Overview of the Multinational Railway Corporation - Case Study Example

September 19, 2009 HAC/GV 9-09 Boss’ Name of the Student SUBJECT: Company Risk Analysis for Kansas City Southern Here is the information you asked for about Kansas City Southern. I researched the following areas: Company Business Overview Competitive Context Primary Issues Facing the Company Company Business Overview Kansas City Southern (KSU) is a multinational corporation that owns a railway track extending over 6,400 miles spread between Missouri to Mexico (5). KSU has two subsidiaries, which are Kansas City Southern de Mexico (KCSM) and Kansas City Southern Railway (KCSR) (5). Almost ten states from the central and south central US rely for rail-track connectivity on KCSR, while KCSM owns and operates freight services in Mexico. Thus, KCSM owns the shortest and the direct link between the Mexican industrial hub and the US. On other subsidiary of KSU that is, Texas Mexican Railway is responsible for assuring connectivity between KCSR and KCSM. KSU transports a wide range of freight that includes agricultural products, industrial products, chemicals, minerals, petroleum, automobiles and other consumer products, a variety of industrial products, etc. Besides, KSU has a fifty percent stake in the Panama Canal Railway Company (PCRC). PCRC primarily runs passenger and freight services along the Panama Canal (5). Competitive Context The five salient competitors of KSU are Burlington Northern Santa Fe Corp. (BNI), CSX Corp. (CSX), Canadian National Railway Company (CNI), Norfolk Southern Corp. (NSC) and Union Pacific Corp. (UNP) (7). However, all these companies have a comparable market capitalization and business interests, still considering the existing economic meltdown; each specific company has exhibited varied results. As far as the vital market indicators like return on equity, profit margin, earnings per share and return on assets are concerned, KSU has underperformed as compared to all its important competitors (6). Still, going by the existing scenario in the US rail industry, the circumstances stand to be propitious for KSU owing to a variety of reasons. Railways are a capital-intensive industry, a fact that acts as a natural barrier to the entry of new competitors in the market. High costs and existing legislations make it impossible for any potential competitor to accrue any noteworthy rail assets. So KSU is required to compete with a finite number of predictable and already existing competitors. In that context, KSU already commands a considerable stake in the market, which it can exploit to assure sustenance and growth. In the recent years, diesel prices are exhibiting a marked volatility (8). The US economy is already a victim of continually augmenting fuel prices (8). This has compromised the economic viability of truck-based transportation. On the contrary, railroads being the bulk carriers can certainly act as a viable substitute, which is not particularly vulnerable to oil price fluctuations. Increasing fuel costs have facilitated KSU with an opportunity to exploit its full potential. Besides, as compared to trucks, the railroads are a more efficient mean of transportation. Giving the fact that the customers today are more then willing to choose railroads for transporting goods, all that KSU is required to do is to eke out a cognizable market share to enhance profitability. Owing to the intermodal efficiency of KSU, it commands a better pricing power as compared to its competitors (4). KSU affords to play on the prices, without considerably altering the overall demand, thereby making it more competitive. KSU’s compatibility with the intermodal and international shippers, allows it to extend the most cost effective and efficient transcontinental lines in America. Irrespective of the unpredictable current market scenario, KSU has witnessed a 44 percent appreciation in its container volumes (2). KSU has exhibited a praiseworthy volume growth in metals and chemicals, which account for nearly 50 percent of its revenues (3). Trans Load Center (TLC) Program initiated by KSU has made way for providing cost effective and consolidated services by collaborating with warehouses and trucking firms (9). The availability of economic, high quality and customized freight services has tilted the customer opinion in favor of KSU. Besides KSU has been the preferred transporter for the automotive industry. Traditionally, it has been providing just-in-time transportation services to the automotive supply chains. However, the automotive industry at present is going through doldrums, a possible rebound is definitely poised to benefit KSU, considering its ability to furnish technology based and flexible services to this sector. Primary Issues Facing the Company Currently Ferromax enjoys a competitive advantage over KSU, as far as access to customers is concerned. KSU has already filed an appeal against this arrangement (10). The current losses to KSU owing to this factor are miniscule and ignorable; going by the fact that KSU owns exclusive rights over many profitable Mexican lines. Still, the forthcoming ruling is bound to set new precedents that may immensely affect KSU (10). The archrivals of KSU, which are Ferrocarril del Sareste and Ferrocarril Mexicano already, enjoy a government approved competitive access to customers. Going by the proposed and expected merger of these two railroad giants, the market share of KSU in Mexico will certainly decline, thereby culminating into a reduced profitability (1). Thus, KSU is quite vulnerable as far as the Mexican branch of its operations is concerned. The current economic meltdown has immensely decreased the Gross Domestic Production in the US and Mexico. The fallout of the recession on the railroad industry has been immense, resulting in curtailed freight volumes. The international market is already exhibiting a fall in demand, portending a critical and intimidating scenario. With the resultant decline in productivity and a considerable fall in the freight volumes, the KSU is bound to face price deterioration and compromised profit margins. Though this problem is not exclusive to KSU, it has the potential to wreck havoc with its financial health. The US and the Mexican governments are considering some regulatory changes that may have a negative influence on KSU’s profitability. Beside the legal suits filed by some of its customers may also lead to dire repercussions. Going by these developments, KSU may not be able to sustain its pricing power and competitiveness in the times to come. There is no denying the fact that KSU is required to deal astutely with the emerging scenarios. Works Cited 1. “Anti-Monopoly Commission Rules Against Merger of Private Rail Companies”. SourceMax Economic News and Analysis on Mexico. Retrieved Sept. 19, 2009 ,from HighBeam Research: http://www.highbeam.com 2. “Global Market Perspective vs. Kansas City Southern”. M2 Presswire. Retrieved Sept. 19, 2009, from HighBeam Research: http://www.highbeam.com 3. Kansas City Southern Annual Report (2008). Retrieved Sept. 19, 2009, from http:// www.kcsi.com/en-us/Investors/Pages/AnnualReport.aspx 4. Kansas City Intermodal (2009). Retrieved Sept. 19, 2009, from http://www.wdger Tonks.org/KCIMFPamphlet.pdf 5. Kansas City Southern (2009). CNN Money.com. Retrieved Sept. 19, 2009, from http:// Money.cnn.comquote/snapshot/snapshot.html?symb=KSU 6. Kansas City Southern (2009). Hoovers. Retrieved Sept. 19, 2009, from http://www.hover .com/Kansas-City-Southern/--ID_10835--/free-co-profile.xhtml 7. Kansas City Southern Competitors (2009). Yahoo Finance. Retrieved Sept. 19, 2009, from http://finance.yahoo.com/q/co?s=KSU 8. Leeb, Stephen (2004). The Oil Factor. New York: Business Plus. 9. Malone, Robert (2006). Railroads can Move Forward. Forbes.com. Retrieved Sept. 19, 2009, from http://www.forbes.com/2006/05/04/railroads-intermodal-shipping-cx_ Rm_0505rail.html 10. Merrill Lynch Report. Exposure to Trackage Rights Dispute Minimal, Pg. 1, Sept. 19, 2008 Read More