Kansas City Southern: The little railroad that could

Written by jrood

In 1995 when railroad veteran Michael Haverty joined Kansas City Southern Railway as chief executive, the carrier seemed to be chugging into a long, dark tunnel with no exit, The Kansas City Star reports. The future for the Kansas City railroad appeared anything but bright. Mergers in the rail industry were creating mega-carriers in the nation's western half. The giants, Burlington Northern Santa Fe and Union Pacific, were threatening to overwhelm Kansas City Southern, the smallest of the major carriers, with its network running from the heartland to the Gulf Coast.

Owned
by a holding company with other interests at that time, Kansas City Southern
Railway was up for sale, but deals kept falling through. While the owner tried
to unload the carrier, little capital investment was made, causing the
equipment and rail line to deteriorate.

Today,
it’s a different story. With Haverty as its lead conductor, Kansas City
Southern became the little railroad that could. Though it’s the smallest of the
five big U.S. railway companies, Kansas City Southern has doubled its size from
15 years ago and managed to remain independent, operating as the NAFTA
railroad.

"Clearly,
Haverty’s been one of the real innovators of the modern rail industry," said
Jason Seidl, transportation analyst with Dahlman Rose & Co.

Beginning
in August, Haverty’s successes will include executing a succession plan. He
will remain executive chairman and still be active in the company but will turn
over the CEO title and its day-to-day duties to David Starling, currently the
president and chief operating officer.

Analysts
say Starling will inherit a railroad better positioned than when Haverty
arrived on the scene. Coming from what was then the Santa Fe Railway, Haverty
was known as a dyed-in-the-wool railroader and one of the pioneers of
intermodal freight, moving goods through a combination of rail and truck.

But
as head of Kansas City Southern, Haverty displayed other traits as the company
found unorthodox ways to grow, according to transportation analysts who have
followed the railroad.

"For
someone who considers himself primarily a blue-collar operating guy, Mike
Haverty has also been particularly effective as a visionary and strategic
thinker," said Rick Paterson of UBS. "He’s turned a rusty little railroad in
the Midwest into an international network more than double the size through
unwavering belief and dogged determination."

Perhaps
that determination first surfaced in 1996 when Kansas City Southern and Mexican
partner Grupo TMM won the auction to buy and operate a key rail line owned by
the Mexican government. Industry observers at the time said Kansas City
Southern overpaid with the $1.4 billion purchase price, and the company took on
a mountain of debt.

In
addition to the huge investment in the Mexican rail line, Kansas City Southern
acquired other pieces or partnered with others in the U.S., expanding its
network to East St. Louis, Ill., and gaining access to the Southeast with
Norfolk Southern. The company also became a partner in the Panama Canal Railway
Co., which was headed by Starling.

In
addition, Kansas City Southern Industries spun off its financial services units
and simply became Kansas City Southern, focused on the rail business. Haverty
became CEO of the railroad company in 2000 and chairman in 2001.

While
upgrading its capital equipment in the U.S. and Mexico, Kansas City Southern
also fought legal battles through the last decade with its Mexican partner and
tax issues with the Mexican government. In 2005, the company finally got full
control of the Mexican railroad, renaming it Kansas City Southern de Mexico.

Kansas
City Southern finally was able to begin operating its 6,000-mile network the
way it wanted, but reaching that point was fraught with potential disasters,
analysts noted.

"Even
internally within the company, many didn’t think it was possible to get through
the legal problems in Mexico," Paterson said. "But Haverty was relentless. He
never gave up."

In
an interview, Haverty, 66, was hesitant to sum up his achievements over the
past 15 years, emphasizing that he planned to keep working at Kansas City
Southern’s headquarters as executive chairman. But he believes the company is
on the right track.

"Back
in 1995, it was a challenging time," he said. "So it’s extremely satisfying now
to see the survival and expansion of the company with the team we put together.
There was a long period when everyone thought we were done for."

Dahlman
Rose’s Seidl agreed, saying speculation about whether Kansas City Southern
could survive has been around as long as he’s followed the industry.

"Haverty
oversaw some tough times, and his legacy will show that he also was a great
administrator," he said.

Haverty
said he thought the time was right to pass the CEO mantle to Starling, 60, who
became Kansas City Southern’s No. 2 executive two years ago after his stint at
the Panama Canal Railway.

"Dave
came here with the clear expectation that he had an opportunity to succeed me
with in a couple of years," he said. "One of his best assets is he is a great
team leader."

After
the first year of learning the company’s operations, Starling has gradually
taken on more responsibilities, Haverty said. Starling led cost-cutting efforts
at Kansas City Southern after the economy collapsed in late 2008. With business
volumes returning, the cost reductions have remained in place, leading to
strong results so far this year.

"We
took a lot of costs out, but we had to keep our focus on customers and not let
it affect our service levels," Starling said. "It was difficult, but we have an
excellent group of people to work with at this company."

Starling’s
years of international business experience were seen as an asset, and he said
that even before he formally joined Kansas City Southern, Haverty assigned him
the job of developing the Mexico business.

Kansas
City Southern hopes that more goods from Asia will come through Mexico because
of the growing congestion at ports in Southern California. Starling was
involved early in trying to develop Lazaro Cardenas, a port in western Mexico
that Kansas City Southern de Mexico serves.

"When
Mike took over, this was a regional railroad," Starling said. "The Mexico piece
was the crowning touch, and he fought all those battles. Now we want to execute
the plan he’s put in place and help develop that cross-border business."

The
Mexican connection has analysts optimistic about Kansas City Southern’s
prospects.

"The
cross-border traffic generates more revenue opportunities with the imports and
exports," Paterson of UBS said. "They probably will grow faster than the bigger
guys in the coming years."

Analysts
also are taking a wait-and-see attitude about how Starling will fare as CEO.

"He
did a really great job with the Panama Canal Railway," said Seidl of Dahlman
Rose. "But it would be unfair to judge him at this point."

Analysts
may have a better idea about Starling’s effectiveness – or at least his crisis
management – in the coming weeks. Hurricane Alex devastated Mexico earlier this
month, and damage to a key rail bridge on the border has disrupted KCS de
Mexico’s service. Starling has been to Mexico to survey the damage, and he said
it could be a few weeks before the bridge is repaired on both sides of the
border.

"There
wasn’t a lot of media coverage here, but Mexico was really hit hard by Alex,"
Starling said. "I’ve never seen problems across a network so widespread. We had
as many as 45 to 50 washouts across the country."

Haverty
and Starling agreed that they had not seen the kind of physical damage done by
Hurricane Alex in Mexico in all their years in the industry. The company has
yet to put any cost estimates or revenue impact on the storm, but officials
said insurance would cover the damage.

Beyond
that short-term challenge, Kansas City Southern’s top executives believe the
economy continues to keep improving, at least in the rail sector. And despite
the occasional conjecture that Kansas City Southern ultimately will be acquired
to create a transcontinental system, Haverty said the Kansas City-based company
would keep its focus.

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