RailTex, Inc. - Company Profile, Information, Business Description, History, Background Information on RailTex, Inc.

4040 Broadway, Suite 200
San Antonio, Texas 78209

Company Perspectives:

RailTex, Inc., is North America's leading short line railroad organization, providing freight service over approximately 3,800 miles of track in the United States, Canada, and Mexico. The Company's strategy is to grow though additions to its portfolio of short line railroad and other properties, seeking overall diversification with respect to geography, customers, commodities, and connecting railroads; and improvement in the operating performance of newly added and currently operated properties. RailTex believes its expertise in adding railroad properties to its portfolio and its focus on customer service and operating efficiency positions it to effectively implement its strategy.

History of RailTex, Inc.

RailTex, Inc. is the leading short line railroad operator in the United States. Short line railroads are created when large, main line railroads such as Union Pacific, Burlington Northern/Santa Fe, or Norfolk Southern decide to jettison a few hundred miles of unprofitable feeder rail to concentrate on core traffic. Most rail freight originates or terminates on feeder lines, so their upkeep is vital to the main line--yet the larger, Class I railroads no longer want to invest in running them. That is where companies like RailTex step in, purchasing the short line and then charge the main line a fee for every car that comes from that feeder line onto the main track.

According to Bill Loftus, president of the American Short Line Railroad Association, short line railroads account for 541 out of the nation's 550 railroads, 36 percent of the route miles, 11 percent of those employed on a railroad, and 9 percent of the rail industry's revenue. About 12 companies compete for short line acquisitions and, of those, RailTex has a clear lead.

In the late 1990s, Railtex managed approximately 3,800 miles of feeder track in the United States, Canada, and Mexico, and has interests in Kazakstan and Brazil. Its 897 profit-sharing employees are cross-trained and, unlike the average railroad, 96 percent of Railtex employees do not belong to unions. From 1990 to 1996, the company posted an average yearly growth of 33 percent and operating revenue rose from $21.4 million to $121.1 million.

RailTex, Inc. was founded in 1977 by entrepreneur Bruce Flohr, no stranger to the railroad business. After a tour with the Army Corps of Engineers in Alaska, he went to work with Southern Pacific as a train-crew brakeman in 1965. He rose to superintendent of Southern Pacific's San Antonio Division until, in 1975, he became deputy administrator of the Federal Railroad Administration. In 1977, he returned to San Antonio and started raising money from venture capitalists to start a new company--he had decided there was an untapped market for the leasing of railcars.

Tracking Tactics: RailTex 1977--88

RailTex got off to a slow-rolling start in San Antonio with Flohr's own $50,000 and another $50,000 from investors. The new enterprise almost derailed in the first five years because of poor economy and high inflation rates. RailTex was struggling, and by 1982, with revenues of $2 million, the company still was not profitable.

Always the entrepreneur, Flohr reorganized his small, hand-picked team of railroad veterans. He and his team began to seek consultancy contracts with small railroads. Many short lines were also having trouble being profitable, and Flohr figured if he and his team of experts could help the smaller companies back on their feet, he would diversify his revenue base.

The strategy was a stroke of luck and a turning point for the company. They discovered that the smaller lines were in desperate need of competent management and marketing. Never one to hold back on a hunch, Flohr decided to purchase the San Diego & Imperial Valley Railroad, owned by Kyle Railways, Inc. Although a Big Six accounting firm report to Kyle warned that the line would always operate at a loss and could only remain open by government subsidy, Flohr was unimpressed. "I didn't think the consultants understood the industry," he said, and made a successful bid on the property.

He then needed to acquire a locomotive. All of his leasing cars were just that--cars, not engines. A new locomotive cost about $1 million, but older models sold for a tenth of that. RailTex acquired a remanufactured 1950s-era diesel, laid off the union employees that had worked the line, and put in place salaried, non-union workers that were paid a fraction of the union wage. According to Inc. Magazine writer Jay Finegan, unionized trains run with a crew of three to four that were each paid $23 dollars an hour on average--and are limited in the kinds of jobs they are contracted to do. Non-union employees can fix the track as well as run the train, can make sales calls when they are in the station, and can do maintenance work. Union contracts forbid that kind of multi-tasking.

RailTex is able to operate its trains with two multi-functional employees, called transportation specialists or "transpecs," paid on a salary that averages $10--$15 an hour. RailTex transpecs receive generous medical benefits and also profit-sharing bonuses. The principle of hiring non-union, flexible workers became one of the cornerstones of RailTex's profitability.

