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A Better Way To Run A Railroad
May 1998 -- In 1987, several railroad executives believed there was a better way to run a railroad. After finding an opportunity to acquire a rail line, they mortgaged their homes, withdrew personal savings, and arranged additional financing to purchase a 2,000-mile Midwestern line, which they named the Wisconsin Central (WC). Now, ten years later, their annual reports and numerous customer service awards have proved that a railroad can be managed to reward investors handsomely and also satisfy shippers. Moreover, Wisconsin Central Transportation Corporation is not only managing an expanded version of its original line, located primarily in its namesake state, but recently made the bold decision to operate newly privatized railroads in New Zealand, England, Canada, and Australia. Dagny Taggart would smile.
In the Beginning
Railroad prices (rates) were deregulated by the
In 1975, in a game of railroad chess, the Soo Line (a subsidiary of Canadian Pacific bearing the nickname of
Edward Burkhardt, vice president-transportation of the marginally profitable Chicago and North Western, and Thomas Power, chief financial officer of the
But on “Go Day” the ICC—influenced by labor unions and some of their political allies—issued a forty-five day stay, saying it needed to study the transaction in more detail. Fortunately, a flood of protests from outraged shippers and prospective employees caused the ICC to dissolve its stay on October 8, and to set the starting time for 12:01 a.m., Sunday, October 11, just three days later. However, back when the ICC originally delayed the sale, a locomotive lessor had sent twenty of his locomotives to another railroad, and many employees who had relocated to
And then the railroad realized that someone, perhaps a disgruntled Soo Line union clerk, had erased the billing information for 2.700 freight cars from the computer. The only way to identify the cars was through a track-by-track inspection of every car and its contents. The first two months were chaos and cost the company up to $8 million in extra expenses, but those months did solidify the espirit de corps of the workforce. The Wisconsin Central became profitable after only six months, and it never looked back.
Making Money on the Railroad
Trained to cut costs and reduce plant size, most operating managers are at a loss when growth is required. Likewise, when a large railroad such as Union Pacific suffers a congestion “meltdown” that ripples though industrial
Their average crew size on a freight train, 2.2 persons, better reflected actual manpower needs than the 4.8 average on the old
The increased business came from the employees, not only the marketing staff, but train crews and others familiar with local businesses, who went out and talked both to existing shippers, many of whom were large paper manufacturers, and to smaller potential shippers who had given up or never used rail service. Most larger railroads had convinced themselves that they could not make money hauling low-value commodities (such as aggregates) or on short-distance shipments; furthermore, they considered it a bother to try. As their interest and service levels in such businesses declined, many of their shippers turned to trucks. Without the burden of a large corporation, Wisconsin Central’s people decided they could provide the personalized, one-contact service that would make much of the spurned business profitable, and they did, breaking rust off side tracks that had not been used for years. It was not uncommon for the railroad to send a locomotive on short notice to a shipper’s facility to pick up a few “rush” cars, although most other mega-lines would huffily remind the shipper (“who doesn’t understand railroading”) that their train was not scheduled to run until next Monday. The “railroad rebels” of Wisconsin Central saw their rails as an extension of the customer’s production line. That was good news to the paper manufacturers, who now account for about half of the railroad’s business.
A trade publication, which conducts an annual survey of shippers, rates the various carriers on several categories of service. In 1989, only two years after startup, Wisconsin Central won the top Quality Carrier prize. And it has won that prize every year since—nine years and counting.
Wisconsin Central’s emphasis on service had another benefit: asset utilization. Just as Southwest Airlines realized that the natural state of an airplane is flying, not standing at a terminal gate, Wisconsin Central realized that the natural state of a $50,000 freight car is moving, not standing still in a yard or at a shipper’s dock. This lesson has been lost on most other railroads.
Wisconsin Central also differed from most other railroads in rejecting a siege mentality and adopting instead an open, benevolent policy toward shippers and communities, even toward the nonshipping populace of the territory it served. President Ed Burkhardt has sad, “We want to be everyone’s favorite railroad,” and he means it. Consequently, special passenger excursion trains are operated on occasion. Wisconsin Central knows that nary a frown will be seen trackside when a train’s power is a large restored steam locomotive, even though bystanders are engulfed in a shower of soot as the steel beast whistles through town, siderods flailing, in a celebration of our industrial heritage and achievement.
