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By Jeff Stagl, managing editor
For the better part of its 23-year history, RailAmerica Inc. has followed one growth doctrine: acquire as many railroads as possible, but leave operations up to the individual railroad.
The strategy helped the firm — which went public in 1992 — become North America’s largest short-line holding company in a little more than a decade. By 2002, RailAmerica increased its holdings to more than 50 regionals and short lines in the United States and Canada, as well as interests in Chilean and Australian railroads. In addition, annual revenue climbed past $400 million and earnings reached record levels.
But in 2003, facing a sluggish economy that reduced revenue and profits, RailAmerica began to sell assets to reduce debt, increase free-cash flow and boost earnings. The company eventually sold its overseas railroad interests and several North American railroads until, by late 2006, it owned 42 U.S. and Canadian railroads. But debt and operating costs continued to rise while earnings tumbled.
In November 2006, Fortress Investment Group L.L.C. landed a deal under which the asset management firm would acquire RailAmerica and refinance the company’s debt. Fortress assumed ownership in February 2007, at which time RailAmerica became a privately held company again.
During the past two years, RailAmerica has undergone another transformation. Out is the franchisor/franchisee approach through which the company sought to acquire railroads and enable each to operate as an independent entity. In is a centralization strategy aimed at making RailAmerica an operating company first — one that primarily controls its 42 railroads from headquarters — and an acquisition-minded firm second.
“The decentralization model wasn’t working. We took over a company that had struggled for a few years, with an operating ratio at 89, 90,” says John Giles, a former Great Lakes Transportation L.L.C president and chief executive officer who became RailAmerica’s CEO in February 2007.
Over time, after the operating company goal’s achieved and the economy rebounds, RailAmerica will again become an M&A player in the short-line industry, he says.
“The economy is not favorable for acquisitions,” says Giles, adding that it has become increasingly difficult to borrow money to swing a deal. “We plan to get the company poised and planted to take in acquisitions at some future date.”
For now, RailAmerica is in better financial shape than it was two years ago. The company registered record earnings in 2008 and has quadrupled cash flow, says Giles. In addition, the operating ratio has dropped 10 points in two years.
The driving force behind the turnaround is the senior management team, says Giles. Soon after he joined the company, Giles recruited several experienced senior executives he had worked with before, including Senior Vice President and Chief Operating Officer David Rohal, a fellow ex-CSXer; SVP and Chief Administrative Officer David Novak, another fellow ex-CSXer and former Great Lakes Transportation exec; and SVP and Chief Commercial Officer Charles Patterson, who also previously served CSX and Great Lakes Transportation.
“Many of us have worked together three, four and five times,” says Giles. “It’s like putting a band back together.”
The “band’s” first item of business: increasing the number of regions from three to five and assigning a regional vice president to each.
“There was one region that had a territory running from Nova Scotia to Alabama — that’s not efficient,” says Giles. “We designed the regions so a vice president can drive anywhere in their area in one day.”
Last year, the number of regions increased to six after Fortress acquired Florida East Coast Railway (FECR) and merged the regional’s operation with RailAmerica.
Next, Giles & Co. drastically reduced the number of responsibilities assigned to each railroad’s general manager. Key responsibilities — from pricing to sales to purchasing to human resources to Class I relationships — now are handled by executives at headquarters.
“The general managers had too much to do, and they’re not necessarily skilled in all areas,” says Giles, adding that hiring at the railroads was “uneven.”
Senior execs also clarified their expectations for each GM, such as how to best manage resources.
“We’re driving from the top down, taking the role of the senior team to do what we do best,” says Giles.
In turn, regional VPs and railroad GMs now have the latitude to do what they do best, such as marketing and transportation.
“The big thing is the support from the senior group. If I have a situation with a Class I, I’m not out on my own,” says Robert Jones, regional VP-West region. “In my 35-plus years in railroading, mostly at SP and UP, I did not have that support.”
To help RailAmerica recruit the best possible support staff at HQ, the company relocated its headquarters from Boca Raton to Jacksonville, Fla., last year.
“Boca is a retirement community and it’s hard to lure talent there,” says Giles. “Jacksonville has a better educated, service-oriented workforce.”
Recruiting talent is one thing; retaining good mid-level managers is another. So, RailAmerica changed managers’ compensation system, enabling them to boost earnings based on financial and performance goals vs. strictly salary increases.
Now, the company and its managers are reaping the benefits from improved operational and financial performance.
“It’s not uncommon for some managers to make as much in bonuses as in salary,” says Giles. “We want to challenge them to find ways to make this year better than last year, and to make the company better on a daily basis.”
Adds SVP and COO Rohal: “Performance of managers and performance of the railroads go together. It’s like a football coach — good performance usually follows good coaches.”
