Warren Buffett Buying BNSF?

Just FYI:

  • BNSF stands for Burlington Northern Santa Fe
  • BNSF is made up of many consolidations & acquisitions of 390 railroads over the last 150+ years.  It serves a vast rail network from Seattle to Chicago to LA and has trackage rights on other networks that allows access to hundreds of other locations.  For more history on the companies that make up the modern BNSF railroad check out their history page.

On to Warren & his Purchase

Wow, the suspicion I have behind the Warren Buffet purchase of BNSF has my mind racing through ideas on why.  The simple act of a single individual owning a major railroad in the United States again is awe inspiring, suspicious, and in some ways fills me with hope for the nation.  Let me explain why.

The last private owner of a railroad that was anywhere near the scale of BNSF was a long long time ago.  Now, modern America will have a railroad that can literally act in seconds, move with the speed and innovation pushed by an individual.  Boards can’t act that fast, Governments have no hope to even remotely act fast, let alone act, and other forms of organization just can’t compare.  This of course can be a good thing and a bad thing.

Does Warren know railroads?  I don’t know if he does or not, he does seem to be able to pick investments pretty well, and he just bet the farm on the purchase of an entire railroad.  That is saying a lot.  Is he literally telling America that he believes in the underpinnings of free-market (REAL free-market, not that psuedo psycho Republican free-market ideal) capitalism?  Or is there some hidden agendas being played out?  Do these agendas possible come from somewhere else besides Mr. Buffett himself?  I have some suspicions about this, but I’m not betting anything on it yet because there are a lot of factors that haven’t shown their respective cards.

Re-regulation?

Over the last 5 years or so a lot of energy, money, and other political willpower has been put into re-regulating the freight railroads again.  This, by any turn of events, would be horrible for the freight carriers and bad for America in general.  I’m not even going to bat around the nonsense that it would be an increase in competition or anything of that sort.  This re-regulation would starve the industry, quite rapidly, by requiring the railroads to sink more money into political pandering and less into the functional investment of the railroads themselves.  Already pricing and other things are regulated by the Federal Government, we don’t need additional nonsense for them to deal with. 

Does Warren know about a death of this effort?  Because there would be zero reason for him to invest if he thought there was a remote chance that re-regulation would go through.  Indeed, this is something to ponder.

Political Positioning

The key players in the administration, which would be Obama and Biden, both are in support of high speed rail and rail transport in general.  Biden especially, loves passenger rail.  BNSF of course is not involved in passenger rail, but having a huge supporter owning the railroad puts the administration in a very powerful position to make change.  This can happen on two major idealistic fronts;  the free-market advocates viewpoint and the more socialistically minded & environmentally friendly supporting Democrat.  With Warren owning the railroad the administration could easily encourage without any legislation at all some very positive actions, winning accolades for the railroad, for the administration, and getting the administration more in tune to what is really going on at the rail.

Does Mr. Buffett have some inside knowledge on some political action by the administration?  Does he know about some major event or is guessing at some major event that would position the railroad to drastically expand operations into new realms of service?  Once again, another legitimate thought to keep in mind when pondering this purchase.

Summary

So do I know what Warren is up to?  No.  Do I think I even have a remotely logical idea about his action?  Nope.  Overall I have absolutely zero idea why he would step out this far in order to purchase an entire freight railroad.  In some ways the political environment seems to make this an absolutely bad idea, and in another it seems like a great idea.  From an economic stand point it appears to be a really odd play, without a significant ROI in comparison to some other parts of the market.  Especially with the economy in the position it is currently in.

What do you think?  Any ideas, conspiracies, inside knowledge?  I’d love to read some comments on this so light em’ up.

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19 Comments

  1. Warren Buffett doesn’t have to know *how* to run a railroad. He doesn’t have to.

    He saw something he understands could make money for him on the equities end.

    Buffett makes his investing style an open secret through many books and through shares of Berkshire Hathaway, his firm. A single share of Berkshire Hathaway stock goes for more than $10,000! That’s a reflection of Buffett’s economics textbook approach to investing, and that BH keeps its shares in tight supply.

    Simply, though, Buffett thinks BNSF will make him money. That’s all. How it will affect railroading, transportation, or the workings of the world … well, maybe everything will stay the same.

    Reply

  2. He’s betting on rail freight as a stable and efficient way to transport goods in our future. Or, he’s betting on HSR and will convert all the ROWs to accommodate uninterrupted high speed passenger service 🙂

    Hard to say really. He doesn’t think like most of us.

    Reply

  3. <i>It serves a vast rail network from Seattle to Chicago to LA and has trackage rights on other networks that allows access to hundreds of other locations. For more history on the companies that make up the modern BNSF railroad check out their history page.</i>

    Actually if you want to be really technical:

    BNSF serves Vancouver, BC (former GN route). This is one of at least two locations where BNSF enters and operates within Canada; historically there was at least one branchline that extended north of Spokane, entered Canada and returned into the U.S. which is now a shortline.

