Grupo Transportación Ferroviaria Mexicana, S.A. de C.V.

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Grupo Transportación Ferroviaria Mexicana, S.A. de C.V.

Avenida Periferico Sur 4829, Piso 4
Mexico City, D.F. 14112
Mexico
Telephone: (525) 447-5836
Toll Free: (800) 849-6145
Fax: (525) 447-5739
Web site: http://www.tfm.com.mx

Joint Venture of Transportación Maritima Mexicana, S.A.
de C.V., Kansas City Southern Industries Inc., and the
Mexican federal government
Incorporated: 1996
Employees: 4,500
Sales: $667.8 million (2000)
NAIC: 482111 Line-Haul Railroads

Grupo Transportación Ferroviaria Mexicana, S.A. de C.V. (TFM), which means “Mexican Railway Transportation” in English, is the principal Mexican railroad, hauling cargoes over a main-line network of 4,282 kilometers (2,661 miles). This line—almost all of it single-track—runs between Mexico City and Nuevo Laredo, from where it crosses the Rio Grande and connects to other rail lines in the United States and Canada. TFM handles 60 percent of all rail traffic crossing the U.S.-Mexican border and has access to nearly 70 percent of Mexico’s population. Spurs or trackage rights link the main line to such important industrial cities as Guadalajara, Monterrey, Puebla, and Querétaro, and to Mexico’s three main seaports: Lázaro Cárdenas, Tampico, and Veracruz. Grupo TFM is jointly owned by Transportación Maritima Mexicana (TMM), which translates as “Mexican Maritime Transportation”; Kansas City Southern Industries Inc. (KCSI), a holding company that owns—wholly or partly—four U.S. railway lines; and the federal government of Mexico.

The Mexican Railway System: 1837–1996

In 1837, the Mexican government granted Francisco Arrillaga, a wealthy Spanish-born merchant, a concession to construct the nation’s first railroad, between Mexico City and Veracruz, its chief port. This project was never effected for a variety of reasons and ended with Arrillaga’s death. In 1857, a grant to Antonio Escandon gave him the right to build a line through Mexico City from the Gulf of Mexico to the Pacific Ocean. Escandon had to sell his concession to the government of Emperor Maximilian, which then granted it to a British company that it subsidized and that completed a line between Mexico City and Veracruz in 1872.

In 1880, the Mexican Congress approved a 99-year concession to enterprises who would undertake to build three rail lines. The most important of the three was awarded to Ferrocarril Central Mexicano (Mexican Central Railroad), which was incorporated that year in Massachusetts. Mexico Central completed, in 1884, a line running from Mexico City to Nuevo Laredo, bordering Texas, as well as another one to Ciudad Juarez. Two years later, Mexico Central was connected to U.S. lines running as far north as Chicago. By 1890, there were several branch lines, including Monterrey-Matamoros and San Luis Potosi-Tampico. But in the early 1900s, the two largest U.S. concessionaires merged, creating alarm among nationalist Mexicans. Accordingly, in 1908 the federal government bought out the owners and became the main shareholder of the newly created Ferrocarriles Nacionales de México (FNM), with authority over 11,157 kilometers (6,933 miles) of line.

The Mexican revolution that began in 1910 disrupted the nation’s railway system so severely that some lines did not function normally until 1920. There was no service at all in the north between 1914 and 1916. Some $400 million in debt, the FNM was restructured in 1926 as a private company, with the federal government holding 51 percent of the shares. With the private investors unwilling to continue bearing their share of the load, the FNM was nationalized in 1937. The federal government now assumed administration of the system for the first time. The northern line, which covered the most developed part of the country, was profitable, but other lines were not. The FNM suffered from debt, obsolete equipment, administrative inexperience, corruption, and sabotage.

