By Pat Foran, Editor-in-Chief
In late 1998, I was fortunate to spend time talking with former Kansas City Southern CEO Mike Haverty as he continued to develop what then was called his "NAFTA Railway."
When it came to Mexico, when it came to thinking north-south, Mike put his money where his mouth was. In late 1996, while reporting the first story I ever wrote for Progressive Railroading, I called Mike to talk about the KCS-Transportacion Maritima Mexican joint venture fall of '96 bid of $1.4 billion for Mexico's 2,445-mile Northeast Railway. Mike picked up the phone, and before I could even introduce myself, asked: "So, do you think I paid too much?" I didn't answer his question, but financial analysts and competing bidders at the time said, "ummm ... yeah." Turned out, that no, it wasn't too much. By any stretch.
Mike, who retired from KCS in 2013, was one of my favorite people to interview/talk with. He was candid. He was gracious with his time. He had vision. I learned a lot about North American rail strategy, or at least the thinking behind it; as well as the corresponding politics within the rail realm that often accompanied it.
The story the late 1998 conversation with Mike netted — "Growing Against the Grain: Haverty pushes KCS north and south in the name of NAFTA, new transport patterns — and rail independence" — was published in the January 1999 issue of Progressive Railroading and hasn't been available online until now. In 2011, we presented Mike with our Railroad Innovator Award, which gave me another opportunity to talk with (and write about) him. Mike retired in 2013.
I'm grateful for all the time Mike gave me over the years. For thinking bigger picture — north-south vs. the U.S. centric east-west. And for all he did to help position KCS to be part of what is now North America's only true north-south (transcontinental) railway in Canadian Pacific Kansas City.
The uncluttered conference room next to Mike Haverty’s office offers only a few reminders that there’s been some serious cartography kicked around at Kansas City Southern Railway over the past couple of years. Pictures of locomotives from KCS and its affiliates adorn the walls. More telling is an easel that holds a map of the North American rail network.
It’s a map Haverty helped remake.
“Back in 1887, when Arthur Stillwell founded this railroad, he was going against the grain by coming across the U.S. and down the Gulf of Mexico to Port Arthur,” says Haverty, pointing to the map, which depicts KCS’s partnerships with Canadian National Railway to the north, Transportacion Ferroviaria Mexicana S.A. de C.V. (TFM) to the south and a host of others in between. “It makes a lot more sense for KCS today than it did 100 years ago.”
But these days, Haverty isn’t just going against the grain. He’s also trying to grow against it.
Since taking over as chairman, president and chief executive officer in 1993, Haverty has repositioned KCS as a north-south carrier to be reckoned with.
After KCS acquired the Gateway Western and Gateway Eastern railroads, and a 49 percent share in the Texas Mexican Railway in the mid-1990s, Haverty helped convince KCS parent Kansas City Southern Industries Inc. in 1996 to invest in Mexico. In April 1998, he negotiated a 15-year marketing agreement with CN and Illinois Central Corp. — a deal that’s already paying dividends. Now, for a haulage fee, he’s inviting other carriers to move freight across KCS tracks.
“This system has the ability to feed all of the Class I carriers,” Haverty says.
The system’s certainly feeding KCS’s top line. For the third quarter ended Sept. 30, 1998, KCS and its rail affiliates posted earnings of $30.2 million — more than quadrupling the $6.3 million recorded a year earlier. And KCS’s operating ratio improved to 78. 7 percent, compared with 85.7 percent during the same period in 1997.
In an interview last month at KCS’s Kansas City headquarters, Haverty discussed deal-making, competition and collaboration. He also talked about what it’ll take to keep KCS on the right track.
“The biggest issue for us is to try to remain an independent entity,” he says. “There are those who would just as soon see us disappear.”
Unconventional wisdom
Privately, Class I executives say they wouldn’t mind seeing the pesky KCS, if and when it’s spun off by KCSI, fall by the acquisition wayside.
In the meantime, count on KCS to continue taking chances, to be unconventional. Haverty, who broke in as a brake man on the Missouri Pacific in 1967, doesn’t know any other way.
He’s got a knack for making innovation seem run of the mill. Railroaders still talk about when, as the Santa Fe’s president in 1989, Haverty brought together two unlikely business partners by initiating the J.B. Hunt Transport and Santa Fe intermodal service.
“People said, ‘How can you do it? You fight with them.’ But it made sense,” Haverty says.
The KCS-Transportacion Maritima Mexicana joint venture bid $1.4 billion for Mexico’s 2,445-mile Northeast Railway also made sense, at least to Haverty. But in late 1996, “sense” was not a word railroaders, financial analysts and even a few KCS employees used to characterize the bid.
“Everybody said, ‘What are you doing? The way to grow is east-west. And you buy someone or get eaten up by bigger guys.’ Well, things change,” Haverty says. “We are becoming a North American economy, and we’re going to compete in the global economy as a North American economy.”
Given TFM’s out-of-the-blocks success and obvious potential, some of Haverty’s second-guessers — including a few Class I CEOs — are looking a little closer at north-south traffic flows.
“In the railroad industry, there’s kind of a herd mentality — when somebody else does it, then maybe they’ll do it,” Haverty says.
But the herd approach won’t cut it, particularly when it comes to coming up with better ways to improve rail service. Railroad customer confidence is at a low ebb.
“I think we’re in for a rough year ahead — the shipper community is so dissatisfied,” Haverty says. “I don’t think anybody wants to go back to regulation. The problem is, what is the proper balance?”
The rail industry needs to find it quick. An inability to put today’s customer confidence crisis into context could be crippling — particularly if there’s an economic slowdown.
