Matt Rose: “Less is NOT better”Written by William C. Vantuono, Editor-in-Chief
Railway Age December 2018, Cover Story: BNSF Railway Co. Executive Chairman Matthew K. Rose will retire from the railroad in April of 2019, after 26 years of service. At the end of his tenure, Rose will have been Executive Chairman for six years, and CEO for the prior 13 years. He also served in senior marketing and operations positions at BNSF and predecessor Burlington Northern before assuming the CEO role in December 2000.
Railway Age selected Rose as its 2010 Railroader of the Year. “In the railroad industry, where strong, focused leadership counts for a whole lot, [he] has led BNSF Railway to new heights,” wrote Railway Age Editor-in-Chief William C. Vantuono in the January 2010 issue.
“One of Matt Rose’s most impressive traits has been the ability to grow,” wrote the late Larry Kaufman, a Railway Age Contributing Editor, in January 2010. “Like good executives in any industry, he thinks long-term—five years and more into the future.”
“It was a very lucky day for me and for Berkshire Hathaway when I met Matt Rose,” said Chairman Warren Buffett when Rose’s pending retirement was announced. “Under Matt’s management, BNSF has become a major source of profit and pride for Berkshire. And, as a citizen, Matt has been an exemplar for corporate leadership.”
Rose and Vantuono met at BNSF’s Washington, D.C. office in late November for a wide-ranging interview in which Rose reflected on his career and talked about the industry’s future.
Vantuono: You joined BN as director of automotive terminals.
Rose: Yes. I actually came out of the trucking industry. I joined BN in 1993. We merged on Sept. 22, 1995 with Santa Fe. The CEO, Rob Krebs, came from Santa Fe, the smaller railroad of the two. When I was 38, Rob told me that he wanted me to be the next CEO of the company. I laughed, and he said, “Why are you laughing?” I said, “Because I’ve never run a railroad.” He said, “Well, I’m going to change that tomorrow. You’re going to become the Chief Operating Officer of this company.” And I laughed even more. Sure enough to his word, he did that, and then a year later he named me President. Then a year later, on Dec. 7, 2000 he named me CEO. He stayed one year, and then left. I really was not qualified in the least to run this railroad.
Vantuono: I remember you telling me about this conversation nine years ago when you were Railroader of the Year.
Rose: Same story. Still wasn’t qualified!
Vantuono: How about now?
Rose: Oh, I’m qualified now!
Vantuono: Obviously! So, in the past 25 years, you’ve witnessed a lot.
Rose: I’ve thought of my career as having three different cycles. The first cycle was 2000. I’ll start with safety, as I always like to do. We were really struggling with safety as an industry. A lot of derailments. People just can’t fathom the amount of head-on and rear-end collisions, non-accidental releases, injuries, amputations and deaths that were occurring. Safety was not very good. And we were not growing as an industry; we were really struggling to grow. It was the dot-com era. When I would go to Wall Street, all people wanted to talk about was technology stocks, internet stocks. Everybody was going to point-and-click. No more bricks and mortar. Everyone was going to buy stuff over the internet. The returns of the industry were mid-single-digits. And yet we were spending a lot of capital. There was an enormous amount of frustration, with customers saying, “We’ve got to re-regulate the railroads.” But the regulators, I think, almost felt a little bit of empathy for us because our returns were, quite frankly, subpar. And we would say, “Look at all this money, and we’re only making 7.5% on our investment,” and so no harm was done.
In the second phase, safety was getting much better, and the investments that we were making were starting to pay off in terms of a better-quality railroad to run on—rails, ties and ballast. Processes were getting better, and we were really seeing improvement in personal injury frequency, fatalities and everything else. We were spending a lot of money, and we were coming into a strong manufacturing growth cycle. A lot more business was coming to the industry. We started seeing fuel costs go up, and more customers wanted to use us. Rob Krebs, quite frankly, had laid a real nice bedrock for us in terms of capital to expand, specifically the Transcon and the Northern Transcon. We were seeing an enormous amount of growth from our trucking partners. All that point-and-click was really paying dividends for the Federal Expresses, UPS’s and J.B. Hunts of the world. We were really in this growth groove.
