Or, maybe not. When UP merged SP, most railfans figured it would become the mega-railroad. Here we are a number of years down the road, and that doesn’t seem to have happened. BNSF, NS, or CN- take your pick. All three seem to have surpassed UP.
Has UP attined what it wanted with the SP merger, or is there more to come trafficwise and profitwise?
I’m quite happy with the UP and how the large portion of UP stock in my portfolio has gained almost $40 dollars a share since March and today split 2 to 1.
My Candian National stock in the same period has gained $10 dollars a share. That’s not too bad either.
If anyone has a stock portfolio, I would call my broker tommorow morning and buy as much UP stock as you can afford. At the closing bell today UP stock finished at $80 a share after the split.
Perhaps I’m missing something here. These are the 2007 net incomes for the railroads you cite:
UP $3.4b CN $2.15b BNSF $1.86b NS $1.4b CSX $1.34b
In what way have any of the others surpassed UP? CN is known for its operating ratios, but they always have been since they became a publicly-held company. Other than that???
John Timm
Norris, I don’t think UP has attained what it’s wanted to with the SP merger–nor do I think that it necessarily follows that it won’t attain whatever that goal is perceived to be. UP’s goals for train velocity are regularly being exceeded lately. Fuel efficiency is better. Income’s still up–first quarter 2008 not only exceeded 2007, but beat the expectations of those who watch such things a bit more closely than we do.
A lot of folks don’t realize just how badly off SP was when UP took it over (UP itself sure didn’t!). There’s been a lot of catch-up to do, just to get the railroad in shape to handle today’s volume, let alone what will be coming because of (or in spite of) what fuel costs are doing to the economy. UP’s having to plunk down a lot more second track than BNSF to get its LA-Chicago line “widened”, mostly on former SP property. But they’re getting it done.
I suspect, though, that regardless of whether any of the railroads are performing to satisfaction, they’re all going to be swamped just as badly in the not-too-distant future.
Not trying to be difficult, Norris, but I think first requirement is to define “what it wanted.” Who is “it”? The board? The stockholders? The executive committee? Do we choose, for the base-case to compare the present day, the official statements at the time of the announcement of the merger? Confidential white papers? Inner thoughts of the key decision-makers? (Don’t ask me, I don’t know any of these answers!)
The future of the industry has never looked so bright in my lifetime as it does today. It might be useful to look at expectations at time of merger vs. results of today to see if there is remaining potential to be extracted from the merger, or not, or what it might be. Or, to understand how people get things right or wrong, as a lesson for future people. Or to further provide rank and order to this event vs. all the other events that shaped railroading today. Other than that, though, a lot has changed in the last decade, and whatever we all thought back then about this merger it’s largely been overcome by events.
There’s not a single Class I today that is not successful, if by “success” we mean rising market capitalization, revenues, profits, importance to shippers, and value to the U.S. economy and society. Most of the comparisons between Class Is is quibbling over crumbs or partisan zealotry. What a contrast to the railroading of
My guess is that UP primarily wanted three things when it bought SP.
Sunset Route
More access to the Texas Chemical Coast
I-5 Corridor
You’re right, and I guess I’d chalk it it to me not doing my homework, as far as numbers go. While the UP total net income is higher than the others, I guess I understood that UP’s return on investment was lower. Can you tell me how that compares? In true investment dummy fashion: are those numbers you quoted after reinvestment in infrastructure? I know that UP is pumping some money into their expansion projects. If I’m all wet on this, please tell me so.[:)]
Oh, you can be difficult, just don’t drag me into a discussion about the true identity of the U.S. Postal Service.[:-,]
My poorly worded post was meant to mean something like this: Ahem…why isn’t the UP eating BNSF’s lunch, like a lot of people anticipated when it merged SP? The merger, at the time, had all the signs of becoming the 800 # gorilla of western railroading. As some posters have mentioned above, UP is doing good, but perhaps, not as well as a lot expected.
From what I recall from 10 years ago, it was thought UP+SP had better routes, while BN+SF did not complement each other very well. But during the last couple of years BNSF has had the better operating ratio.
Is UP lagging behind(?) because it is still bringing the ex SP up to standard, or does BNSF now possess a superior route network due to traffic shifts?
I think the only way one could determine which railroad has the better “route” would be to look at the top volume origin/destination pairs and calculate the route mileages between the selected pairs. (OK-add in grades an alignment) However, and I am sure this is obvious to you, a route is only a line on a map until track, signals and terminal facilities are ready to efficiently handle all the traffic that could be obtained.
I think it is clear that the UP had and still has a big mountain to climb to get the ex-SP (and other spots on the UP) to that high efficiency level.
On the other hand, shifts in traffic patterns from a decade ago may also be having at least a bit of an impact. I will contend that even with the best of forecasting and analytical tools, hitting the mark 10 years out has got to be a bit of the luck of the draw.
At this stage of the game, I do not see any of the 4 main US Class 1’s getting clobbered by any of the other. With tight capacity now and for some time into the future, none have the resources to capture a significant chunk of any of the others.
For something as sprawling as a modern Class I with enormous diversity of traffic and economic geography, it’s a daunting challenge to measure which might have “better routes.” Even if we define “better” as “generates more revenue and profit margin”, there are systemic interactions between the routes that confound analysis.
Fifty years ago when a big Class I often consisted of a single trunk with tributary branch lines and industries, it was useful to compare routes, e.g., the value of each of the six Iowa roads. Now I think it would be a fool’s exercise.
