Ferromex at 10

By Pat Foran, Editor

By just about any measure, Ferrocarril Mexicano S.A. de C.V. (Ferromex) had a solid 2007. But not as good a year as Ferromex execs had hoped, especially after coming off an exceptional 2006, when the 5,245-mile railroad hauled 15 percent more freight and recorded 20 percent higher revenue than it did the previous year.

Expectations notwithstanding, the railroad did set records in revenue ton-kilometers (40.6 billion) and revenue ($988 million) in 2007. Ferromex also posted its lowest-ever railroad accident rate, 1.69 accidents per million ton-kilometers — a 23 percent improvement compared with the previous year’s rate and a 75.2 percent improvement compared with 2000’s rate.

Not bad for an organization that’s spent 10 years navigating the long and winding road that is railway privatization.

“It has been a very exciting journey,” says Ferromex Chief Operations Officer Lorenzo Reyes Retana, who’s been with the railroad since its 1998 inception after spending 10 years with Ferrocarriles Nacionales de México (FNM), the government-run predecessor. “When we started, we had to make up our own culture, and we have developed one that is focused on the customer — it took awhile, but we have done that. And now, Ferromex is a very healthy railroad.”

How healthy? Ferromex execs project traffic volumes will rise 4.1 percent, to 42.1 billion revenue ton-kilometers, this year. They’re also projecting revenue of $1.38 billion, which would represent a 5 percent hike compared with 2007’s total.

“From 2000 to 2006, they went from 24 billion in revenue ton-kilometers to 39.1 billion, and they increased their share of the rail market in Mexico from 46 percent to 53 percent,” says Emilio Sacristán Roy, director general of the Asociación Mexicana de Empresas Ferrocarrileras A.C. (AMF). “They’ve really had spectacular growth.”

UNSPECTACULAR, but satisfying

Except, well, last year. Even though Ferromex — which serves the Mexico City-Guadalajara-Monterrey economic triangle, five border cities and six ports — posted record volume, the total ton-kilometers represented only a 3.5 percent increase.

“We had prepared for 8 percent,” Retana says.

What happened? The loss of a joint Honda move with BNSF Railway Co. took a 15 percent bite out of Ferromex’s automotive/intermodal volume, says Chief Commercial Officer Rogelio Vélez. A less-than-robust Mexican economy didn’t help, either. One consequence: Ferromex, which had acquired 60 AC4300 locomotives in 2006 and 40 last year, ended up “having to store some of that power,” Retana says.

So, despite strong showings in grain (which represented 38 percent of the railroad’s total volume and accounted for 30 percent of the ’07 revenue) and minerals (volume was up 35 percent due to steady business with steelmaker Ternium S.A. and a new customer — wire producer Deacero S.A. de C.V.), Ferromex didn’t meet its goal of cracking the $1 billion revenue mark.

“Even so, we were satisfied with the year,” Vélez says.

And they’ll be satisfied this year if grain continues to grow at the steady clip it has during the past decade. It should, Vélez says, citing the continued success of a shuttle train service the railroad, working with Union Pacific Railroad (which owns 26 percent of Ferromex) and BNSF, has operated since 2001.

“We started with 24 shuttle trains,” Vélez says. “Last year, we ran 434 shuttles, and we had a record month in January [2008].”

Intermodal volume should rebound, too, possibly at a double-digit rate. This year, there’ll be terminal planning and development work in such strategic locations as Ciudad Juarez, Tabalaopa, Culiacán and Viborillas. Meanwhile, yard expansions are scheduled for facilities in Manzanillo, Bojay, Empalme and Guadalajara, Ferromex’s operations center.

“There won’t be heavy [terminal investment] — probably $500,000 for each facility,” Vélez says. “These are facilities to handle interim growth.”

To accommodate intermodal and other growth, the railroad plans to spend $182.2 million this year, most of it on infrastructure upkeep, says Juan Manuel Soler, director of maintenance/operations resources. Ferromex plans to install 125 miles of new rail, much of it along the 374-mile Torreon-to-Ciudad Juarez segment — specifically, replacing 100-pound with 136-pound rail to accommodate 286,000-pound cars. Ferromex also will rehab 38 bridges, and extend or build 30 sidings.

