Prof Guido Friebel on the Largest ever Rail Road Deal

Warren Buffett makes $44bn bet on US recovery with railroad deal
Billionaire investor Warren Buffett has made a $44bn (£27bn) bet on the future of America's rail network in the biggest takeover ever for his company.



Yeah, it’s amazing. I am all excited about it.

Let me give you my appraisal of it. I have been working since 2001 as an advisor to the German railroads which, at a turnover of roughly 30 bn Euro is more than twice as big as Burlington Santa Fe, which in turn is one of the big players in the US. One thing that has struck me during that period is that people are both very romantic about railroads, but that they know very little about how they operate and what winning strategies really look like.

Now, Warren Buffet is entering in the market and that is hopefully a signal to the public and to investors as well: yes, railroads are a modern technology, and, yes, likely, you can make money with railroads.

So, where does the misconception come from that this is a romantic, but sort of obsolete technology. Let me me give you some reasons: First, railroads were chronically overstaffed, but in the US and Europe alike they went through some major restructuring and they are now pretty lean. Second, at least in Europe, railroads were mainly transporting people, in particular on origins and destinations you can’t make money on, because when density is too low, you cannot make money. In Germany, this has been corrected for to some extent, by deregulating the long hauls (profitable) and contracting out many of the short hauls through competitive tenders, which makes subsidies transparent. The US has very little passenger rail (except for light rail that sort of works). Rail can be profitable for passengers in the North East corridor, but Amtrak is notoriously badly managed. Third, railroads have been politicized in the past, but again, this is changing although not at the speed I would like it to happen. Germany is a case in point: many good things are simply blocked by uninformed politicians and the public (for instance the privatization plans).

Now, what is the prospect really for rail. Warren Buffet is a philanthropist, yes, but he is known for his mart investment strategies. What may be driving his investment is first of all a simple correlation between economic growth and transport volumes. If we enter another period of massive growth by, say, 2011, then he may make good money. But that is not enough to put in this huge heap of money. But there may be a long term strategy: Burlington has a massive network that spreads to the West, but the East is not connected. One option would be to try merging with one of the easern companies, but competition authorities may not like that. Another option is to enter a market that currently is pretty much in German hands: worldwide logistics, combining sea, rail, road and air transport. Here the world leaders are, surprise, Deutsche Bahn and Deutsche Post.

So, this is an exciting thing for the US, for rail and for global logistics and maybe a new global entrant in this market which has both massive margins and the right size for a big fella like Buffet.

All the best from Auckland, Guido

Guido Friebel
Professor, Department of economics and business administration (FB 2)
Goethe University Frankfurt
Campus Westend
RuW Building, Room 4.224
Grüneburgplatz 1
D-60323 Frankfurt
Germany

+49 69 798 34826 Phone
+49 69 798 35021 Telefax