Conrail's Brown: recession could produce a "leaner, more efficient operation." - H. William Brown, Consolidated Rail Corp. Vice President of Finance - interview

Railway Age, Feb, 1991 by Anthony D. Kruglinski

Conrail's Brown: Recession could produce a "leaner, more efficient operation" KRUGLINSKI: How do you think the economic climate will impact the nation's railroads in general and yourself and your competitors in particular?

BROWN: There's no question that the recesssion will impact the railroad industry's revenues, some more than others. Their ability to weather such a downturn will rest on their expense reductions during this period.

From a revenue standpoint, Conrail, as you know, is somewhat different from the other railroads. While a significant portion of their revenue base is supported by bulk commodities such as goal and grain, Conrail has a more diversified traffic base, supported by the consumer and industrial oriented northeeast and midwest regions.

Coal, which represents approximately 15% to 18% of our revenue, should continue to be a fairly steady performer. As for the other commodities, we have made some key decisions and investments in the recent past which have allowed us to improve our market share in such areas as vehicles, intermodal, and steel. So while traffic will be down, we should benefit with increased share.

From a cost standpoint, cost control remains the hallmark of Conrail. We have proven that we can manage the railroad's operating costs on a volume variable basis. For example, monitoring traffic levels on a trick-by-trick basis so as to consolidate trains wherever possible becomes a criticlly important function. Depending on the severity of the overall traffic decline, we will manage our other expenses accordingly.

However, we don't want to lose any ground in those areas where we have gained market share from the highways. The key is service. So while we have proven our ability to reduce expenses, we cannot cut our service levels back to the point where we might lose ground in the long run. Therefore, during such an economic downturn, it will be critical for us to communicate with our customers to coordinate their needs with our service levels.

In the meantime, we will continue with the development of some very important information systems, as well as our efforts to work with other railroads to provide "seamless" transportation services which will generate added value to our customers. These actions should enhance our position as we come out of this downturn.

To further enhance our position in the transportation marketplace, we recently instituted a continuous quality improvement process at Conrail. This quality program will be the mark of Conrail in the 1990s. Our goal is to be the best at satisfying the needs and wants of our customers in those markets which we choose to serve. Everything else will then follow--increased revenue, reduced cost, and job security. And these are the important issues at Conrail.

KRUGLINSKId What can railroaders do to make up for a potential dip in revenues--short term? Long term?

BROWN: In an economic downturn, it is essential for the railroads to aggressively manage down their cost base. Obviously the key will be the length and severity of the downturn.

In a short-term, slight fall-off in business, it will be important for railroads to manage their volume variable expenses, such as labor, car hire and fuel. A railroad shoud adjust its service to its business levels. However, in a longer-term, more severe dip in revenues, we will have to manage those expenses more aggressively; but the opportunities are there.

Overall, Conrail has positioned itself very well in terms of its roadway and equipment maintenance. In 1988, for example, when traffic levels were strong, we expanded our maintenance programs, and at the present time, we find ourselves with an asset base which is in excellent condition. As a result, with any significant drop-off in traffic, we will be able to reduce our maintenance requirements without any impact on our long-term operation. After all, when you start with an asset base in such good physicial condition and have a lower traffic level than you're used to, you don't need anywhere near as much maintenance. And of course lower volumes result in much less wear and tear on the physical plant. In the short term, reductions can be substantial; however, this must be recognized as a "pay me now" or "pay me later" situation.

In addition, there are many other considerations, both in operations and G&A, which can be implemented depending on the severity of the downturn, so long as you don't sacrifice the long-term opportunities. And as you cut back in various areas, where the business levels pick up again, you can carefully evaluate your operation before adding back any of these expenses. As a result, you should end up with a leaner, more efficient operation coming out the other end. For instance, at Conrail we encourage all of our people to use every opportunity for belt-tightening and often the savings become permanent.

KRUGLISNKId How will this situation impact equipment acquisitions in 1991 and beyond?

BROWN: For 1991, I doubt that there will be any impact since we don't have a very large equipment acquisition program. We will be buying 50 new locomotives, some fully enclosed auto racks, and some rapid discharge cars.