Engines of Profit

Joseph Bonney | Nov 3, 2009 5:50PM GMT

We'll skip the cliche that great minds think alike, but we can't help but point out the timing of Berkshire Hathaway's $34 billion offer for Burlington Northern Santa Fe Corp. and the subject of John Boyd's cover story in this week's The Journal of Commerce.

John's article, Engines of Profit, noted that railroads are weathering the recession in much better condition than carriers in other transportation modes.

"There is a long list of pieces to the railroads' profit puzzle, but the key to making it all fit is a strong discipline among all the major carriers," he writes. "They displayed it a few years ago by avoiding a rush to add too much equipment, workers or track when shipments are robust.

"Now they are shedding workers by the thousands and idling vast fleets of equipment until it pays to use them. And still the railroads insist that most new freight contracts include higher pricing.

"It's the mirror opposite," Boyd writes, "of the big ship orders and battles for market share in the ocean liner industry and of unwieldy networks built up in trucking consolidation."

Interestingly, Buffett has talked up the rail data before:

http://www.joc.com/node/413435

Then again, he did own at least 22.7 percent of BNSF recently, so clearly he is not coming late to what some believe is - dare I say it? - a rail Renaissance.

- By Paul Page on 11/3/09

If the article compares the economics of U.S. railroads against that of global liner carriers, the writer has missed a few key points. First, the U.S.Railroads have gone through consolidation years ago and there are few competitive lanes left. In fact, they are more an oligopoly, and in some lanes a duopoly, than real competitors. Compare this to ocean liner carriers.

The major trade lanes are hyper-competitive. The build up of ships was to keep one step ahead of the competition. In addition, global liner carriers are working with the economics of several countries, not just USA imports and exports.

It would be easy for railroads to hold back equipment, workers and track in robust times, with the full knowledge that their few competitors will do the same.

The point is well taken on Berkshire's purchase, however. Mr. Buffet rarely makes a mistake when it comes to picking up companies for cheap.

- By John Doble on 11/3/09