The strategy becomes clearer for uniting ports and railroads
Warren Buffett indeed has more on his mind than just railroads. Ports chatter has it that Berkshire Hathaway is staring intermodal transit in the face and wants real action.
Recent history plays a part in this, in the form of the contracts (which cover three to five years at a time) that Burlington Northern has with the container carriers. In the 1990s, Burlington was looking for growth and gave the carriers low rates. Business was starting to boom and the prognosis was that port and intermodal traffic would grow ad infinitum. Especially low tariffs were set for categories such as empty container repositioning.
Come 2003-5 and the scene had changed. Burlington was looking for profit – volumes were high enough – and it went for stiffer rates, particularly to smaller markets and for smaller volume goods. Some of the traffic went away, with some ocean traffic being switched to Gulf and East Coast ports and railed from there.
Now the situation has changed again, and this is where Buffett's talent comes in. First, the railroads are slicing and dicing the contracts much more finely, introducing more specific clauses that apply to particular goods and markets. Secondly, they are going after the intermodal business much more aggressively – because this is where the real competition will erupt.
Domestic traffic is being left alone, at least for the moment, based on the rule of thumb that routes up to 500-750 miles are cheaper by truck while longer distances are for rail. However, for intermodal that rule is being thrown out the window, because new technology and equipment means that rail can certainly do the job better. What's more, the switch from the ship to surface transport at the ports can be done much more quickly for rail, provided the system is geared up for it.
Buffett is pushing for investment to be stepped up at the docks but he also wants the shipping lines to play their part, which means a balancing act. The carriers and terminal operators want the cargo to get out of the terminals as quickly as possible -- while the railroads want the cars as full as possible before moving. The opposing viewpoints have become more closely aligned, in large part due to Buffett's efforts.
Proof of this is the combined sales promotion in China by the six West Coast ports and the railroads. The Chinese are much more receptive than they would have been, because they know that if anyone can improve West Coast operations it is Buffett.