Wisconsin Central Transportation Corporation

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Wisconsin Central Transportation Corporation

One O’Hare Centre
Suite 9000
6250 N. River Road
Rosemont, Illinois 60017-5062
U.S.A.
(847) 318-4600
Fax: (847) 318-4618
Web site: http://www.wclx.com

Public Company
Incorporated: 1987
Sales: $333.5 million (1997)
Employees: 2,254
Stock Exchanges: NASDAQ
Ticker Symbol: WCLX
SICs: 4011 Railroads, Line Haul Operating

Wisconsin Central Ltd., the core railroad of the holding company Wisconsin Central Transportation Corporation, was the brainchild of Edward Burkhardt, a 27-year career railroad industry veteran for the Chicago & Northwestern (C&NW). During his quarter century in the business, Burkhardt—like other railroad lifers—had watched with dismay as an industry once synonymous with the technological achievements of the American economy lost large swaths of the transportation market to the trucking sector. However, Burkhardt believed railroads were still an intrinsically competitive freight shipping option and was convinced their market share losses were due as much to crippling labor regulations and outmoded operating practices as to their rigid and unimaginative approaches to the competition offered by the trucking industry. Joining forces with Milwaukee Road executive Thomas F. Powers, Jr., former Illinois governor Richard Ogilvie, and two other investors, Burkhardt mortgaged his home and raided his savings to create a new “entrepreneurial railroad” that would steal back business lost to trucking through efficiency, faster service, lower charges, and responsive customer service.

Deep Roots: 1871-1987

Most of the trackage the new Wisconsin Central acquired in 1987 was descended from lines laid by the original Wisconsin Central beginning in the 19th century. That first Wisconsin Central had been formed in 1871 to haul pulpwood, iron ore, and grain between central Wisconsin and Lake Superior, and by 1884 it had expanded to service St. Paul and by 1886 Chicago. Always financially shaky, in 1909 the original Wisconsin Central formed an alliance with the Soo Line (i.e., the Minneapolis, St. Paul & Sault Ste. Marie, which had been owned by the Canadian Pacific since 1888). The Soo Line bought a majority stock interest in Wisconsin Central but allowed it to retain its operational independence. For the next 32 years the original Wisconsin Central remained a subsidiary of the Soo Line, although following Wisconsin Central’s bankruptcy in 1932 the Soo Line became its operating agent as well. Between 1945 and 1960 the original Wisconsin Central made the transition from steam to diesel power and upgraded its passenger service.

In 1960 the original Wisconsin Central and the Soo Line merged with the Duluth, South Shore & Atlantic to form the so-called “New Soo.” Between 1968 and 1970 the last dedicated passenger service on both the New Soo and the Wisconsin Central was discontinued. Although the New Soo was a profitable railroad in the 1960s and 1970s, it failed to raise its operating speeds (kept to a noncompetitive 40 miles per hour) or renegotiate tougher labor contracts with unions to enable to run with more efficient crew sizes. To expand its network to compensate for the decline in heavy industry on its traditional routes, the New Soo bought the Milwaukee Road in 1985 for $575 million, thereby expanding its trackage from 4,400 to 7,500 miles and widening its network to cover the Canadian border to the north and Louisville and Kansas City to the south. Although it was suddenly the nation’s tenth largest railroad, the purchase entailed the assumption of Milwaukee Road’s staggering debt and substandard equipment and infrastructure. The Soo’s history of profitability was threatened.

Rechristened “The Soo/Milwaukee System,” the Soo attempted to create a new internal “railroad within a railroad”—dubbed the Lake States Transportation Division—to regain its profitability. Under the Staggers Rail Act of 1980 smaller regional railroads were exempt from the regulations that hampered so-called Class I railroads, which allowed them to operate trains with smaller crews, adjust their shipping rates, and negotiate long-term contracts. The new separately managed Lake States railroad would operate within the bounds of St. Paul to the west, Lake Superior to the north, Lake Michigan to the east, and Chicago to the South—virtually the same territory as the original Wisconsin Central. Some railroad unions refused to allow Lake States to negotiate less costly work rules, however, and the Soo’s management concluded that servicing “light-density” markets with the costs of a Class 1 carrier was a losing proposition. To reduce its still large debt levels, in April 1987 it decided to sell the Lake States operation to Burkhardt’s newly formed Wisconsin Central Ltd. company.

“Retailing Transportation Services”: 1987-90

Burkhardt established the new Wisconsin Central’s operations and customer service headquarters in Stevens Point, Wisconsin, and the corporate headquarters in the Chicago suburb of Rosemont. A holding company structure—Wisconsin Central Transportation Corporation—was created under which Wisconsin Central Ltd. (WCL) would operate the rail service; WCL Railcars, Inc. would own the locomotives and cars (leasing them to WCL); and Wisconsin Bridges Inc. held the stock of the bridge operation company Sault Ste. Marie Bridge Co., an essential component in a territory dotted by valleys, rolling terrain, and waterways. By the end of the summer of 1987 four hundred new railroad workers had been recruited to run the railroad.

