today’s BNSF.
RA: What brought you into the railroad industry full time?
OTTENSMEYER: A result of knowing the people very well and developing a great relationship, and trust, with the person who ultimately became Chief Financial Officer, Dennis Springer. After he was promoted to CFO, he needed to replace himself, and he called me to see if I was interested in moving back to Chicago and getting into the railroad business in a finance capacity. That was 1993.
RA: How did you get to Kansas City Southern?
OTTENSMEYER: I left the railroad industry after a few years with BNSF. I left the industry for a few years, and dabbled in some venture capital. I did a number of different things, including teaching. And then, in 2006, had an inquiry to come back into the public company finance realm as Kansas City Southern CFO. I jumped at it.
RA: What attracted you to KCS? What did you see in KCS that made you think this was a great opportunity?
OTTENSMEYER:I was 49 and had been out of the public company finance world for a few years, and thought the timing was right to come back in as CFO of a publicly traded company. I knew a number of the players, including Mike Haverty. I didn’t know Mike well at the time, but he and I had some dealings when he was at Santa Fe and I was their banker. Art Shoener, President of Kansas City Southern at the time, I knew a little bit better. Generally, I had some awareness of Kansas City Southern because of my years in the industry. This was early in 2006. In 2005, Mike Haverty accomplished something that a lot of people at the time thought was not ever going to happen: He got control of what is now Kansas City Southern de México and put together this cross-border network that dramatically changed the strategic significance of the company that we are today.
RA: The Mexican portion was TFM, of which KCS ownership was 49% at the time.
OTTENSMEYER:I came on as CFO and realized again, partly because of my years in the railroad industry, that this was just a huge game-changer for the company. In fact, one little tidbit that I have often told people: When I joined the company in 2006 as CFO, there were two sell-side Wall Street analysts that followed the company. They’ve changed firms, but they’re both still followers of our company. If you read their research reports in 2006, you would have read what the company was worth as a takeover or as a breakup, because no one believed that we would ever get control of the Mexican subsidiary. There was no one who really understood or talked about the company as a going concern. But this was such a strategic game-changer, and one of the very first things I did when I joined the company as CFO was to develop that independent valuation thesis. So in 2006 and 2007, we began to really put together the story. What is this company worth as a going concern as a standalone publicly traded company? And Mike and I, you know, figuratively killed ourselves going around the country and the world telling that story and really generating a lot of enthusiasm and excitement.
RA: Kansas City Southern de México is where traffic growth is these days.
OTTENSMEYER: That’s been the biggest success since 2005, 2006. We’ve been around for 132 or 133 years. But the company that you see today was really born in 2006, the seamless cross-border network connecting the two countries right in the heart of North America. That all began in 2006. Cross-border business has been the fastest growing. Our volumes for the past two years have grown in the low- to mid-teens, 12% to 15%; in some quarters as much as 18%—in spite of the fact that our overall volumes are flat.
RA: A lot has happened since 2016 and the election and the change in power in Washington. Much has to do with the relationship with Mexico—cross-border trade and traffic. You have been an integral part of shaping USMCA (U.S.-Mexico-Canada Agreement), the successor to NAFTA. What are the key differences between NAFTA and USMCA?
OTTENSMEYER: The key differences are in the areas of intellectual property, e-commerce, the pharmaceutical space, etc. In the automotive space, some of the rules of origin, the content thresholds and regulations for things like automobiles and other manufactured projects, but particularly automobiles, have changed. North American content has been increased. One of the more significant changes in this new agreement has to do with labor market reforms that have taken place in Mexico at the insistence of the U.S. side to, over time, try to equalize that labor advantage—the belief being that there have been huge outflows of manufacturing jobs from the U.S. to Mexico because the old NAFTA didn’t effectively stop that. So part of the agreement that was signed a year ago by the three countries required the Mexican government to change its labor laws through their Congress, which they did in April or May of 2019. But there was, even after that, some criticism and concerns on the part of U.S. Congress thinking Mexico didn’t have the resources or the commitment to enforce those new labor laws. So the U.S. Congress went back to Mexican government officials and said, “Prove to us that you have the resources and the commitment to enforce those laws.” And they did that, in the form of a letter that was written from the President of Mexico to Congressman Richard Neal (D-Mass.), Chairman of the House Ways and Means Committee, laying out exactly what they are going to do, the funding and the resources that were available to enforce the new labor laws in Mexico. That was one of the last hangups to get to the point that we are today, where a new version of the agreement has been signed by the three countries. It has been approved by the legislature and the Congress in Mexico, and it’s literally on the doorstep of the U.S. Congress to be approved.