That traffic was coming to the railroad. Somebody’s got to move it, and we were moving it. Our growth curve started going up, and we were spending, again, a really significant amount of capital. It was all working. But there was more regulatory oversight, and more and more people were calling for changes.
And then we came into the 2011-2012 period where crude by rail really started hitting. The investments ramped up even more. And yet, at that point in time, the regulators were basically saying, “Look at all the money these guys are spending to meet demand. This is still really good.” Okay, returns were going up, but they were in the 10% to 12% range. We were still below the average return on invested capital for American business. All that worked as well.
The third phase of my career in leadership is a little trickier, because now we’re seeing record profits and returns as well as sustained growth. We’re seeing an industry that is starting to have discussions around, “I only want what fits on my network.. I only want to provide service that fits on my network, based on a balanced view of my network.”
The railroads are still investing significant sums, but we’re starting to be goaded into lower capital targets by Wall Street, the sell-side guys. They’re giving railroads kudos for saying, “Oh, I can spend capital as a percent of revenue.” That’s not the best measure. We don’t spend capital as a percent of revenue. We spend capital based on gross ton-miles we haul.
Bridges don’t wear out with revenue; they wear out with units and gross ton-miles. So now, there’s this line of thinking out there where some of the railroads are saying: “We can get our capital as a percent of revenue down to 15%.” Somebody else has said 13%. And yet, railroads are making record profits.
And now we’ve also got political shifting of the sands. Here we are, the day after the mid-term elections. The House flips, and there will be a new Transportation & Infrastructure Committee chair who may look at all this stuff differently. And so, the conversation is no longer about revenue adequacy. We’re talking about investment and service.
I think we’re at a tricky time now. The Street—I’m talking about sell-side analysts—has been extremely aggressive with the publicly traded railroads. They’re saying that less is better. Less capital is better. Fewer market opportunities are better. Fewer unit trains are better. It’s all about lowering the operating ratio. I disagree with almost all of that. I truly believe that every industry, every business, needs growth.
Vantuono: So you would say less is not better?
Rose: Absolutely. It’s not. Let me tell you why. If you go back to the 1980s, you saw where some railroads had a singular focus on operating ratio. And the easiest way to reduce operating ratio is to take out track and reduce maintenance expenses. That’s really not the covenant, if you will, we have with our regulator, the STB, and even public policy makers. The Staggers Act wasn’t, “Railroads, haul only what you want to haul on your network.” It’s “Haul everything, and you have the ability and the flexibility to differentially price on your network.” That’s the deal, and it’s in the public’s best interest to move more tons to the railroad network, not to move tons off the railroad network.
So, I think we’re going into an interesting period where that will all be sorted out. I can’t tell you how it’s all going to work out, but there’s going to be a lot of activity.
I think again, when I go back to 2000, I had a saying. I never said it publicly: “There’s really no such thing as a bad load of freight.” We need to find the right operating expense to haul it, but we’ve also got to find the right price to haul it. We didn’t go around shooting down freight, because we saw this industry in the ’90s lose enormous amounts of market share to truck. I believe that, when we fast-forward 10 years in the future, we may not be saying that there is no such thing as a bad load of freight. But I do think we will be wanting to find ways to expand our offerings to bring more freight to the railroads. I just don’t think you can shrink yourself into a virtuous-cycle model that works.
BNSF’s mission has simply been to provide a great service through the heartbeat of the railroad—capital investment. Expand the railroad. You see every year that we do expansion in our company, and then provide service that’s going to get more customers to use our railroad in more locations.
There was an article in the Wall Street Journal that’s instructive about supply chains. The point was that customers are moving their manufacturing facilities closer to their users because of high transportation costs. They aren’t fingering the railroads or trucks. It’s just higher transportation costs, driven by higher fuel costs, driven by congestion and all these things.