On the eve of the September 1987 date set for the railroad’s launch, however, the Interstate Commerce Commission (ICC)—the government body that regulates interstate transportation—shocked Burkhardt’s team by announcing that it needed 45 more days to evaluate its approval of the startup. As the locomotives lined up for the September launch date were leased away to other companies, a deluge of protests by Wisconsin Central’s industry and community supporters convinced the ICC to change its mind and, a month late, Wisconsin Central’s 85 locomotives and 2,900 freight cars were finally permitted to roll. Already $8 million behind because of the ICC’s delay, the Wisconsin Central was further hampered by a computer glitch that caused some 3,000 trains to suddenly disappear from its tracking system, and in its first few months train schedules had to be improvised on the fly. Order was finally achieved by the end of the year, however, and in the words of the railroad’s historian (Wisconsin Central: Railroad Success Story) “shipper complaints [began] turning into compliments.”

By March 1988 Wisconsin Central was turning its first profit, and by the end of the year revenues stood at $94 million. Relying primarily on contracts to ship materials for Wisconsin’s paper, pulp, and converting mills to and from Chicago, Wisconsin Central soon began to vindicate Burkhardt’s vision of a marketing-savvy, customer-driven, cost-efficient railroad that could beat the trucking industry at its own game. Its marketing plan focused on getting more business from existing customers, regaining former Soo customers who had shifted to trucks, and finding new shippers by offering competitive freight rates. It began to go after the more profitable Canadian and iron ore traffic, and by 1996 iron ore had replaced paper industry products as Wisconsin Central’s largest type of traffic (in terms of carloads shipped). As early as December 1989, Wisconsin Central was also reporting a 60 percent increase in its “intermo-dal” traffic (in which railroads “piggyback” the containers or trailers hauled by trucks over part of the shipping route). Flexible work rules allowed Wisconsin Central to use an average crew size of two, and because they had been cross-trained in various aspects of rail duty its crews could be called upon to perform tasks as required without raising a labor representative’s ire. As a result, Wisconsin Central’s labor expense as a percentage of revenue was soon at 30 percent—versus the national rail industry’s 45 percent.

Other innovations included the first use by a regional U.S. railroad of a computer program called the Transportation Control System (originated by Union Pacific), which enabled Wisconsin Central to compute trip schedules, process work orders, generate waybills, and crunch shipment data. Moreover, Wisconsin Central began upgrading the aging rail infrastructure—installing welded rails, replacing ties, applying gravel ballast—it had inherited from the Soo Line and created its own state-of-the-art rail vehicle maintenance and upgrade facility so it could turn cheaply purchased used freight cars and engines into modern equipment. By the end of 1988 Wisconsin Central had also secured more track rights for direct connections to Chicago’s railroads, and its four main “gateways” enabled it to escape overdependence on any single connector railroad to keep its freight moving.

Company Perspectives

To offer superior transportation consisting of more frequent, dependable train service, at competitive prices, with proper equipment, accomplished by customer-minded employees.

Expansion in Wisconsin and New Zealand: 1991-93

By the early 1990s Wisconsin Central had already caught the eye of the national business press and, more importantly, the accolades of its customers and industry trade magazines, who began citing it with quality awards. Wisconsin Central’s ore shipping traffic began to rise substantially in 1990, and by 1994 it was shipping more than 32,000 carloads of ore a year. Its intermodal traffic also increased, from 28,300 units in 1991 to more than 42,000 units in 1994. As early as 1991 Wisconsin Central had met the ICC’s technical definition for a Class 1 railroad (revenues exceeding $90 million for three straight years), but it successfully petitioned to retain its Class 2 status—thus evading the burdensome regulations that hampered the nation’s largest railroads. In May 1991, Burkhardt decided to take Wisconsin Central public, raising $36.2 million in an initial public stock offering (IPO), which he used to pay down the high debt taken on at the Soo/Lake States acquisition in 1987 (by 1994 Wisconsin Central had lowered its debt-to-capital ratio to 35 percent).

