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In This Issue
Railroader of the Year
Planes to the trains: Coming to America?
ECP: How soon?
Passenger Car Review and Outlook
We're looking for a few good railroaders

Commentary
From the Editor: A man for all seasons
Commentary of the Month: Will the UTU prevail in 2001?
A Point of View/Guest Columnist: Is profitable revenue growth possible?


Mike Haverty, Railroader of the Year

By William C. Vantuono, Editor

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Alex Bourdo/Ron Berg Photography
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Historians who years from now will be writing about the railroad industry as its exists today will probably use words like "consolidation" and "cost cutting" to set the general tone for what they say. But if they will be looking for examples of leaders who spent the bulk of their careers building, whether it was infrastructure or new business, the name Mike Haverty will most likely surface.

Mike Haverty, president and CEO of Kansas City Southern Railway and Chairman of Kansas City Southern Industries, is indeed a builder, an independent thinker who has often cast aside the doubts of those who say "it can't be done." He has spearheaded bold initiatives, often under intense criticism. He has almost always proven his critics wrong, particularly in taking the bold step that proved to be the keystone of the NAFTA Railway. That's why he's Railway Age's Railroader of the Year.

Mike Haverty is a fourth-generation railroader from a blue-collar family. His great-grandfather, an Irish immigrant who came over from Galway in 1860, laid track in Atchison, Kans., on the Central Branch of the Union Pacific (which eventually was folded into the Missouri Pacific). He and many other Irish immigrants were recruited by the UP to help build America's mushrooming railroad system. Haverty's grandfather and father were both MoPac conductors.

Haverty, a native of Atchison, embarked on his railroad career as a MoPac brakeman on June 11, 1963, his 19th birthday. (He still has the certificate of examination from that day. The superintendent who signed it, A. W. Rees, is the father of Ab Rees, who worked alongside Haverty on the Santa Fe and is now KCSR's senior vice president-international operations.) Haverty completed MoPac's management training program in 1967, and moved to the Santa Fe in 1970. He held several operating positions before being named president and chief operating officer in 1989. He was appointed president and CEO of KCSR in 1995, and added the title of chairman of KCSI this month.

There have been many milestones in Haverty's 38-year railroad career. If one of them stands out, "It's the fact that I, coming from a railroad family, was the first to graduate from college," he says. "To start out as a brakeman and become president of a railroad, the Santa Fe, is in my mind one of my most significant accomplishments."

One thing that stands out about Haverty is his candor. He's outspoken, and at the same time modest, quick to give credit to the people who have worked closely with him.

"Some people think that I'm a maverick, an independent," he says. "When I became president of the Santa Fe, a reporter asked me, 'If you had to do it all over again, what would you do differently?' I responded, 'I'd never work for a big company.' The reporter was astounded, and asked me what I meant. I said, 'Well, running a big company is kind of like steering an ocean liner. You turn and turn the wheel, and it changes direction very slowly. It's bureaucratic, with many layers.'"

Haverty describes himself as "kind of an entrepreneurial guy who just happened to get caught up in the railroad business." "Because I don't always do things the 'established' way within the industry, and I don't always conform to the way people think I should do things, I get branded as a maverick or even a radical," he says. "People don't always understand what I'm doing, but it's really pretty simple: I'm not concerned about the establishment. If I think something makes sense, I pursue it. With the J. B. Hunt deal, people were laughing at us, saying, 'What is the Santa Fe doing?'" Haverty laughed as well-all the way to the bank.

Haverty got about the same response when the KCSI/ Transportación Maritima Mexicana winning bid of $1.4 billion for Mexico's Northeast Railway was announced in 1996. People said KCSI had paid way too much, and scoffed at Haverty's "north-south focus in an east-west world," as he puts it. But once again, the skeptics, the naysayers, have been proven wrong.

The story behind the formation of Transportación Ferroviaria Mexicana is equally as intriguing as the J. B. Hunt deal. "I'm a believer that timing is everything," says Haverty. "At the Santa Fe, I had begun to believe that Mexico was a great opportunity. I had attended a conference there where I met several Mexican businessmen, and was impressed with the potential. I began to think what the Santa Fe could do, and of course we were kind of restricted because the only real access we had was at El Paso. After I left the Santa Fe, I still believed there was a great opportunity in Mexico, so I put together a concept I called 'Central Intermodal of America.' It would have taken the intermodal operations of Grand Trunk Western, Wisconsin Central, Illinois Central, Gateway Western, and KCSR, and linked them up with Chihuahua in Mexico via the South Orient Railway. It had a north-south focus, with each company putting its short-haul intermodal business together with the others to create a long-distance franchise, with each as an owner."

Central Intermodal of America never got off the ground because, as Haverty puts it, "there were too many parochial interests on the part of each carrier. It was tough to get them to talk about joint ownership." But he remained firm in his belief in a north-south railroad, and his idea eventually formed the basis of what's known today as the NAFTA Railway. Again, timing was everything.

"I had just left the Santa Fe, was on my own, and was on the Wisconsin Central board," says Haverty. "We had just invested in New Zealand (Tranz Rail), so I knew there were some international opportunities. I also liked what WCTC had done to put different pieces together to build a franchise." Haverty had been talking to then-KCSI Chairman Landon Rowland about his intermodal concept for a couple of years when Rowland recruited him as KCSR president and CEO-just when NAFTA and Mexican railway privatization came about.