We’re going to have to find ways, as an industry, to continue to grow. If there’s one thing that I think will impede the progress of the railroads, it’s lack of growth. We’ll get a little confused in the meantime because we’ve got crude by rail rolling because the pipelines aren’t in. Coal is still moving at a rate at which we are all a little surprised.
But long-term, we’ve got to find ways to grow outside these commodities, and it’s probably going to be modal conversion, i.e.; intermodal. That’s going to require really strong maintenance and expansion capital, and service offerings that are available to everybody.
Vantuono: Since BNSF became part of Berkshire Hathaway, you haven’t had to answer to Wall Street. Would you say that’s been an advantage?
Rose: Yes. When we did the deal in 2009, I told our management team that it would probably take us 10 years to look back and say whether or not this was a good experiment. And by that I meant, could we outperform vs. being a standalone company? And I think the answer is yes. Why is that? Warren has given me, personally, tremendous flexibility to run the company. He’s been very interested in our returns, and we have done a good job for him.
They’ve got a couple basic philosophies. Charlie Munger, who’s Warren’s right-hand man, says, “We don’t have to make the last dollar.” Warren talks about this in his annual letter. He says that we make these investments with the belief that the future regulator—not the regulator who’s there today, the regulator who’s there tomorrow—will take all this into account. I simply call it the unwritten commitment. That is, we spend enormous amounts of capital on these networks, and we get a regulator who allows us to provide good returns. All that’s worked, I think, pretty well.
Vantuono: How do you view hedge funds coming into our industry? Do you think it’s been beneficial, or not? Is the hedge fund era over, if there was a hedge fund era?
Rose: When we were publicly traded, I would go to sell-side conferences. It used to be me with investors and sell-side analysts. And then it changed. The meetings got larger. There’d be 20 hedge fund analysts; they all seemed to be under 30 years of age. Creating transparency about how you’re doing versus another company, and the old spirit of how you’re running your company versuss somebody else, I think that’s fine. But when a hedge fund says, “I really want to know how you’re going to do next quarter” on a railroad that is making 30-, 40-, 50-year-long asset investments, it’s really not consistent.
The day after we had our shareholder meeting, and the shareholders voted 97% in favor of the Berkshire Hathaway transaction, it was snowing in Fort Worth. I’ll never forget. I called Warren, and I said, “Okay Warren, you now own a railroad. Congratulations. What do you want me to do? You want me to come to Omaha and bring a power point and show you what our next five-year plan’s going to be?” And he said, “No. I want you to run this company like you own it, and you’re going to be in charge of it for the next 100 years.” And I don’t think that’s consistent with a hedge fund wanting to know what the next quarter’s going to look like.
When you think about getting back to the customer, and working with the markets and customers to grow your business, these are not necessarily 10-year opportunities, but they’re not something that always shows up in the next quarter, or even in next year’s numbers. Stock prices have certainly benefitted, if you look at the market caps of the railroads. It would be hard to say that there hasn’t been an enormous amount of shareholder value. But that’s just one of three elements of the value proposition.
Vantuono: Do you think shareholder value is misinterpreted? Or there’s too much emphasis on share price?
Rose: Yes. We’ve always looked at the value proposition of the railroad as a three-legged stool. Shareholders are a very important leg of that stool because they provide the capital for us to make investments. The second leg of the stool is the employees. They provide the services that allow us to make the investments that allow us to make the returns to provide to the shareholders. And then finally, there are the customers. People are always asking, “What’s the most important?” Well, they’re all important. And if you think about a three-legged stool, if one of those legs gets a little out of whack, things don’t work very well.
Vantuono: So, you believe that you’ve got to have a balance. The three legs should be more or less even?
