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Rail News Home Kansas City Southern

October 2012



Rail News: Kansas City Southern

Kansas City Southern Railway reaches 125th anniversary in good stead



— by Jeff Stagl, managing editor

In the past 125 years, Kansas City Southern leaders have made a number of important decisions that helped the Class I survive and thrive. But the ones made at night by two former top executives might have had the most profound impact on the Class I's evolution.

Arthur Stilwell, who in 1887 founded KCS' earliest predecessor, the 40-mile Kansas City Suburban Belt line, was renowned for nocturnal dreams or visions that influenced his decisions. The railroad's president from 1897 to 1900, Stilwell wrote a book titled, "I Had a Hunch" and claimed several of his ideas — such as establishing a north-south railroad connecting Kansas City, Mo., to the Gulf of Mexico and beyond, including Mexico — came to him from what he characterized as nighttime "brownies."

Decades later, KCS Executive Chairman Mike Haverty, who was the Class I's president and chief executive officer from mid-2000 to mid-2010, pondered many key issues after midnight. He might not have opted to pursue the concession for Mexico's premier Northeast Railroad in 1996 with Grupo TMM S.A. de C.V. or formed a Meridian Speedway joint venture with Norfolk Southern Railway in 2005 if not for some late-night brainstorming sessions.

"I found that I made my best decisions at 3 a.m.," says Haverty. "They would come to me and I'd think, 'yeah, that's the best way to go.'"

There would be no "go" in KCS' development as a Class I and international intermodal player if leaders past and present hadn't made bold moves or taken several risks along the way. And there likely would be no KCS today if the single most important decision hadn't been made in 2005, says Haverty.

At the time, Haverty & Co. decided to gain sole control of TFM S.A. de C.V., which was formed after KCS and Grupo TMM acquired the Northeast line. Control of the line, which now is operated as Kansas City Southern de México S. A. de C.V. (KCSM), enabled KCS to transition from more of a regional U.S. railroad to a multi-national railroad operating across the U.S./Mexico border. Becoming a single, cross-border entity was a "game changer," says Haverty.

"We would not have gained the full benefit of our investment in Mexico without the control," he says. "And we would not be sitting here today if we didn't do it."

As the Class I marks its 125th anniversary this year, the railroad's current leadership team — led by President and CEO David Starling, and advised by Haverty — is acknowledging the past developments that helped forge today's KCS. They're also discerning the opportunities that lie ahead for what's now an established north-south international railroad.

Prospects abound in Mexico and are plentiful in the United States, a nation where KCS is thriving among predominantly large east-west railroads, they say.

"We're in an enviable position today. Ten to 15 years ago, we were desperate and just trying to survive," says Haverty, referring to a period when KCS was considered a prime acquisition candidate. "We have a nice niche, and we're not yet tapping its upside potential."

The foray into Mexico helped KCS build intermodal traffic at the Port of Lázaro Cárdenas, which is similar in scope to the port complex in Los Angeles and Long Beach, Calif., "but we are the sole server," says Vice President of Investor Relations Bill Galligan.

The Class I currently is moving six trains daily from the port, but there's enough capacity to operate 25 to 30 trains, he says.

"We've barely scratched the surface," says Galligan. "Our survival wasn't always a given, and now we're relevant. Other railroads want to do business with us."

Out With The In-Crowd

That wasn't always the case. Stilwell aggravated leaders of other railroads in the late 1800s and early 1900s when he bucked their rate-hike moves and kept prices the same for his Kansas City, Pittsburg and Gulf Railroad Co. (KCP&G), which in 1900 became the Kansas City Southern Railway (KCSR).

"Stilwell didn't fit in with the crowd," says Haverty.

His idea to create a north-south railroad from K.C. to the Gulf wasn't very popular, either. Some rail industry constituents believed Stilwell's proposed line was unrealistic because other railroads were being built on east-west routes. But the KCP&G eventually operated from Kansas City to Shreveport and Port Arthur, Texas, a port city named after Stilwell, realizing part of his north-south dream.

Later in the 1900s, KCS made other moves to broaden its network. In 1939 — under then-President Harvey Couch's watch — KCSR acquired the Louisiana and Arkansas Railway Co. The transaction provided a route from Dallas to New Orleans and access to areas northeast of Shreveport, into Minden, La., and Hope, Ark. The acquisition also provided a link between Kansas City and New Orleans; from 1940 to 1969, KCS offered luxury passenger-rail service between the cities on the Southern Belle.

Another milestone was reached in 1962, when then-President William Deramus established Kansas City Southern Industries Inc. (KCSI), a diversified holding company that invested in many non-rail businesses. At the time, every railroad was becoming a diversified company with "industries" attached to its name, says Haverty.

But the KCSI experience became a lesson learned because Deramus believed the company could focus on both a transportation company and a financial services company, and it didn't pan out, says Haverty.

In 2000, KCSI was spun off in a sale to shareholders; two years later, the company's name was changed from Kansas City Southern Industries to Kansas City Southern Railway, reflecting the focus on rail transportation.

"Now, we're a railroad, a transportation company," says Haverty.

Ideal Dealmaking

Through the 1980s and 1990s, KCS continued to pull off a number of deals that helped advance its transportation-provider prospects. In 1988, the Class I entered into a haulage/joint rate agreement with Union Pacific Railroad that provided KCS haulage rights to Lincoln and Omaha, Neb., Council Bluffs, Iowa, and Atchison and Topeka, Kan. UP's acquisition of the Missouri-Kansas-Texas Railroad later that year enabled KCS to access grain territories in Nebraska, Iowa and Kansas.