To complete the transformation of the San Diego & Imperial Valley Railroad, Flohr decided to hire three marketing managers for the line--an unprecedented approach, when much larger railroads tended to employ only one marketing person. The team of three sought business from alongside but also five and ten miles from the track. Traffic increased from 1,600 cars per year to 6,000 in three years.

With this taste of success, the leasing-car-company-cum-railroad-operator tried its hand at a second line in 1986, the Austin & Northwestern Railroad. In three years, the traffic had increased from 2,700 cars per year to 9,000, and RailTex was operating 325 miles of rail.

Choosing the Right Route: RailTex 1989--93

Meanwhile, the leasing car business was back on track and Flohr was defining his approach to what had become a two-pronged company. RailTex had its roots in the leased car business and operated a fleet of 600, with customers demanding he buy more. Simultaneously, short lines that Flohr was confident RailTex could turn around and make profitable were popping up for sale across the country. The company had limited capital resources, and Flohr knew he could only choose one future. He sold the railcars to Chrysler Corp in 1989. "It was like throwing out the baby with the bathwater, because we took our original line of business and dumped the whole thing," he told Inc. Magazine in February 1993.

Since then, the company has never looked back. RailTex immediately launched a wholehearted acquisitions strategy and has not stopped. In 1989, RailTex revenues were at $16.6 million and leaped to $39.3 million in 1992. With over 100 locomotives and 2,400 miles of track, RailTex's combined assets were at $81 million and rising. Railway Age gave RailTex its prestigious "Short Line of the Year" award, unique that year because Railway Age honored not just one line, but the portfolio of 20 lines that comprised RailTex.

Pleased by accolades but undistracted, Flohr continued to refine his growth plan. Smart acquisitions policy and follow-up with smart management were the core of RailTex's success strategy. RailTex only sought out certain kinds of short lines to buy--those with a relatively small crew, comparatively small purchase price, and those with a strong likelihood of good business for years to come. Flohr liked to see clean, well-run factories next to his lines, not aging businesses in disrepair. Then, once a new line had been added to the fold, RailTex dispatched its "Go Team," a formalized group of RailTex employees that operates the line under its first several weeks of RailTex management. The Go Team hired, trained, and supervised until the RailTex culture and entrepreneurial spirit were ingrained in the new acquisition. Finally, the railroad was released to market itself and set its own policies, with guidance from headquarters on large purchases, accounting, sales strategy, technical policies, and little else. The general manager of each rail ran the business as an autonomous unit.

A Public Success Story: RailTex 1993--97

RailTex went public in November 1993. With a new supply of capital from its stock offering, the company plunged into its most aggressive purchases up until that time: the Central Oregon & Pacific Railroad and the New England Central Railroad (NECR). The line was a special challenge for RailTex. An offset of the then government-owned Canadian National (CN) rail, the unionized employees didn't want CN to accept the RailTex proposal. When CN did, there was bad feeling all around. Nevertheless, many of the workers chose to drop their union allegiance, accept less pay, and hire on as multi-capable RailTex employees. By the end of the year, Railway Age had given its "Short Line of the Year" distinction for 1995 to NECR for overcoming tremendous initial turmoil to become a highly profitable and well-organized team.

By the end of 1995, with over 3,300 miles, RailTex opted for a second public offering. Also in 1995, the company created a subsidiary, RailTex Distribution Services, Inc. (RDSI), to help companies find the best logistical means to transport their materials.

"We are transforming from a highly entrepreneurial company to a more structured, results-oriented company," said Flohr in 1995. Free of the day-to-day operations responsibilities of the company and with a talented management team in place, Flohr questioned his own role as the head of RailTex. Entering his fifties, he wondered if he could perhaps hold the company back, if perhaps hiring "professional management" was not in order. Flohr studied company leadership and recrafted his role at RailTex to one of corporate visionary. This led him to eventually put in place railroad insider Henry M. Chidgey as president and COO and to place himself in the role of chairman of the board and CEO. Flohr decided to leverage his time in the acquisitions, shareholder relations, and the constant study of ways to improve and streamline RailTex processes.

"At the onset of 1996," Flohr wrote in his 1996 shareholder address, "we established clear goals and accountabilities for producing extraordinary results in every area .... One primary area targeted for improvement in 1996 was same store growth in operating revenue. Through a revitalization of our marketing team and improved processes to link field marketing personnel with the resources of our senior marketing staff in San Antonio, we exceeded our goal, bringing in new revenues of $5.5 million."