Rose: Right. You have to be worrying about all those constituencies. And if you’re not, bad things are going to occur. You would think that as the railroads become more profitable, by however measure you want to look at it, service would actually improve. And I’m not sure we’ve seen that. I think we’ve seen, actually, a degradation in overall performance of the rail network in general. The litmus test would be things like ISAs (Interline Service Agreements), which nobody even talks about anymore. You would think these would be working perfectly with more people going to Precision Scheduled Railroading. You would think Amtrak performance would be at an all-time high. You would think commuter rail performance would be at an all-time high. They’re not.
I’m not sure that higher shareholder value has resulted in a significant improvement in the railroad network. Employees have done okay. We’re a smaller network. But if you look at BNSF’s major productivity gains through the years, it’s mainly been through attrition, which I think is helpful.
I think that balance is going to be really important going forward. And again, it gets back to that unwritten commitment that we have with the regulator that will, I think, come a little more into light. A little bit has to do with the politics. I assume the new chair of the T&I Committee will be Peter DeFazio (D-Ore.). He is an extremely capable and insightful person who’s been around a long time. I assume he’ll have a very keen interest in passenger rail. He’ll have, I think, a very keen interest in making sure the freight railroads are implementing this three-legged stool to make sure it’s working for all the constituencies of the railroad industry—not just the sell-side guys.
Vantuono: I wanted to bring up the subject of mergers. Do you care to comment? There’s a lot of rumor mongering, which I’ve contributed to! What do you think?
Rose: Here’s what I’ve said for 20 years. Same two issues. I believe that we will have mergers when, one, a big railroad gets in trouble financially, or two, the economy is growing at such a rate that we need more rail capacity.
I do believe you can get more rail capacity through mergers. But I don’t think a railroad’s going to get in trouble financially. And I’m not sure the marketplace is ready to accept the fact that we just need more rail capacity when railroads appear to be reducing capital, not increasing it, and the types of returns we’re having.
The third piece, which is also really instructive, goes something like this: The market caps of the railroads have grown tremendously. CSX is actually worth more than what BNSF was worth when Warren bought it, almost by double. The market cap of Norfolk Southern is worth more than what Warren paid for BNSF. So, when we think about it, how do you do the construct of a merger? You start off with cost synergies. If you go back and look at the history of the mergers—SP-UP, BN-Santa Fe, the Conrail split with CSX and Norfolk Southern, CN-IC, etc.—you basically start out with four, five, six, or seven hundred million dollars of cost synergies.
We call it the Noah Ark’s syndrome. You don’t need two CEOs. You don’t need two presidents. You don’t need two CFOs, etc. So you come up with a lot of cost synergies. You’re able to reduce some terminals, but that’s in that five, six, seven hundred million dollar a year number. And then you have revenue synergies. Well, how much more revenue can you add when you no longer have interchanges, like between the BN and Santa Fe? The answer was, we were able to grow revenue quite a bit, okay? But still, those numbers, I would tell you, are the billion-, billion-and-a-half type of synergies—costs and revenue synergies that you would put on the bulletin board and say, “By merging these two companies, this is what we can get.”
What people aren’t talking about is what you’re going to give up. We know what you’re going to get. I’ve done this a lot. I’ve done a merger analysis on every railroad out there. What we don’t know is what we’re going to give up. What I’m talking about is that I don’t think that the industry is going to be allowed to consolidate without a huge change in regulatory policy. The Justice Department is in a much different place today, even though it’s not the primary overseer of railroad mergers. I think public policy is saying that more concentration, bigger companies are not necessarily better.
And so, I can’t imagine anybody proposing a big transaction today without a full and complete overhaul of the regulatory tenets that govern this industry. Things like reciprocal switching. There’d likely be a reciprocal switching aspect to it. With a reciprocal switch rate in the hundreds of dollars, not thousands of dollars or something like that. It would be very minimal, like what there is in Canada with the competitive line rate. I think that would likely come to us. I think of exemptions right now that the STB doesn’t oversee, a large chunk of railroad commodities. You’d have the STB looking over a lot more commodities than they do today. I believe revenue adequacy standards would change.