RA: Your role in this has been significant.
OTTENSMEYER: It really has been out of necessity. It’s so important to our company and to our customers and to the communities that we serve. We were one of a few U.S. publicly traded companies that didn’t participate in the celebration and the party that took place after the election in 2016. President Trump was elected, there was a Republican Congress, a Republican in the White House, stock markets were up, all the other railroads were up the day after the election. We lost literally 12% of our market capitalization in about the first hour of trading because we were so closely associated with Mexico and NAFTA. There was a lot of confusion. I came to work the next day, not intending to write a letter that started with “Dear fellow Kansas City Southern Colleagues,” but I did because I was told that there was a lot of concern about what this meant for our company. And in that letter, I said something like, “I’m going to try to get involved in the process and influence the outcome and protect our interests and those of our customers and employees.” I’d been CEO for four months. I literally had no idea what that meant.
RA: You figured it out, though.
OTTENSMEYER:We started calling people. And lo and behold, we were able to get meetings with White House and members of the Cabinet as they came together, the leadership in the Congress, and the same thing in Mexico. We really were outspoken in Mexico as well, because we are really a Mexican company and a U.S. company that happened to be joined together at the top. We are not going to rip up our track and move it to Pennsylvania. We’re there for the long haul. We’re an important part of the economy. If you think about how important a critical infrastructure like railroads are to a nation’s economy, we play a different role than even a manufacturing company that is bigger than us in terms of the number of people they employ, because we’re not going anywhere. And all those other companies that are in Mexico—Mexican companies and foreign companies—rely on our network and our service to be efficient, get their products to market, get their raw materials, all of those things.
RA: How does KCS’s role in Mexico compare with Union Pacific and BNSF, which also do a considerable amount of business in Mexico? Although I would think not to the extent of KCS.
OTTENSMEYER: We are the only one of the three that has invested so much in physical infrastructure in Mexico in the past 20 years. Since [we won] the concession 22 years ago, we’ve invested more than $5 billion in Mexico. We have a much different type of exposure. We were a little quicker to become outspoken, in defense of the U.S.-Mexico relationship because of our role and our investment and the nature of our business. Then because of the fact that we are, again, really a Mexican company. That did a lot for us with respect to building a different type of relationship with the Mexican government and business community. Probably one of the reasons that I was asked to be the U.S. co-chair of the U.S.-Mexico CEO Dialogue is because they recognized we had a different role. We were speaking not just for ourselves. We were representing our customers, and we really played a different role than a lot of other U.S. companies.
RA: Everybody’s favorite subject these days: PSR, Precision Scheduled Railroading. KCS has its own version, which is a bit different. What’s different about it and what is your strategy for implementing it? What drives that?
OTTENSMEYER: We’re a year into the PSR transformation. We haven’t closed any yards or consolidated any routing options. We’re pretty much a single-line railroad. We don’t really have the options that some of the larger, more complicated networks have to move traffic to certain locations, create density that might then make it possible for them to close yards. We never had any hump yards; we didn’t have any hump yards to close. Those are just some of the more obvious examples of things that other PSR railroads did that didn’t really apply to us. What did apply to us was thinking about our scheduling differently, about train length, service schedules, the way we used our yards and eliminating a lot of unnecessary handling, trying to streamline activities.
We have eliminated congestion on our network. We have gotten out of our own way. When we really looked at the way we were running trains, we were bumping into ourselves all too often. We did kind of a thoughtful redesigning of the network. We brought in an executive who has significant PSR experience, Sameh Fahmy, who was part of the Hunter Harrison team at CN and then at CSX for a period of time, to really help us understand what is it that, given our network, could work and be effective in reducing congestion, rethinking how we design our train schedules, how we use our locomotives and crews, how we use our yards to be able to handle the same or more traffic with fewer assets. So far we’ve had really good success. Our volumes overall have been flat, as has the industry for the past year or so. But we’re handling the same amount of freight, the same number of carloads, with 12% fewer locomotives, about 8% or 9% fewer cars and fewer train starts. We’ve significantly reduced congestion on line-of-road and in the yards, and our asset utilization, cycle times and transit times have improved significantly. We are handling the same amount of traffic with fewer assets and less cost.
