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More on Buffett's purchase of Burlington Northern Santa Fe Railroad

A reader responds to my earlier post:

There are many reasons Buffett purchased BNSF. The WSJ argument is tenuous, at best. Your analysis hits on potential factor involved in his timing (he could have bought much earlier). However, since he passed the 20% ownership mark a year ago after a slow build-up (of two other railroads, as well; he didn't purchase any shares in CSX, as it is the black sheep of the big four), your conclusion that Buffett's purchase "represents a success of Obama's revitalization" gives credit a little late and to the wrong factors.

The entire railroad industry, since the days of deregulation in 1978 and 1980, and the gradual certainty and panic over waning oil supplies, has steadily improved volume, margins, and safety. On the BTS.gov site, you will find statistics for an important measure of railroad business--revenue ton miles--growing rapidly for two decades. You may also find measures of their efficiency, which also increase steadily (look at the distance a ton of freight can be transported with a single gallon of diesel). One could argue that the railroad industry has been revitalized and is performing extremely well.

Just these two statistics, when viewed by individual company, show BNSF's sizable lead over its competitors. They are best in class. They also have what Buffett frequently looks for--insurmountable competitive positions (expensive to lay track, operational efficiency, experience, brand, etc.), solid managers, and an industry that has staying power.

I would say that he has lots of other reasons that include his company and legacy, pieces that complement the powerful straw-into-gold machine he has created, and benefits from BNSF to his other companies, but the man is way more complicated than the image he portrays of himself, so I'll stop.


By Ezra Klein  |  November 4, 2009; 5:26 PM ET
 
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Comments

as a long-time berkshire shareholder (since 1991, although don't get me started about how i should have bought after the '87 crash), i agree completely with your reader's take.

the railroad industry today is the most profitable in its long history, and buffett has bought the best in class. It will not be a 10-bagger of a purchase, but it will be yet another steadly generator of free cash flow.

Posted by: howard16 | November 4, 2009 6:08 PM | Report abuse

If revitalization has happened since 1980, it means it occurred in Regan, Bush Sr., Clinton and Bush Jr. times; what is that to do with Obama Presidency?

Again if rail road companies became cash cows (otherwise there is no way in the world Buffett would touch one of them); that happened after 'deregulation' (like Telcom deregulation in Clinton times as well as Financial deregulation).

But, alas, railroad deregulation does not bring collapse like financial deregulation (even though Rep. Frank says repeal of Glass-Stegall could not have stopped AIG mess) because times are different.

There were times Rail road companies owned State Governments (e.g. California) and they had their gilded age effective monopolies. Today seems like there is no such danger (or could I be wrong?).

Posted by: umesh409 | November 4, 2009 6:26 PM | Report abuse

With the revitalization of the railroad industry, cities should also look to ways of co-opting them into the greater urban fabric. As my grandmother used to say about US railroads, "if you want to see the armpit of any city, take the railroad."

Posted by: Jaycal | November 4, 2009 7:34 PM | Report abuse

Watching these very long cargo trains in Arizona, I often think it would be great if they could economically put solar panels on the tops of every car (or even the sides too; the trains go through a lot of area with nothing at all that blocks the sun).

Eventually with the length of these trains this could generate massive electricity. They could even start running trains a lot more by day. The trains might be carbon free, or even generate more electricity than they use.

Posted by: RichardHSerlin | November 4, 2009 10:08 PM | Report abuse

It brings up an interesting question, if solar panels on your roof in Arizona, California, etc., can come close to paying for themselves, then why can't whole plants of them in those same places come really really close, or make it, to paying for themselves, given economies of scale (without subsidies, or taxes on carbon so that other power sources reflect their true costs)?

There's the land cost, which you don't pay when you put solar panels on your house, or on a train, but rural land in the AZ desert is very cheap.

Not having to use the grid, though, is where you may really get a savings in putting panels on your home or a train. The grid is expensive, and a lot of power is lost in transmission over many miles.

Posted by: RichardHSerlin | November 4, 2009 10:22 PM | Report abuse

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