Chairman & CEO Michael R. Haverty says that despite the global economic downturn, the Kansas City Southern Railway (KCS) remains positive about the long-term outlook for its cross-border franchise.
A couple of years ago, KCS announced a five-year plan projecting that revenues would grow 10% to 14% compounded annually with the primary driver being new business opportunities, said Haverty. Those projections were contingent on a strong global economy and no economic downturns during the planning horizon. Today, he said, the global economy is in recession and beginning in the fall, North America’s railroads began to see a significant decline in car loadings. This decline came after several years of very strong conditions in the rail industry, including volume growth, pricing strength and improvements in operating efficiencies.
This combination of positive factors resulted in a rapid rise in railroad profitability and return on capital. Despite the economic downturn, KCS remains very positive about the long-term outlook for its cross-border rail franchise, continued Haverty. “We still believe that our long-term growth will be driven by new business opportunities that are planned to occur on our network. We were beginning to see some of these new business opportunities materialize [at the end of] 2008, such as KCSM’s access to a new automotive plant in San Luis Potosi and consumer products plants in Ramos Arizpe and Apodaca, Mexico.
In the US, KCS signed a long-term contract with the largest oil refinery in the world and a new, three-year contract with a major steel producer, he added.
The rehabilitation of the line from Victoria to Rosenberg, TX, combined with a new intermodal shipper facility near Rosenberg, will allow KCS to offer an entirely new rail service where no viable intermodal/rail service exists today, said Haverty.
Rehabilitation of this line will shorten the KCS' cross border route by approximately 70 miles and eliminate the need for KCS to operate over nearly 160 miles of Union Pacific-controlled track, which is a heavily-congested rail corridor.
Phase I of the Rosenberg intermodal shipper facility to serve the Houston market will consist of two 5,000 feet intermodal tracks with associated parking and loading/unloading facilities. Later phases might include up to six intermodal tracks with total capacity of 45,000 track feet. The facility is planned to open in January 2009 and the entire line will be operational in the second quarter of 2009. A planned, distribution logistics park, adjacent to the intermodal shipper facility, will be developed by CenterPoint Properties and is expected to grow over time to several million square feet of warehouse and distribution space.
The new terminal at the Port of Lázaro Cárdenas helped attract three major ocean carriers who moved from the Port of Manzanillo to the Port of Lázaro Cárdenas.
KCSM completed two new intermodal tracks at Palm Island near the Port, and early 2009, the Lázaro Cárdenas Railroad Planning and Operating Committee will begin discussions regarding continued expansion of the Hutchison container terminal, a new container terminal and the new specialized automotive loading terminal that will be put out for bid in 2009.
Despite the economy, the KCSR and KCSM agriculture and minerals business unit had a strong year in 2008 and is expected to show positive year-over-year revenue growth in all segments.
We also recognize that some growth plans are being delayed because of current economic conditions, said Haverty. “We are seeing volumes decline in many of our business units that are closely correlated to global economic conditions, such as steel, automobiles and construction materials. As a result, we are making every effort to respond to these changing conditions by rethinking the way we run our business and thoroughly examining all aspects of our cost structure and capital spending programs.”
The big story for KCS in 2008, said Haverty, is the marked improvements resulting from a new operations management methodology. The new methodology concentrates on optimizing network throughput and cost controls. The key aspects of this methodology are disciplined delivery of the service committed to the customer; management of key performance indicators; and accountability by field management for the drivers that affect results and variable cost. “By using a common set of metrics and compliance monitoring, we will continue to realize sustainable improvements in overall execution,” said Haverty.
The new approach also provides a new level of attention to the cost of quality. “Even the best operating plan can be affected by a number of factors from human to mechanical to infrastructure. When a process encounters any level of failure, the team determines the root cause and an action plan to overcome the core issue, follows the plan and measures results.
A new international asset management group was formed to ensure the best possible economy of scale in the distribution of some of the railroads’ more valuable assets. Through effective enterprise asset modeling and disciplined execution of plan, we are seeing results in many key performance indicators,” added Haverty.
System velocity increased 10.4% from 25.49 mph to 28.7 mph. Foreign Car Cycle Time went from 7.32 days to 6.7 days. On-Time Origination rose 42.5% from 74.42% to 88%. On-Time Destination improved from 66.04% to 78%, a 59.1% gain. System Dwell, at 17.82 hours, dropped -11.0% to 15.7 hours. And, Right Train Right Day rates of 84.71% improved 21.9% to 90%.