Man at top has bold plans to get Tranz Rail back on track

By FRAN O'SULLIVAN Assistant editor

Tranz Rail chief executive Michael Beard does not intend to knock out his major customers with hefty price rises to achieve the optimistic financial forecasts he has made to retain market confidence.

Beard's bold experiment to turn Tranz Rail into a virtual rail-freight operator has come perilously close to falling off the tracks this year as major users rebelled against the company's practices.

Tranz Rail and its chief executive have had a horror year.

In the past the company has been dogged by an atrocious safety record and claims that former shareholders had stripped capital from it - claims consistently denied by those concerned.

But in the nine years since Tranz Rail was formed - after the National Government sold the former New Zealand Rail in September 1993 to a consortium headed by then Wisconsin Central and merchant bankers Fay, Richwhite - it has never got itself into such trouble with its major customers. The issues have to be resolved, to everyone's satisfaction.

Not only is Tranz Rail's future as a freight company at risk but the company itself simply cannot afford to have users such as Carter Holt Harvey, Solid Energy or Fonterra look for alternatives.

The man who has been turning the company inside out since he left a successful chief executive's role as head of ANZDL, a shipping operation based in Los Angeles, is well aware that he needs to get those customers back on board.

Beard was forced to bring forward a planned strategic briefing six weeks ago when the company's share price went into a tailspin. The stock price had fallen dramatically during July following market rumours that Tranz Rail would post a marked downturn in profitability for the June 30 year.

Persistent questions over the company's accounting practices did not help. Both issues will again be on the agenda when the company unveils its financial result tomorrow.

The company's share price did firm temporarily when Beard and his chief financial officer, Wayne Collins, shared with analysts forward projections from their "Step by Step" plan to achieve "quantum improvements" which they believe will treble profitability on an earnings before interest and tax basis over the next three years.

In a subsequent interview, Beard was keen to ensure that Tranz Rail's customers did not get the impression that he intended to bridge the profitability gap by hitting them with major price increases.

"We haven't assumed any major situation. It's also driven off a previous year when we had some holes develop."

The holes in Tranz Rail's freight business he is referring to relate to teething problems during a switch to a new work process, a re-engineering method called ITP - Intermodal Transformation Project.

This project is geared to simplifying train operations and performance using fixed-capacity trains which load containers on a "lift-on, lift-off" basis, minimising the need for wagon shunting.

"We dropped the ball in terms of lost containers ... so the ship lines took a lot of our containers off us. They have now put them on again.

"We had a close down of the steel mill, we had the forestry industry cutting away from the railhead. We also moved out of two products quite deliberately. That was tissue and newsprint. There was a big capex [capital expenditure] spend to continue to carry it in the box cars and we now have a different method of carrying that. It may be that we can get back into a fair amount of that sort of cargo.

"We have a reasonable grip on the extent to which we can obtain that top line," said Beard. "But, as you know, the freight market can be fickle."

There are critical variables which could affect Tranz Rail's ability to deliver its promised profitability.

If the quality of service deteriorated the business could suffer.

The New Zealand economy is another variable.

If the economy "craters", says Beard, Tranz Rail would be affected. Nearly one-quarter of the freight business is domestically oriented. If exporting or importing trade dramatically changed, Tranz Rail's fragility would also be exposed.

Acts of God cannot be predicted. But contingency plans are in place for events such as line washouts.

Beard says Tranz Rail built its three-year forecasts using New Zealand Institute of Economic Research projects for various sectors and segments of the economy.

"We then build the numbers from the ground up in terms of individual customers, what their projections for growth are, what customers we think we can acquire and what customers we can possibly lose.

"We then try to make up a composite picture of what we think our market share is and how we expect the top line of the company to evolve from there."

After nearly three years in the top job, Beard believes he is close to completing a new foundation to allow the railway to grow.

"What was going on before was a huge capex which would have bankrupted the company.

"So your costs were going up and your prices were dropping ... so you were actually going to a bankrupt situation ... so there wasn't any choice about the need for a change programme."

Beard says Tranz Rail was not really focused as a company. It used to offer trains, ships, long-distance passenger and commuter rail, warehouses, freight-forwarding ... "You can't do all those things in a world-class fashion.

"So we said let's be a world-class freight company and focus on that."

Beard also moved to outsourcing critical operational areas such as maintenance and signalling and instituted the major work process re-engineering programme.

The "really quite chunky bits of change we have been involved in in the last 18 months ... most of it has been completed".

But the company's major customers are far from satisfied.

"There'll always be critics out there," says Beard. "Running a railroad is a very public operation. It touches a lot of people.

"Most Kiwis have a family member who has worked in rail. Everyone has a view on how you operate a railway, so there are plenty of advisers out there."