Warren Buffett sees strong rail system as key to U.S. growth

Written by jrood

In Matt Rose's 10 years at the helm of BNSF, he'd heard plenty of investors talk about quarterly performance. A few would even talk about the railroad's annual performance, Dan Reed writes in USA TODAY. Then on Feb. 12, he answered a call from Warren Buffett, the legendary investor who looks for long-term return and whose Berkshire Hathaway holding company had just closed on its $26-billion purchase of the 77 percent of BNSF shares it didn't already own.

"Warren
called me and said, ‘I’m looking forward to our first century together,’ "
Rose says. "I’d never heard an investor use the word ‘century’
before."

When
the deal – the largest purchase in Berkshire’s history – was announced in
November, there was plenty of second-guessing. Was age finally catching up with
the "Oracle of Omaha?" Railroads, after all, generally are viewed as
19th-century technology, and they’ve suffered big talking about an investment
that pays off throughout the 21st century?

Buffett
chuckles at the suggestion that buying the nation’s second-biggest railroad is
a sign of senility. He argues that railroads represent the future. They’re
best-positioned to haul the raw material and finished goods for a nation and
economy that he insists are bound to grow. Unlike trucks, trains don’t have to
compete on congested highways. Nor do railroads depend on strapped governments
to maintain infrastructure.

"They
don’t need the government to build them new highways and airports," he
says in an interview with USA TODAY. "They’ve already invested heavily in
their infrastructure and technology, and they plan to invest more to keep up
with the growing demand. They’re the only mode of freight transportation that
can handle growth. What’s not to like about that?"

Buffett
also laughs that his big bet on the future – taking what for him was the
radical step of splitting Berkshire class B shares
50-to-1 to make the BNSF acquisition acceptable to the railroad’s
shareholders – is a second sign he’s slipping.

"We
didn’t split the A stock!" Buffett says in a half-joking defense of his
competency. Berkshire’s iconic class A shares
currently are priced at a jaw-dropping $122,090 each.

Nor
would he have split Berkshire’s class B shares, priced at more than $3,000 a
share before the BNSF deal, if he didn’t think his wager was worth it. When the
class B shares were created in 1996 as a way for smaller investors to buy a
piece of Berkshire, Buffett says the plan always was to execute a stock split
if it became necessary to close an important purchase. But he also intended to
be pretty picky about what would be worth that step. A railroad is that
purchase.

Buffett
grew up in the 1930s and 1940s when folks in Omaha, the hometown he shares with
Union Pacific, thought eating Sunday lunch at the Union Pacific station
downtown was a sign of social sophistication. And he confesses to a life-long
love of railroads. He has an elaborate model railroad layout on the third floor
of his home for his children and grandchildren, though "it gets little
action," he says, because they don’t share his fascination and he has
little time for it.

But
buying BNSF is no nostalgia play. Buffett foresees a dynamic and profitable
future not just for BNSF but also for the nation’s rail industry; so much so
that he chastises himself for coming to that view, he says, two years late.

"There
are just four big railroads in the U.S.," Buffett says. "I know the
people who run three of the four, and they’re all good people. They will all
have similar destinies. They will all do very well, especially Union Pacific
and BNSF."

Counting
the $8 billion in BNSF shares Berkshire already owned, the $26 billion in cash
it paid for the remaining BNSF shares, and the assumption of $10 billion of
debt, Buffett has invested $44 billion in the railroad.

Rail
also is a capital-intensive industry. Buffett says, "If anything, we’ll be
investing more" in BNSF in the near term "as we build it for the
future."

BNSF’s
Rose says the industry, and BNSF in particular, is well-positioned to help the nation
prosper. It’s already made huge investments in new technology, infrastructure
and markets, he says.

After
the industry was deregulated in 1980, Rose says, "The railroads spent the
next two decades going on a productivity binge, wringing out excess costs,
getting rid of inefficient lines, finding wage rates that we all could live
within, both for employees and our companies. We think we are a very productive
institution at this time."

U.S.
railroads were 144 percent more efficient in 2008 than in 1980, according to
the
Association of American Railroads, the industry’s trade group.
In 2008, they carried, on average, a ton of freight 457 miles on one gallon of
diesel fuel, up five percent from 436 miles just a year earlier. And the
association claims that if just 10 percent of the freight that now moves by
truck were moved to the rails, the USA would burn one billion fewer gallons of
fuel a year.

And
that’s what they want to do: move more freight from the highways to the
railways. The fuel savings would be an economic benefit to the rails and
shippers, and a general benefit to society and the environment, Rose says.

"While
there’s been a tremendous couple of decades of productivity with the trucks,
they’ve hit that peak, and now they’re headed down," he says.

And
the railroads are ready. The AAR’s member railroads have poured more than $440
billion, better than 40 percent of their combined revenues, between
deregulation in 1980 and 2008 into new locomotives and technologies to improve
hauling capabilities and lower costs. They’ve laid double, triple, quadruple
tracks in heavily traveled rail corridors to relieve costly shipping
bottlenecks. They’ve opened new and enlarged existing rail yards and intermodal
shipping sites, where ocean shipping containers and de-coupled highway truck
trailers can be stacked on flat cars for long-haul shipping, to make lines more
accessible.

Meanwhile,
inflation-adjusted average shipping rates, excluding fuel and other surcharges,
fell 49 percent over that same 28-year period, according to AAR data. And the
same economics of scale that help make rails the lowest-cost option for
transporting heavy loads long distances also happen to make them relatively
"green" in an era when that increasingly matters. Rose and other rail
boosters claim long-haul trains are three to four times more fuel-efficient
than trucks in terms of freight tons miles per gallon of fuel.

"This
has an enormous beneficial effect on society," Buffett says.

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