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September 2010

Rail News: BNSF Railway

BNSF's Matt Rose: Winner of Progressive Railroading's 2010 'Railroad Innovator' Award


— by Pat Foran, Editor

On this 19th-straight day of 100-degree heat in Fort Worth, Texas, Matt Rose sits in his office at BNSF Railway Co., sipping from a strawed Sonic cup. The Class I's chairman, president and CEO is amiably cool, comfortable and clearly in the zone — definitely ready to field a range of questions from this reporter. But if the analogy root is baseball (it is) and word/phrase choice matters (it does), Rose, on this mid-August morning, isn't really "fielding" — he's at the plate, hitting the ball where it's pitched. At times, it seems, he's hitting the pitch before it's delivered. During the 75-minute conversation, he consistently drove the ball with the confidence befitting a CEO who's used to connecting on drive after authoritative drive during his first 10 years at BNSF's helm.

"It's been a fascinating decade," he says before offering up a time line that neatly frames the first 10 years of the new millennium, a theme he revisited throughout the morning. But it wasn't long before Rose brought it all back to the present. This past year, he notes, has been uniquely interesting in its own right.

He talked about the year of years that he and his BNSF colleagues are in the midst of experiencing. He shared his thoughts on the BNSF-Berkshire Hathaway Inc. transition, acknowledging that he still catches himself thinking it's time to conduct quarterly conference calls with financial analysts. He discussed the state of rail regulatory policy, noting that longtime Southern Pacific CEO Ben Biaggini advised him never to lose sight of its significance. In so doing, Rose offered a glimpse into BNSF's past, present and future. The North American rail industry's, too.

An 'Innovator' Who Gets It

A model modern rail CEO, Rose is a consensus builder, a mentor who makes the rest of his team better, BNSF execs have told us. He's made leadership development a priority at BNSF, fostering a cooperative, even collegial, culture — no mean feat, given the far-flung nature of railroading. What's helped, colleagues say, is Rose's plain-spoken ability to make potentially nebulous words and concepts like "core values" and "culture" real. He's a rail advocate who not only gets it, but is able to articulate it.

By steering clear of rhetoric, Rose also has helped bring customer focus to the railway, observers believe. Along the way, he's tried to meet the rail industry challenges of capacity and growth head on; he's able to look ahead without taking his eye off the near-term ball. In so doing, he helped make BNSF that much more attractive of an investment, to which the folks (or at least one folk: Mr. Buffett) at Berkshire Hathaway can attest.

Rose also has brought his brand of big-picture thinking to the table elsewhere in the transportation realm, from his work with the National Surface Transportation Policy and Revenue Commission and the OneRail Coalition or his willingness to share constructive thoughts on legislative, regulatory and other policy-shaping matters.

In recognition of his talents and contributions, Progressive Railroading has named Rose the recipient of the 2010 "Railroad Innovator Award." We'll present it to him this month at our annual RailTrends conference, which will be held Sept. 28-29 at the Affinia Manhattan in New York City.

Technically, the "Innovator" recognition isn't a lifetime achievement award, but in Rose's case, it might as well be. The innovator in him has manifested itself over time — certainly since he was hand-picked by predecessor/mentor Rob Krebs to serve as BNSF's president and chief operating officer in June 1999. He was named CEO in December 2000.

"I spent my first few years [as CEO] walking around, wondering what I was supposed to do," Rose says, chuckling.

A New-Breed Leader

Hardly a wanderer, Rose spent much of that time observing, listening, recognizing change — and, when appropriate, embracing it. Regarding the latter: He didn't have much choice.

"When I came in, there was a manufacturing recession," he says. "Then, we went right into 9/11 — such an interesting time for our industry. Then, you had the extreme upheaval in corporate governance — Enron, WorldCom. That period was a challenge for a fairly new CEO."

He may have been one of the new guys, but Rose knew that railroads required a new breed of leader.

"One personality doesn't run a railroad anymore," as he put it to Progressive Railroading Managing Editor Jeff Stagl in early 2001. "You have to have a team of leaders handling operations."

From that sentiment, Rose hasn't wavered. On the leadership front, he's been a remarkably consistent message-sender during the past decade.

"My job is to create an environment so the team can accomplish their goals," he says. "We're still a long way from where we want to be, but we're a long way from where we came from. We believe that what we've done sets the stage for getting the best performance of the team."

During the mid-2000s, BNSF and other railroads definitely kicked it up a notch, performance-wise. In 2006, with the "rail renaissance" in full bore, BNSF handled more than 10 million units and recorded $14 billion in revenue. In 2008, BNSF posted revenue of $18 billion.

"The economy started cooking, and I got to experience the company running on all cylinders," Rose says. "It was all about growth and building capacity."

And developing processes to facilitate both. In 2005, BNSF rolled out its "Velocity" initiative, which challenges workers to assess every aspect of operations and find ways to take time out of every task. The idea: Improving velocity helps BNSF add capacity to accommodate traffic growth, shorten equipment cycle times and increase equipment availability, improve on-time performance and generate revenue.

