How Kahn Had It Wrong

I read with interest your "exclusive interview" with the deservedly honored Professor Emeritus Alfred Kahn (Oct. 5) and felt compelled, no matter how belatedly, to comment. I had the honor of sitting next to Professor Kahn when we both testified to the House Railroad Subcommittee in April. While I clearly respect his role as one of the fathers of transportation deregulation, I feel now he has unduly and unfairly turned on the railroads as they struggle to fulfill the promise of the post-Staggers world to achieve what I and others have called the "railroad renaissance." Aside from the obvious issue of declining real rail rates, Professor Kahn ignores two more issues that investors and potential investors in the rail industry focus on.  

The first is the matter of modal competition, either water or highway, both subsidized. The fact is that aside from the bright years of promise in the early to middle years of this decade, the rails have consistently lost share to their rivals. When one considers so-called "bottleneck" cases, one should clearly remember the impact of the river, canal or more likely highway next to the aggrieved customer.  

Second, and perhaps even more profound, is that Professor Kahn and many others seem to misunderstand Wall Street's view of the rail industry and even, perhaps, of the purpose of investing itself. The Street remains extremely skeptical of rail earnings power, rather than the Kahn view of it endorsing some mythical semi-monopolist mega-returns. The fact is that the rail stocks trade at the same or lower multiple (the price-earnings ratio of the industry based on year out earnings forecasts relative to the market as a whole, the standard investment measurement for the industry) than they did before Staggers! In laymen's terms, the stocks are cheaper now than they have ever been in the deregulatory environment - and why not, for their returns have been lousy! Pick any start date; for example, since the end of 1994, the S&P Railroad composite's 41 percent gain was tripled by the market (S&P 500) as a whole. There is a lot of competition out there for the investment dollar.  

So, why does the Street invest at all? Not, clearly, as an affirmation of the enormous success the rails are now achieving (presumably on the backs of those they wish to serve), but because of their potential. That's why investors spend money, and those that are still owners of rail equities understand that the potential for the rails - once capacity, MIS and other issues are resolved - to actually grow their top line by offering better service is almost unlimited.  

That is, unless somehow the rules of the game are changed. Right now, the interests of rail customers, shareholders and potential shareholders are very much aligned - better service will grow the top line, provide better earnings and returns which will provide more capital to invest in capacity, which provides better service, etc. Then and only then will the returns justify the investment; left unencumbered by onerous new rules I expect that day will come, and perhaps not too long from now.  

Anthony B. Hatch  

Independent railroad analyst