In 1994, KCS acquired MidSouth Rail Corp., which extended a line to Meridian, Miss.; Counce, Tenn.; and Tuscaloosa and Birmingham, Ala. The deal, which included trackage rights into Gulfport, Miss., helped KCS create the Meridian Speedway between Dallas, Meridian and Shreveport, La., and enabled the Class I to interchange with NS and CSX Transportation.

The speedway, which offered one of the shortest rail routes between the Southwest and Southeast, later became a key connector for KCS' International Intermodal Corridor between Mexico and the U.S. Southeast. In 2005, KCS forged the joint venture with NS that helped boost capacity and improve service performance on the speedway.

"[The creation of] the Meridian Speedway was key, giving us a connection to NS," says Haverty.

In 1997, KCS forged a marketing agreement with I&M Rail Link (which later became part of Dakota, Minnesota & Eastern Railroad, now owned by Canadian Pacific) to obtain access to grain accounts in northern Iowa and southern Minnesota, as well as access to Chicago. That same year, KCS also acquired the Gateway Western Railway Co., which provided the railroad access to grain business from K.C. to East St. Louis and Springfield, Ill.

Gateway In Play

Since the Gateway Western acquisition, business has grown substantially on the line and new grain facilities now are being built in Jacksonville, Ill., and Corder, Mo., says Haverty.

"The Gateway is as strategically important as the Meridian Speedway," he says, adding that grain traffic can bypass St. Louis, offering a "very efficient" route from the Midwest to Mideast.

Since nobody is building railroads anymore in the region, the Gateway Western route will become a "hugely strategic line" someday, Haverty believes.

"I think in five to 10 years, it will be important," he says, adding that KCS over time can take advantage of the local traffic on the line.

KCS also consummated a significant deal in 1998 that holds traffic-building promise in the future. The Class I acquired a 50 percent stake in the Panama Canal Railway Co. The railway's 47.6-mile line, which was built in 1855 and fully restored in 2002, accommodates freight and passenger traffic across the isthmus from Panama City to Colon.

"It's an independent subsidiary with little supervision, and it's been very successful with an operating ratio in the 40s," says Haverty. "It has turned out to be a good investment. If there are more ships after the Panama Canal expansion, we'll get some of that."

In addition to the aforementioned domestic and international transactions, the 1990s included several acquisitions, partnerships and investments that helped forge KCS' path into Mexico. In 1995, the Class I invested in Mexrail Inc., which owned the Texas Mexican Railway Co. (TexMex) and its border crossing in Laredo, Texas. The deal helped KCS take advantage of the 1994 North American Free Trade Agreement, which eventually changed shipping patterns on the continent.

In 1996, TexMex was granted trackage rights over UP lines in Texas between Beaumont and Robstown, including routes from Houston through Rosenberg to Flatonia, and from Flatonia through Victoria to Placedo. TexMex later purchased the "Rosenberg Line" from UP in 1999.

Also in 1996, KCS and Grupo TMM won the Northeast Railroad concession, leading to TFM and then KCSM. Nine years later came what Haverty & Co. consider the pièce de résistance: the acquisition of full ownership in Mexrail and purchase of Grupo TMM's interest in TFM.

Gaining full control of Mexrail and TFM doubled KCS' franchise and made the Class I more of a substantial player in North American freight logistics, as well as a better link to Gulf Coast and Mexican ports.

Although the deal fulfilled Stilwell's dream of tapping Mexico, the reasons for gaining a presence south of the U.S. border differ from Stilwell's, says Haverty.

"He wanted to get to the port on the Pacific. Our main reason was because Mexico was a key manufacturing area for North America, with traffic going north and south," says Haverty.

Loads Of Opportunities

Now, KCS is a growing railroad because of its Mexican arm, he says. KCSM — which operates independently, as does U.S. subsidiary the Kansas City Southern Railway Co. — is contributing to booming cross-border business this year.

In the second quarter, cross-border traffic skyrocketed 106 percent on a year-over-year basis. And in terms of growth opportunities, there are 2.6 million loads of cross-border traffic available to tap along KCS' International Intermodal Corridor, says Galligan.

In addition, NS plans to open a new intermodal facility in Birmingham along its evolving Crescent Corridor — a 2,500-mile New Jersey-to-Louisiana route promising a one-day reduction in transit time — that will play a role in traffic moving from Meridian to the Northeast. The facility will make the Meridian Speedway more of a critical intermodal link between Mexico City and New York City, Haverty believes.

To continue increasing traffic, KCS aims to continue serving as a premier rail-service provider from Mexico's industrial heartland to markets in the central and southeastern portion of the United States.

"Our focus is on growing business on the franchise we built," says Haverty. "We're enjoying the fruits we had hoped for, and are doing something not done before."

Persistence has paid off for KCS, which long had been considered a stodgy, older company that ran against the grain, but is an entrepreneurial, independent-thinking railroad, says Galligan.

KCS has historically been underestimated, adds Haverty.

"Every time, that has proven to be a mistake," he says. "People used to say we couldn't compete with the big boys, so why fight that battle? I used to say, 'Why not get that business?'"

Perhaps nothing better defines the tenacity and resiliency displayed at KCS the past 125 years than realizing Stilwell's vision to establish a north-south railroad from the Midwest to Mexico's Pacific Coast, even if that goal wasn't achieved in his lifetime, says Haverty. Stilwell likely would approve of the International Intermodal Corridor and what it's done for the Class I.

"I hope he's upstairs and looking down on us, and he's enjoying what he's seeing," says Haverty.



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