    BNSF serves San Diego (former AT&SF Surfline, now owned by Metrolink and NCTD but BNSF retains freight operations to the city.)

    BNSF serves New Orleans (via the former Southern Pacific route; this was a concession during the UP merger.)

    As for your concerns about regulation: He owns MidAmerican Energy Holdings, which owns PacifiCorp, which owns Pacific Power. Which operates in an EXTREMELY regulated environment. If anything, railroads (even if regulated) is still better as it would be federally regulated with ONE regulator, instead of a power company which deals with ten PUCs (six within PacifiCorp territory and four within MidAmerican territory), all of whom have very different philosophies about how the power business works – or should work.

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  4. My guess is that Buffett MAY be setting up BNSF to play a role in the future of passenger rail.

    I base it off of Division B, Title II, Section 214 of the Passenger Rail Investment and Improvement Act of 2008, which says:

    "Within 1 year after the date of enactment of the Passenger Rail Investment and Improvement Act of 2008, the Federal Railroad Administration shall complete a rulemaking proceeding to develop a pilot program that–
    `(1) permits a rail carrier or rail carriers that own infrastructure over which Amtrak operates a passenger rail service route…to petition the Administration to be considered as a passenger rail service provider over that route in lieu of Amtrak."

    Assuming that the feds actually do their jobs and let these freight companies bid on long-distance routes, we could see a future where BNSF is operating trains like the Southwest Chief on its own–or Buffett sets up a separate spinoff that involves some of the very companies currently bidding on high-speed rail service. Such a company will act on behalf of BNSF and can make a profit for everyone involved. Either way, Amtrak needs a scare, and this country desperately needs multiple options for passenger rail travel.

    Reply

  5. Josie Summa – Excellent point. And yeah, total bitch slap to UP.

    Wad – Also a good point. But knowing the business you are buying absolutely helps you keep an eye on it.

    Paul – True, Warren doesn’t think like most of us.

    Erik H. – I was speaking generally, but thanks for the technical description of the network trackage. 🙂 Point taken regarding the railroads vs. power.

    KRW – I agree totally, and kind of see that possibility. It gives me hope of having a decent passenger rail system one day. I can promise society we’ll continue to have a crap system as long as Amtrak/Government is the monopoly holder. BNSF is also one of the friendliest & most efficient toward passenger trains. I believe about every passenger line BNSF currently "operates" under contract has a better than 97% on time; Empire Builder, Sounder, certain Metra lines, etc.

    Reply

  6. Adron wrote:

    [i]I can promise society we’ll continue to have a crap system as long as Amtrak/Government is the monopoly holder.[/i]

    Adron, you have to remember the principal/agent relationship is different under a public service than under a for-profit model.

    Amtrak has the brains to run a railroad well if it wanted to. And, if we ever have private rail service again, we have to hire people who have kept the system alive during the troubled years of Amtrak to help with continuity.

    In this case, if you hate Amtrak, blame your Senator and Congressperson.

    It’s the Congressional tail that wags the Amtrak dog.

    What we have in Washington is a bipartisan consensus for failure.

    Anti-Amtrak factions like keeping Amtrak around as a pinata to whack as an example of why government is Teh Suck, as the blogosphere likes to say. The pinata analogy is apt because once its finally broken, it can gorge on the treats spilled but a broken pinata is useless as a focal point of anger.

    Pro-Amtrak factions don’t have enough political support for a mandate but count on their biggest donors — Amtrak employee unions — to keep the system running. Because they won’t get the support to make Amtrak a good rail service, they will fashion legislation to the point where Amtrak is running and everyone keeps his or her job.

    The antis get to keep their pinata, the pros get to keep their trains and special interests happy. Thus, you have the failure consensus.

    The bigger hurdle: How do you make rail produce a ticket revenue of >%100 to allow for just one profitable operator?

    Reply

  7. Wad – "In this case, if you hate Amtrak, blame your Senator and Congressperson."

    Oh I don’t really hate Amtrak, it’s 95% the Senate and Congress I hate. They’re a bunch of … fill in the blank … people who aren’t true to country, founding ideals, or all that intelligent about keeping or putting things together based on reality vs. their little world of "political ticket punching".

    "What we have in Washington is a bipartisan consensus for failure."

    Yup.

    Reply

  8. i hear that guy hates unions ? I work for bsnf as a contractor we are a union thanks for being happy more people are gonna lose jobs thats awesome! go from a high wage to low wage thats how america works. rich man get richer cause always some fool wants a job and will work for half of what you was paying some one else and half of that and well were back to basic wages good job sticking together, thats what unions where for but hey what ever americans are idiots !!!

    Reply

  9. tony ? – That doesn’t make a whole lot of sense. Most people don’t trust unions, and he probably doesn’t like unions. But he does support them, he supports Democrats heavily, so you might want to check your facts or ideals about the guy.

    Reply

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