When Warren Buffett announced late in 2009 his Berkshire Hathaway investment firm would buy up BNSF Railway, he said he’d always wanted to own a railroad. He sounded almost like a kid having his pick from a giant toy store, and taking away a long-sought prize: the world’s largest train set.
Nearly a year-and-a-half after that deal closed on Feb. 12, 2010, rail industry watchers say Berkshire’s ownership has given BSNF a special gift. As Buffett promised, and in keeping with his ownership style, he has largely left BNSF alone and kept its management team intact.
That has allowed BNSF, under Chairman and CEO Matthew K. Rose, to keep pursuing the business strategy that has it hauling more freight shipments than any other railroad in North America.
Sidebar: BNSF's Top Team.
Less clear, however, is whether Buffett’s promise — and his financial safety net, for that matter — to also release the railroad from its ties to the short horizons of Wall Street has opened the business to the “the long-term investments and long-term strategic decisions broader, strategic investments” that Rose spoke of when the sale was announced.
“We won’t be necessarily worried about an individual quarter,” Rose said last year. “We will be looking at the longer-term horizon.”
BNSF’s capital spending plan for 2011 is up sharply, to $3.5 billion, but that’s not far beyond rival Union Pacific Railroad’s $3.2 billion plan. And the Association of American Railroads says overall spending by the largest U.S. railroads will grow from $10.7 billion last year to more than $12 billion this year.
Railroad analyst Anthony Hatch of ABH Consulting says any changes BNSF executives have made to infrastructure plans or operations over the past year or so are in line with how they already were planning their network.
Rail industry veteran executive Thomas Finkbiner, senior chairman for the Intermodal Transportation Institute at the University of Denver, sees no difference in BNSF now and before Buffett expanded his investment in the railroad to buy the rest of it outright. “And you really wouldn’t expect to,” Finkbiner said. Buffett “didn’t buy it to fix,” he said, but because it was already a good investment and a well-run railroad.
Being private means BNSF doesn’t not have to justify its capital spending to Wall Street investment analysts, but that doesn’t really change how the railroad makes its decisions, said John Lanigan, BNSF’s executive vice president and chief marketing officer.
“Because of the long-lived value of our assets, the process we go through to evaluate our investment in those assets hasn’t changed,” he said. “Either there is a case to be made for that investment or there is not. The ownership by Berkshire is not a blank check. Being private rather than public doesn’t give us the right to not be profitable. We still have to be a good investment for our owners.”
The BNSF network also forms something of a spine for the physical map of the U.S. economy, with railcars and intermodal trains that carry clear, forward-looking signals of economic activity across the American industrial sector.
Sprawling across the western U.S. and into much of the heartland, BNSF has extensive links to West Coast ports, Midwest grain fields and Wyoming coal mines. Despite several years of tough competition from western rival UP, which bit off a bigger share of intermodal traffic across that region, BNSF remains the dominant intermodal carrier in North America.
Because of its network map, BNSF also is well positioned for the growing rail freight business out of the Bakken Shale oil formation, which extends across several Great Plains states and parts of Canada. Various railroads are hauling drill pipe and other materials in and taking long lines of oil tanker railcars out, in what Hatch calls a rolling pipeline of unit trains taking the oil to distant refineries. BNSF, he said, is picking up a big piece of that business.
BNSF and UP vie for the title of largest North American railroad, with UP pulling in more money, BNSF more freight volume.
UP last year generated a little more revenue at $16.96 billion to BNSF’s $16.85 billion, and had about $2.8 billion in profit compared with nearly $2.5 billion for BNSF.
In traffic categories, UP’s concentration in bulk cargoes leaves the Omaha, Neb.-based carrier outpacing BNSF in carload shipments. UP originated almost 2.2 million carload shipments this year through May 28, while Berkshire’s railroad handled just under 2 million.
However, BNSF leads in several key carload business lines. The railroad hauls more high-value vehicle shipments and runs more coal trains, thanks to its concentration in Wyoming’s Powder River Basin. It also runs more unit trains loaded with grain, which Hatch attributes to “luck of geography but also service,” because BNSF maximizes the advantage from its route map.
But where BNSF really leads is intermodal. Although UP narrowed the gap in recent years, especially in container loadings as it pulled some intermodal partners away from its rival, BNSF in the first five months of 2011 moved 1.8 million intermodal containers and trailers while UP moved 1.4 million.
