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June 2009

Rail News: Short Lines & Regionals

While the recession stalls acquisitions, Genesee & Wyoming seeks internal efficiencies


By Jeff Stagl, managing editor

For a company that seeks to grow via acquisition, 2008 was a banner year for Genesee & Wyoming Inc. (GWI). The firm acquired the Ohio Central Railroad System, Cagy Industries Inc., Georgia Southwestern Railroad and the Netherlands’ Rotterdam Rail Feeding — a record number of property acquisitions for GWI in a given year.

The transactions boosted the firm’s railroad holdings from 48 to 63. North America’s largest and only publicly traded short-line holding company now owns and operates rail properties in the United States, Canada, Australia and the Netherlands, and owns a minority interest in a Bolivian railroad.

But through May, the 22-year-old company hadn’t acquired any rail properties in 2009. And it probably won’t acquire any the rest of the year. Chalk it up to the recession.

“On the positive side, there are assets around the world in which a great deal of debt has been utilized, and therefore owners or creditors have been or will be looking to sell, and we have a strong balance sheet to pursue the right opportunities,” says GWI President and Chief Executive Officer John Hellmann. “At the same time, it’s a challenging time to be analyzing and valuing a railroad business given the volatility and uncertainty in the economic environment.”

So, GWI will wait for a more promising acquisition environment down the road, he says. In the meantime, the company — which also provides rail service at 16 North American and European ports, as well as contract coal loading and rail-car switching services — plans to focus its energies on being a better service provider and railroad operator.

“We’re enhancing the efficiency of our core operations as we adjust to the recession,” says Hellmann. “Our overarching short-term goal is to emerge from the recession leaner, smarter and more efficient at everything we do.”

To meet that objective, GWI will need to keep finding ways to drum up more business from existing customers, improve service performance, cut costs and re-size its nine operating departments to adjust to lower traffic volumes — an effort that so far has resulted in 160 furloughs. Sans acquisitions and an influx of new industries along its railroads’ lines, the company is relying on those maneuvers to inch closer to its long-term goals of surpassing $1 billion in annual revenue and generating more shareholder value. In 2008, the company boosted revenue by 17 percent to $602 million and increased diluted earnings per share from continuing operations by 13 percent to $2 compared with 2007 totals.

But it’ll be challenging, to say the least, for Hellmann & Co. to meet their long- and short-term goals after a less-than-stellar first quarter. Same-railroad revenue, which doesn’t include revenue generated by recent acquisitions, fell 16.6 percent as same-railroad traffic dropped 8.3 percent compared with first-quarter 2008 totals. Metals traffic plummeted 34 percent, pulp/paper carloads plunged 24 percent and lumber/forest products traffic dropped 20 percent.

Nonetheless, there were promising signs that the company’s tactics were working: first-quarter operating income rose 22.5 percent to $26.1 million, same-railroad operating expenses decreased 9 percent to $112.3 million and GWI’s operating ratio improved 3.8 points to 81.1.

Staying on top of safety

GWI is making strides in other areas, as well. The firm — which long has strived to become the world’s safest and most-respected rail service provider, says Hellmann — has posted progress on the safety front.

Last year, GWI lowered its ratio of injuries per 200,000 manhours to a record 1.33. The ratio has steadily dropped since 2004, when a 2.01 ratio was followed by 1.99 in 2005, 1.95 in 2006 and 1.61 in 2007.

This year’s goal is a 1.25 ratio, says Vice President of Safety Tyrone James, adding that GWI is on pace to shatter 2008’s record.

“Our ratio was at 0.92 in April, and May has been clean so far,” he said during an interview on May 18. “Safety is a cornerstone of the company and part of everything we do.”

The company is deriving benefits from a relationship GWI developed in late 2007 with DuPont, the premier safety management company, says James.

“To be the best, we had to learn from the best,” he says.

GWI developed safety training classes and processes based on DuPont’s safety management philosophy. For example, GWI now performs safety audits instead of safety inspections because audits focus on people while inspections focus on “things,” says James.

“This way, we get feedback from employees,” he says.

Since training classes began in September 2007, GWI has trained 345 managers and rank-and-file employees on DuPont’s philosophies. By year’s end, that number is expected to exceed 400.

GWI also conducts monthly safety conference calls with workers, in part to keep safety “in front of employees,” and arranges root-cause analysis calls after an incident, says James.

“We believe every incident must be analyzed,” he says. “We try to make the calls conversational and not adversarial.”

Earlier this year, a contractor’s employee lost control of a grinder while working on a track project in Oregon and cut his leg. Although the incident didn’t involve one of his workers, James conducted a root-cause analysis call with GWI’s employee team in Oregon to discuss ways the incident could have been avoided, he says.

In addition to being the key topic of his conference calls with workers, safety is the first thing mentioned during senior executives’ meetings, says James.

“Safety has credibility here now and support from senior leadership,” he says.

Performance review

Senior execs also are throwing their weight behind service improvements. Later this year, GWI will conduct a customer survey — something the company does every other year — so the execs can gain feedback on ways to boost service performance, says Hellmann.

GWI also is trying to enhance communications with customers to ensure managers understand their needs, he says.

