Engineering a Comeback : Jerry Davis Works to Put Southern Pacific Back on Track

Jerry Davis had been chief executive of Southern Pacific Rail Corp., California’s biggest railroad, only a few weeks when he faced his first crisis: Heavy rains battering the state in March damaged a bridge near Red Bluff that blocked the railroad’s critical route along Interstate 5.

A 38-year industry veteran, Davis reacted with dispatch, deploying troops to repair the bridge and arranging clearances with other railroads to allow SP trains to detour around the washed-out areas. He marched into the offices of startled staffers to ask how he could help.

Within a week, San Francisco-based SP resumed its service along I-5. “I’ve been in railroading all my life, and one thing I’ve learned is you can’t . . . lose any sleep over those things,” Davis said matter-of-factly in a recent interview.

That’s Davis, associates said: steady, practical, and--no matter the challenge--unflappable.

Those attributes are likely to serve him well at SP, which is still in the early stages of a rebound from its abysmal performance in the 1980s and early ‘90s, when it was known as “The Struggling Pacific” for its terrible service and financial woes.

It’s now up to Davis to ensure that the comeback does not derail--a challenge that he could not turn down when Denver billionaire Philip F. Anschutz wooed him for the job.

At 56, Davis could have ridden out his career at CSX Corp., where he headed its prosperous railroad operations spread across the Eastern United States. “But, hell,” he said, “there’s no challenge in that.”

At SP, a company with $3 billion in annual revenue, Davis aims to build on the progress of his predecessor, Edward L. Moyers, who was hired in 1993 but had to retire unexpectedly two years later.

Moyers slashed operating costs, raised cash, improved earnings and plowed money into upgrading SP’s decrepit fleet of 2,000 locomotives, which serve 14,500 miles of track overall in 15 states.

Moyers, 66, recently retired for health reasons, and that led Anschutz, the railroad’s chairman and biggest stockholder, to recruit Davis. Now, with its locomotives, balance sheet and profits on the mend, Davis must improve SP’s service and reliability.

In fact, Davis’ primary goal is easier to articulate than attain: Make the trains run on time. “We sell service,” Davis said. “No matter how good it gets, it can always get better.”

SP’s clients can certainly attest to that.

The shipping chief at one Fortune 500 company--which asked not to be identified but counts itself among SP’s biggest customers--said “in the last few months, SP really has begun to put it together” by having “the right piece of equipment in the right spot when we want it there.”

“But I don’t know if it’s a fluke, and that’s my concern,” said the shipper, who asked not to be identified by name. “They have a lot of major customers--us being one of them--that are very unhappy.”

Davis “still has to convince customers that the service will be good,” agreed Scott Flower, railroad analyst at PaineWebber Inc. in New York. “There’s still a lot of old fruit left from the tree.”

Still, SP’s franchise is valuable. Besides its I-5 route, which runs through the farm-rich San Joaquin Valley, the railroad also has a line running from Los Angeles to Texas, separate lines from both Los Angeles and San Francisco to Chicago, and six paths into Mexico.

SP carries not only farm goods, but also coal, automotive parts, forest products and chemicals. SP’s biggest market is “intermodal” freight--those multicolored containers that can be carried on ships, railroads and trucks and are used for hauling everything from furniture to shoes.

SP also runs a big intermodal-transfer facility that serves the ports of Los Angeles and Long Beach.

Ron Guss, owner of City of Commerce-based Intermodal West, which picks up intermodal cargo from ships in those ports and delivers it to SP’s waiting trains a few miles away, said SP’s service “is better, but it still has a ways to go.”

“Their train schedules seem to be more reliable, and that was the key,” Guss said. “The SP’s trains were always late.”

Late is no longer an option in freight transportation. The trains’ corporate customers today increasingly rely on “just-in-time” shipments that they can immediately use for production or sale, so their inventories--and the cost of storing them--stay as low as possible.

That means each day’s supplies must arrive on time. Otherwise, customers have no supplies left, forcing them either to stop production or miss shipments of goods to stores.

Indeed, that immediacy is one big reason why SP and all railroads consider trucking firms--with their ability to nimbly use the highways to make deliveries--as much of a competitor as rival railroads.

“Safeway will not store carloads of cereals; they want them to hit their warehouse floor so they can (move) it from their trucks to their stores immediately,” said Donald C. Orris, president of SP’s rail division, Southern Pacific Lines. “Today, if you have a grain train that gets delayed, you start worrying about chickens starving to death.

“The demand for (on-time delivery) is so high, it’s more important than our freight charges,” Orris said.

SP had few such concerns before the 1980s, when it was an overwhelming force in freight transportation, “that giant in the West that everyone bowed to,” as Orris recalled. But the bowing stopped in the 1980s, when SP’s wheels came off.

The trouble began in 1983, when SP and another major Western railroad, Santa Fe, agreed to merge. The railroads’ parent companies merged immediately to create Santa Fe Southern Pacific Corp., but the railroad themselves had to wait for permission from the U.S. Interstate Commerce Commission.