Nevertheless, by 1991 Wisconsin Central, for all its success, was still not generating enough revenue to assure the regular upkeep of its infrastructure, and Burkhardt decided that revenue could only be had through expansion. In January 1992 he therefore created a new subsidiary, Fox Valley and Western Ltd., to acquire two smaller Wisconsin railroads: the century-old Green Bay & Western (GB&W) and the Fox River Valley (FRV), a spinoff of the Chicago & Northwestern (C&NW) that serviced the eastern central portion of Wisconsin. Burkhardt’s former employer, CN&W, attacked the proposed purchase from the start, claiming it established “monopolistic” conditions—despite the fact that the trucking industry had long ago crushed any rail industry dreams of a transportation monopoly. The deal was finally closed for $61 million in September 1992, giving Wisconsin Central 479 miles of track, 53 locomotives, 1,275 freight cars, and 100 new customers in the Fox River Valley alone.

Burkhardt’s expansion strategy continued. Shortly before beginning a new intermodal service with trucking giant J. B. Hunt in August 1992, Wisconsin Central signed a deal with C&NW that gave it the shortest direct line to the crucial Lake Superior shipping ports of Duluth, Minnesota, and Superior, Wisconsin—and thus access to the lucrative Canadian haulage business bound for Chicago. This new link to the Canadian market eventually evolved into a new intermodal agreement, in April 1996, between Wisconsin Central, CSX Intermodal, and Canadian National.

As Burkhardt was completing negotiations for the Green Bay & Western and the Fox River Valley acquisition, he was approached by New Zealand investment bankers who were helping their government privatize the island’s only rail service, the state-run New Zealand Rail Ltd. Regional carriers like Wisconsin Central and RailTex were regarded as experts at running the new-style “entrepreneurial” American railroad, and Burkhardt’s company in particular had earned a reputation as a “well-run, high-quality customer-service” railroad (as Burkhardt himself later recalled). Because New Zealand Rail’s $400 million, 2,500-mile system was almost twice as large as Wisconsin Central’s, Burkhardt knew he would need help in closing the $222 million acquisition. He therefore turned to Berkshire Partners, his partners in buying Wisconsin Central’s lines from the Soo Line, and created a new subsidiary, Wisconsin Central International, to run the new unit. When the deal was closed in July 1993, Wisconsin Central had added 5,300 employees, 269 locomotives, and 6,000 freight cars. Burkhardt decided that three full-time executives in New Zealand would be sufficient to manage New Zealand Rail’s (renamed Tranz Rail in 1995) transition to an American-style private carrier. Among their first acts was the downsizing of New Zealand Rail’s bloated workforce. In June 1993, as Wisconsin Central was transforming itself into a player in the international transportation market, a Wisconsin Central locomotive was hauling the railroad’s one millionth rail shipment.

Into Canada and Great Britain: 1994-95

In 1994 Wisconsin Central placed the largest single order—for over 1,000 hoppers, gondolas, and boxcars—for new cars in the history of modern regional railroads. It was also continuing its successful campaign to keep unions out of its workforce. In the fall, employees of the Fox River Valley failed to meet the 50 percent vote threshold needed to win union representation. Although Wisconsin Central declared the vote an endorsement of the railroad’s profit sharing and 401(k) benefits packages, they were no doubt privately concerned that each successive union vote won greater worker support for the Brotherhood of Locomotive Engineers.

In January 1995, Wisconsin Central acquired Algoma Central Railway, a 321-mile regional Canadian line operating between Sault Ste. Marie and Hearst, Ontario. For a price of $24.4 million, the purchase added 23 locomotives and 866 freight cars to Wisconsin Central’s stable, bolstering its access to the important Canadian freight market. The addition also gave Wisconsin Central its first fully unionized operation—a development that prefigured the decision by Wisconsin Central’s engineers and conductors in July 1997 to accept representation by the rail workers’union.

In 1995, Wisconsin Central began adopting Tranz Rail’s policy of using one-man crews, an innovation made possible by technology that enabled the caboose to be controlled remotely from the locomotive cabin. The Tranz Rail purchase was also bearing fruit of a different kind. The New Zealand firm that had helped Burkhardt buy New Zealand Rail Ltd. teamed with him and Berkshire Partners again in December 1995 to acquire ownership of Great Britain’s Rail Express Systems Limited (RES), the letter-carrying rail service for the Royal Mail, a division of Britain’s Post Office. A month later Burkhardt led another consortium of investors—North & South Railways Limited—to buy 90 percent of Britain’s freight rail service from British Rail. The addition of these three companies—Loadhaul, Mainline, and Transrail—immediately added 7,000 workers, 910 locomotives, and 19,300 freight cars to Wisconsin Central’s fleet. Rechristened the English Welsh & Scottish Railway Ltd. (EWSR), the new company was in desperate need of Burkhardt’s entrepreneurial talents. Its locomotives leaked, its infrastructure cried out for modernization, and its workforce suffered from the same redundant crew bloat as the U.S. railroads Burkhardt sought to replace. Burkhardt immediately cut 1,800 jobs and twisted the arm of Railtrack, the British firm leasing it the rights to use the rails, convincing them to agree to a more reasonable flat rail-use fee in place of the exorbitant 50 percent-of-revenues Railtrack had initially levied. The remaining EWSR workforce was offered profit-sharing and incentive plans, and within months Burkhardt had reduced EWSR’s shipping rates between 30 and 50 percent. The profit potential of Burkhardt’s latest international foray looked better than ever. While 40 percent of U.S. freight was shipped by rail, British freight carriers moved only six percent, offering substantial room for growth.

