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Buffett’s Rail Wager Paying Off With $3.25 Billion in Dividends


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Buffett’s Rail Wager Paying Off With $3.25 Billion in Dividends

2011-05-12 21:00:00.5 GMT



By Mark Clothier

    May 13 (Bloomberg) -- A little more than a year ago, Berkshire Hathaway Inc. Chairman Warren Buffett made his famous “all-in wager” on the economic future of the U.S.

    Berkshire spent $26.5 billion to buy the 77 percent of Burlington Northern Santa Fe railroad the company didn’t already own, essentially taking it private. It seemed a daring bet at the time, considering that the U.S. had fallen into a recession that had crushed consumer spending and created the highest unemployment in a quarter century.

    Yet in only 15 months the Burlington investment has played out better than even Buffett said he expected, Bloomberg Businessweek reported in its May 16 issue. The recovery from the recession, which ended in 2009, continues to strengthen, unemployment has dipped and the jump in oil prices has worked to railroads’ advantage.

    All that’s buoyed Buffett’s financial return: In the first

13 months since the buyout, Burlington paid $2.25 billion in dividends to its new parent, Omaha, Nebraska-based Berkshire, and will fork over an additional $1 billion this month.

    “It’s worked out really well, and I’m surprised at how fast,” said Bruce Allen, president of Bruce G. Allen Investments in Denver.

    Burlington Chief Executive Officer Matthew K. Rose is determined to take advantage of the industry’s improved climate and the flexibility he gets by having only one shareholder -- Buffett.


                        Capital Spending


    This year, Rose is boosting capital spending by 31 percent, triple the increase of other major railroads. He’s buying about 200 locomotives and building more transfer facilities where rail freight containers are switched between trucks and trains.

    Rose’s goal: To bolster the second-largest U.S. railroad’s competitiveness relative to long-haul truckers. Rose estimates companies spend $10 billion in the western U.S. to truck freight that could move less expensively by rail.

    That gap widens with higher pump prices -- up 31 percent in the past year -- since locomotives are more fuel-efficient.

    “Maybe a big consumer-goods company ships 25 percent intermodally today,” Rose said, referring to shipping that uses both rail and trucks on a single trip. “Can we convince them to go 35 percent because of higher fuel prices or driver issues?

Those opportunities are everywhere.”

    About $500 billion is spent each year to haul U.S. freight by rail or highway. More than half -- $300 billion -- is spent on shipments between cities. Rails today get about 13 percent of that business, Rose said.


                        Fuel Efficiency


    To expand rail’s share, he pitches trains’ greater fuel efficiency -- railroads can carry a ton of freight two to four times as efficiently as trucks -- and improved reliability, in part because of heavy capital spending in recent years.

    A shortage of drivers and rising emissions standards also are eroding truckers’ advantages, as is growing road congestion.

    “People need to know that the trains are going to run on time,” said Chris Ferrell, a logistics consultant with Tompkins Associates. “They don’t mind that you’re a day and a half slower, they just want to make sure that you’re a day and a half slower every time.”

    So far, Rose has received the hands-off management that Berkshire companies typically enjoy.

    “Every morning he can wake up and spend all day on Burlington and do whatever makes sense,” Buffett said.


                      Intermodal Expansion


    Lately, that has meant expanding the intermodal business, part of the consumer-products unit that generated 31 percent of Fort Worth, Texas-based Burlington’s $16.9 billion in 2010 sales. Intermodal took off in the 1970s as manufacturers expanded the geographic breadth of their supply chains to lower costs.

    Burlington now has 32 intermodal freight hubs in places such as Haslet, Texas, and Memphis, Tennessee.

    At the Haslet facility, three workers at computer terminals in a control tower coordinate the arrivals and departures of 17 trains in and out each day. A crane, guided by a worker on the ground and controlled by one in the cab, takes about 45 seconds to pluck a 6,500-pound container off the train and place it onto a truck.

    Workers can unload a train with more than 100 cars in an hour and 45 minutes. From there, truckers haul the goods the final leg to a customer’s store or distribution center.

    Railroads still battle perceptions of delayed departures and inconsistent punctuality, said Walter Spracklin, an analyst with RBC Capital Markets.


                        ‘Leap of Faith’


    “Railroads are not known for service -- trucking companies are,” he said. “They’re actually asking the customer to do a little bit of a leap of faith.”

    That’s why Rose in the past year doubled to 12 Burlington’s national sales team, which pitches the benefits of intermodal freight to customers such as Best Buy Co. and Home Depot Inc.

    Rail’s sweet spot is for hauls longer than 750 miles (1,200 kilometers). It would be $1,002 cheaper to transport a freight container by rail the 2,020 miles from Los Angeles to Chicago, with half of the carbon emissions, Burlington said.

    Landing a sale can take two years, said Chief Marketing Officer John P. Lanigan Jr.

    “In some cases, you’re overcoming long-held beliefs that may have been grounded in fact two decades ago but are no longer,” he said.

    One recent win was FedEx Corp., which in February started using Burlington for freight hauls of more than 500 miles in the western U.S. after years of being courted, Lanigan said.

    “We were relentless over time,” he said. “Finally, at some point, it just makes sense for them.”

    FedEx declined to comment. Ferrell said shippers don’t make such changes quickly or lightly.

    “Once they’re convinced service levels will not suffer, then it’s Finance 101: Am I going to be decreasing my costs?”

he said. “If the answer is lower, you do it.”


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