A little more than a year ago, Berkshire Hathaway (BRK.A)(BRK.B, Financial) Chairman Warren E. Buffett made his famous "all-in wager" on the economic future of the U.S. Berkshire spent $26.5 billion to buy the 77 percent of Burlington Northern Santa Fe railroad the company didn't already own, essentially taking it private. It seemed a daring bet at the time, considering that the U.S. had fallen into a deep recession that had crushed consumer spending and created the highest unemployment in a quarter century.
Yet in only 15 months the Burlington investment has played out better than even Buffett says he expected. The recovery from the recession, which ended in late 2009, continues to strengthen, unemployment has dipped, and even the unforeseen jump in oil prices has worked to railroads' advantage.
All that's buoyed Buffett's financial return: In the first 13 months since the buyout, Burlington paid out $2.25 billion in dividends to its new parent, Berkshire, and will fork over another $1 billion this month. "It's worked out really well, and I'm surprised at how fast," says Bruce Allen, president of Bruce G. Allen Investments in Denver.
Burlington Chief Executive Officer Matthew K. Rose is determined to take advantage of the industry's improved climate and the flexibility he gets by having only one shareholder—Buffett. This year, Rose is boosting capital spending by 31 percent, triple the increase of other major rails. He's buying about 200 locomotives and building more huge transfer facilities where rail freight containers are switched to and from trucks before and after their transport by train. Rose's goal: to bolster the second-largest U.S. railroad's competitiveness relative to long-haul truckers.
Rose estimates companies spend $10 billion in the western U.S. to truck freight that could move less expensively by rail. That gap only widens with higher pump prices—up 31 percent in the past year—since locomotives are more fuel-efficient. "Maybe a big consumer goods company ships 25 percent intermodally [utilizing both rail and trucks on a single trip] today," Rose says. "Can we convince them to go 35 percent because of higher fuel prices or driver issues? Those opportunities are everywhere."
About $500 billion is spent each year to haul U.S. freight by rail or highway. More than half—$300 billion—is spent on shipments between cities. Rails today get only about 13 percent of that business, Rose says.
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Yet in only 15 months the Burlington investment has played out better than even Buffett says he expected. The recovery from the recession, which ended in late 2009, continues to strengthen, unemployment has dipped, and even the unforeseen jump in oil prices has worked to railroads' advantage.
All that's buoyed Buffett's financial return: In the first 13 months since the buyout, Burlington paid out $2.25 billion in dividends to its new parent, Berkshire, and will fork over another $1 billion this month. "It's worked out really well, and I'm surprised at how fast," says Bruce Allen, president of Bruce G. Allen Investments in Denver.
Burlington Chief Executive Officer Matthew K. Rose is determined to take advantage of the industry's improved climate and the flexibility he gets by having only one shareholder—Buffett. This year, Rose is boosting capital spending by 31 percent, triple the increase of other major rails. He's buying about 200 locomotives and building more huge transfer facilities where rail freight containers are switched to and from trucks before and after their transport by train. Rose's goal: to bolster the second-largest U.S. railroad's competitiveness relative to long-haul truckers.
Rose estimates companies spend $10 billion in the western U.S. to truck freight that could move less expensively by rail. That gap only widens with higher pump prices—up 31 percent in the past year—since locomotives are more fuel-efficient. "Maybe a big consumer goods company ships 25 percent intermodally [utilizing both rail and trucks on a single trip] today," Rose says. "Can we convince them to go 35 percent because of higher fuel prices or driver issues? Those opportunities are everywhere."
About $500 billion is spent each year to haul U.S. freight by rail or highway. More than half—$300 billion—is spent on shipments between cities. Rails today get only about 13 percent of that business, Rose says.
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