Michael, it’s always great to see these discussions - I know they are painful for you sometimes, but I’ve learned a lot about the economics of railroading by reading them.
Dakguy, you essentially have it right. A covenant is a restriction that’s written into a bond agreement that limits the borrower’s freedom of action, usually with a view to protecting the value of the asset. Some of them are comparatively trivial (a requirement to keep locomotives painted for a certain company, for example), while others are significant. A big portion of the value of the main line is its physical continuity and state of repair; break it, and a portion of the value of the asset to the lender if it’s repossessed is lost. In the case you mentioned, maintaining it may be sufficient; there were a lot of miles of railroad out there that carried rails for year
Based on what you’ve stated previously in this thread, the “cash” (your word) is what kept the Adjusted Return on Investments from being lower than they were on your chart. If, as you stated, the abandonments only helped the railroad’s finances in the future tense, what shows on your chart is a future that was better, in part, due to the abandonments you say helped the bottom line. Thanks for provided the chart to help visualize that.
Readers, I interject at this point only to offer a suggestion. First, though, I genuinely appreciate the sincerity and general tone in this discussion…it’s quite refreshing. I can absolutely tell that all of you are busting your butts trying to keep this moving positively forward, and that some of you are struggling a bit, either with terms, logic, or with making sense of facts. I see it, and I hope you can keep it up. I say this aware that there has been some tension, as well, here and in previous threads. So far, so good.
My suggestion, for what it may be worth, is that there has been an almost overhwelming breadth of information supplied here, and many questions asked about points of clarification. The thread has grown a bit hairy, in other words, and the nails are long, too. It may be useful for all readers to pause, and to go away from the thread for a bit. Take a break, maybe for a day, and then start reading right at the beginning again and use fresh eyes to try to make sense of all that is being said.
I suggest this because a rest may make clear some things that just won’t leap off the pages for you at present.
Thanks for reading this, and I hope that whatever happens the thread continues to teach us all something.
I may be misunderstanding you. The “net cash” came during the period 1960-1976; as deferred maintenance allowed branchlines to contribute positive cash flow to the companies even as their condition spiralled down. After abandonment, there was no “cash flow” because there was nothing to “harvest”.
The net cash flow enjoyed during the period 1960-1976 stopped after abandonment. The railroads lost that net cash flow. They wouldn’t have had it anyway, but the fact is, railroads had lower revenue on that account after abandonment than they did before abandonment and, given the nature of the “harvest”, the loss of revenue was the loss of revenue that generated a profit over the costs incurred. They were less profitable overall on that particular point after abandonment, and if you measure abandonment by the Staggers Act as a point of reference, then there was a loss of that profitable revenue after the Staggers Act which had nothing to do with the unexpected losses in revenue due rate competition.
And yes, as I initially stated, the idea of abandonments was to avoid future investment drains. These things were at the end of their economic service lives; either abandon or put money into them. But at the same time as they avoided those expenditures by abandonment – they had been avoiding them already for 20 years and still getting cash flow out of them. And that was going to stop.
I had to go back and re-read that for clarity, but it does make sense. The avoided cost, by way of the abandonments, as you point out, were not a boon of cash when the lines were shut down, more a termination of whatever cashflow was still coming in from the line. Therefore, as you point out, it’s the avoided costs that the railroads sought, that affected their post 1980 financials-upward, as opposed to downward. I’d have a hard time believing that railroads would have abandonded lines for anything other than financial reasons.
Well, “upwards” and “downwards” implies that its relative to something. But, not relative to the years preceding Staggers because the investments weren’t being made then either. Had the investments been necessary for some reason, things would have looked pretty bad after Staggers. But, had they been actually made before Staggers, things would have looked worse compared to what they actually were as well.
The point is, overall, abandonments did not change post-Staggers income statements compared to pre-Staggers income statements except for a loss of profitable revenue.
Too, looking at 1991 - a minor recession year – and look at the impact on ROI. Worse than nearly any pre-Staggers number since WWII. As I postulated early in this thread, the rail industry has prospered, but I think the reasons lie mostly outside of the Staggers Act, while the Staggers Act itself has created a greater sensitivity to economic conditions; indeed it may be more leveraged by economic conditions – doing even better in good times, but, well … we haven’t seen the bad times yet and what the Staggers Act may really mean.
The “results” of Staggers are compared to the 1970s. But conditions have been nothing like the 1970s, so where’s the comparison? Anything would look good by comparison, including the most onerous regulation.
And the industry has been lucky insofar as what those economic conditions have been. That 1991 result – a virtual zero ROI – is clearly a post-Staggers phenomenon for which the industry has had little experience and a lot of luck.
