This Week at Amtrak

CP Rail Loco in Thunder Bay ON (Photo credit: Wikipedia)

From the Untied Rail Passenger Alliance 
This Week at Amtrak; Vol. 9 No. 5

A very heartfelt thanks to all who contributed to this issue.

From the Editors…


So you think you know a thing or two about the railroad business. Oh really?


The “invisible hand” versus “the art of the possible”


It is no secret that railroads, as investment opportunities, have regained a stature not seen since what has been labeled as “the gilded age.” With such attention, however, comes great responsibility. Since about the most recent turn of the century, there remain seven major railroads in North America: Union Pacific, BNSF Railway, Norfolk Southern, CSX, Kansas City Southern, Canadian National and Canadian Pacific. It is also no secret that the Canadian Pacific is perceived as the weakest of the seven. Although one of the smaller roads, it still boasts a market cap of $13.2 billion and an enterprise value of $17.7 billion.


For those of us with our boots on the ground, there have long been signs of increasing trouble at CP. Now the trouble is in the top office. In late October, 2011, Pershing Square Capital Management, an activist hedge fund based in New York City, announced it had acquired a 12.2 percent stake in CP. Between then and now, the stakes have only risen to a current 14.2 percent, and the relationship between Pershing Square and the CP board has become bloody.


Contrary to your statement in the letter that we “acknowledge” that we have no plan to improve Canadian Pacific’s operating performance, we do have a plan, and we have made that plan clear both in our initial meeting and in subsequent communications with you. Our plan is to transform Canadian Pacific from the worst performing railroad in North America into one of the best by effectuating a cultural and operational transformation of Canadian Pacific which begins with a new leader. – Excerpt from January 3, 2012 letter from Pershing Square’s William Ackman to CP chairman John Cleghorn


Pershing Square is now promoting to shareholders a slate of seven alternative directors as part of its CP turnaround strategy. Two of these are significant: Stephen Tobias and E. Hunter Harrison.


For most, these names may not ring a bell; but for railroaders, these men are superstars. Both of them are past recipients of the Railway Age Railroader of the Year award: Tobias, as Norfolk Southern Chief Operating Officer and later Vice Chairman; Harrison, as President and Chief Executive Officer of CP-rival Canadian National. Tobias was a lifelong employee of NS and its predecessors, starting in 1969 as a junior engineer. He worked his way through the ranks over the next four decades until being named Vice Chairman and Chief Operating Officer in 1998. He retired from NS in 2009. Harrison’s work history is not as straightforward. He started in1964 with the St. Louis-San Francisco Railway, which later became part of the Burlington Northern. Later, he would be President of the Illinois Central which was acquired by Canadian National in 1998. He retired at the end of 2009 as CEO. It is anticipated that Harrison would reprise that role at CP if Pershing Square’s seven alternative directors are elected by the stockholders. One slight problem: That job is currently held by Fred Green.


The past six months have seen quite the flurry of activity at CP’s headquarters in Calgary, Alberta. Press releases, video streams of meetings and letters to stockholders have literally flowed unabated in preparation for the annual stockholders meeting set for May 17. A letter to the shareholders dated March 7, 2012 sets the company’s tone:


CP’s management team is aggressively and successfully executing on the Company’s Multi-Year Plan and has the full support of the Board of Directors. Your Board and management team firmly believe the CP’s string, established relationships with customers will continue to create significant value for shareholders. Strong and profitable customer relationships are essential to maintaining and expanding the volume growth that underpins CP’s Multi-Year Plan to increase earnings per share, drive down the railroad’s operating ratio and deliver greater shareholder value. The Board believes that Pershing Square’s demand that the Company replace its CEO, Fred Green, with Hunter Harrison would put at severe risk the significant forward momentum the Company is making on the Multi-Year plan.


Interestingly, CP developed and released its “Multi-Year Plan” in January; two months after Pershing Square had announced its investment.


It should be noted that none of what has transpired was at the behest of Washington or Ottawa. What we see at work has been described as “the invisible hand,” that is, when enough people believe the bottom line could be improved, something will be done.


Meanwhile, back in Washington…


Something that has been mentioned repeatedly by transportation advocates is the undying loyalty of the current presidential administration to “rail.” As evidence, they point to the administration’s mention of “High-Speed Rail” in a State of the Union speech. As we have covered here in the pages of This Week, the latest iteration of domestic “Fast Train Fever” is going the way of the previous cycles, with the last gasp — California’s HSR dreams — on life support, and the pulse slowly ebbing into silence. Rail was not mentioned in the latest State of the Union address of this past January. Perhaps the administration has given up hope on rail. If so that may explain its latest nomination:


President Obama has nominated former U.S. Rep. Yvonne Brathwaite Burke, a trailblazing fixture in Los Angeles area politics, to the AMTRAK board of directors, the White House announced Thursday.

As a young attorney in 1966, Burke made history when she became the first African American woman elected to the state Assembly. She was elected to Congress in 1972 and served until 1978. In 1979 she was appointed to a vacancy on the Board of Supervisors but lost her election bid the following year in a racially charged contest. In 1992, she won election to the board from a different district. – Los Angeles Times, March 29, 2012 


Before proceeding any further, let us be clear that we are not, in any way, minimizing Representative Burke’s long and distinguished record of accomplishments. She most definitely blazed trails, and when the doors would not open, she broke through them. That said, what does she know about railroads and their governance?


Currently, the seven members of the Amtrak board are: Thomas C. Carper (Chairman of the Board), Nancy A. Naples (Vice Chairman of the Board), Joseph H. Boardman (Amtrak President and CEO), Anthony R. Coscia, Bert DiClemente, Jeffrey R. Moreland, and Ray LaHood (U.S. Secretary of Transportation). Of these, only Mr. Moreland has a working history with a railroad. Starting in 1978, Mr. Moreland joined the Santa Fe Railway as Assistant General Attorney, in 1994 became Vice President for Law and General Counsel for Santa Fe’s parent company, and later retired with the same title from BNSF Railway.


