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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.
Railroad prices (rates) were deregulated by the U.S. government in 1980. The subsequent Reagan era effectively deregulated many costs, especially labor. Train-crew sizes were reduced in steps from five to two, and cabooses were eliminated. Today, the ease of market entry under deregulation allows entrepreneurs to acquire unwanted branch lines from major carriers. Typically, the result is an unprecedented level of customer service, an increase in traffic, and a decrease in costs, usually in a non-union environment.
In 1975, in a game of railroad chess, the Soo Line (a subsidiary of Canadian Pacific bearing the nickname of Sault Sainte Marie, Ontario) acquired the parallel Milwaukee Road, which had better routes but little money. Then Soo spun off much of its original railroad into a subsidiary, Lake States Transportation Division, which was to operate in a flexible work-rule, and thus low-cost, environment. But the low costs did not materialize, and, needing cash, the Soo Line put the “For Sale” sign up on its Lakes State property in January 1987.
Edward Burkhardt, vice president-transportation of the marginally profitable Chicago and North Western, and Thomas Power, chief financial officer of the Milwaukee Road during its bankruptcy reorganization, decided they could be more productive if they ran their own railroad. The “For Sale” sign on the Lake States property caught their eye. In April 1987, a sales agreement was reached with the Soo Line, subject to approval by the Interstate Commerce Commission (ICC). To pay for their new railroad and provide start-up and working capital, Burkhardt, Power, and three others scraped together $5 million in personal cash, obtained $10 million more from Berkshire Partners (a company that arranges funds and invests in new companies), and lined up $140 million in bank and insurance-company loans. Engines and equipment were obtained, usually by lease. Employees were recruited from forty-two states for the start-up of the new non-union operation. With everything ready to go, Wisconsin Central petitioned the ICC to begin operations on September 11, 1987.
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 Wisconsin had returned home. Nevertheless, by four in the morning on that Sunday, 80,000 pages of closing documents had been shuffled and signed. With no time for celebration, the new railroad went to work. The first train departed shortly after 8 a.m.
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.
The new management earned its profit on a previously marginal, redundant railroad through employee relations that were innovative (at least for railroads), asset and labor efficiency, and aggressive marketing. A cooperative management-employee relationship replaced the militaristic, authoritarian style traditional to the railroad industry. In most railroad circles, a genuinely cooperative relationship with the rank-and-file, when implemented sincerely, is greeted with contemp. A successful operating department manager’s reputation is often based on how many people he (and it is almost always a “he”) has fired. The attitude is: Your paycheck is all the praise you need. Physical endurance and automatic obedience are valued more highly than innovation. By contrast, Wisconsin Central is run more like a family.
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 America, the excuses are vintage James Taggart: “It’s not my fault,” and “Real railroaders don’t apologize.” The self-styled “railroad rebels” of Wisconsin Central dared to buck these and other deeply ingrained railroad traditions, creating an efficient, growing operation.
Their average crew size on a freight train, 2.2 persons, better reflected actual manpower needs than the 4.8 average on the old Late States and Soo Lines. Craft distinctions were erased and employees were cross-trained in various skills, which served to minimize seasonal layoffs. Unlike the unionized pay scale, which was based on a miles/time formula, with dozens of penalty payments, all Wisconsin Central employees were salaried. Year-end bonuses were distributed based on the year’s performance, and employees could participate in a stock purchase plan. Any necessary discipline became remedial, not punitive. As a result of increased business and the need to catch up on Soo Line’s deferred maintenance, the railroad had more employees on its payroll than the former Lake States Transportation just one year after start-up, even with the reduced crew sizes.
Craft distinctions were erased and employees were cross-trained in various skills, which served to minimize season layoffs.
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.
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 New Zealand. The line is about equal in length to Wisconsin Central’s own domestic operation, but unionized, and with twice as many employees. As the sole railroad member of the consortium, the company purchased from the government of New Zealand 27 percent of Tranz Rail’s shares (later 30 percent, after exercising options). As part of the deal, the company also provided a certain amount of managerial expertise and guidance. By 1996, after only three years, an initial public stock offering reduced the company’s stake to 23 percent and yielded Wisconsin Central a cash return of $24.4 million on a $22.2 million investment. Although current performance has been sluggish, largely because of New Zealand’s weak economy, even Lindsay Perigo, New Zealand’s well-known contrarian and libertarian, has had good words to say about Tranz Rail’s performance as a capitalist business.
In 1993, Wisconsin Central startled the industry by joining a consortium to purchase Tranz Rail, New Zealand’s 2.400-mile state-owned and state-operated railroad.
Flushed with the success of their New Zealand venture, Wisconsin Central turned its attention to Great Britain. Here the privatization divestiture was being handled differently: One newly formed company (Railtrack) would buy, maintain, and control train movement on all of the track. Separate service companies would negotiate with Railtrack to operate their passenger and freight trains on the track.
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 Britain, and consolidated them along with Railway Express under the name English, Welsh and Scottish Railways Holdings, Ltd (EW&S). Wisconsin Central acquired a 31 percent stake, since increased to 34 percent by exercising performance-based options.
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 Britain’s various passenger train operations, which are also unprofitable and also subsidized.
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 Wisconsin operation, EW&S’s sales force, taught and inspired by Wisconsin Central’s people, are developing new traffic opportunities and resuscitating old ones on the almost moribund British freight rail system. The firm has placed large orders for new locomotives and cars. Whether the freight is international containers, steel, coal, lumber, or aggregates, the railroad wants the business, thereby defying conventional “wisdom” that the only money to be made in freight railroading is from long-haul traffic, which (because of geography) Britain cannot offer.
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 Province of Ontario. This line connects with the Wisconsin Central at Sault Ste. Marie and extends north over 300 miles to Hearst, Ontario. Although primarily a freight carrier, handling principally iron ore, steel, and paper products, the railroad also maintains passenger service to remote northern areas and operates seasonal one-day trips to Agawa Canyon, 114 miles north of Sault Ste. Marie. In 1996, Algoma Central had a workforce 229 people compared with 450 before acquisition.
The company’s latest international acquisition is Tasrail, the rail lines on the Australian island-state of Tasmania. A consortium of Wisconsin Central, Tranz Rail Holdings, Berkshire Partners, and others purchased the stock from the Australian government in late 1997. The sale is the first step in Australia’s attempt to privatize its entire rail system by the end of 1998. At least ten countries have privatized their nationalized rail systems in recent years; at least a dozen more are planning to do the same in the near future. Wisconsin Central will be looking for more opportunities to use their proven managerial expertise to create wealth from previously unprofitable state-owned operations.
Inevitably, Wisconsin Central attracted the animosity of those who resent achievement. The vultures were ready to pounce whenever misfortune struck. And they did.
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 Weyauwega, Wisconsin, in March 1996. Thirty-five cars derailed, almost half of them containing liquefied petroleum gas. One car exploded, but the heroic efforts of the train’s conductor minimized the extent of the fire. No one was injured.
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.
But the Wisconsin newspapers climbed all over the railroad, sensationalizing its safety record and operating practices. The politically reflexive Federal Railway Administration picked up the cue, sending a small army of inspectors to the property to examine all aspects of the railroad’s operation. Fines were levied against the railroad, primarily for nit-picking violations of regulations whose impact on safety was questionable. For example, Wisconsin Central had been experimenting with a one-man crew on certain trains, a common practice in New Zealand and Europe. As part of the resulting “agreement” with the FRA, that experiment had to be suspended. Recently, the Wisconsin legislature passed a law prohibiting one-man train crews in the state.
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.