The point is that there’d be a lot of change. And none of us have put any of that into the model. The final piece that I think that people will be shocked about is—and this probably isn’t the right phrase—is community and environmental concerns. In the BN-Santa Fe merger, we got through with very little of that. The SP-UP got through with a little more of that. The Conrail split was really the first time where we started seeing cities saying, “Wait a minute. You’re going to reroute these trains, we want this, we want that,” and so on.
The CN-Elgin Joliet & Eastern merger: That one hit a stride. The STB stipulated, I think, about $240 million for grade crossings. It was a very small railroad. And Hunter [Harrison] sued the STB and lost. And then he sued in federal court and lost.
My point is that the next big merger will have enormous environmental and social costs. I just don’t think anybody’s thinking about this. I may be tone deaf to it, but I don’t see it.
There’s no doubt about it. The investment bankers are spending nights awake doing all their little models, trying to figure how much money they can make off fees by getting a big railroad transaction. These numbers have gone up in orders of magnitude compared to where they were when we did the last round of mergers. And at the end of the day, you have to ask what I call the big question: What’s the point? And I haven’t heard anyone say, “Well, it would be much better for employees; it would be much better for customers.”
Let’s just take a big railroad buying a smaller railroad, with a 20% or 30% premium. How are you going to pay that premium? Again, I could almost guarantee there are going to be five, six, seven hundred million dollars in cost synergies. Revenue synergies, maybe another billion. But the question is, how are you going to pay for that? The STB, and public policy in general, I think, could come in with rate cap levels. That would prevent the parties from extracting the value to pay for the merger. So I don’t see it. I think it’s just a bad financial deal, and I think the unintended costs that would come from this would be enormous: environmental costs, regulatory rollback.
Vantuono: That’s saying, in financial terms, “unintended consequences?”
Rose:: Absolutely. I don’t think any investment banker understands that side of it, of what it would cost.
Vantuono: Let’s talk about Amtrak. We’re asking the question, is it a failed public enterprise experiment?
Rose: The question is, what’s the litmus test of success? Or failure? And if the litmus test is to be profitable, yes it’s probably a failure. But you put that same litmus test against any commuter rail operation, any highway project, any public transit system also fails as those things don’t make money.
Public policy needs to determine who pays for this stuff, and what is the role of Amtrak. It’s not for the railroads to determine, and quite frankly, it’s not for the Amtrak board to determine. Do we want a national system? Do we want just a regional system? What is the value of having passengers being able to utilize that system in the middle of North Dakota? If you’re living in the state of North Dakota, it’s a high value. If you’re living in L.A. and want to get to Chicago, it’s probably not a huge value.
That’s what it all comes back to. We’re only going to talk about transportation policy a certain number of hours and days in Washington, right? There’s only so much you can talk about. If you look at the amount of time that we spend on Amtrak, it’s out-weighed versus the cost of Amtrak. Even in the budget. When the President puts his budget together, and the Congress puts its budget together, they’re always debating whether it’s going to be a billion-three or a billion-five or a billion-eight for Amtrak, in a DOT budget that’s hundreds of billions of dollars; a national highway system that’s investing $100 billion.
So much of this focus, because of the political nature of Amtrak, is on this investment. And so I would say a couple things. Public policy needs to determine, do you want, long-term, to have a national passenger railroad network? If you do, then you need to pay for it.
Amtrak is not getting enough capital to renew its long-distance trains. And over time, you’ll have more and more service failures, you’ll be clogging up the national railroad network. That’s just the way things work when they age out. Some would argue that there’s probably a lot of money that instead could be spent in the Northeast Corridor to provide a lot of value for this economy and all the various states around it.
I don’t think it’s for the railroads to make that decision at all. As long as Amtrak runs the national network, our job at BNSF is to run it as a premium service, which we do. That is what we’re instructed to do. And we’re always going to try and do everything we can to meet the performance standards.
