In the driver's seat

Last month I discussed in this space how intermodal increasingly is paying its way and no longer is a low-revenue, throw-away line of business for railroads content to generate a few extra bucks from their excess capacity. I understated the case. Intermodal is the growth driver for railroads, and it is drawing significant capital investment.

Early this month, Kansas City Southern Railway and Norfolk Southern Corp. announced that they are forming a joint venture that will result in a major upgrade of the east-west KCS line known as the Meridian Speedway between Meridian, Miss., and Shreveport, La. KCS is contributing the 320-mile line to the new venture and NS is investing $300 million cash.

The Meridian Speedway is the most direct short route connecting the Southwest and the Southeast. East-west traffic that doesn't roll over the Speedway must connect by way of New Orleans, which is a longer route, or Memphis, which is longer and more congested.

NS is known to study capital investments thoroughly - some might say it studies them to death - before committing its money. While some analysts quickly suggested that the $300 million is "pricey," NS fully expects to see a return on its investment.

Four or five NS daily intermodal trains now run over the Speedway route under an agreement with KCS. It essentially is a bridge between NS and BNSF Railway - the haulage rights only apply to NS trains connecting with BNSF.

NS is putting its money where its mouth is. It has been pressing KCS for several years to upgrade the line, which now is mostly a single-track with short sidings and a lack of signaling. NS haul-age fees and KCS's own traffic, however, do not generate sufficient income to justify the investment KCS would have to make in upgrading the Speedway.

With added capacity on the Speed-way, NS intends to double the number of trains routed between Shreveport and Meridian over the next few years. The $300 million will allow KCS to install more double-track, lengthen sidings and improve signaling. Higher operating speeds also effectively will increase line capacity. In exchange for its $300 million, NS gets 30 percent ownership of the joint venture. KCS, with 70 percent, keeps control of one of its key assets.

There's more to this joint venture. With the exception of KCS's own traffic, NS will have an exclusive franchise for intermodal over the Meridian Speed-way, which will allow it to interline trains with Union Pacific at Shreveport, as well as with BNSF under the existing haulage rights agreement.

KCS is the smallest of the seven Class I railroads, but it has grown tremendously with the acquisition earlier this year of full control of what now is called Kansas City Southern de Mexico. The Kansas City, Mo.-based railroad has limited access to capital and a large debt resulting from the Mexican acquisition. With capital for expansion of the Meridian Speedway off the table, KCS will be free to focus on reducing its debt and devoting capital to improving the Mexican operation.

KCS has a route from the Mexican Pacific Coast port of Lazaro Cardenas that gives it a straight shot north to the U.S. border at Laredo, Texas, and the rest of the KCS system. The Mexican property needs a lot of capital investment and managerial focus if it is going to perform at a level that will attract shippers looking for less-congested alternatives to the ports of Los Angeles and Long Beach. KCS hopes to expand intermodal business to northern Mexico and the U.S. through Lazaro Cardenas.

The NS-KCS joint venture also lessens the likelihood that any merger involving Class I railroads will occur in the near term. Just about all merger speculation focused on KCS as the most likely candidate to be acquired. The 2001 Surface Transportation Board merger rules even had a so-called KCS exception, allowing any merger involving the company to be processed under old, less-burdensome rules.

NS, with its strategic needs satisfied by the Meridian Speedway joint venture, probably has removed itself as a suitor. KCS is essentially a north-south railroad, and other than the Speedway line, has little attraction for NS. Similarly, BNSF has limited interest in KCS, and the east-west line upgrade will resolve some of its concerns. The joint-venture precedent also raises the possibility that BNSF and KCS could put together a similar deal for the KCS line from Shreveport to Dallas, an important route for BNSF.

UP is unlikely to start the merger game. The largest carrier in North America, it would draw opposition to any venture that would make it even larger. It also has its hands full managing its system. CSX appears to be the odd-man-out. It interlines considerable traffic with UP and could stand to lose if UP opts to route traffic in conjunction with NS over a shorter, faster Meridian Speedway.

Larry Kaufman, former intermodal editor of The Journal of Commerce, has worked in and written about railroads for nearly 40 years. He can be contacted at Lkauf81509@aol.com.

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