Buffet has not missed his advantage
23.11.2009 (13:47)
The purchase of the Burlington Northern Sante Fe (BNSF) railway company in the USA by the well-known investor Warren Buffet for an unbelievable $34 billion has made a lot of noise in the transport sector. Henry Posner III, another American railway magnate and Chairman of the Railroad Development Corporation, is sharing his impressions of this deal with RZD-Partner.Ru IA.
- Mr Posner, what do you think are the main reasons for Buffett to buy a railway company? Railway transportation was never an easy or high-profit business; on the contrary, it requires hard work, responsibility and being forced to meet different (often controversial!) public interests. What could have stimulated Buffett to make such an investment?
- The Buffett investment represents the evolution of the rail industry as a mature, stable business in a deregulated environment. While it is true that railway transportation has never been an easy or high-profit business, it can be said that it is now a business where good management (and in the case of BNSF, excellent management) can earn a competitive profit as compared with the profitability of other industries. In other words, railways have evolved to the point where they are considered "normal" businesses.
With regard to the need for railways to also meet public interests, I would argue that these concerns were addressed in the USA long ago, in 1971 with the creation of Amtrak (to deal with the need for unprofitable passenger services) and in 1980 with deregulation (to deal with the need to compete with trucks and to restructure or shed unprofitable freight services). Before railways can be called upon to serve a broad variety of public interests, they must survive !
- Can this deal signal a major strategic shift in transport development in the world? I mean, many politicians are constantly speaking of the need to develop railway transportations which are "greener" than auto transportations. Can it be so that Buffett felt this new trend and made a bet on the industry that's likely to gain government support and thus gain new profits in the near future?
- This is not as much a major strategic shift as a recognition that the industry has at some point in the recent past evolved to the point that Warren Buffett saw both economic value and strategic importance to the industry. In his typically-modest comments he has stated that with the benefit of hindsight he should have recognized the opportunity a bit earlier.
With regard to railways being “green”, this is increasingly recognized worldwide but translating it to the bottom line is still difficult as railways are seldom paid extra by clients or the public sector just because they’re “green”.
- Many explain that the deal means Buffett believes in the future growth of the national economy (and the global economy as well). What is your opinion about that: should we wait for the growth which can justify such a great investment into a railway company?
- Warren Buffett has stated that this is an investment in the future of the national economy, as opposed to a declaration that the recession is officially over and that railways will be the center of the universe going forward. His investment reflects the economic fundamentals of railways as an important part of the national economy regardless of the state of that economy or the timing of any economic recovery.
- Can such a step by Buffett have followers? Will it turn into a trend, so that financial investors buy railway assets?
In the days following the Buffett announcement, many railway people in the US no doubt spent considerable time reflecting on their vision and good fortune in having gotten into the rail industry ahead of Warren Buffett; in my own case, that was a decision made more than 30 years ago! We are all feeling slightly wealthier and slightly smarter, but fundamentally the industry has not changed and the challenges remain the same.
After the euphoria and distraction, railway people went back to work, and the economics of the railway investment remain no different from any other industry; "every deal is a good deal if the price is right". That being said, we are holding our heads a bit higher…but not too high!
Interviewed by Ivan Stupachenko
Print version
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