As one of the many results of Flohr's decision to put an accent on vision for the future, RailTex expanded its fleet of railcars almost 41 percent in 1996, from 2,694 to 3,085. In 1997, plans were to purchase another 3,000. This purchasing boom came about to increase RailTex's independence and ability to serve its customers. In the past, when customers needed a specialized railcar, RailTex would likely have to lease the car from one of the large railroads. Now, with a large and diverse fleet of boxcars, gondolas, covered grain hoppers, and "intermodal" cars that accept semi-truck trailers, RailTex can provide for its customers directly.

In 1996 RailTex also began to look outside of North America for acquisitions. In September of that year, RailTex International Holdings, Inc., a wholly owned subsidiary, purchased almost 13 percent equity in the 4,400-mile Brazilian Ferrovia Centro Atlantica S. A. (FCA) rail. Much larger than other RailTex properties, the FCA nevertheless had much in common with the much shorter lines RailTex was used to turning around. Like the NECR acquired from Canadian National, the FCA used to be a government-owned railroad, and was now making the transition, under RailTex, to a market-driven, capitalist enterprise. Late in the year RailTex also took on a 6 percent interest in a newly formed railroad named the Ferrovia Sul Atlantica, S.A. (FSA), which assumed operations for 4,200 miles of rail in southern Brazil.

Wholly owned subsidiary RailTex Distribution Services, Inc. (RDSI) took on the first privatization of rail in the former Soviet Union, providing consulting services to the new Tengizchevroil (TCO) rail, a limited liability partnership between a Kazakstani oil company and Chevron.

Despite expansion into international arenas, RailTex found that the 1995--96 period was generally slow in acquisitions for all short line operators. Mergers among the large railroads slowed down decision-making on casting off feeder rail. In 1997, RailTex stock was exposed to a jerky decline, falling to $14.25 on April 25, below its initial public offering price of $16 in 1993. Start-up of the company's largest acquisition to date, the Detroit, Toledo, & Ironton Railroad (DTI), and loss due to the collapse of a wall in a coal mine served by Railtex were considered factors in the loss of net income.

However, compared to the first quarter of 1996, carloadings increased by 27 percent to 109,698 in fiscal 1997, operating revenues increased by 19 percent to $34.2 million, and operating income increased by 2 percent to $5.1 million. As a part of an overall strategy to boost stock value for shareholders, the company hired a new vice president for development and acquisitions, Greg Petersen, whose background is similar in airline transportation.

Although the first half of 1997 may have been a little shaky from a stockholder's point of view, long-term prospects for continued RailTex growth remain excellent. Between 1990 and 1996 RailTex's compound annual growth per share was a healthy 19 percent. The voracious appetite of the short-line giant will have a smorgasbord of offerings to choose from in the next few years. Privatization of rail is a trend that will continue in Canada, which expects to free 10,000 miles of track in 1997 and 1998, and in the former Soviet Union. Closer to home, Mexico, with which RailTex has a long-term agreement, is set to shed miles of government rail. In the U.S., the Burlington Northern-Santa Fe merger should result in 4,000 miles of track up for grabs. The acquisition of Contrail by CSX and Norfold Southern could result in divestures in two to three years. Union Pacific, which recently merged with Southern Pacific, will want to slim down to a trunk line, potentially offering several more thousands of miles. Flohr, who acknowledges a passion for acquisitions, is also eyeing tempting properties in Australia. RailTex keeps eight of its staff busy on acquisitions, and although 1995 and 1996 were slow by RailTex standards, 1997 promises to blow the boiler lid off.

Principal Subsidiaries: RailTex International Holdings, Inc.; RailTex Trac Co., Inc.; RailTex Distribution Services, Inc.

Additional Details

Further Reference

Allen, Margaret, "RailTex Will Benefit from Railroad Commission Grant," San Antonio Business Journal, June 20, 1997, p. 31.Burke, Jack, "Mergers, Capital Concerns to Accelerate Spin-Offs of Shortline and Regional Railroads," Traffic World, June 19, 1995.------, "Shortline Competition Heats Up," TrafficWorld, August 26, 1996.Evert, Ed, "Short Line Marketing: How Old Ideas Create New Profits," Progressive Railroading, October 1992.Finegan, Jay, "The Continuously Improving CEO," Inc. Magazine, February 1993.Hendricks, David, "RailTex Seeks New Railroads," San Antonio Express-News, May 22, 1997, p. E1.Weber, James, RailTex, Inc., Harvard Business School: Boston, 1994.

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