To reduce political pressures that were incompatible with making the system profitable, the FNM became a formally independent public corporation at the end of 1940, but it was once again tied closely to the government in 1948. Deficits and labor trouble were chronic problems, with a major and bloody strike in the 1950s and a history of derailments due to poor maintenance. The FNM lacked enough capital to modernize its facilities and was unable to raise its low rates in the face of opposition by pressure groups. In 1987, the federal government decided not to pay out operating subsidies any longer, but it still had to carry the load for amortization of debt, interest, and financing capital expenses. By 1996, the FNM was hauling only 12 percent of all freight in its service area, compared to 20 percent a decade earlier (and 37 percent in the United States by U.S. railroads).

Privatization of the FNE: 1996–97

In spite of its problems, the FNM would have remained a politically sacrosanct government monopoly but for the economic crisis and ensuing peso devaluation of late 1994. The badly pressed federal government secured, in 1995, a constitutional amendment that permitted the privatization of the nation’s railway system and made plans for the piecemeal auctions of three main lines and several short lines. Regarded as the “jewel in the crown” was Ferrocarril del Noreste, S.A. de C.V. (FNE, or Northeast Railway), which consisted of 19 percent of the nation’s trackage but 38 percent of its traffic (of which 70 percent was international traffic). A joint venture of Union Pacific Corp. and Empresas ICA—Mexico’s largest construction company—was expected to submit the winning bid, in December 1996, for this section of the system, but its $527 million offer was far short of an 11.07 billion peso bid ( about $1.4 billion) by Grupo TFM, which had recently been established and was 51 percent owned by TMM and 49 percent owned by KCSI. (Jorge Serrano, chairman and chief executive of TMM, also held these posts for Grupo TFM.) For this sum the partners won 80 percent of the 50-year concession awarded to the operating company FNE—which was renamed TFM— plus an option to run the line for another 50 years. The federal government retained the other 20 percent but said it would sell this stake within two years.

TMM and KCSI shareholders and creditors immediately questioned how these companies could afford to make such a bid and still recoup their investment, and other observers questioned the Mexican government’s own credibility. Accordingly, after TMM and KCSI made a down payment of $560 million at the end of January 1997, the government reduced its claim on the partners by contributing about $200 million of the rest for a total of 24.6 percent of the shares of Grupo TFM, with TMM retaining 38.5 percent and KCSI 36.9 percent. The government said it would remain a partner for up to seven years before liquidating its shares in a public stock offering or selling them back to Grupo TFM, whose officials had pledged to invest $200 million in 1997 to improve the line and an average of $125 million per year for the next five years. Morgan Stanley Co. extended a $150 million revolving credit line and a $325 million loan over 12 years and helped the partners raise another $400 million through the sale of notes and debentures. After paying out the remaining $860 million, Grupo TFM officially took control of the northeast line in June 1997.

TFM inherited lower labor costs, because the federal government had compelled the 8,700-member workforce of the line into retirement and then let the new owners rehire only those they considered necessary: about 4,500. These staffers received a wage increase averaging 25 percent. A Monterrey-based centralized sales force—something the FNM did not have in place—went to work signing up six classes of customers: automotive, agricultural, chemicals, industry (forest products and manufacturing), minerals, and intermodal. Security improved with the creation of a new police force that had the authority to arrest and prosecute thieves, vandals, trespassers, and stowaways attempting to cross into the United States. Most of the 371 locomotives were rebuilt and modernized by privatized locomotive shops. By late 2000, freight trains that four years earlier had averaged 60 hours for the 700-mile trek to Mexico City from the Texas border were making the trip in 34 to 41 hours. Average train speed had improved from 11.2 to 16.1 miles per hour.

An essential link to the United States was Texas Mexican Railway, also jointly owned by TMM and KCSI. This “Tex-Mex” line linked Nuevo Laredo to Laredo, Texas, and Matamoros to Brownsville and Corpus Christi, Texas. It then—by means of trackage rights—continued north as far as Beaumont, where it connected to the Kansas Southern Railway line. By late 1999, TFM was handling about 60 percent of all cross-border rail traffic between the United States and Mexico, most of it over the Laredo bridge. TFM operated the Mexican side of this single-track bridge. However, Union Pacific remained its chief customer at the Laredo gateway and was vocal in its complaints about congestion. A new Tex-Mex yard near the gateway, completed in 1999, increased the number of rail cars capable of crossing the bridge on a single day from 1,300 to 3,000.

