Life after Conrail: fertile ground for short lines

Railway Age, May, 1997 by Roy H. Blanchard

An April gathering of Norfolk Southern's connecting short lines in Virginia Beach was the first ever convocation of all NS short lines, including those it will "inherit" from Conrail. It was also the first short line meeting following the joint CSX-NS decision regarding the division of Conrail.

NS clearly put its best foot forward for its guests, and the short lines responded with intelligent dialogue and sharp questions. The tone was set when NS Chairman David Goode gave as candid a welcoming speech as I've ever heard.

The breakup of Conrail breaks new ground. Not simply a merger of two or three companies, it is first an "un-merger" of the Penn Central and the other bankrupts that formed Conrail twenty years go. Once that's been done, it becomes two separate mergers as NS absorbs essentially the Pennsylvania Railroad, Reading, Eric-Lackawanna, and Lehigh Valley remnants while CSX absorbs the former New York Central assets.

Both players will have a lot of money on the table before the actual sale process even starts. The Surface Transportation Board filing fee is nearly $1 million just to walk in the door. Add to that all the up-front legal and consulting expenses, settlements and protection for Conrail employees, plus a host of other items, and it begins to look like real money.

Where's it coming from? Some prophets of doom say freight rates will have to go up. However, that doesn't follow. This transaction adds competition where there was none, so revenue compression will be the more likely effect. NS and CSX will have to find the money the old fashioned way--by earning it. That will require new, more profitable traffic, additional operating savings, and better service. The $5 billion stock-buyback program NS just suspended should help.

By this month, the parties were to have been close to filing with STB, and an expedited schedule was desired. Conrail is in what NS's Assistant Vice President-Strategic Planning Nancy Fleischman called "a fragile state." Its managers are waiting for the other shoe to drop, and the agreement personnel are busily trying to figure out who will have seniority and whose name will be on their paychecks. Customers, too, need to plan logistical streams, and that requires knowing who will serve them, what will happen to schedules and routings, and which Conrail origins and destinations wind up with which railroad.

Once all that is decided, said Fleischman, NS will face daunting tasks: servicing new markets, creating new services, making new investments, and finding new opportunities. Short lines will play a critical role in all since they already know their markets and what it will take to develop new business. However, NS's culture of taking the long view will be new to many who have become accustomed to Conrail's shorter term perspective. And some short lines have learned already that this preference for the longer look can be in direct conflict with their near term goals.

One of the usual short line laments is that the Class I's focus on long-haul intermodal traffic to the detriment of their carload business. A second lament is that they have had little or no interest in short-haul carload business. Yet in her remarks, Fleischman said there is "huge potential for unexplored carload business," especially north-south. Readers of this page will recall that more than a year ago none other than Henry Watts, recently retired NS vice chairman, remarked on missed carload opportunities in that lane. It's a different ball game now.

NS's earnings projections were around 10% before Conrail and are somewhat more than that with Conrail. What's driving this, said Wait Trollinger, NS assistant vice president-marketing, is a renewed focus on industry-specific sales growth fueled in part by diversion from truck and an intensified industrial development program. A good chunk of that truck market is the two billion annual truck tons moving in the under-150 mile market.

If marketing is charged with creating products the sales force can sell, then surely the sales force becomes the voice of the customer when products are being created. This was writ large in NS Assistant Vice President-Sales Tom Lindsey's charge to the short lines: to use the Conrail merger to expand sales opportunities.

Said Lindsey: "The merger will require a rejuvenated, more intense customer focus." This year's NS capital program includes more than $800 million for plant and equipment, all targeted toward better customer service. Another $100 million has gone for systems improvements. There were 120 more new locomotives on the property April 1 than there were January 1. Crew starts for the first quarter were up by more than 3,000 over last year and 30% more than five years ago.

In other words, NS is proof of the old saying, "If you want the business you have to run the trains." Grain, rock, cat food, cars--same thing.

If companies grow by creating customers through innovation and marketing, NS has given its short lines the seeds for their own success and has provided the fertile ground for those seeds. Harvesting the fruit is up to the short lines.