Vantuono: Hypothetical scenario. Suppose the government were to come to you and say, “We’re dismantling Amtrak. We need a new business model. BNSF, we want you to run the long-distance trains, or corridor trains, and we will pay you, in some form, your avoidable costs. We’ll help you pay for capacity improvements. The object is not for you to make a profit. The object is to provide a service. And you could put the BNSF name on those passenger trains.” I’ve talked about this before. Do you think it could work?
Rose: It all depends on for what they would reimburse us, at what rate. We would look at it and say, “Okay what’s the alternative?” If outside operators were going to come in, we’d be concerned that they wouldn’t respect the same railroad operating rules and cadence that Amtrak does, and that we wouldn’t have the same liability structure that we have with Amtrak. We’d probably look at it, out of defense more than offense.
I don’t think that anybody makes money anywhere close to the current rates that are being charged today on a nationwide Amtrak route. But again, that’s not the question that should be asked. The question is, how much are we willing to pay for that public transportation service?”
One thing we do appreciate about Amtrak. They really do conform to our safety rules. That is unbelievably important to us.
Vantuono: What’s your view of private passenger train operators?
Rose: I think they’re fine, as long as they have rail experience and they understand the operating rules. And in a lot of cases, they’re going to be operating with PTC. But again, this isn’t something you just all of a sudden decide, without the experience.
Vantuono: BNSF, even before your tenure, has been a technology leader, pushing the envelope. Where do you see technology headed? Let’s just talk a little about autonomous or semi-autonomous trains.
Rose: When we think about what’s going on around us, again, how do we grow our business? We grow our business by having more opportunities with stuff that’s on the highway. We have to look at what’s going on with our largest customer, and largest competitor, the truck. We see them very aggressively moving toward autonomous platooning. If they just did platooning, how much market share could that cost us? If they did platooning with autonomous, how much market share can that cost us? If they did platooning, autonomous, and battery operated Class A tractors, how much can that cost us?” And then, if you look long-term, it’s no longer a stool; it’s a chair. The fourth leg of that chair? They no longer have to pay their true fair share of the national highway system. It’s a bleak picture for us.
We have to do a couple things. One, we have to figure out how we can keep up with them on productivity. We believe with all of our hearts at BNSF that the term should be “attended automation.” With that, we believe that there is a long path with a certain number of trains, with PTC, that you can automate the left seat of the locomotive. It’s not for every train on our network. For us, we don’t believe that you do this where you’re not running PTC. And that’s not a uniformly held belief in our industry.
We also believe in the principle of user pay. We’re not asking for the public to pay for our private railroad, and we don’t think that longer, heavier trucks not paying their fair share is an equitable argument. We’re going to be really strong and always coming back to those principles that trucks should pay their fair share on the highway. And that means user-pay systems, whether it’s commercial VMTs (vehicle-miles traveled) or a weight/distance fee, like what’s going on in Oregon. Interesting, right?
Vantuono: Battery-powered trucks are not going to be contributing to motor fuels taxes, and they’re still going to be wearing out bridges and pavement.
Rose: That’s why a VMT. We’ve got a path to a commercial VMT on the highway system. And we’ve also got to look at alternative fuels for our locomotives. We tested LNG, and we don’t see the spread between diesel and natural gas wide enough to justify us making that investment, and it’s a significant investment.
For us, it’s probably $8 billion to $10 billion. We don’t see the returns of doing that. So we’ll open the next chapter of our book—battery operated locomotives. And we’re looking at different tender configurations, and working with suppliers on who we think could provide us with some unique battery technology development.
Long-term, I think we will head toward some kind of carbon pricing. ExxonMobil, the largest oil company in the world, is floating a carbon tax idea. It just feels like, long-term, we’re going to put a price on carbon, and the railroads need to be there step-by-step with the trucks on productivity, user-paid systems and alternative fuel sources for locomotives. If we don’t, we lose more market share. If we do, we’ll actually get more market share. Because pound for pound, ton for ton, we will always be the most efficient and potentially the best on carbon pricing, environmental impact, and highway congestion impacts when you look at how to move freight through this nation’s supply chain.
