After decades of bankruptcy and fallen flags, railroads are now profitable. What change turned this around; getting rid of steam, getting rid of passenger service, computer automation, consolidation? Or was it something else?
Railroads are profitable? Who knew? Since when have they been able to earn the cost of capital?
Gabe
CN just reported a second quarter net income of US$ 340 million.
…By lowering costs. Overhead.
I have read the Staggers Act of 1980 (?) which deregulated the railroads helped alot, but I am not familiar with the specifics of this legislation.
OK Mark Hemphill is the real expert and let us hope he gets around to reading the website and picking up on this thread.
Railroads were generally profitable because they were the lowest cost means of moving people and freight from one point to another. Sometimes with some Gov. help but usually only from investor capital they built their infrastructure and bought their equipment. They often engaged in unfair practices which brought regulation. They continued to be profitable, generally, until tax revenue was used by the ogvernments to assist road, water, and air competition. They became profitable again after the Staggers Act legislation which altered and eliminated regulation to allow them to operate more as businesses and less as public servants. This is an oversimplification but does explain the heart of the matter.
I recently was discussing this topic in relation to the Milwaukee Road in 1977, and used “Financial Ratios” as a means of comparison of Milwaukee’s position at that time, as a company entering bankruptcy, with current railroad financial ratios.
An interesting ratio is net assets to total liabilities. This would be general measure of “wealth” of a company.
In 1977, Milwaukee Road’s ratio was 131%. In 2004, BNSF was 48%. Total Assets/Total liabilities, MILW 231%, BNSF 148%.
The basis for Trustee Stanley Hillman’s remark, reacting to a report he received in 1978 to which he seemed surprised, “the Milwaukee Road is a relatively wealthy company” becomes clear. In relative terms, Milwaukee Road in the year of its bankruptcy was a substantially wealthier company than BNSF today.
Two financial ratios, Current Ratio and Quick Ratio are often called Liquidity ratios, or even solvency ratios. They measure the ability of a company to meet current liabilities out of current assets. A ratio greater than 1.0 is pretty comfortable. A ratio less than one is evidence of insufficient working capital. The higher the ratio, the better.
Year 1977, Current Ratio MILW 1.5, BNSF (2004), 0.6.
The Quick Ratio measures liquidity. Cash on hand and accounts receivable are measured against current liabilities. The industry average today is 0.5. Lower than that is bad.
Quick Ratio, MILW (1977) 0.5, BNSF (2004), 0.2.
For total debt to net worth, the lower the ratio, the better.
Total debt/net worth, MILW 0.9, BNSF, 2.1.
There are a variety of financial models which measure the overall financial situation of a publicly held company based upon multivariate analysis of important financial ratios. These models were designed for manufacturing c
Thanks Michael, my head is spinning.
Michael,
I always enjoy your posts and thank you for the one above. Truly fascinating reading.
As a Milwaukee Road survivor of the era you mention, all I can think is “What happened?”
Mitch
Poor management waiting to merge with C&NW starting in 1954 and letting the railroad rot away beneath them.
After the rise of effective competition the railroads were givin back the ability to operate in a market enviroment.
Back in the late '40s, the RRs listed 3 major issues facing them - all the result of gov’t regulation or policy:
- Passenger losses - “public good” not profitablilty was guiding principle for ICC
- High labor costs - full crew laws in many states
- Regulated rates and routes - “common carrier” status, not profitabiltiy governed the ICC.
The amazing thing is that the industry survived the 50s and 60s at all.
Each of these three issues has been dealt with.
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Amtrak and commuter agencies have removed nearly all costs from the RRs. In fact, BNSF actually finds contract commuter business profitable these days.
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Full crew laws are gone and train crew size has been greatly reduced.
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Staggers act lets RRs drop unprofitable routes and set their own rates with comparitive ease.
Even with this, the RRs have struggled to earn the cost of capital, although it appears that the industry may be getting close to that goal.
I use to compete with the Milw in the midwest. You hit the nail on the head. The MILW board in the 70’s should get a Darwin Award.
What hurt the railroad was trucking, they can go most anywhere, but trains need tracks. Amtrack helped out by taking over the passenger service, but they are in big trouble because they are forever in debt.
[quote]
QUOTE: Originally posted by MichaelSol
I recently was discussing this topic in relation to the Milwaukee Road in 1977, and used “Financial Ratios” as a means of comparison of Milwaukee’s position at that time, as a company entering bankruptcy, with current railroad financial ratios.