In 1987, the railroad—with 85 locomotives, 2,900 freight cars, and 660 employees—ran 35 trains per day. Ten years later, with 242 locomotives, 12,300 freight cars, and 2,200 employees, it is operating an average of 130 trains per day.
By 1989, the company was able to refinance some of its higher interest bank debt, and a public stock offering was made in 1991. Those who invested in it have been handsomely rewarded. The stock’s value increased over 700 percent.
Privatizing the People’s Railroads
In its ten years of growth, Wisconsin Central has picked up additional rail lines, both those of connecting short lines and the unwanted or unprofitable branch lines of major carriers. As a result, its domestic mileage has increased by one-half.
But in 1993, Wisconsin Central startled rail-industry observers by announcing that it was part of a consortium that would purchase Tranz Rail, the 2,400-mile, state-owned, and state-operated railroad in
Flushed with the success of their
Wisconsin Central and its consortium partners first tested the waters in late 1995 by acquiring Railway Express Systems Limited, which principally handles mail throughout the country, including a system of overnight mail trains. Then in early 1996, they bought the three companies that provide most of the rail freight service in
Most recently, EW&S picked up beleaguered Railfreight Distribution, the company that operates freight trains in the English Channel Tunnel (the “Chunnel”). Since this new service is not close to becoming profitable, the operation will be subsidized by the British government. Other companies (including Virgin Atlantic Airlines) have bought
The hope and goal is that with private, performance-rewarded management, the dismal financial performance of freight railroading under government operation will be reversed. Taking the same approach to marketing as it had done with its
For Wisconsin Central, a fringe benefit of its international ventures has been picking up operating ideas from overseas to implement on its domestic operation.
In 1995, WC acquired the heavily-subsidized (and unionized) Algoma Central, promising to operate without any subsidy from the
The company’s latest international acquisition is Tasrail, the rail lines on the Australian island-state of
Power and Envy
Inevitably, the success of Wisconsin Central attracted the animosity of those who resent achievement. The vultures were ready to pounce whenever misfortune struck. And they did pounce in the aftermath of a train derailment caused by a broken switch in the small community of
Government agencies on the scene seized control. The 1,700 residents living within a radius of two miles were forced to evacuate their homes—for over two weeks. Officious government bureaucrats, in a power play impervious to any rational risk/benefit analysis, refused to allow the railroad to take steps that would have minimized the disruption to the public. (A near riot erupted among some evacuees until government officials finally allowed them to return briefly, but singly and in full hazardous-material gear, to retrieve their household pets._ For its part, the railroad generally received praise and good will for its conscientious handling of the needs of the evacuees. Over 97 percent of the affected residents and businesses settled with the railroad within months. All but one of the remaining cases were settled out of court.
The railroad unions also took the cue. After a ten-year campaign of anti-management rhetoric, they were able to win a close election giving them the power to represent the train crews. The extent to which this unionization will unravel the culture and profitability of the railroad remains to be seen.
In any case, all of this has a price. When the railroad announced in December 1997 that its fourth-quarter earnings would be flat compared to last year, the stock price plunged, dropping 21 percent on December 17 alone. Most of the loss has since been recovered, the railroad is still profitable, and hopefully the company will weather the current bumps laid down by the government and the unions. “Damn the torpedoes, full speed ahead” is representative of the firm’s attitude.
Ed Burkhardt may have been naïve in his wish that his company be everybody’s favorite railroad. But for those of use who admire the creators and executors of new ideas that profitably solve old problems, the Wisconsin Central has to be our favorite (nonfiction) railroad.
Frank W. Bryan first read Atlas Shrugged in college, in 1957, thinking it was a railroad novel. After recovering from his surprise, he went on to work in railroad and airline operations management, as a rail traffic manager for a chemical shipper and as a private railroad consultant. Now retired, he is the designer and general manager of a scale model railroad that would be commercially viable if it were an actual railroad.
This article was originally published in the May 1998 issue of Navigator magazine, The Atlas Society precursor to The New Individualist.