“It will allow us to handle more and heavier traffic,” Soler says.

Ferromex execs expect heavier volume — as in a 28 percent boost — from the automotive segment this year, thanks in large part to a new customer Vélez declined to name until the deal is completely sealed.

“We feel very good about automotive this year,” he says.

TARGETING TRUCK TRAFFIC

As good as Ferromex officials feel about the road ahead, they’re also pragmatic about near-term prospects. The intermodal evolution is just that — an evolution, Retana says. (“There is big potential, but it will take time to develop.”)

They also know that U.S. economic rumblings reverberate in Mexico. Cross-border car interchange volume decreased 1.8 percent in 2007, and registered a 5.1 percent drop in January alone. Regardless, Ferromex at minimum will post “modest growth” this year, Retana says.

“We’re not going to be impacted as much as we used to by the slowdown of the American economy,” he says.

One reason: They’ll be putting more emphasis on domestic opportunities in ’08. Ferromex is targeting freight that’s now transported on Mexican highways.

“We are working hard with our salespeople to make sure that our service and our rates are good enough to take a larger ground transportation share,” Retana says. “As an industry, we’ve gone from an 18 percent share to 26 percent since 1998. We want a larger piece of this cake.”

Of course, rate-cutting has been de rigeur among Mexico’s railroads for some time.

“In real terms, railroads have reduced rates by 10 percent during the past 10 years, and it’s largely been dictated by inflation,” AMF’s Sacristán says.

Reducing rates might help garner market share, but you can’t cut your way to prosperity. And Ferromex doesn’t plan to. “It’s going to take a big effort to achieve this 4.1 percent [traffic volume] increase,” Retana says. “It will require us to continue to improve service.”

GETTING WITH THE ‘PROGRAMADO’

Technology will play a role, as well. Later this year, Ferromex plans to replace TCS, the transportation control system it inherited from FNM, with a yet-to-be-determined system, Retana says. Moreover, managers and rank-and-filers alike must continue to live and breathe Ferrocarril Programado, Ferromex’s version of the “scheduled railroad” model, he says.

“It’s a commitment to a certain quality level — a way of doing things that has been built into our processes,” Retana says. “The result is better service.”

For the effort, Ferromex recently earned ISO-9001:2000 certification, which applies to companies that improve design, manufacturing and service quality processes to enhance customer satisfaction.

“Right now, it mostly covers control and administrative activities, but we have to bring our union people to this concept — they, too, need to own and commit to these values,” Retana says. “It is all about coordination, consistency and reliability.”

Which is precisely what made joining the TTX Co. rail-car pool and owner roster this past December so special, Vélez adds. The addition of Ferromex — TTX’s first new owner in 43 years — enhances rail moves into and out of Mexico, TTX officials believe.

For the railroad, becoming a TTX owner ensures a reliable rail-car supply, maximizes equipment efficiency through pooling, reduces transportation costs — and eliminates a competitive advantage that rival Kansas City Southern de México S.A. de C.V. had over Ferromex, Vélez says. “We started seeing results right away in January,” he adds.

RAILROADING WITH A PURPOSE

Instant results aren’t typical in post-privatization Mexico. Witness Ferromex’s plan to acquire the 917-mile Ferrosur S.A. de C.V., which Mexico’s Comisión Federal de Competencia has rejected. Proposed in 2005, the deal is hung up in the courts and will take another “three, four, five years” to sort out, Vélez says. But Ferromex execs haven’t given up the merger ghost.

“We operate two separate railroads, but we share some technical expertise — both railroads are partly owned by [Ferromex parent] Grupo Mexico,”

Retana says. “We still intend to merge. We just have to promote this objective in the right way.”

Just as they’ve had to convince their customers, their owners — and each other — that they’re in this service-intensive business for the long haul.

“It’s taken awhile, but we understand each other better, and we understand the railroad’s purpose better,” says Soler, who joined Ferromex in 1998. “First, it was all about moving trains. Then it was, ‘What is the reason we’re moving them? The customer.’ We’ve become much more customer focused and much more competitive.”