Spilt milk to Class Ones

Trains Magazine General Discussion
1

I just finished reading a book about the Indiana Railroad. It got me thinking of a lot of things. When the line was sold by the IC, it had less than 12,000 car loads per year. The INRD bought it, had a five year span of 15% increases in net revenue and now does well over 100,000 car loads per year.

Seemingly, the IC missed an opportunity to make a buck. Moreover, if the INRD had the deep pockets of a Class One, just think what it could have done?

The IC also sold the Midland South, which last time I checked, was somewhere “close” to earning its keep (yes, I am being sarcastic). The IC finally sold the Paducha and Louisville. Which aslo does well over 100,000 carloads per year (ironically, aslo heavily owned by CSX, which also owns the INRD).

I realize there are two ways of looking at this–the sale of these assets helped the Class Ones make the turn around in railroading in the 80s that kept railroads alive to become prosperous today. The other way is, they missed an opportunity to believe in themselves and make a profit.

Thinking of other IC spinoffs, I don’t know if they were all like this. The Chicago Central was successful enough for the IC to buy it back–or maybe that decision was motivated by “strategery.”

I think the old Alton line just wasn’t sold to the right owner. Given SP’s purchase of the line, it would suggest that a profit could be turned on this line as well.

Can you think of other railroads shedding seemingly “dead horses” that turned out to be very profitable? Naturally, I can, but it would be more fun to let this thread develop on its own.

Gabe

P.S. Was the sale a bad decision by impotent management or a realization that unionization and other aspects of Class Ones made regional ownership of these lines the only vialble option?

2

Gabe:

I think the IC did exactly the right thing to shed all of those lines. Looking back at where they were in the early 80’s…they were a mess. Too many lines going nowhere. I dont know if the IC ran coal on the Indy line or not. But, I doubt if they would have been interested in a 100 mile haul of coal. Look at CP’s recent sale to INDR. There was quite a bit of traffic on that line, but it didnt fit in their strategy.

I used to work in the LTL trucking industry. The large carriers such as Yellow and Roadway would pass on short haul business, as it didnt fit their cost structure. I think the same thing occured with IC and others as it didnt make sense to run a four or five man crew on these routes.

The Meridian line is obviously a line they probably should have kept. NO doubt about it. That line is valuable.

I still dont understand the repurchase of the Iowa line. There just isnt much traffic on that line. They run a pair of daily trains from Chicago to Iowa (one each way) plus some grain…but that is it. I remember reading the proxy on the repurchase and thought there must be something with tying in their western Canada freight which was coming down the BN at the time. Instead they purchased the WC.

The IC had a firesale and made a lot of money concentrating on being a north-south carrier. They made their investors a TON of money, as the stock has just been a horse.

ed

3

Well, I think the ICG could have been run better. But then every organization in the world could be run better. Leaving that aside, operations like the Indiana Rail Road have huge advantages over the old ICG.

  1. Union Work Rules. A financial guy (who had no reason to lie to me) told me that obsolete work rules were costing us $80 million/year. That was over 10% of our gross revenue. Any company that brings 10% of its gross down to net is doing great. We were litteraly paying people (a lot) to take train rides.

We had to put 4/5 people on a train and change them very often. They worked all the way from Chicago to Champaign, 125 whole miles and they often stopped 3 hours for lunch along the way. We’d buy thier lunch if they agreed to eat it while the train kept moving.

Then there were the “tabulated locals”. As an example, the union contract required that we pay a full crew to run a turn from Bloomington, IL to Mason City, IL and back six days a week. Now this train would operate with about as many cars as it had crew members, and it required an engine (cost), caboose (cost) and fuel (cost). But if we didn’t run it every day, we had to pay the crew anyway.

These “Tab Locals” were all over the system and they ate up money. If we were literally forced to operate the Bloomington-Mason City turn, and we were, we couldn’t put more trains on other lines to gain more traffic. We couldn’t spend the money twice.

For years, the railroad unions were the best friends the truckload carriers had.

The Indiana and the P&L have never faced these poblems. The IRR operates one person crews (and those singular crews are union members.)

The IC presented a plan to the unions called “The Iowa Experiment” in which trains on the Iowa Division would be operated with reduced crews - but there would be more trains. This would have benifited the employees. Brakemen would have

4
  1. Wisconsin Central. They took what were secondary lines at best, and increased traffic to their highest levels EVER. They did what SOO, MILW, and CNW could never have done with those lines. Too bad CN seems to be undoing a lot of the good that WC did. Maybe they should consider leasing off those lightly-traveled lines to someone who wants them? Nah, too much fear of it becoming another WC, probably!

Also see DM&E, IC&E, MRL (but not IMRL, I think that’s been discussed before)… just about any of the decent-sized regionals!

  1. My vote would be with the latter. For as much as unions think they help the employees they represent, they also hurt those same employees by blocking opportunities for the company to help its own employees. (Like in greyhounds’ example, or the UTU idiot that crashed the Lake States Transportation Division, leading to the sale to WC.) The union is always good, and the company is always trying to screw the employees, right? [V] (Which is why I’ll be at my union’s meeting this weekend, but that’s a different topic for a different forum…)

Also, I was trying to figure out what the “Midland South” was… ??? Oh! I got it, MidSouth! [:D]

5

I have to admit, I am prejudiced from the start when it comes to Unions.

I bagged groceries, stocked shelfs, ran a cash register, and eventually became an office manager at a Krogger grocery store in Litchfield, Illinois for seven years starting when I was 15 and ending when I was done with my masters degree at age 22.