Haverty tells what happened next, and it's a study in strategy: "Pepe Serrano, the chairman of TMM, was interested in finding a U.S. partner to try to acquire one of the Mexican railway franchises. KCSR had been looking at Mexico on its own. Literally the second day I was on the job here, the TMM people and their consultants from the Kingsley Group paid us a visit. Pepe had visited virtually every big railroad in the U.S. and Canada, and had no takers. I said, 'Maybe, but I've only been here two days-give us a little time.'"

It didn't take Haverty long to decide that pursuing a Mexican franchise jibed with KCSR's desire to expand in the face of rapid consolidation in the railroad industry. "There we were in 1995 looking at two merger approvals (UP + Chicago & North Western and Burlington Northern + Santa Fe) and one merger announcement (UP + Southern Pacific)," says Haverty. "It looked like the opportunities were running out, so we met again with the TMM and Kingsley people. The first thing we did was buy 49% of the Texas-Mexican from TMM-just shy of a controlling interest, so we wouldn't have to go to the Surface Transportation Board for approval. We also decided that we would seek conditions in the UP-SP merger-divestiture of track or trackage rights, for competitive reasons. We formed a partnership with TMM to bid on Mexico's Northeast Railway, the first piece privatized, with the idea of using the Tex-Mex as a link between KCSR and Mexico. We pursued divestiture; Tex-Mex pursued trackage rights-either one would give us the link over the UP we needed to complete the system."

It was a shrewd strategy that paid off. "At the time we made the Tex-Mex investment, we were a laughing stock," says Haverty. "In the face of two huge mergers, we were reacting by buying 49% of a 150-mile railroad we didn't connect with. Many people said we'd get neither divestiture or trackage rights. But we had a plan to capitalize on the north-south traffic we knew was there."

Trackage rights over the UP were granted by the STB in 1996, and KCSR's acquisition of Gateway Western extended its reach to Chicago and a connection with the Canadian roads. That year, KCSI and TMM took on UP, the proverbial 800-pound gorilla, and bid on the Northeast Railway. "People weren't laughing quite as hard, but they still were saying we were foolish to bid against the mighty UP, which considered the border connection at Laredo and the line south to Mexico City as kind of its birthright. But we were a legitimate bidder, because we got to the border. Pepe Serrano was really the guy who pushed the whole thing through, and we had the support of Landon Rowland. We stunned the world with our blowout bid, and were criticized roundly for what we paid. But we had done a tremendous amount of due diligence beforehand, and knew it was a potential gold mine."

People stopped laughing this year when they started seeing the return KCSI was reaping from its TFM operation, which the company described in its third-quarter financial statement as "an incredible growth story," with revenues and operating profit increasing 24% and 45%, respectively, over 1999. Equity earnings from TFM for the first nine months of 2000 increased 300% over the prior-year period. KCSI management believes that what TFM has achieved thus far is "merely scratching the surface."

History has a way of repeating itself. Arthur Stillwell founded the Kansas City Southern in 1887, "at a time when other railroads were building to the West Coast," says Haverty, a student of railroad history. "Stillwell decided to build a railroad from Kansas City to the Gulf Coast to handle agricultural products. He was going against the grain, and everybody said he was crazy. In the early 1900s, he wanted to build a railroad into Mexico, and he formed a company called the Kansas City, Mexico & Orient Railroad. It would have run from Kansas City to the port of Topolobampo, and would have at the time been the shortest route to water and the Orient shipping trade."

Stillwell never saw his dream materialize, but nearly 100 years later, says Haverty, "we are capitalizing on his north-south idea, and are in Mexico."

Haverty sees a similar growth scenario for Panama, where KCSR and MiJack Products have partnered to operate what they've named the Panama Canal Railway Co. "It was in horrible shape when I first saw it a few years ago," says Haverty. But a few months from now, the Panama Canal Railway, which will serve one of the largest free-trade zones in the world, will be open for business, hauling freight and passengers (including tourists) and acting as a backup to the canal operations over a right-of-way that's being completely rebuilt with 136-pound welded rail and concrete ties. "Of all the things I've done in my career, this probably is the most exciting," says Haverty. "I think it has as much potential as anything I've ever been involved in." The concept is the same as TFM: putting capital in up front that will last 50 years, reducing the operating dollars needed.

Many are quick to point out what's wrong with the railroads. What's right with them? "The steel wheel on the steel rail is still the most efficient means of transportation there is in this country-if it's properly managed," says Haverty. "The railroad industry has faced all kinds of obstacles for 150 years-robber barons, bankruptcies, inefficient work rules-and has survived in spite of all that because it's always been a very efficient type of transportation. In the scheme of what's required for national transportation to support our economy, railroads are clearly needed. We're an integral part of the national transportation network. But we've kind of lost our focus in the last five years with all the mergers, and have developed kind of a herd mentality. I'm not anti-merger-I was a trainmaster in Chicago in the 1960s when we interchanged with 26 different carriers, and I'm not saying we should go back to that. But are one or two railroads enough? I don't think so, because competition is what made this country great."



Copyright © 2000. Simmons-Boardman Publishing Corp.