“We are seeing signs of softening in the economy,” Haverty says, declining to provide 1999 growth projections. “We think growth will be moderate.”
One reason: Paper companies may be producing paper, but they’re putting a lot of it in warehouses, Haverty says. Chemical traffic, too, could slough off.
That makes crossborder traffic that much more important to KCS. At least in the near term.
“Over the next five years, growth between the U.S. and Mexico is projected at a little less than 12 percent — between the U.S. and Canada, it’s around 11-1/2 percent,” he says. “That’s a positive for the transportation industry, and certainly for us.”
TFM already is making a positive contribution to Haverty’s NAFTA Railway. TFM revenues exceeded expectations for Year One, mostly due to higher- than-anticipated traffic within Mexico. But the KCS link in the NAFTA Railway chain is taking a little longer to develop.
“For a while, the problems that Union Pacific had pretty much decimated all of the traffic — 90 percent of it — moving between the U.S. and Mexico,” Haverty says. “A lot of the traffic has gone to truck.”
UP insists its service recovery now is in full swing, that its congestion crisis is over. The Surface Transportation Board agrees. On Dec. 21, STB rejected appeals to reopen the UP-Southern Pacific merger, including the KCS-backed “Consensus” plan, which sought to give the Texas Mexican Railway permanent access to Houston shippers.
A vocal opponent of the 1996 UP-SP merger, Haverty isn’t ready to bless UP’s recovery (“Shippers are the best ones to ask about that.”). He also isn’t satisfied with the traffic the nascent NAFTA system is generating. But he’s beginning to like the numbers he’s seeing.
“We’re doing well, regardless,” Haverty says. “Two years ago, we handled zero Mexican traffic — today, we’re handling over 20,000 loads in and out of Mexico. Customers are beginning to understand that we are an alternative to the UP [into Mexico].”
‘A friendly connection'
That recognition is due in large part to the CN-IC-KCS marketing agreement. The pact allows the three roads to target new markets — namely, automotive and intermodal — in key northsouth traffic corridors from Canada to the United States to Mexico. KCS already is handling a “significant amount” of Volkswagen and GM traffic over TFM and the Texas Mexican Railway,” Haverty says.
KCS and CN also signed a separate agreement that covers certain haulage and trackage rights. The deal is contingent upon Surface Transportation Board approval of the CN-IC merger.
“CN actually was the initiator of the marketing agreement,” Haverty says. “Once Paul [Tellier] ought IC, he needed friendly connection at the south end of the system. We provide that friendly connection.”
Haverty hopes KCS can be a friendly connection to even more carriers. The railway’s survival depends on how well it competes and collaborates with Class Is.
“You merge or enter into strategic alliances,” Haverty says.
Collaboration doesn’t always mean developing CN-IC-KCS- likem arketingp acts. KCS is working with Canadian Pacific Railway through the I&M Rail Link. A haulage deal gives Norfolk Southern Railway access to KCS’s Texas tracks.
Haverty says he’s also approached CSX Transportation, with whom KCS already has a business relationship, about developing haulage agreements that would give the East’s other big carrier access to Kansas City and Dallas.
“CSX is interested in Kansas City because of the Gateway Western, and they want to use it to come into Kansas City and compete,” he says. “But they haven’t shown any interest in Dallas.”
In the meantime, Haverty will keep marketing north-south traffic lanes, in general, and his railway, in particular. And his colleagues will continue to monitor his progress.
“I think we’ll know a lot more when we see, post-Conrail how the service lanes develop,” says NS Chairman, President and CEO David Goode. “That’s going to tell us how well that works — how smart we are about completing these alliances. We’ll learn more about whether these arrangements are the next steps.”
For KCS, the next big steps could be toward the West. Haverty may have some fence-building to do with UP and Burlington Northern Santa Fe.
“Generally, our relationship with BN is fluid,” Haverty says. “ls it cozy? I don’t think I would describe our relationship with BN, or the UP, as ‘cozy.’ I think the BN and UP would just as soon see KCS go away.”
Work to do in the West
The UP-KCS relationship remains particularly strained. UP is balking at the proposed CN-IC combination on the grounds that it fails to reflect the marketing pact with KCS. If approved, the CN-IC merger would give KCS access to three Geismar, La., chemical plants.
“What we have done with the marketing agreement is not that much different from what railroads have been doing for years,” Haverty says. “The only difference is that we’re taking marketing people from each of the three carriers, and marketing traffic in that corridor.”
But Haverty needs to nurture KCS’s relationship with BNSF— “they’re still our most important customer,” Haverty says.
About 25 percent of KCS’s revenue freight originates on the BNSF; 85 percent of it is coal traffic.
“We’re kind of in a tough position,” Haverty says. “On the one hand, we might compete. On the other hand, we have to work together.”
It’s a statement Haverty could make about any rail — even truck — partnership KCS has. And partnerships take time, sometimes lots of it, to develop.
In December 1997, the Panamanian Congress gave KCS a 25-year concession to operate the 48-mile railroad that runs along the Panama Canal. KCS and partner Mi-Jack Products, which originally won the concession in mid-1996, plan to convert the line into an intermodal cargo system. The startup project’s still about a year away.
“We’d hoped to start at the end of [1998],” Haverty says.
But Haverty’s biggest hope, at least publicly, is that KCS will be able to stave off Class I suitors, should there be any.
“The more successful we are, the greater the opportunity for independence,” Haverty says. “That’s the thing I preach to our employees. That’s the only thing we can do.”
It helps to have shifting trade traffic patterns on your side.
“Three years ago, conventional wisdom said we were going to see two railroads,” he says. “I’m not sure conventional wisdom says that today.”
Not that it would make any difference to Haverty what conventional wisdom has to say about anything.