Company Perspectives:

From its inception, TFM has invested heavily in modernizing equipment and infrastructure and improving its operation performance. TFM today provides the Mexican industry with a freight transport service that is effective, safe and reliable.

Seeking Trucking Business: 1999–2001

TFM, KCSR, and Tex-Mex introduced at the International Intermodal Expo held in Atlanta in April 1999 a new intermodal service that they called the NAFTA Express. The new venture aimed to win truck-hauling business for cross-border traffic, particularly automotive parts into, and finished vehicles out of, Mexico. (Automobiles and auto parts were by far the biggest categories of such traffic.) “Mexico has always been looked upon by shippers and carriers as a black hole when it comes to moving equipment down there,” a TFM executive told John Gallagher of Traffic World. “Most of the units going down had no tires by the time they came back up.” He said that the former 31-day cycle for auto parts moving between Laredo and Mexico City had been cut to 12 days and that expenses on theft claims had been cut by nearly 80 percent. TFM was also said to be receiving the lion’s share of exports of Corona beer being shipped to the eastern half of the United States.

A 2000 TFM plan called for five regional intermodal hubs: in Nuevo Laredo, Monterrey, Querétaro, San Luis Potosí, and Toluca. “Truck conversions are one of our biggest goals,” a TFM marketing executive told Lawrence H. Kaufman of Railway Age in 2001. “We’re still educating the U.S. shipper as to the actual availability of rail in Mexico and the service that TFM can provide“by means of the major corridors into Mexico from Chicago, Dallas, Houston, Los Angeles, and eastern gateways. TFM’s service included pre-cleared trains that bypassed customs services at the border. The Toluca and San Luis Potosí terminals were in operation by late 2001.

By late 1999, TFM’s five-year capital-investment plan totaled $731 million, with the annual sum expected to peak at $229.8 million in 2000. Long-term lease agreements for 4,720 freight cars brought the fleet to more than 11,000 cars by mid-2000, a 69 percent increase. A TFM yard with capacity to hold 950 cars had been completed at Nuevo Laredo, just south of the U.S. border. An alliance between KCSR and Canadian National Railway Co. allowed TFM to carry finished goods from Mexico all the way to Canada. The company had a goal of $1.5 billion in revenue by 2005, with 60 percent of the growth expected from cross-border traffic and the remainder from traffic within Mexico and growth through Mexican ports.

Grupo TFM was reportedly considering an initial public offering of shares on the New York Stock Exchange before the end of 2001, but these plans were shelved because of falling prices for existing stocks. By May 2001, the company had placed about $750 million worth of bonds on international markets.

TMM and KCSI announced in June 2001 that they would acquire the Mexican government’s stake in Grupo TFM later in the year. Payment for the government’s share of the company was estimated at about $249 million, less about $81 million representing the proceeds from the sale of a redundant 18-mile rail line to the government. The purchase was to be through a combination of cash and debt financing. In its annual filing with the Securities and Exchange Commission, however, KCSI reported that it and TMM actually held a call option to buy the Mexican government’s share by July 31, 2002. The partners also, in March 2002, sold Grupo TFM the common stock of Mexrail, Inc. for $31.4 million. Mexrail owned the Texas Mexican Railway and the northern (U.S.) half of the Laredo international railway bridge.

Principal Competitors

Burlington Northern Santa Fe Corp.; Celadon Group; Grupo Ferroviario Mexicano, S.A. de C.V.; Union Pacific Corp.

Key Dates:

1884:: The main line (Mexico City-Nuevo Laredo) of what would become Transportacion Ferroviaria Mexicana (TFM) is completed.
1908:: This line and others are nationalized by the Mexican government.
1996:: Transportacion Maritima Mexicana, S.A. de C.V. (TMM) and Kansas City Southern Industries Inc. (KCSI) enter the winning bid for the Northeast railway line.
1997:: Grupo TFM officially takes possession of the line.
1999:: TFM introduces an intermodal service in order to win truck-hauling business.
2001:: Two of five planned TFM intermodal service hubs are in operation.