Operations managers talk with customers almost daily to discuss service frequency, the optimal time of day to provide service and the right type of equipment, says Dave Collins, GWI’s senior vice president of the New York/Ohio/Pennsylvania region, which comprises 13 railroads.

“We have open communication,” he says. “You find out that maybe midnight is a better option for a customer than noon.”

GWI needs to ensure it’s an effective partner with its customers, says Gerry Gates, SVP of the southern region, which comprises 16 railroads.

“It could mean more cars or less cars, or Thursday service instead of Friday,” he says. “We need to be flexible and nimble.”

The company also needs to balance its assets and constantly adjust operating plans, says Collins.

“In Ohio, we have our fourth operating plan of the year and it’s only May,” he said during a May 19 interview. “You have to keep adjusting the plans. You have to ask, ‘Do we really need to do this?’”

A developing story

One thing managers are asking customers often is, “Do you plan to expand your plant or relocate to a larger facility?” GWI is trying to attract industrial development to real estate adjacent to its railroads, says Hellmann.

However, because of the recession, industrial development efforts have shifted from attracting new facilities and shippers to working with existing customers who want to expand their operations, says Gates.

Not that GWI hasn’t landed a few new industries of late. Last year, the company’s Bay Line Railroad L.L.C. worked with Jackson County and the Port of Panama City, Fla., and Green Circle Bio Energy to attract the world’s largest wood pellet bio-fuel production facility to Cottondale, Fla.

Pellet production at the 560,000- metric-ton-per-year facility began in 2008. Wood pellets are loaded directly into rail cars for transport to the port via seven-day-per-week dedicated train service. The Bay Line — which operates more than 100 miles of track between Panama City and Abbeville, Ala. — leased 75 covered hoppers and additional locomotives for the service.

In addition, GWI’s St. Lawrence & Atlantic Railroad Co. (SL&A) attracted an ethanol transload facility to Auburn, Maine — the only such plant in northern New England, which now handles bio-diesel and bunker oil #6, as well as ethanol.

SL&A worked with its interchange partner CN, Safe Handling Inc., the Maine Department of Transportation and Maine Office of Energy Independence to develop the project.

The short line — which operates more than 260 miles of track between Portland, Maine, and Ste. Rosalie, Quebec — also developed an “Alternative Fuels Distribution” marketing concept to shift traffic from truck to rail. As a result, SL&A last year moved 160 carloads of ethanol and 232 carloads of heavy #6 and bio-diesel, and generated about $434,000 in revenue. The short line plans to move about 750 carloads of ethanol and 500-plus carloads of heavy #6 and bio-diesel in 2009.

The Bay Line’s and SL&A’s efforts paid off in April, when the short lines won two of three marketing awards presented by the American Short Line and Regional Railroad Association.

Multiple Class I connections and customized service are key to attracting new customers, says Gates. So is having the right people in place to drive industrial development projects.

One of GWI’s corporate goals is to develop its own talent to ensure the company has the leaders necessary to support future growth, says Hellmann.

To do so, GWI relies on a management/leadership training program. The company has a deeper pool to draw from because the number of U.S. employees has more than doubled from 951 to 1,989 since 2001.

At the regional level, executives and managers identify employees who have leadership potential, says Gates. Those workers then are trained to understand finances, mechanics and other key operational topics at a corporate level.

Independence at local level

Providing each region a significant level of autonomy to foster local decision-making defines how GWI operates, says Hellmann.

“We’re close to our customers and able to react quickly to changing business conditions,” he says. “Ultimately, we’re preserving the spirit of short-line entrepreneurship and independence in each region.”

The autonomy enables each regional manager to focus on service and understand each customer’s business needs, says Collins.

“A con is that we can lose sight of Genesee & Wyoming as the larger entity, and we don’t always know what some other individual property is doing,” he says, adding that a cross-functional team tries to communicate best practices to all properties.

GWI also actively seeks an open internal debate when it comes to decision-making because the “best ideas withstand scrutiny and can come from anywhere,” such as regional managers, the field, the company’s board or shareholders, says Hellmann.

One decision that likely won’t stir much debate is the hiatus from acquisitions. However, GWI continues to study both North American and international opportunities, says Hellmann.

“We always prefer acquisitions that are contiguous or close to our existing operations, where we already have management and business experience, so that means the Unites States, Canada, Australia and the Netherlands,” he says, adding that the Rotterdam Rail Feeding transaction last year broke the mold, but the acquisition played into GWI’s port rail service experience.

Acquiring properties in close proximity to current holdings also “typically unlocks the maximum amount of cost savings and revenue opportunities,” he says.

While GWI doesn’t anticipate an acquisition anytime soon, the company does expect to make strides with its operational, financial and safety goals.

Growth — of the financial and property-holding kinds — obviously is important to the company’s success, says Hellmann. But if GWI isn’t careful about how it pursues growth, success likely won’t follow, he says.

“We are certainly built to grow by acquisition and have deep expertise, but we philosophically don’t have to grow,” says Hellmann. “There is no imperative about growth for growth’s sake because that is when acquisition-driven companies typically make mistakes.”


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