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Prior to returning to self-employment, Tim ran International Investment Conferences, a producer of mining investment networking events. He came into the position thanks to a blend of experience in the media and mining industries. He gained a working knowledge of the mining industry as well as... More
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  • Buffett’s Burlington buy – passengers, not freight? 3 comments
    Nov 3, 2009 9:02 PM | about stocks: BNI, CNI, CSX, FDX, BRK.A

    ST. LOUIS (Alpha Found) — We have been surprised by the limited attention paid to the passenger rail strategy  that may lie behind Berkshire Hathaway’s [BRK.A], aka Warren Buffett, $44 billion takeover of the 77% of Burlington Northern [NYSE:BNI] that it did not already own.

    BNSF indirectly ferries tens of thousands of rail passengers a year thanks to its ownership of track that is leased to government rail monopoly, Amtrak. We think part of Buffett’s bet may be based on a long range view of a new era of high speed rail travel.

    We certainly don’t agree with some of the analysis suggesting that Buffett is betting on moving bulk commodities to the West Coast to feed China. It’s a stretch to think mined products (coal, copper etc) are a primary reason for the deal given that mining growth in the US is dying because of political opposition. There is a case to be made for farmed products, but it’s not very strong unless crop yields multiply and the barge business fails.

    Similarly, we disagree with views that this is a bet America will be consuming more Chinese products, or adding China spawned intermodal traffic. Import consumption will grow – slowly for a good while – but there is plenty of current capacity to handle it. The intermodal transport is on the verge of a revolution as the Panama Canal widening project moves to completion. That project’s goal is specific – bypass intermodal transport in the US with post-Panamax vessels which are becoming a larger portion of the global container shipping fleet.

    There is little reason to dwell on the coal business that dominates BNSF’s income statement at this time. We expect that to decline because it’s about coal fired power generation. The decline will be rapid, perhaps precipitous, if cap and trade becomes law. That would be a superb irony for a railroad that is marketing its green credentials!

    Passenger rail renaissance

    BNSF as a passenger hauler may seem unthinkable now given Amtrak’s special privilege to suffocate competition and harm customers who subsidize it via taxes siphoned off in Washington. However, America has fallen embarrassingly far behind the rest of the world in high speed rail travel. There now seems to be momentum developing, at least behind the scenes, to incentivize the development of new tracks and trains that would bring the US into the current century.

    P7294234

    Burlington Route Zephyr. St. Louis Transport Museum. (NYSE:C) Alpha Found

    That doesn’t necessarily mean derailing Amtrak and its special interests. Amtrak can be left to own the Northeast Corridor, but it is likely that it will have to compete on equal terms in other markets.

    BNSF would be ideally positioned to take advantage of a shift in the rail landscape, especially because it is so far from Amtrak’s home base. We see the change unfolding in two primary ways.

    Firstly, the development of high speed, high frequency intercity trains over distances of 200-500 miles.

    These trains would focus primarily on revenue from commuter traffic in distant dormitory suburbs of large cities. But it’s not hard to see business and tourism traffic following quickly as the trains defeat mid-range air travel.

    Secondly, the development of rail hubs that mimic airline hubs to address the infrastructure bias that leaves large parts of the country without direct routing between major cities. Whilst commercial airlines presently serve this role, they do so inefficiently at distances of 500 miles and less.

    Hubs would allow smaller trains (in terms of coaches) to run enabling good yield management and, therefore, high margins. The proposed high speed rail upgrade between St. Louis and Chicago would be a prototype provided the politicians don’t parasite it too much.

    Other factors pushing toward a passenger rail renaissance include environmental, infrastructure, and congestion pressures.

    The environmental issues are obvious, even with the bogus ‘carbon footprint’ removed. However, a more important driver may be state and federal highway dollars. It is simply cheaper per mile to maintain, police and service rail than road. With budget pressures only mounting in future years, we foresee traditional highway expenditures being increasingly diverted to mass transit.

    For presently freight-focused rail companies a long-term move into passenger handling should be relatively straightforward. Capital expenditures would be relatively light, and we would expect a lot of cost-sharing on key infrastructure like passenger terminals and even electrification to replace diesel locomotives.

    Passenger services would also provide a smoothing opportunity for revenue and earnings. That’s because mass transit gains business in weak economic conditions when freight struggles. Overall, the opportunity to take market share away from airlines is a better reason for freight haulers to consider the passenger market. There is also a very good case to make for taking market share away from Fedex and UPS in certain markets.

    Timing? We would say a horizon of 15-20 years is reasonable to expect to see the envisaged passenger model taking shape. With the right incentives, it could be visible and viable within 10 years. But we just do not see the political will to achieve that.



    DISCLOSURE: No Positions

    Themes: Transport, M A, Infrastructure Stocks: BNI, CNI, CSX, FDX, BRK.A
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Comments (3)
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  • Old Trader
    , contributor
    Comments (5724) | Send Message
     
    Tim,

     

    I know that Buffet is famous for taking the "long view", but I'd guess that passenger rail might well exceed even his vision for BNI. I don't know that I'd be so quick to dismiss grain traffic, as most barge traffic runs north/south, via the Mississippi River.

     

    As for coal, I agree the future looks a bit questionable at the moment, but given that we (the US) have so much of it, I'm certain there's no shortage of sharp minds working on making it sufficiently "clean" to satisfy the Greens.
    3 Nov 2009, 10:26 PM Reply Like
  • AlphaFound
    , contributor
    Comment (1) | Send Message
     
    Author’s reply » Thanks, appreciate the good feedback. Rail cannot compete effectively with barge traffic on the Mississippi that is moving product for export. The barge volumes are massive, with low unit costs. I don't discount rail becoming more competitive on ag traffic, but it will be marginal rather than significant.

     

    Clean coal or not, I do not see a large increase in volumes compared with what we have already seen. Nuclear is going to eat into all the potential growth for a long while.

     

    That said, I do not totally discount a situation that would unlock the mindless 'greening' now going on. That would be coal positive.

     

    Rgs
    Tim
    4 Nov 2009, 08:55 AM Reply Like
  • Credit Lime
    , contributor
    Comments (26) | Send Message
     
    interesting about the passenger part. good to hear a different take on that deal. does BNSF own the northeast corridor track that Amtrak uses?

     

    also as far as the traditional deal points go regarding shipping commodities, didn't a NYT report mention how China was building a new coal power plant like every 10 days? if that is the case then there is definitely a case to be made for America being happy to ship coal which versus some of its other more valued resources. Even if it leans to more nuclear power in the future as the new southern deal indicates mining coal and selling it to other countries does create jobs for Americans and export dollars for America - something the Obama administration is targeting on different levels. It may be bad for pollution, clean coal or not, but that doesn't mean people decide upon the 'cleanest' alternatives especially when money is involved. Coal is definitely one of the cheaper and more abundant mass energy sources available which makes it a no-brainer solution especially for countries with fiscal problems (which seems to be quite a lot of them right now).
    23 Feb 2010, 04:39 AM Reply Like
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