RAIL INDUSTRY OPTIMISTIC THAT 1998 WILL SMOOTH OUT SOME ROAD BUMPS

RAIL INDUSTRY OPTIMISTIC THAT 1998 WILL SMOOTH OUT SOME ROAD BUMPS

This year will be critical for the railroads, which are thrashing around in search of a new formula to inject some financial life into an industry where profits are stagnant, traffic growth is modest and observers wonder how much longer expense reductions can be the key reason for earnings growth.

The industry is facing fundamental questions again. Can railroads ever offer a truly strong service product that attracts - and keeps - new business? Can they find a workable growth strategy instead of lagging the U.S. economy year after year?These issues rise above recent market trends, such as Asian economic woes and a depressing outlook for coal and grain exports.

Consider this: Railroads experienced widespread service problems in 1993, 1994 and 1997. Those misdeeds did little to validate the senior management's eternal, hopeful statements about the industry's ability to achieve ambitious growth and performance targets.

A REALISTIC APPROACH

OR COCKEYED OPTIMISM?

In this week's meetings with securities analysts, carrier officials have been upbeat about the prospects for 1998, while acknowledging real question marks such as Asia's long-term financial health.

Is their optimism misplaced?

We'll see.

Robert Krebs, chief executive of Burlington Northern and Santa Fe Railway, said earlier this week that he had promised too much in the way of merger benefits in the early days after the 1995 linkup of Santa Fe Pacific and Burlington Northern Inc.

BNSF has spent more on capital programs - and capacity improvements - than the company planned to beef up its locomotive fleet and facilities so it can deliver service needed to capture those merger benefits in the form of stronger profitability. This year's BNSF capital program of $2.4 billion reduces flow and cuts earnings potential.

Mr. Krebs emphasized BNSF's long-term intention to boost earnings. The route to that growth, he noted, was very direct.

UP PROBLEMS SEEM

FAR FROM OVER

''People are dying to do business with us,'' he said. ''The excuse (for not using BNSF) is some kind of reasonable service. We are getting in shape to do that (provide improved service).''

He told analysts that this year is shaping up as a pivotal year for capturing merger benefits.

BNSF is further down that road than Union Pacific, whose losses in the fourth quarter are a testament to what can go wrong after a merger. While UP executives insist that their long-range plan for integrating Southern Pacific Lines will deliver benefits eventually, the 15 months since UP acquired SP fell short of expectations - by a few hundred million dollars.

SERVICE QUESTIONS

DOG RAILROADS

CSX Corp. continues to promise success with Norfolk Southern Corp. in attracting 1 million truck shipments back onto the rails.

No matter how hard they try, observers and customers will wonder how the acquisition of Conrail Inc. by those two companies can be achieved from both a marketing and operational perspective. Many wonder why 1 million truck shipments would be diverted to rails with a sullied service reputation.

What can railroads do to make believers out of those who wonder when, or if, the industry will consistently provide reliable service?

Once capacity improvements are in place on BNSF and other carriers, the answer now is the same as it has been year after year: Be dependable, be careful what you promise and deliver on every promise you make.

RAILROADS MUST START

ACTING LIKE TRUCKERS

Consultants have exhorted railroaders to think like truckers for years.

Railroads need to act like truckers, and deliver dependable service in a competitive environment. If railroads can do that in 1998, and meet those other goals, then perhaps the long-expected promise will be captured.