When the decision finally arrived in 1986, the deal was rejected on “anti-competitive” grounds.

SP withered during those years of limbo. Unsure of whether the merger would get completed, SP spent too little to modernize its locomotives and facilities. Meanwhile, its operating costs ran too high, profits vanished, service eroded and employee morale sagged.

As Railway Age magazine put it, SP had become “a scrawny dog.”

Enter Anschutz, who made his fortune in energy drilling. In 1988, he bought SP for $1 billion in mostly borrowed cash, assumed an additional $780 million in debt and combined SP with Rio Grande Industries, a smaller railroad that he already owned. (Anschutz declined comment for this article.)

After Anschutz hired Moyers, SP began to turn around. The company earned $242 million last year after losing a total of $292 million from 1991 through 1993. Despite the California floods, SP also earned $16.5 million in the first three months of 1995, up from $9 million a year earlier.

Today, less than 10% of SP’s locomotives are out of service for repairs, down from the 13%--about one of every eight locomotives in the fleet--that were out of commission in mid-1993.

SP also is fixing its trains faster. At its cavernous repair yard in downtown Denver, SP now sends one refurbished locomotive back into service about every two days, compared to one every 60 days five years ago.

SP raised hundreds of millions of dollars through stock sales and also slashed its long-term debt by 22% to $1.15 billion. That transformed its negative net worth of $77 million in 1992 into a positive net worth of $1.1 billion only two years later.

“They’re actually making decent money from their core operations,” said Scott O’Shea, a railroad analyst at the debt-research firm Duff & Phelps in Chicago.

Not to mention the money SP has already earned for Anschutz, who still owns 32% of the company. After Anschutz bought SP, he sold a piece of the railroad to the public in mid-1993 at $13.50 a share.

Then secondary sales of $21 a share and again at $19.75 came the next year. Those public sales, along with Anschutz’s own trades, likely have enabled him to recoup his estimated original investment in SP of about $100 million. That means Anschutz’s remaining stake in SP--currently valued at $832.7 million--is nearly all profit.

Davis is a tall, stout native of Salina, Kan., who wears metal-rimmed glasses and has razor-straight graying hair. With a genial and plain-spoken manner, “he’s one of the straightest arrows you’d want to find,” said PaineWebber’s Flower.

Though physically imposing, Davis is without airs and prefers to be called “Jerry,” associates said. But he also expects workers to reach the goals he establishes, and he has a near-obsessive emphasis on having employees follow stringent safety guidelines on the job, they said.

While he enjoys playing golf (he has a 10 handicap), he equally enjoys riding in the engineer’s cab of a freight train as he inspects the oncoming track.

“Do I like them (trains)? Damn right I like them,” he said. “I love to get out in the field.” With his arms extended and palms facing forward, as though he were passing a basketball, Davis said, “After all, the railroad is out there with 17,000 people trying to run it.”

He got into the railroad business in 1957 as a student telegrapher with Union Pacific. He steadily rose in the company over the next 30 years, becoming UP’s executive vice president of operations in 1986. Both he and Richard K. Davidson, now UP’s president, are credited with strengthening its operations in the mid-1980s.

Indeed, analysts said Davis’ UP stint is a big plus for SP as it tries to find competitive edges against UP in the West. While Davis was cautious discussing that, he conceded that “I understand where their ‘pinch-points’ are.”

After UP, Davis moved to CSX in 1989 and, in 1991, became executive vice president for operations at CSX’s rail group. But with CSX Chairman John W. Snow only 55 years old, Davis said “it was very clear” he would never get the top job at Richmond, Va.-based CSX.

So he was ready when Anschutz came calling, even though Davis had heard the reports about how Moyers and Anschutz clashed periodically over SP’s direction. Davis said he has no qualms about working for Anschutz.

Anschutz and the rest of SP’s board want the railroad run efficiently and on time, “and they made that very clear” during Davis’ job interview, Davis said. “We share that vision,” he said.

Besides, Davis said, there aren’t many opportunities to run a railroad any more, what with so many of the big carriers merging in recent years. SP, in fact, is periodically mentioned as a takeover candidate, particularly now that archrival Santa Fe is being acquired by Burlington Northern Inc.

“I wouldn’t be surprised if there’s some interest by some railroads in the Southern Pacific,” Davis said. But he added that he’s too busy running SP to worry about such things: “I haven’t given that a lot of thought.”

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Southern Pacific’s Uphill Climb

Southern Pacific Rail Corp., California’s largest railroad, is financially back on track after a dismal performance in the 1980s. The company’s revenue, profit and freight traffic are all on the upswing.

WHAT SOUTHERN PACIFIC CARRIED IN 1994: Percentage of total carloads: Intermodal: 32.0% Chemical/petroleum goods: 15.1% Coal: 13.3% Food/agriculture: 10.9% Forest products: 9.9% Metals/ores: 8.0% Construction goods: 7.6% Automotive parts: 3.2% Source: Southern Pacific Rail Corp.