At the end of 1995, Wisconsin Central could look back at annual growth of 22 percent or higher since 1993, a 69 percent increase in carloads, and annual operating revenues approaching $265 million.

Weyauwega and After: 1996-97

On March 4, 1996, a one-crew Wisconsin Central locomotive entering the center of Weyauwega, Wisconsin (midway between Appleton and Stevens Point, Wisconsin) derailed, sending 34 cars off the tracks, 14 of which were loaded with propane or liquefied petroleum. An explosive fire erupted, forcing 1,700 Weyauwega residents to flee (there were no fatalities), and continued to burn for two weeks. Wisconsin Central immediately offered to lodge the town in nearby hotels and motels at its own expense, paid for inspection teams to analyze the wreckage and certify the safety of all the homes and businesses in the area, underwrote all the repair costs, and donated $400,000 to the Red Cross and Salvation Army for their aid expenses. The $27 million accident was nevertheless a public relations disaster, and news cameras beamed images of the burning wreckage across the country. Worse, less than a month before the Milwaukee Journal Sentinel had run an article citing “safety concerns” over Wisconsin Central’s rapid growth. As investigations into the incident continued an internal Wisconsin Central memo surfaced demonstrating that three months before the accident the company had warned its crews that “switching errors” were causing an inordinate number of derailings and sides wiped trains.

Public officials soon began questioning Wisconsin Central’s decision to embrace the one-man crew work format, and newspapers ran articles complaining that Wisconsin Central was permitting insufficiently trained engineers to run its fleet. In February 1997 federal rail safety officials announced that Wisconsin Central would be the subject of a thorough safety inspection because its accident rate was two to three times above the industry norm. Wisconsin Central responded by agreeing to spend 30 percent more on improvements to its tracks (bad track as a result of improper employee maintenance training had been identified as the cause of the Weyauwega accident) and pointed to “dramatic” reductions in its accident rates during the first nine months of 1996.

However, Wisconsin Central’s safety record came under renewed scrutiny in November 1997 when a derailing train plowed into a factory in Fond du Lac, causing the first fatality as a result of a Wisconsin Central derailment and the first such death in Wisconsin in 11 years. This time, Wisconsin Senator Russ Feingold and Governor Tommy Thompson publicly expressed concern over the railroad’s efforts to bring its safety performance up to speed. The federal government’s safety investigation into Wisconsin Central was given a one-year extension.

Safety Concerns and Tasmania: 1997-98

As Wisconsin Central’s earnings suffered the multiple blows of these public relations setbacks and revenue downturns caused by weather and changing business conditions, Burkhardt led the company forward. By 1996 its stock had appreciated 800 percent since the company’s IPO in 1991, and in ten years it had become the largest regional railroad in the United States, with a five-year average sales growth of 24 percent. In January 1997 Wisconsin Central added 216 miles of trackage through acquisitions of small lines in northeastern Wisconsin, the upper peninsula of Michigan, and Hay ward and Wausau, Wisconsin. It also entered into a safety compliance agreement with the Federal Railroad Administration to create and evaluate new programs for improving railroad safety. As part of this effort increased capital costs were set aside for new cross ties, ballast, and welded rails.

With Wisconsin Central’s newly unionized workforce now forcing the railroad to face some of the same labor costs as the Class 1 railroads, Burkhardt’s international strategy grew in importance. In late 1997 Wisconsin Central thus acquired Railfreight Distribution Limited from the British government, giving it a share of the freight business traveling through the Channel Tunnel and potential access to the continental European market. It also created a new subsidiary, Australian Transport Network Limited, to acquire one-third of Tasrail, the commercial rail freight service on the Australian island of Tasmania. Although Wisconsin Central was a minority owner of all three of its overseas operations, it was the controlling party, and its international operations now surpassed its domestic operations in locomotives in service, route miles operated, employees, and revenues generated. By 1997-98 its traffic volume has risen 169 percent over the past seven years and its freight car fleet had tripled in size.

Principal Subsidiaries

Wisconsin Central Ltd.; WCL Railcars, Inc.; Sault Ste. Marie Bridge Company; Fox Valley & Western Ltd.; Wisconsin Central International, Inc.; WC Canada Holdings, Inc.; Algoma Central Railway Inc. (Canada); Wisconsin Central International, B.V. (Netherlands).