Buffett: Berkshire Hathaway is closely watching BNSF rival Union Pacific

Chairman says BNSF will make changes if necessary as industry embraces Precision Scheduled Railroading
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A westbound BNSF Railway intermodal train passes through La Grange, Ill., on April 20, 2019. Warren Buffett, chairman of BNSF parent Berkshire Hathaway, says the company is closely watching Union Pacific as it adopts Precision Scheduled Railroading.
TRAINS: David Lassen

OMAHA, Neb. – Berkshire Hathaway is monitoring Union Pacific as it adopts Precision Scheduled Railroading and will make changes at its BNSF Railway if necessary, Berkshire Chairman Warren Buffett says.

Buffett fielded several questions about BNSF during a six-hour question-and-answer session at Berkshire's annual shareholder meeting on Saturday. Among them: Why does BNSF lag UP on profitability even though it has grown revenue and traffic volume faster than its Western rival?

“We pay a lot of attention to what’s going on at the Union Pacific, as we should,” Buffett says.

“It’s not like we’re losing business to anybody but they have been operating more efficiently, in effect, than we have during the last few years and, like I say, we take notice of it,” Buffett says.

UP has eliminated a lot of jobs as part of its efficiency drive, Buffett notes, particularly in Omaha where both UP and Berkshire Hathaway are based.

“We’ll see what that does in terms of shipper satisfaction,” Buffett says. “But we are measuring ourselves very carefully against what they do and if changes are needed we’ll do them.”

UP’s operating ratio last year was 62.7%, which was 4.2 points ahead of BNSF’s 66.9%, which was last place among the Class I systems.

BNSF Executive Chairman Matt Rose, who retired in April, was critical of Precision Scheduled Railroading in several conference appearances this year. BNSF is the lone Class I system not adopting PSR.

But Buffett says BNSF could learn from railroads that use the operating model touted by the late E. Hunter Harrison.

Buffett noted the financial turnarounds Harrison led at Illinois Central, Canadian National, Canadian Pacific, and CSX Transportation.

“All of those companies dramatically improved their profit margins,” he says, while also noting the varying degrees of service disruptions that accompanied Harrison’s quick operational changes.

“We are not above copying anything that is successful,” Buffett says. “And I think that there’s a good deal that has been learned by watching these four railroads.”

“If we think we can serve our customers well and get more efficient in the process, we will adopt whatever we observe,” Buffett says. “But we don’t have to do it today or tomorrow, but we do have to find something that gets at least equal and hopefully better customer satisfaction and that makes our railroad more efficient. There’s been growing evidence from the actions of these other four railroads … that we can learn something from what they do.”

"I doubt anyone is interested in unprecision in railroading," Berkshire Vice Chairman Charlie Munger says.

Buffett noted that BNSF brings in the lowest revenue per ton-mile of the six big systems in North America. He attributed that, in part, to the railroad’s traffic mix.

The Oracle of Omaha, as the 88-year-old Buffett is called, did not note that BNSF operates what’s by far the industry’s largest intermodal franchise and is the railroad most reliant on intermodal traffic, which generates lower revenue per unit than carload freight.

“We’ve got a wonderful franchise and we should have margins comparable to other railroads,” Buffett says.

Berkshire Hathaway took a stake in BNSF in 2006, then bought the entire railroad in 2010. Buffett says that remains a great investment decision and praised railroads in general and BNSF in particular.

— Updated May 6 at 11:40 a.m. CDT with additional Buffett comments.

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