RWM
Many of the sought-after efficiencies from the takeover did not materialize for a lot of reasons that have been hashed over elsewhere. The UP was in a meltdown state for years afterwards. The BNSF mergers have gone more smoothly, leaving UP in a catch up mode for over a decade. The Sunset Route especially remains a point of vulnerability and will until the second main is completed.
As to what UP got for its money, it has been pointed out that they got a big piece of the lucrative “Chemical Coast” traffic base when they bought SP.
They also got multiple points of entry to the L.A. Basin, San Francisco and the Pacific Northwest. And by slowly buying up their other competitors, they whittled the number of players west of the Mississippi to two. In my book, that’s what’s called an “oligopoly.” It means that if you want to ship something by rail, there’s a good chance it will have to go by UP all or most of the way. Not a bad position to be in.
I’m not sure that they have capitalized on the I-5 corridor as much as they expected. The lumber business is down and they don’t seem to be able to lure a lot of traffic away from trucks. That may change with the rising price of diesel fuel.
All-in-all, the people who put their money where their mouth is, the investors, like what they see and in business, that’s what counts most.
John Timm
Agreed. My suggestion of “shortest route” says nothing of any use. Throw everything and the kitchen sink into the defination and analysis and it still is “What’s the point?” If, for example, it was found that the BNSF Transcon is the best route between LA and Chicago, that information and $5.00 will get you a Starbucks. If I have it right, that route is filled up, so the answer to what’s best provides nothing of value to either the railroad or shippers.
Jay – I ought to clarify that it’s still useful to take a hard look at the physical plant of two roughly comparable routes, comparing vertical and horizontal alignment; length of sidings; type, capacity, and reliability of train-control systems; speed of turnouts; location, spacing between, and traffic of roadway and rail grade crossings; permanent speed limits; condition of ties, rail, ballast, subgrade, and bridges; and presence of Amtrak, other passenger service, or other obligations. That will tell you a great deal about the capacity and operating costs, and if you know present traffic, the capacity for future traffic.
What’s hard to discern is the economic opportunity because there are so many choices and the choices interact with each other. For instance, if you have a line with two train slots per day spare capacity, should you fill that with a unit mineral train at 2.5 cents a ton-mile, steamship intermodal at 5 cents a ton-mile, or carload manifest at 8 cents a ton-mile? The choice you make can ripple through to other lanes and business groups; for example, accepting the steamship intermodal might result in transfer of volume from one port to another, dropping the first port below an economic threshold for the steamship company and resulting in all the traffic shifting from the first port where you have six trains per day to the second port where you pick up two trains per day and your competitor with more spare capacity gets the other four. Net loss to you is four trains per day.
RWM
I think we could say that such a study has merit for the conduct of the business, but when you do throw in the physical plant conditions, you might only get a correct answer for the time frame of the study. If the second best decides to add some sidings and a few other improvements, perhaps it then could move out in front.
My point is that it is a dynamic environment and so as between two roughly comparable routes, or even the six between Chicago and Omaha, making an argument that any given route is the best for all time is rather useless.
This is a great discussion and hopefully it will continue for awhile. I agree with RWM that the situation for today’s class 1’s has never seemed better. I really dont have inside information to agree with that comment, being an outsider to the industry, but when compared to the past few decades (70’s - disaster, 80’s - a time of change, 90’s -refining the systems, and 00’s - leveraging strengths) the rails are poised for good times, if they manage their franchises wisely.
Case in point was today’s Chicago Tribune which had an article in Business Section about the logjam in Chicago and the editorial page featured a pro-CN/EJE merger by a local government official. Discount the article on Union Tank Car’s East Chicago closing today and it was really a pro rail rag.
An interesting note in the article was that rails are experiencing times of gridlock now, with rail traffic off by 3%…making one wonder, what will happen in a few years when (if) we are experiencing solid growth patterns.
I have not paid too much attention to the UP’s financials for a year, but will order an annual report and 10K. If they have turned the corner (has that been confirmed?) what were the major factors?
ed
RWM’s analysis is about as all incompassing as any here can provide.
I would throw in a study that was used (in my days) when mergers were being analyzed. We had a proceedure (formula) to convert route miles to “equivalent straight and level miles” which compensated for grades and curvature. This proceedure was also used (along with many other factors) to jusify line changes.
I took a quick look at UNP and BNI financials for 2007 and TTM’s and while UNP has some nice revenue momentum and has improved margins, considerable work needs to be done for them to catch up with BNI on several measurements:
UNP is larger than BNI in revenue ($16.2B vs $18.8B), however their margins are lower. One indication is the revenue per employee which is $329,000 vs $400,000 for BNI. That is a huge differential.
Return on equity is much lower for UNP (12.3%) vs BNI 17.3%. However, some of that can be attributed to BNI’s higher financial leverage (more debt on the balance sheet). Looking at ROA (return on assets) the gap narrows UNP (5.0%) vs BNI’s 5.6%.
Both carriers pale in comparison to CNI which has ROE of 21.6% and ROA of 9.1% with lower financial leverage than either BNI or UNP.
Correct me if I am wrong, but CNI basically does this without being a major player in coal or intermodal.
ed
Murph,
You come up with some good threads.
Gabe
“Correct me if I am wrong, but CNI basically does this without being a major player in coal or intermodal.”
ed
You are essentially correct. What interests me most is that they make their margins on what should be the least efficient mode = loose car railroading.
John Timm