If you are similar to most people, somewhere near where you lived a railroad passed. It may or may not stopped but the trains passed nearby and at some hours during the day you could hear the whistle, or the training is coming or going across a road crossing.

The US is blessed to have a long coastline on both sides of the country, and when the country was being founded people came by ship. Goods moved up and down the coast on ships and ships had a monopoly of the movement of goods and people. Eventually people started moving inland and the rivers only went so far, it was long journey to have goods such as grains moved to point to go to the river. With the invention of the industrial revolution, it also included a steam engine and rail tracks. This set up a boom in railway building because it was less expensive and faster to move goods by rail.

In America, the railway financing and building boom until railways were consolidated to larger and profitable lines. There are many stories about how the consolidation happened and understand securities laws were much looser then. The larger lines eventually emerged, and they had a monopoly on the movement of goods and people. Although cars were invented and Henry Ford made them affordable, the roads were not that good. It was not until President Eisenhower was elected and one of the things he did not like was it took military vehicles weeks to cross the US. Among the many bills he passed, the building of the interstate highways or I highways was under his leadership.

The good news was trucks that took weeks to cross the US could now do it days. The growth of the trucking industry meant that the railroads had competition. The interstates also meant people had choices and they choose to travel in cars or not on railroads. The passenger service became unprofitable, and the railway companies offloaded them to the government or Amtrak.

In terms of freight, it is less expensive to move bulk commodities on trains so they will always have a monopoly for those items. However, the companies ensure they have the lowest rates as possible. One method to see how the railroad companies are doing is examining tonnage of bulk commodities – grain, coal, oil, timber, etc. For many years, how railroads run did not change, even though the competition did. For decades, freight trains did not run on schedules. The trains departed with the customer’s load showed for shipment.

In a book called Railroader – Hunter Harrison written by Howard Green, published by Page Two Books, Vancouver, BC, 2018, changes were made to the operations of railroads with what is called Precision Scheduled Railroading.

Hunter Harrison over his railroading career rose to become CEO of 4 railroad companies Illinois Central, CN, CP (now called CPKC) and CSX. In all those companies, he improved profitability and share price of the companies.

His system evolved to Precision Scheduled Railroading and the just of it is Railroads are very capital intensive. Every $1.00 of rail revenuer requires $2.50 in net property, plant and taxes. Therefore, capital decisions must be made very carefully. In addition, capital decisions made will have a long life, if you buy a locomotive, expect to have it around for 40 years.

Few things bothered Mr. Hunter mode than underutilized assets. If an asset is not being used, it is a liability because of the costs of owning it. Railroads only make money when cars are moving. Track is a railroad’s most expensive physical asset. Track has a 40 year life, so why should we lay track just to have cars sit idle? In 2005, one mile of track was used to store about 100 cars, cost $1 million. If you moved cars instead of stored cars, you save $1 million. The more efficient the operation, the fewer assets it needed.

What if dwell times in yards or railway cares were cut to 8 or 12 hours instead of 24? What if customers unloaded faster so their cars were there for half the time? What if average velocity went from 25 to 30 miles a hour? Now we are getting more cycles from the same equipment, and a thousand little things equal a lot of money.

When Mr. Hunter came to CN. they had 200,000 O&D (originating and destination points), but 5% of those 200,000 account for 80% of the traffic volume. Optimize that 80% and the other 20% takes care of itself. This led to Operating Ratios (OR) fell from 89% to the 50’s and profits increased.

Linking to dividend paying stocks, railroads typically pay dividends because they have a monopoly on bulk commodities, however it does not mean all railroads were run well and were efficient. It takes a lot of change to drive efficiencies and new way of thinking about assets into the system. If you own stock when Mr. Hunter was CEO, your wealth went up, which is why all railroads implemented the Precision Scheduled Railroad system – how does the company look at its assets?

There are more questions than answers, till the next time – to raising questions.