To derive better performance from unionized employees, the senior team found a way to motivate them, too. Instead of getting the workers — half of whom are organized — to ratify an agreement calling for significant wage increases, senior
execs convinced them to accept a contract that includes lucrative safety-related bonuses, says Giles.
If a worker doesn’t suffer a reportable injury during a quarter, he or she receives 2 percent of their pay. In addition, if the worker also helps a co-worker avoid an injury during the three-month period, he or she receives another 2 percent of their pay.
“If they’re not involved in a human factor-caused derailment, they get another 1 percent,” says Giles.
The incentives are helping RailAmerica boost safety performance. The company hasn’t had a reportable injury in 2.5 years or a derailment in two straight years, and the safety ratio now stands at a low 0.67 injuries per 200,000 manhours, says Regional VP Jones.
“A big thing for me is safety awareness,” he says.
Jones is a proponent of motivational speaker and author David Sarkus’ book on the seven “C’s” to improved safety. “The Safety Coach: Unleash the 7 C’s for World-Class Safety Performance” identifies the Cs as confirming, correcting, caring, collaborating, coaching, conciliating and clarifying.
In 2007, Jones helped pilot the book’s concepts at the California Northern Railroad, then roll them out elsewhere.
“It puts a positive spin on safety,” he says.
For example, when “confirming” an incident, a supervisor first talks about 15 things a worker did right before he or she discusses the one thing that wasn’t done properly and what needs to be done to correct it, says Jones, who because of his efforts was named the 2008 Safety Person of the Year by the American Short Line and Regional Railroad Association last month.
RailAmerica also formed safety teams at each property that are led by a safety captain and include representatives from each department. The teams meet monthly and perform safety audits. In addition, workers receive restaurant gift certificates if they correctly perform a task a certain number of times in a row, and railroads shut down on light traffic days to provide a cookout for employees and discuss safety issues.
If there’s an ongoing issue, Jones can bring it up during the next weekly conference call with Giles and senior managers. Each Monday afternoon, senior execs and regional VPs hold teleconferences to discuss problems.
“It’s decided right then who will do what and when,” says Jones.
That key person becomes the “monkey,” says SVP Rohal.
“I keep two kinds of stuffed animals in my office: a monkey and fish,” he says. “The monkey represents what job there is to do and who will do it, and the fish means that as something swims by you, you have the right to look at it and question it. If there’s something you don’t think will work, throw the fish on the table.”
A senior exec did just that a few months ago during a Monday conference call.
The senior management team was just about to drop plans to buy four new locomotives for FECR when SVP Patterson — who’s “quite removed from being heavily involved in a locomotive purchase,” says Rohal — brought up the motive power’s potential long-term fuel-saving benefits.
“He asked what the returns would be if we proceeded with the purchase,” says Rohal. “We were one sentence away from not going ahead with it.”
In addition to opening the lines of communication through regular meetings, senior execs authored a mission statement (“Our mission is to consistently exceed customer expectations with the highest degree of integrity, safety and service”) and identified six core values that, in part, promote an open dialogue at RailAmerica.
The company wants to ensure that every employee contributes to performance improvement, says Rohal.
The core values are integrity (“We speak and act with truth and honesty”); respect (“We treat others as we wish to be treated”); fact-based (“We make recommendations and decisions based upon objective evidence”); heads in the game (“We continuously seek to improve, and we remain focused on our challenges”); hands on (“We actively strive for results in our areas of responsibility, and we help one another for the success of the team”); and demanding partner (“We expect from others what we expect from ourselves, and we collaborate to achieve the best results for all”).
“The first three are embraced by most companies, but I doubt the other three are articulated this way,” says Rohal. “We had a derailment in Ontario a few years ago because someone’s head wasn’t in the game.”
To ensure everyone’s contributing to the team, RailAmerica will continue to provide employees opportunities to identify concerns and recommend solutions, he says.
“Each employee making a small contribution every day is very powerful — it all adds up,” says Rohal. “We need contributions from everyone to make the enterprise better tomorrow than it is today.”
There still are a few items that need attention before the company takes another large continuous-improvement step, says Giles. For example, RailAmerica soon will re-engineer its pricing-to-cash processes to reduce the number of workers involved in each billing transaction — a number that sometimes reaches 250 to 300.
“We found that we bill unevenly and don’t bill customers for things we should,” says Giles. “Ultimately, we want to take out costs and gain efficiencies.”
As long as senior managers keep RailAmerica on the continuous-improvement path, they believe the efficiency and financial gains will follow.
“We want to turn RailAmerica into a high-performance organization,” says Giles. “We now have the depth and breadth of experience to do it.”