It sits there, firmly planted like a dark and forbidding cancer in the post-Staggers statistical record, refuting everything that Staggers
Well, I have got to get some work done in the real world, and so this will probably be my last post on the topic. But, if an analyst wanted review the direction of influences on the rail industry leading up to today, compared to, say, 1979, and wanted to make a hypothesis to test, this would be an interesting one:
General Economy 65%
Non-crew Productivity 25%
Train Crew Staffing 25%
Tax law changes 15%
4R Act 5%
Carload weight -15%
Staggers Act -20%
These describe, for the purpose of modeling a hypothetical, 100% of the economic influences on the rail industry. This is a view I suspect may be true. And if you have decided that the Staggers Act is the sole reason for a particular economic outcome, the Staggers Act can look very good indeed. But, there are many things which affect outcomes. Looking only at an overall result can obscure the actual effect of inputs, and ignoring key inputs can in fact compel the wrong analysis.
I would say no, based on the statements of several Class I VPs of Traffic. The were talking about only using contract rates to cover deals where the railroad had to put up capital and needed a revenue committment to make the deal look good to a lender. However, the reality was very different and to me not surprising looking back at the overcapcity rate wars in the 1890s. I think there were three things that caused these predictions to be so far off. No one had any experience with a deregulated enviroment. Very few people knew anything about the 1890s. They were whistling in the dark.
Two illustrations from the real world. Bud Braun was the VP of Sales and Marketing at the C&NW and retiring in the same week Staggers went into effect. He wished us well and said he picked a perfect time to retire. Bud was right! I had a soda ash customer that was so eager for rebates he asked us for a proposal in the window between Carter signing the law and it taking effect. Within three years the C&NW’s margin on soda ash dropped from 100% to zero and my succesor was telling soda ash shippers to give the BN the traffic.
Throughout my carrier I noticed that shippers and railroads grasp on history did not reach back before they started working. In terms of today there is not much grasp of anything before 1980. Very few supply chain managers with a shipper or market manager at a railroad are aware of the costs and benifits to their employer with Staggers. They view it as about as relvent as the Battle of Yorktown. In many ways the a correct as the manage thier business going forward.
I think that by the end of 08 we will begin to see more mergers in the airline industries not unlike the rail industry in the past 50 years. As to the maintenance factor, planes are operating at 25,000 feet and constant maintanence is a good idea. The airline industries are poor planners for sure, but is Amtrak using this to thier advantage? I dont know, ridership is up and that is good. However, will Amtrak make the decisions necessary to grow the company or wait on Uncle Sam to do it for them.
Choochoo I think you are right in believing the airlines are about to go through the same kind of a combination process the Class I railroads did. For example, United and Delta are reported to be talking to each other right now but others say it is Delta and Northwest. If any of that were done, it could easily kick off another round as American, Frontier (and whomever) scramble to find partners.
The more interesting question is will we see further combinations among the Class I’s? I have major doubts mostly based on my assumption of government opposition to such a move; but should anyone have a differing viewpoint, I’d like to hear the reasons you think it might occur.
Part of the problem in this is giving credit to the Staggers Act for everything that happened after the Staggers Act was passed.
The 4R Act gave the ICC the authority to exempt railroads from the standard abandonment requirements. Under 4R, the ICC could approve abandonments when no traffic had moved over the line for at least 2 years and ICC found no valid user complaints. Between 1984 and March 1989, railroads filed to abandon about 7,600 miles under the 4R Exemption Authority. The ICC approved abandonment of about 6,900 miles in that time frame. Unfortunately, we don’t have Exemption Authority abandonment statistics prior to 1984 because the ICC, for some reason, didn’t compile the data. But, those were 4R abandonments. Extrapolating back to 1981, we could guess that as much as 12,000 miles of track was abandoned, post-Staggers, but under 4R Act Exemption Authority, while the remainder was abandoned under 4R revenue to cost standards. Although Staggers established a nine-month deadline for consideration, the Exemption Authority abandonments were generally decided considerably faster than that anyway. And that’s really all Staggers did, was set a deadline – but there was no evidence that the ICC was not generally expediting petitions by that time anyway under its increased 4R Act authority.
Similarly, abandonments on Conrail were not governed by the Staggers Act, but by the Northeast Rail Service Act of 1981 which established different abandonment procedures for Conrail. Under that Act, th
“Between 1981 and 1988, the inflation-adjusted operating revenues of Class I railroads included in our analysis declined, on average, about 4.3 percent annually…” – a loss overall of approximately 30% of the industry revenue by 1988. U.S. General Accounting Office, “Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980,” May, 1990, GPO.
Objectively, the Staggers Act actually diminished some of the strong improvements being made under the 4R Act. Regarding coal rates (both tariff and contract), for instance, “the real increase in prices from 1973 to 1978 is about 4.6 percent per year; the real increase from 1978 to 1983 is about 2.1 percent per year. The results indicate that the percentage increase in rail prices is higher during the period containing the 4-R Act than the period containing the Staggers Act”. Frederick C. Dunbar and Joyce S. Mehring, “Coal Rail Prices During Deregulation, a Hedonic Price Analysis,” The Logistics and Transportation Review March, 1990, 26:1, p. 17.
After 1983, coal prices began a long decline notwithstanding that coal was not seriously impacted by truck competition, and this is part of the collapse of industry revenues in the ten year period following the passage of the Staggers Act.
If memory serves me correctly, the last person to do this managed to be a Bengal Tiger’s lunch. Then again, the tiger didn’t get fair too well either . . .