It has been intimated that Amtrak has lacked a true operating foundation since 1993, when the legendary Graham Claytor retired. What did he bring to the table?


Graham Claytor had, first of all, had the stature on the Hill that we needed, but more importantly, he came out of a business environment. Even though he was a rail buff, which he was, he was a businessman, first and foremost, and that’s what we need at Amtrak. – Kathleen Gordon, Amtrak Senior Director, e-Commerce, retired, Amtrak: The First 40 Years 1971-2011, RK Publishing


Mr. Claytor never singled out one aspect of the corporation to blame for all of its faults. He knew the Northeast Corridor was a drain on finances, but accepted that fact as federal welfare to state-run operations. Under Claytor, Amtrak was a fairly well run “traditional” railroad focused on a national system. After his demise, however, the company morphed into a government agency with ferocious survival instincts. It became very NEC-centric, and continued that path by expanding its corridor service with state partners, particularly California.


Politics, “the art of the possible,” is not concerned with the bottom line, but rather short-term survivability. Politicians count on the short-term memories of their constituents to traverse the delicate tightrope walk that is their elected term in office. Railroading, on the other hand, is anything but a short term-enterprise. All railroads need long-term planning to succeed, and a core philosophy to be the thread that weaves those plans together. Since politics are by their very nature mercurial, anything beholden unto politics will be inefficient and unreliable. That pretty much explains Amtrak after 40 years.


There have been many attempts to recruit people with railroading (or at the very least, transportation) experience to the Amtrak board. Mr. Claytor was appointed Amtrak president in 1982, coming out of retirement. This was one year after Congress had altered Amtrak’s original board structure and governance, in which the four railroad common stockholders were represented on the Amtrak board and the common stock had voting rights. (The eviction of the railroad shareholders from the board and their disenfranchisement was of dubious constitutionality, but was never challenged.)


The pendulum was to swing in the other direction in 1997, when the Amtrak Reform and Accountability Act ended the monopoly voting rights of the preferred stock, held only by the Department of Transportation, restoring the original voting status of the railroads’ (now including the corporate successor of Penn Central) common stock. Nevertheless, Amtrak has continued to ignore the common shareholders, in violation of District of Columbia corporate legal requirements.


The 1997 legislation also mandated a nonpartisan expert board of directors, using language parallel to the National Transportation Safety Board statute . All directors were to possess “technical qualification, professional standing, and demonstrated expertise in the fields of transportation or corporate or financial management,” and could not be “representatives of rail labor or rail management.” Sadly, these requirements were flouted by the initial board appointments by the Clinton Administration. The following regime would attempt to follow the rule of law only to feel the blowback from the usual sources:


Bush appointees to Amtrak board foreshadow breakup and privatization

President George Bush’s proposed nomination of three new members to Amtrak’s board of directors foreshadows the administration’s support for breaking up the national passenger rail system and selling off its most profitable parts to private industry.

Among the nominees is Louis S. Thompson, who retired earlier this year from the World Bank. Thompson began his career at the Transportation Department and played a role in creating Amtrak. At the World Bank, Thompson spearheaded successful efforts to privatize railroads in Argentina, Chile, Mexico and Romania; he also played a role in similar efforts to privatize railroads in China, India and Russia.

The second nominee is Robert Crandall, who retired from the chairmanship of American Airlines parent company AMR in 1998. Since then, Crandall has served on several boards, including Halliburton, the company formerly headed by Vice President Dick Cheney. The last nominee is Floyd Hall, a long-time Republican fundraiser and former executive of companies such as Singer Sewing Machine Co., the Grand Union Co. grocery chain and KMart. – Brotherhood of Locomotive Engineers and Trainmen quoting the World Socialist Web Site, Published by the International Committee of the Fourth International (ICFI), 30 September 2003


Subsequently, all the actual appointees were virtually devoid of any of the listed qualifications, and consisted mainly of elected officials, lobbyists, and others of similar background.


The pendulum was to swing yet again in 2008, with the enactment of the Passenger Rail Investment and Improvement Act (PRIIA). The 1997 board statute was completely repealed, and replaced with a new, larger (nine- versus seven-member) board structure, with language openly inviting the appointment of politicians and the politically connected. The following are listed in PRIIA as alternative and independent qualifications for board membership: “general business and financial experience, experience or qualifications in transportation, freight and passenger rail transportation, travel, hospitality, cruise line, or passenger air transportation businesses, or representatives of employees or users of passenger rail transportation or a State government.” PRIIA also made the Amtrak board avowedly partisan, with a formula usually applied to multi-member federal agencies: “Not more than 5 individuals appointed…may be members of the same political party.” (“Balanced representation” of “major geographic regions served by Amtrak” is a recommended, but not required, consideration.) The ensuing appointments have been predictable.


One by one, each potential expert appointee has not passed political muster for one reason or another. Ultimately the jobs go to those who will not make anyone uncomfortable within the company, including, above all, the NEC orientation of Amtrak. Thus, it again appears that the status quo is not endangered. How will this all end? The words of Mr. Claytor from two decades ago now seem prophetic:


“Not everybody knows, and it does not always come through in the press, that the basic statute provides that Amtrak is not to be a government agency and is to be operated as a for-profit, privately owned railroad corporation. If it weren’t for that, a lot of us wouldn‘t be here, because I don’t‘ think that it is possible to run a railroad as a government agency and not have it be a disaster.” – Interview with Graham Claytor, Trains magazine, June 1991