Meanwhile, BNSF continued to make considerable capital investments annually during good and not-so-good times (witness the $2.4 billion committed for 2010). BNSF had to, Rose says. Capacity — finding more of it, financing it — would be key to the industry's future, rail advocates told themselves during the fateful fall of 2008. "Then I got to experience the greatest recession since the Great Depression," Rose says.

It was the kind of experience that prompted some to question their assumptions about the global economy, and rail's place in it. Not Rose.

"All we did [is] we lost four years," he says, citing rail traffic stats. "The peak for BNSF was 2007 — 219,000 carloads. Now, we're about 10 percent off it."

In short: Rail's vital role, regardless of the extent to which the economy's undergoing something of a restructuring, remains intact and, ultimately, assured. Rose's charge, then, remains: to keep the rail-as-a-growth-industry momentum going. He's got help — a cadre of 40,000 employees that he continues to credit for BNSF's success.

"We are a culture of tough-minded optimists, and nothing demonstrates that more convincingly than the success we've achieved together," Rose told them in the Spring 2010 edition of BNSF Railway, an internal publication.

An affirmation that the Class I has been "doing the right things, in tough times as well as in good times" is Berkshire Hathaway's acquisition of BNSF, Rose added in the same article.

BNSF — a Family Business

The ins and outs of Berkshire Hathaway Chairman Warren Buffett's "all-in-wager" on the U.S. economy have been well documented. There's been less written since the deal was consummated. "The transition has gone flawlessly," Rose says. "We lost a couple from our leadership team — one was our corporate secretary, our SEC attorney. The second was our investor relations VP. Everybody else, we retained."

Even so, when there's a new owner in town, uncertainty can rule. To mitigate it, Rose asked Buffett to meet with the management team in early spring. Buffett "immediately put a lot of people at ease," reminding them he didn't buy BNSF to overhaul it. ("He buys well-run companies and lets them run," Rose says.)

Rose, too, has had some reassuring to do. His message: "This is the same company we built," he says. He acknowledges, though, that some of the details of his job have changed, or will.

"I'm getting rid of stuff that, quite frankly, took a lot of time — the quarterly conference calls, the annual meetings, the bank meetings, meeting with supply side analysts, hedge funds," he says. "It probably accounted for 20 to 25 percent of my life."

How's Rose been using his newfound time? He's spending more time out on the railroad as well as with customers. He's also putting the BNSF leadership model to the test.

"Warren said, 'I want you to think of this as a 100-year-old family business,'" Rose says. "OK, but what does that mean? What will our capital structure look like? Will it be different?"

It's too soon to tell, Rose says. But he's sure the focus on the bigger picture will continue — if not sharpen.

"Really, that's something we've always done," he says, with a nod to former BNSF CEO Krebs, who recognized the need to reinvest, even when traffic volumes weren't great.

In any event, it'll take awhile for management and employees to adjust to the brave new BNSF world. Stronger evidence that the recovery pace is picking up would help. "It's been a significant recovery, but there's still room to grow," Rose says. "The big question: Do the numbers we've been seeing begin to pick up or do we take a stumble?"

Based on feedback from BNSF's biggest customers, Rose and his team don't expect to be stumbling. "We think we're going to be really busy this fall," he says, citing strength in grain, coal, intermodal and industrial products.

Ultimately, Rose expects what he characterizes as a "continued gradual recovery" on the order of a 2.5 percent to 3 percent Gross Domestic Product growth. Longer term, Rose has greater expectations. He can't shake what he knows in his soul to be true: The U.S. economy's going to grow, and freight railroads will grow right along with it.

"It's population growth," Rose says. "There'll be 364 million people by 2030 and every American consumes tons of stuff, and we're going to need efficient freight transportation."

Particularly as capacity shortages in the trucking industry continue to drive more freight to the rails.

"Pretty much everybody agrees that, from a policy standpoint, moving truck traffic to rail makes sense," he says. "Now, how do you do that?"

The Evolution Never Stops

For Rose, it's meant taking a more active (and vocal) leadership role at the policy-shaping table. In 2008, The National Surface Transportation Policy and Revenue Study Commission on which Rose served recommended increasing surface transportation investment to the tune of $225 billion to $340 billion annually during the next 50 years. Then there's the Rose-endorsed OneRail Coalition, which counts among its principles the following: "A balanced transportation policy that addresses a critical missing link in our nation's surface transportation policy — rail."

"We have tried to lead from a policy standpoint," Rose says. "We need to be in the conversation."

The same is true in legislative and regulatory dialogues, or so the late Ben Biaggini, a deregulation advocate who ruled the Southern Railroad from the 1960s through the early 1980s, told Rose years ago. "He said to me, 'The rail regulatory policy will never stop in terms of its evolution. You've got to pay attention to it,'" Rose says.

Rose and his Class I CEO counterparts certainly are paying attention to the painstaking crafting that's been S. 2889, the Surface Transportation Board Reauthorization Act of 2009, which aims to address the economic regulatory system for U.S. railroads. If passed, it would represent the first comprehensive reauthorization of the STB since it was established under the ICC Termination Act of 1995.

"It's a huge deal — that's why it's taking so long to work it through," Rose says. "People know what's at stake here. We've got to find the right balance."

Spoken like a true consensus-builder.

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