Vantuono: LNG can work in certain operating scenarios, like Florida East Coast. But that’s a small, captive system, and they’ve got their own LNG supply. They set up their network very well, as far as I know. To try and institute LNG on a big system like BNSF with interchange locomotives and fueling stations?
Rose: It’s gnarly. But battery-powered locomotives? They create a lot of electricity going down the track. That energy all dissipates. We haven’t figured out how to capture that electricity. That’s what we’re spending a lot of time thinking about.
Vantuono: What about electrification? This has been talked about in the past. At one time BNSF was looking at it, where the electricity is generated via huge wind farms out in the Rockies, for example. And you use the right-of-way for a power grid, and then tap off that grid for traction power.
Rose: We looked it at in New Mexico and West Texas. We actually looked at putting a DC line underneath our right-of-way. The capital didn’t pencil out. Could it eventually? Maybe. But I believe that battery technology is going to really improve. Look at what the automotive guys are doing. The problem with the railroad industry? We think it’s very large, but it’s actually a very small market for one of these guys. If you’re a battery guy, you’re going to see the automotive industry as this enormous market. You’re going to see the trucking industry as a much smaller market. You look at the railroads and you see an even smaller market. We can’t just wait for this to come to us. We have to go out and partner with suppliers to bring it. That’s been a trademark of BNSF. It’s what we did with PTC. It’s what we did with AC traction locomotives. And I think it’s reasonable to think that we will do it with battery, too.
It’s game on when you see how much money Toyota, Ford, General Motors, Volvo, etc. are putting into this stuff. We have to stay up with that, and we must find suppliers willing to address it and be paid fairly in our much smaller market.
Vantuono: Big Data. That’s become sort of a buzz word in this industry. mainly on the engineering side. You collect all this data. What do you do with it? How do you manage it, put it to good use?
Rose:: We’ve got thousands of wayside detectors out there. The trick is to take all that data that comes in every hour and to string it into a manageable set of information. We’ve partnered with IBM on some of that stuff. We’re doing some testing right now with a Silicon Valley company, and they’re looking at actual detection data. We’re working with the FRA. We’ve got autonomous inspection vehicles running up and down our railroad everyday.
Vantuono: You’re now using drones for bridge inspections.
Rose: Yes, we are, but the real impact is with the collective total of all of our inspection technologies. The existing regulatory structure isn’t real accommodating to all this technology. And so we’re working with Administrator [Ronald] Batory and his staff on how to use more of it, instead of putting people in harm’s way to do inspections. Take inspecting track, for example, Instead of a hi-rail vehicle that puts our employees in harm’s way and relies on visual inspections, we’re using an autonomous inspection car that uploads the railroad data and really gets to see the defect ratios. The FRA has accommodated a demonstration of that.
I think we are in the second and third inning of the technology impact to this railroad industry. We’re going to see a lot of stuff with a fully implemented, integrated PTC network, starting with more efficient train operations and moving toward automated autonomation in the locomotive. With just PTC, we already know we’re running a much safer railroad. PTC is not the be-all, end-all for safety, but we are seriously a much safer railroad.
But we’re still reading out train orders. So we’re working with the FRA on automatic directives that will, we think, create a safer, more efficient railroad.
Longer-term, as we think about PTC, the next piece of that is movement planning. We’ve been working with GE on that over the past couple of years. We’re going to start rolling that out next year. Movement planning, if you think about it, will automate a lot more of the dispatching decisions. And because there’s so much data, by harvesting this information, we believe that with the right algorithms, a movement planner can make better decisions than having to make sure you have a dispatcher with 30 years of experience to make that decision.
And then, even longer-term that leads us into changing the fixed blocks within the signal system, and reducing train spacing.
