2019: Why is Union Pacific more profitable than BNSF?
GREGG WARREN: Good morning, Charlie. I have a follow up on the railroad business.
By nearly all measures, BNSF had a solid year in 2018, full-year revenue growth of 11 1/2 percent was better than the 7 1/2 percent topline growth at Union Pacific — which is BNSF’s largest direct competitor — came up with, with Burlington Northern seeing both larger increases in average revenue per car unit and total volumes than its closest peer.
Even so, Burlington Northern once again fell short of Union Pacific when it came to profitability, with its operating ratio declining 130 basis points to 66.9 percent, while Union Pacific’s ratio fell only 120 basis points to 62.7, further cementing the spread that exists between the two companies’ margins, at more than 400 basis points.
Can you explain what is driving the difference in profitability between Burlington Northern and Union Pacific, as theoretically we should not see that wide of a spread between two similar-sized companies that are basically competing for the same business, with the same customers in the western half of the United States?
And while you noted that Burlington Northern is in a wait and see mode with regards to precision-schedule railroading, we’ve kind of heard the same line historically with regards to GEICO’s approach to telematics.
And what worries me here is that the potential now exists for a much wider gap to emerge between profitability levels at Burlington Northern and Union Pacific, which has recently adopted a version of PSR some of which Union Pacific could eventually use to get more price competitive.
CHARLIE MUNGER: Well, Warren knows the answer to that a lot better than I do. My guess is that they work a little harder than we do at billing the rates. But Warren, you answer that one.
WARREN BUFFETT: Yeah. Well, it’s true that we receive the lowest ton mile revenue of any of the six big railroads in North America, and there’s some explanation for that — obviously, a significant explanation — in the particular types of hauls we have and that sort of thing. We have longer hauls, generally.
But the answer — Union Pacific’s profit margin, they talk about operating ratios, but that goes back to the Interstate Commerce Commission. It’s really profit margin, pre-tax, pre-interest profit margin. And Union Pacific, at one time, probably 15 or maybe a little more years ago, they really went off the tracks, so to speak. But they’ve done a very good job of getting — well, they got a lot of underpriced coal contracts that worked out, as did we.
But they’ve also — they’ve done a very good job on expenses. And there’s no fundamental reason why the BNSF franchise — I always like the western railroads better than the eastern — not by a dramatic margin — but I think the west will do better in terms of ton miles over time than the eastern roads.
And we’ve got some great routes, some of which were underwater in March for a while. (Laughs)
We pay a lot of attention to what’s going on at the Union Pacific, as we should.
And the future, it’s not like we’re losing business to anybody. But they have been operating more efficiently, in effect, than we have during the last few years. And like I said, we take notice of it.
They’ve cut a lot of people, right here in Omaha. And we’ll see what that does in terms of passengers — or in terms of shipper satisfaction.
But we are measuring ourselves very carefully against what they do. And if changes are needed, we’ll do that.
We’ve got a wonderful asset in that business. And when I bought it, I said it’s for a hundred years. It’s for a lot more than a hundred years. It is a very, very fundamental business. And we’ve got a wonderful franchise, and we should have margins comparable to other railroads. Charlie?
CHARLIE MUNGER: I don’t know much about it.
WARREN BUFFETT: You don’t? (Laughter)