An interesting ratio is net assets to total liabilities. This would be general measure of “wealth” of a company.
In 1977, Milwaukee Road’s ratio was 131%. In 2004, BNSF was 48%. Total Assets/Total liabilities, MILW 231%, BNSF 148%.
The basis for Trustee Stanley Hillman’s remark, reacting to a report he received in 1978 to which he seemed surprised, “the Milwaukee Road is a relatively wealthy company” becomes clear. In relative terms, Milwaukee Road in the year of its bankruptcy was a substantially wealthier company than BNSF today.
Two financial ratios, Current Ratio and Quick Ratio are often called Liquidity ratios, or even solvency ratios. They measure the ability of a company to meet current liabilities out of current assets. A ratio greater than 1.0 is pretty comfortable. A ratio less than one is evidence of insufficient working capital. The higher the ratio, the better.
Year 1977, Current Ratio MILW 1.5, BNSF (2004), 0.6.
The Quick Ratio measures liquidity. Cash on hand and accounts receivable are measured against current liabilities. The industry average today is 0.5. Lower than that is bad.
Quick Ratio, MILW (1977) 0.5, BNSF (2004), 0.2.
For total debt to net worth, the lower the ratio, the better.
Total debt/net worth, MILW 0.9, BNSF, 2.1.
There are a variety of financial models which measure the overall financial situation of a publicly held company based upon multivariate analysis of important
Financial ratios are pretty well understood, and are taken directly off of published Consolidated Financial Statements.
Most of them involve simple division of two numbers.
Sometimes simple addition involving two or more numbers is involved beforehand.
You may be right.
Best regards, Michael Sol
Michael:
Thanks for the input on this. Is there a source for MILW financial data on line? If not, I could probably find something in the local university library in a Moody’s.
Your discussion of working capital is interesting. Comparing manufacturing companies to others is a little misleading or difficult, as you stated. You mentioned that BNSF had a negetive working capital of $1.1 billion. Looking at two other companies shows the following:
McDonalds 2004 working capital was negetive $663 million
Proctor and Gamble’s was negetive $5.03 billion. YES…-5.03 BILLION. Really.
That surprized the heck out of me. McDonalds didnt.
A little more data, if you will:
This is day’s receivables, which measures how many days of revenue is in accounts receiveables.
BNSF (2004) 6 days
McDonalds 14 days
Proctor Gamble 29 days
Most people consider McDonalds to be a “cash” business, and would wonder why the high number of days. In reality, a large portion of McDonalds business is franchise, in a way they are much closer to a real estate operation.
Proctor and Gamble’s 29 days is fairly typical for a manufacturer.
What is extremely surprizing is that BNSF’s was only 6 days. How did that happen? I dont know, but either they are set up for almost immediate billing and payment (electronically) or they factor their A/R’s.
A negetive working capital number in itself is not necessarily a red flag, it must be compared with other balance sheet numbers. The fact that BNSF has almost no Accounts Receivable tied up allows them to finance their working capital needs thru cash flow.
Yes, they borrow money and they refinanced loans. They are going thru a massive capital investment program. It will be interesting to see, in a decade if that investment will pay off.
Fascinating discussion.
ed
The mind boogles with the financial ratios. If you really want to see the financial people mumble ask them to come up with a measure for the cost of capital on the equity part of a balance sheet. Debt is straight forward, you know how much you will save if you pay off the loan early. With the stock they get fuzzy with the answer. I did not follow the ICC hearings to figure the railroads cost of capital but it must have been something as divorced from reality as some of their merger decsions in the 1960s.
I was impressed with the the age of the BNSF’s receivables. This is from the fellow how ran up his over 30 day receivables with a customer to something just over $1,000,000. The CFO was not happy since it had been at that level for six months.
The CFO went on to better things and so did I. Retirement is wonderful!
The only source that seems to be generally available is Moody’s, although Transport Statistics of the United States (ICC) has far more detailed data in terms of operating costs, but less otherwise. Best regards, Michael Sol
Staggers Act: How many other industries could be denied the advantages of depreciation for 70+ years and still survive? (Addition & Betterments [A&B] made you value everything as “new” until you retired and scrapped it…rough) Railroads finally got a breather to start investing in plant again. (Surprised the re-regulation and open access losers aren’t advocating a return to this)
Changes In Work Rules: Still remember wondering what a fireman was doing on a diesel locomotive in the 1980’s and Amtrak.
Computers & Mechanization
The price of oil . Finally starting to level the playing field with the taxpayer supported truckers.