In my 7+ years of employment, I have paid $9,475.45 in union dues–a number I shall never forget–sometimes there were weeks when my union dues obligations were larger than my paycheck. The day I left Krogger for lawschool, I made 10 cents over minimum wage. Worse yet, management seemed to like me a great deal but were actually precluded from giving me a raise, as there were union-imposed rate structures, and they couldn’t give me a raise with out giving the older employees–who had positions approaching a sinecure–a greater amount.

Also, in the cases where employees were mistreated, everyone knew the labor board was a much better call than the union rep.

The Krogger I worked for is no longer there–non-union Walmart ran circles around it and put the store under. Thus, it appears to me that the sum-total of my $9,475.45 got me a prohibition against raises and the rest of the employees in the store a trip to the unemployment line.

Looking at the demise of the Rock Island and some other railroads, I have to feel as though I am not the only working man who seemed to get a less-than-fair shake from our so called protectors.

Gabe

6

Exactly! And, the WC had a very good friendship with it costumers! If they wanted a different boxcar, because the other one was leaking, they would send them new cars! They also had a great atmoshphere with their employees. Sure, the money wasnt GREAT, but it was good enough for what the WC was asking of them. Down here in New Brighton, we used to have 17, yes, 17 crew members! Now, we have 4… Alec

7

From somewhere around the time he became CEO of the ICG, Harry Bruce often publicly stated that his objective was to put the railroad in a position to be a good merger candidate and he said he would accomplish that by trimming the rairoad down to its “core” lines. Bruce was probably correct on one issue, if the ICG did not do something, it could wind up as a very marginalized regional carrier or at worst, find itself being disposed in a fire sale, a la, Rock Island.

You can argue the changes that came with the Staggers Act and union rules could have allowed the development new business on the “east-west” lines, but, even with the much greater flexibility and lower costs, it took the new owners of those lines years to make the big increase in carloads now being reported. The IC probably did not have that kind of time.

One should keep in mind some of the other conditions of the era. Motor carriers were flexing their new found freedom. The proliferation of truckload operations resulted in rates with paper thin margins and traffic continued to swing to trucks. The eastern and western railroads had all the capacity they needed to to make reasonably efficient direct conections at the major gateways, making the IC’s east west lines less attractive as bridge routes.

Finally, every other railroad in the country was eliminating “marginal” lines. There was not going to be any interest in a rairoad with a spider web of redundant lines and and low traffic branches.

When I was on the ICG up to 1975, I was involved in the “pre-Satggers” effort to develop new business through “innovative” marketing efforts. I would have liked to have seen the ICG to suceed in that effort and to become a major player in the deregulated era. All things considered, I just don’t think that could have ever happened.

8

ICG gave birth to 5 regionals, and 3 of them went bankrupt. The first was Gulf and Mississippi (757 miles, $22.5 million), the biggest was Chicago Central (777 miles, $75 mill), and CM&W (631 miles, $81 mill). The other two were PADL, 309 miles, $70 mill, and MidSouth was 403 miles, $123.5 mill.

9

Another regional that is doing quite well these days is the Chicago, Ft Wayne and Eastern.

CSX pretty much let any local traffic dry up. Now, two years into the operation the CFE is going gangbusters, or should I say gangbustas:

  1. August 2004 - 1 train daily frm Ft Wayne to Chicago. The train would go in to Chicago one day and return the next day. Casual observations was the trains averaged 35 cars…not bad. The trains would stop in route to do local switching and setoffs/pickups.
  2. August 2006 - The same one train in and then back the next day. However, the “Road Train” does not switch local cars. Why? The train is too big. The eastbound on July 29th was a strapping 104 cars, pulled by an old SP SD45 and a rentageep. A daily local works Warsaw to Valpo (WAVA). Traffic is steadily picking up.
  3. On line business is picking up. For instance…Sysco Food Systems is building a massive DC at Hamlet which is on the CFE. The plans are for inbound food in refers or boxcars.

I am not exactly sure what the differences are between the large railroads and the smaller ones, but my guess is that the large (CSX in particular) are budgetized with local trainmasters being limited on their costs. Thus a customer that wants a daily switch might not get it (hey we will give you what we want, not what you need).

Overall, I would tend to say the Harry Bruce plan worked well for IC.

ed

10

One other point not yet discussed is that the sales are bringing additional money into the industry. The selling railroad benefits from having money to invest in the parts of the business where they are making a better return, and the new owners usually invest an additional sum over the purchase price into the shortline or regional. In a contrary example the CP last year invested in capacity expansion of their mainline in British Columbia, about the time that they finished Fording Coal began shipping less coal than they planned, reducing CP’s revenues expected to accrue from the capacity expansion. Of course CP can expect the capacity to be used eventually, but in the mean time the money is spent, and the expected return hasn’t materialized, so they have less money this year, money that was expected to be coming as a result of the capacity being used. The result is that like BNSF went through after the Bob Krebs expansion ended, there is going to be a valley in spending at CP.

11

Gulf & Mississippi and CM&W both went into bankruptcy since they paid too much to acquire their lines from ICG and ICG held onto enough terminal trackage in both deals to keep some major traffic sources for itself. Chicago Central went into Chapter 11 in a dispute between management and one of the major creditors. The management was forced out and the bankruptcy was lifted without having to go through re-organization.

Chicago Central was re-acquired by IC in a defensive move to attempt to reduce IC’s attractiveness as a merger partner and maintain IC’s independence.