(The following story by Randolph Heaster appeared on The Kansas City Star website on July 19, 2010.)
KANSAS CITY, Mo. — In 1995 when railroad veteran Michael Haverty joined Kansas City Southern Railway as chief executive, the carrier seemed to be chugging into a long, dark tunnel with no exit.
The future for the Kansas City railroad appeared anything but bright. Mergers in the rail industry were creating mega-carriers in the nation’s western half. The giants, Burlington Northern Santa Fe and Union Pacific, were threatening to overwhelm Kansas City Southern, the smallest of the major carriers, with its network running from the heartland to the Gulf Coast.
Owned by a holding company with other interests at that time, Kansas City Southern Railway was up for sale, but deals kept falling through. While the owner tried to unload the carrier, little capital investment was made, causing the equipment and rail line to deteriorate.
Today, it’s a different story. With Haverty as its lead conductor, Kansas City Southern became the little railroad that could. Though it’s the smallest of the five big U.S. railway companies, Kansas City Southern has doubled its size from 15 years ago and managed to remain independent, operating as the NAFTA railroad.
“Clearly, Haverty’s been one of the real innovators of the modern rail industry,” said Jason Seidl, transportation analyst with Dahlman Rose & Co.
Beginning in August, Haverty’s successes will include executing a succession plan. He will remain executive chairman and still be active in the company but will turn over the CEO title and its day-to-day duties to David Starling, currently the president and chief operating officer.
Analysts say Starling will inherit a railroad better positioned than when Haverty arrived on the scene. Coming from what was then the Santa Fe Railway, Haverty was known as a dyed-in-the-wool railroader and one of the pioneers of intermodal freight, moving goods through a combination of rail and truck.
But as head of Kansas City Southern, Haverty displayed other traits as the company found unorthodox ways to grow, according to transportation analysts who have followed the railroad.
“For someone who considers himself primarily a blue-collar operating guy, Mike Haverty has also been particularly effective as a visionary and strategic thinker,” said Rick Paterson of UBS. “He’s turned a rusty little railroad in the Midwest into an international network more than double the size through unwavering belief and dogged determination.”
Perhaps that determination first surfaced in 1996 when Kansas City Southern and Mexican partner Grupo TMM won the auction to buy and operate a key rail line owned by the Mexican government. Industry observers at the time said Kansas City Southern overpaid with the $1.4 billion purchase price, and the company took on a mountain of debt.
In addition to the huge investment in the Mexican rail line, Kansas City Southern acquired other pieces or partnered with others in the U.S., expanding its network to East St. Louis, Ill., and gaining access to the Southeast with Norfolk Southern.
The company also became a partner in the Panama Canal Railway Co., which was headed by Starling.
In addition, Kansas City Southern Industries spun off its financial services units and simply became Kansas City Southern, focused on the rail business. Haverty became CEO of the railroad company in 2000 and chairman in 2001.
While upgrading its capital equipment in the U.S. and Mexico, Kansas City Southern also fought legal battles through the last decade with its Mexican partner and tax issues with the Mexican government. In 2005, the company finally got full control of the Mexican railroad, renaming it Kansas City Southern de Mexico.
Kansas City Southern finally was able to begin operating its 6,000-mile network the way it wanted, but reaching that point was fraught with potential disasters, analysts noted.
“Even internally within the company, many didn’t think it was possible to get through the legal problems in Mexico,” Paterson said. “But Haverty was relentless. He never gave up.”
In an interview last week, Haverty, 66, was hesitant to sum up his achievements over the past 15 years, emphasizing that he planned to keep working at Kansas City Southern’s headquarters as executive chairman. But he believes the company is on the right track.
“Back in 1995, it was a challenging time,” he said. “So it’s extremely satisfying now to see the survival and expansion of the company with the team we put together. There was a long period when everyone thought we were done for.”
Dahlman Rose’s Seidl agreed, saying speculation about whether Kansas City Southern could survive has been around as long as he’s followed the industry.
“Haverty oversaw some tough times, and his legacy will show that he also was a great administrator,” he said.
Haverty said he thought the time was right to pass the CEO mantle to Starling, 60, who became Kansas City Southern’s No. 2 executive two years ago after his stint at the Panama Canal Railway.
“Dave came here with the clear expectation that he had an opportunity to succeed me with in a couple of years,” he said. “One of his best assets is he is a great team leader.”
After the first year of learning the company’s operations, Starling has gradually taken on more responsibilities, Haverty said. Starling led cost-cutting efforts at Kansas City Southern after the economy collapsed in late 2008. With business volumes returning, the cost reductions have remained in place, leading to strong results so far this year.
“We took a lot of costs out, but we had to keep our focus on customers and not let it affect our service levels,” Starling said. “It was difficult, but we have an excellent group of people to work with at this company.”
Starling’s years of international business experience were seen as an asset, and he said that even before he formally joined Kansas City Southern, Haverty assigned him the job of developing the Mexico business.
Kansas City Southern hopes that more goods from Asia will come through Mexico because of the growing congestion at ports in Southern California. Starling was involved early in trying to develop Lazaro Cardenas, a port in western Mexico that Kansas City Southern de Mexico serves.
“When Mike took over, this was a regional railroad,” Starling said. “The Mexico piece was the crowning touch, and he fought all those battles. Now we want to execute the plan he’s put in place and help develop that cross-border business.”
The Mexican connection has analysts optimistic about Kansas City Southern’s prospects.
“The cross-border traffic generates more revenue opportunities with the imports and exports,” Paterson of UBS said. “They probably will grow faster than the bigger guys in the coming years.”
Analysts also are taking a wait-and-see attitude about how Starling will fare as CEO.
“He did a really great job with the Panama Canal Railway,” said Seidl of Dahlman Rose. “But it would be unfair to judge him at this point.”
Analysts may have a better idea about Starling’s effectiveness — or at least his crisis management — in the coming weeks. Hurricane Alex devastated Mexico earlier this month, and damage to a key rail bridge on the border has disrupted KCS de Mexico’s service. Starling has been to Mexico to survey the damage, and he said it could be a few weeks before the bridge is repaired on both sides of the border.
“There wasn’t a lot of media coverage here, but Mexico was really hit hard by Alex,” Starling said. “I’ve never seen problems across a network so widespread. We had as many as 45 to 50 washouts across the country.”
Haverty and Starling agreed that they had not seen the kind of physical damage done by Hurricane Alex in Mexico in all their years in the industry. The company has yet to put any cost estimates or revenue impact on the storm, but officials said insurance would cover the damage.
Beyond that short-term challenge, Kansas City Southern’s top executives believe the economy continues to keep improving, at least in the rail sector. And despite the occasional conjecture that Kansas City Southern ultimately will be acquired to create a transcontinental system, Haverty said the Kansas City-based company would keep its focus.
“The demise of the rail industry has been predicted for years and years,” Haverty said. “Analysts call the railroads ‘old economy.’ But when you consider highway congestion and the price of fuel, the steel wheel and the steel rail is the most efficient form of ground transportation. Our philosophy is we’ll run this as an independent company. You create the greatest value for the shareholders when you operate like it’s going to be here 125 years from now.”