RA: So you’d call your implementation of PSR a more measured approach? Thoughtful, even?
OTTENSMEYER: We’re approaching it differently. We are trying to be very thoughtful. Our grain business is a good example. We changed the service, reduced congestion. We saw a very quick and noticeable improvement in transit times. We had excess hopper cars fall out of that, but we made a decision not to get rid of them, but to hold them, because we had this belief that there was more business that we could go after. Our customers were telling us that. So we held onto those cars for a period of time. And then, lo and behold, we literally did see business come to us that we had either lost or didn’t have. We started to see market share increase because our service had improved. Those improvements were sustainable, and we kept the capacity to be able to generate more revenue.
RA: This ties in with your mantra, three great words, “Service Begets Growth.”
OTTENSMEYER: That’s right. It really started to be very noticeable in the third and fourth quarters of 2018. Our service had really begun to suffer. I think it was in two earnings calls and probably three board meetings that I had to say the following words: “There was more business available to us than we could handle because our service was not adequate.” For me and our executive team, we had a very strong belief and conviction that there was business available to us. We just needed to demonstrate that we could handle it. And if we did that, we thought the growth would be there and the business would come back. That was the genesis of the phrase “Service Begets Growth,” a high conviction that the growth opportunities were there. And even through that period of time, the Wall Street community believed that we had these great business opportunities. The best example that really applied uniquely to us and, to a lesser extent the other large railroads, was refined petroleum products moving from U.S. Gulf Coast refineries to terminals deep into Mexico as a result of the opening up of the Mexican markets, because of some congressional and constitutional changes they had made in their energy markets. That was a real opportunity. Those markets were open.
We knew there was a huge amount of interest on the part of U.S. Gulf Coast refineries moving into that market. We just had to get the service right. Those products wanted to move in Mexico. They wanted to move by rail. There isn’t sufficient truck capacity, nor is there pipeline capacity to move it. So we knew that if we got our service right, improved consistency, reliability and resiliency, creating additional capacity by running our railroad differently, the business would be available for us. And it has worked out very, very well. Refined petroleum products has been the single-fastest-growing part of our business for the past 12 to 18 months, with growth rates as high as 40%. As that base gets bigger, those growth rates are going to come down, obviously. But that’s been a real success story.
If we can maintain and sustain the type of service that we’re delivering today, there are going to be more growth opportunities in that area.
RA: It seems to me that the railroads are at what I call an inflection point. They’re facing things like autonomous trucks. The traffic mix is changing. Traffic has been falling off—which is cyclical, of course; it goes up and down with the economy. What do railroads have to do going forward to stay relevant? What are the biggest problems or challenges as you see them?
OTTENSMEYER:The world around us is changing. There’s a lot of Wall Street buzz and interest about autonomous trucks. I’ve gotten into arguments with a number of Wall Street research analysts who believe that autonomous trucking is going to have the same impact on the railroads in the future as the Interstate Highway system did 50 or 60 years ago. We certainly can’t dismiss it. But shame on us as an industry if we let that happen, because there are a number of factors I think, if we do the right thing, look down the road, think ahead and start to invest in some of the technology and innovation available or will be available, there’s no doubt in my mind that we can not only preserve our role in the business world and transportation and logistics, but gain market share.
We’ve spent billions of dollars as an industry on PTC, and maybe we would have done it differently and would prefer that it had not come to us as a government mandate. But here we are; we’ve largely installed PTC. We’re working on interoperability. But that technology is going to be a useful springboard to be able to run a more- autonomous rail network.
What I believe in, and I think the industry is coming around to generally believing in through the AAR SOMC (Safety and Operations Management Committee), of which [KCS Executive Vice President and Chief Operating Officer] Jeff Songer is Chair, is really focusing as an industry on an important issue: How do we go after this and make sure that we don’t become less relevant or ultimately irrelevant in the way freight is moved around North America?
The real payoff, if we continue down that path and make the right investments, the right choices, would be a tremendous increase in the capacity that we can get out of our network, improved consistency and reliability, and resiliency of the network. And if we do all of those things and we create that outcome, I think railroads have a very bright future. Not only will it preserve our role, but we’ll be able to grow it. What that’s going to require, given the nature of the rail network, is that we are going to have to work together as an industry to [address] some of these issues, because of the huge degree of interchange that takes place among the large railroads.