And BNSF is flexing its intermodal muscle more this year, with that traffic growing 11 percent from the same time frame last year. UP’s box volume rose just 2 percent for the January-May period.
When Berkshire moved to buy up the part of BNSF it didn’t already own, there was speculation that deep-pockets Berkshire could help the railroad make some longer-term investments that perhaps other railroads couldn’t, while trying to satisfy stock investors with a focus on quarterly financial performance.
But “the change in ownership has not changed how BNSF operates the railroad or plans capital expenses,” company spokesman Steven Forsberg said. He added Rose has said publicly that it could take five to 10 years before BNSF officials would be able to look back and assess any differences.
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Hatch says the relatively slim difference in capital spending plans is because long-term horizons are really an entrenched part of rail business models, the backbone of the financial discipline that has figured in what he calls the rail “renaissance.”
“All the railroads,” Hatch said, “are playing a long game themselves.”
For shippers, BNSF remains much the same railroad. They were “a damn good railroad before, (and) they are a damn good railroad now,” said Curt Warfel, sourcing manager for bulk transport at chemical shipper AkzoNobel.
The railroad has performed remarkably well, he said, through this year’s tough weather, which has probably hit the carrier more than any other major railroad with floods across its system for several months.
“BNSF’s been hammered this year with floods,” Warfel said, “but they really go out of their way — to the extra link — to keep their customers informed. All the railroads do a decent job of communicating with customers, but some kind of stand out.”
Finkbiner says that’s part of a culture at BNSF that has been forged over the past decade. “I think they tend to be a little less regimented than the teams at some other big railroads,” he said. “They’re edgier. They’re a little hungrier. They are a little more willing to take a chance.”
That could be because the BSNF team is younger, on average, than most officials in the rail industry. Rose took the CEO job when he was 40 in 2000, and became chairman two years later. He came with operating experience with the railroad and other freight companies, a background matched by few others.
Whether that has made the railroad a stronger financial player than its peers is an open question, however. By buying BNSF, after all, Buffett bought into the upper levels of an industry that’s a dependable profit engine, a seeming remnant from a bygone industrial era whose disciplined financial management allowed it to barely miss a beat during a recession that had companies in other industries struggling to survive.
BNSF last year had the lowest profit margin, 14.6 percent, among the five largest railroads, figuring net profit as a percentage of revenue. Its margin in this year’s first quarter ranked fourth, ahead of only Norfolk Southern Railway. And that profit level improved just mildly from the 2010 first quarter, while the other four carriers improved their profit margins more.
Buffett has compared the railroad to a regulated utility that has constraints on rate-setting for its customers, but some observers say that moderate BNSF margin could be more of a short-term development linked to timing of contracts rather than a purposeful strategy.
Although some shippers praise the BNSF team, the company takes its lumps with others.
A Wolfe Trahan survey of freight shippers last month said service metrics including average train speeds and time spent at terminals have generally worsened for major railroads since the low-volume period of two years ago. They worsened again in the past year, the report said, with BNSF’s rating now the company’s “worst in our survey since 2006,” the report said.
BNSF also lost a large rate challenge at the Surface Transportation Board in 2009 over Wyoming coal shipments, and this spring lost a final effort at the Supreme Court to fight the STB’s ruling. In reparations and lower rates over time, the case was worth several hundred million dollars to BNSF.
Another group of shippers is trying to wage a class-action lawsuit against BNSF along with UP, CSX Transportation and Norfolk Southern, over what the shippers charge was railroad collusion to impose industrywide fuel surcharges beyond a level needed to cover actual fuel cost changes.
Coal and coke shipper Oxbow Carbon & Minerals filed an antitrust lawsuit against BNSF and UP, alleging they used monopoly behavior to fix freight pricing and gouge shippers. BNSF and UP denied the allegations and said they would vigorously defend against the action.
BNSF said the Oxbow lawsuit “appears to actually be a routine commercial dispute between Oxbow and Union Pacific regarding a mine in Colorado that is not served by BNSF.”
But the outcome of the case is unlikely to dent what Hatch calls a profit-making machine for Berkshire. “What Buffett did was see a terrific investment opportunity,” and the legendary investor could already capture a “huge” profit of 50 percent or more if he were to sell it today, Hatch said.
Buffett is clearly pleased with the result. “Owning this railroad will increase Berkshire’s ‘normal’ earning power by nearly 40 percent pretax and by well over 30 percent after-tax,” he told shareholders this year. “The economics of this transaction have turned out very well.”