Rose: Yes. We’re looking at several different ways to do that. But if you think about the capacity implications of that, it really is significant. And if you think about the railroad flowing with better fluidity, you then have more regular maintenance windows. Safer, with lower costs. We’re just really in the first couple of innings of the baseball game on technology adoption and implementation. And it’s really exciting. I think in 10 years, we won’t recognize a lot of things today that we’re doing.
Vantuono: You must be a baseball fan, because you’re using a baseball analogy. What’s the grand slam for this industry? It doesn’t matter what inning it comes in, though it may come in the bottom of the ninth with the score 3-0, the bases loaded, two outs, three balls and two strikes.
Rose: It won’t come like that. It’ll come over time. It’ll come with attended automation, moving block and movement planner. With a battery-operated locomotive. If policy makers put a price on carbon. With a highway system paid for by users, and a regulatory agency that, as long as we are making these significant capital investments, will allow us to make double-digit-type returns.
That’s the virtuous cycle that you heard me talk about. We’ll be attracting more business, we’ll be making higher returns, and we’ll be using that money to make more investments in addition to giving it to our shareholders. And regulatory oversight that will say, “Yep, this is all working really well.”
Vantuono:: I know you want to talk about this industry’s future leaders.
Rose: In 2000, when I became CEO, I inherited a company that had an average age of 49. I’m talking about our exempt workforce. And I thought to myself, boy everybody’s going to be retiring here. And here I am, I’m 40 years old. I may have to be here for a long time. Generation X and Y were coming in; this was before the Millennials. They didn’t really appear to be fascinated with a militaristic command and control style of organization. They were more about looking at different opportunities. We adopted and developed what we call the BNSF Leadership Model. The executive team worked through the leadership team, and we installed it. It was a typical deal where most of the organization said, “We cannot do this. This , too, will go away.” And I remember telling everybody, “This is going to take 10 years,” because when you start talking about affecting culture, it really is a long-term deal.
We started helping people understand what was good about leadership, the how and the what. The what was what we wanted people to achieve. And the how was how you accomplish it. We couldn’t just see people’s results. We also wanted to see how they accomplished those results. We had an enormous amount of effort put into development of our people. We believe strongly that developing people from within is a much better strategy than having to hire people from the outside—not that we’re against it, and I have personally done that at senior levels. But we think development is huge, and cross-fertilization is very instructive.
As I leave, Carl Ice is there. He’s been a part of this, walking with us every step. The Leadership Model is now embedded into our organization, like the safety culture. When we think about developing the leadership after Carl, we are really pleased with what we have and what we see in terms of future leadership. A great example is Katie Farmer being promoted to Executive Vice President Operations. She’s been with our company for 25 years. It’s really great to see the highest-ranking woman in the industry working at BNSF. We’re really proud not only of Katie but of the whole leadership team that will be there after I retire, and eventually when Carl retires. It’s a team that’s well-positioned for the next 100 years.
Vantuono: What’s next for Matt Rose? What do you want to do? (Rose will turn 60 next year). I think of 60 as the new 50, or the new 45. Where do you see yourself?
Rose: I’m not going to do another CEO gig. I’m fascinated with the public policy space. And I will find a way to stay involved in that, in one form or another. I may look at some opportunities in private equity in the logistics space.
When I step back and think, 20 or so years of working with Carl and leading this company, it’s been an incredible honor. But there’s also a grind to it. There’s not a day that goes by—and this will sound awful to a lot of readers—there’s not a morning that goes by that I don’t wake up early in the morning and check my phone to see if we’ve had an accident or an incident, making sure that none of our employees were harmed, or that nothing bad happened in one of the communities in which we operate. That’s the downside of the operating environment, with 34,000 grade crossings and 45,000 employees. Stuff always happens.
So, I’m looking forward to not having to have that burden of leadership so intensely, day to day. But honestly, I don’t know. I’m not going to rule anything out. I’m just going to keep my eyes open.