We’re involved in a couple of Blockchain pilots. We’ve taken what I call a partnering type of strategy with respect to innovation. Everything we look at fits into one of three or four buckets. It’s either customer-facing, how can we become more effective and better at the way we interchange and interface with customers like Blockchain, for example. Some of the technologies we look at and some of the actions we’re considering are in the area of asset health, predictive maintenance—those types of things to get better utilization, longer lives and better performance out of our assets.
Autonomous operations is a different bucket. And then there are other financial types of investments and innovations that we’re looking at. So it’s a distributed model in the organization that all comes together at the executive team. We’ve made some investments. We are a small investor in an autonomous vehicle company involved in looking at closed communities—retirement communities, resort communities—in developing autonomous vehicle technologies. We’re working on some ideas and possibly a pilot looking at how we could use their technology at our intermodal ramps to manage dray and movement of containers within the fence, so to speak.
One of the ways I describe our approach right now is, we’re not looking for the needle in the haystack in terms of the big, home-run type of investment in a single technology or a single company. We’re trying to find the haystacks. That means we’re looking for partners and people, companies investing in similar types of technology, trying to leverage their resources and our relationship with those companies to try to become more aware of new, emerging, disruptive technologies that apply to our business.
RA: A good example of that in the rail industry is TTCI.
OTTENSMEYER: Yes. They’re doing a lot of great things in autonomous and the use of drones and asset health. How can we look at that group as a haystack and get a better understanding of the things they’re doing and find those that we think are more relevant to us. There are lots of other examples, from financial institutions to companies like Siemens and Wabtec—all of those companies and many more we consider to be haystacks that we want to get closer to and understand what they’re doing, leveraging their technology, research and resources to better understand what might apply to us.
RA: Let’s talk about the company’s vision, values and culture.
OTTENSMEYER: It’s a topic that I have spent a lot of time on since I became CEO, and probably when I became President. I have spent a lot of time with employee groups, in town hall meetings, really trying to tell people what type of company we want to be. I have a little tool that I use, I have in my pocket every day. It’s a statement, and it has been very useful for me as the CEO of the company to help 7,000 employees across 7,000 miles in two different countries, two languages, two cultures, really understand our vision, our purpose, and what type of behavior is expected and what type of behavior they should expect as an employee.
Our vision is to consistently be the fastest-growing, best-performing, most customer-focused transportation company in North America. So those are the key elements of our vision. So, for example, fast growing certainly means revenue and volume, but it can also be profitability, earnings per share, those types of things. Over time, we have built our management and executive compensation systems around some of those notions. The other key part of this, which I think is really important, is the values and culture piece, which is really more about behaviors, how we expect our people to behave with each other, with customers, with investors, with partners, vendors, whoever. That has really been helpful, for me and really a lot of our managers, to just be very clear on what those core values are, and to tell them and help them understand that this is what’s expected. And if you don’t behave this way, you can’t work here. On the other side of the fence, this is what you should expect as an employee. This is the way you should expect to be treated, in your dealings with supervisors and other people in the company.
RA: My experience with Kansas City Southern goes back to the mid-1990s. There are two things that come to mind: Never complacent. Fiercely independent.
OTTENSMEYER: I would agree with that. Maybe some of it is our size. We’ve got to be on our toes because we’re surrounded by companies that are much larger than we are. Complacency would be very troublesome for our company. Fiercely independent? I would say the nature of our fierce independence has changed over time. A big part of our strategy for the past several years—this is really important—is the way we can connect, our philosophical approach, our desire and willingness to work with the other carriers to get to markets and offer our customers and their customers service options that we wouldn’t have, just based on our own network.
So that again is a very important part of our strategy, more so than most of the other large railroads. Because of our size, of where we’re located, the strategy of developing service options with our connecting carriers and our partners in the railroad industry is very important. I also think a really important part of our value proposition to our customers is that independence. If you’re an auto company building a new plant in central Mexico and you want service options to both railroads in the East, we’re happy to do it. If you want service options to both railroads in Canada, we’re happy to do it. I think we are more valuable to our customers because of our ability and our willingness to do that. If we were part of a bigger network, it might not be so easy.
Railway Age will formally present Pat Ottensmeyer with the Railroader of the Year Award at the Union League Club of Chicago on March 10, 2020, where the presentation has traditionally taken place since 1964, during the Western Railway Club dinner.