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Putting customers in the locomotive: the Alaska Railroad's freight marketing hinges on customer service.

Early one morning in April, Alaska Railroad Corp.'s vice president of marketing, Richard Knapp, is poring over his papers, preparing for a 10 o'clock meeting. The phone rings. Knapp's boss, Robert Hatfield, is about to address the shareholders of a large Outside corporation with operations in Alaska and wants to know how much pipe the corporation shipped to Alaska last year and by what mode.

Fifteen minutes later, Knapp receives the answer from a member of the railroad's marketing staff and promptly relays the numbers to Hatfield. Alaska Railroad's president and chief executive officer weaves the information into his speech, strengthening its message about the reliability of shipping by rail and extolling a renewed commitment by the Alaska Railroad to provide quality service to its freight customers.

The can-do resourcefulness of the sales department and the willingness of the CEO to roll up his sleeves and pitch the message of competitive prices and service to potential customers are indications of the Alaska Railroad's emergence from its first five years of state ownership.

Hatfield, on the job for about a year and a half, says the railroad has made a natural transition to more aggressive marketing following the tenure of Frank Turpin (now commissioner of the Department of Transportation and Public Facilities in the Hickel administration). The corporation's first CEO, Turpin focused on overdue and badly needed maintenance of track and equipment after the state's 1985 purchase of the line from the federal government.

Even without the more competitive stance, the railroad has done well under state control. It posted its fifth straight year in the black in 1991, generating total revenues of $68.4 million on freight, passenger and real estate activities.

Customer Driven. Like any business venture, the railroad's strategy for success has two main elements: attracting and keeping customers. The key to both, say Hatfield and Knapp, is service.

"I have never believed in competing on price alone. If you compete using price alone, you can only keep your customer as long as you keep your price, and there always seems to be somebody out there who is willing to charge $5 less," says Hatfield, a former executive of Southern Pacific Transportation Co. in Potomac, Md.

Hatfield says the railroad is implementing its customer service priority on two fronts. First, he stresses the importance of all railroad employees being customer-oriented. Second, he has invited major shippers to become directly involved in planning and trouble-shooting sessions with railroad staff to address their concerns.

Hatfield says he wants employees to see the big picture as well as to focus on their discrete parts of a complex operation. "Everybody, whether they are maintaining track, entering freight bills, dispatching trains, operating trains or doing engineering drawings, has a very specific impact on whether or not our trains arrive safely and on time," Hatfield explains.

"My purpose is to communicate throughout the organization that we are not in the business of running trains or fixing engines or maintaining track. We are in the business of providing transportation services. We have to get all our employees to focus externally, to say, 'How does my job relate to Mapco's oil train arriving on time?'"

Mapco Petroleum is one of the customers Hatfield has invited to participate in planning sessions, the second front in the service-improvement strategy. "We are involving our customers in some of our internal discussion about what service we are going to provide. We have regular meetings with Mapco to discuss the service design. Their input is exceedingly important, because we are not running trains to suit ourselves," Hatfield says.

"We are running trains to suit Mapco and our intermodal customers, the trailer-on-flatcar folks and all the rest. So we ask them in."

The resulting discussions have proven effective in identifying simple operations changes that can improve service. In one such instance, the railroad wanted to improve delivery time of fuel refined in Fairbanks and shipped to Anchorage customers. Tank trains were made up in no particular order, requiring a lot of time switching and sorting cars in the Anchorage yards. The railroad simply directed Fairbanks yard crews to assemble the trains so that cars going to the same customers or parts of town were together.

Knapp says the railroad's customer surveys indicate support for the emphasis on service. "Almost invariably customers will tell you that consistency and reliability of service is one of the most important considerations. The conclusion that I draw is that they're willing to pay a price for those."

He adds that cultivating new customers involves the same consideration of customer needs as do operational efforts to keep shippers happy. Knapp tells his marketing staff -- one person in Fairbanks, two in Anchorage and one in Seattle -- to put themselves in the customer's shoes.

"What's the customer's business? How does the customer operate? How can the railroad serve that operation? It comes down to knowing the customer's business as well as they do," he says.

Service & Smiles. Some regular, larger-volume shippers say they have noticed, and appreciate, Hatfield's approach. Laurie Gray, sales agent for CN Aquatrain, says the Alaska Railroad is critical both to his company and to its rival rail-barge operation, Alaska Hydro-Train. CN Aquatrain ships railcars between Prince Rupert, British Columbia, and Whittier. Alaska Hydro-Train is a Crowley Maritime subsidiary operating between Seattle and Whittier.

"We rely 100 percent on the railroad and we have an excellent working relationship. They'll bend over backwards on special movements," Gray says. The agent cites the example of a sensitive shipment of munitions destined for war games in the Interior, which required assembling a special train movement and coordinating delivery in conjunction with regular schedules. Gray gives the railroad highest marks for its special performance and says day-to-day service is better, too.

"In several areas we've noticed improvement in services. They're taking a more business-like approach in dealing with their customers and the people who work for them," he adds.

Mike Buza, president of Spenard Builders Supply, agrees. His company ships via the railbarge/railroad combination to bring materials from the Lower 48 through Whittier to Anchorage. Depending on freight hauling needs between Anchorage and Fairbanks, SBS shops around, seeking bids from the railroad and trucking firms for the intra-Alaska segment hauls.

Identity Crisis. Because it is state-owned (although operating from its own revenues, not state appropriations), the Alaska Railroad is faced with some unique problems, pressures and opportunities. Hatfield admits that the public continues to be confused about the ownership structure of the railroad. He is sensitive about the railroad's monopoly in the rail mode, and the perception that a state entity is taking customers from private businesses.

"Many people feel as though we're taking state money and using it to compete in the private sector. And of course, that's not true," Hatfield says.

On the other hand, many Alaskans look to the railroad to be an economic savior, opening up the country as part of a sweeping strategy to fire up the state's economic engines. "It's a very delicate balance. We're sensitive to our ownership," says Knapp. "We have an obligation to at least look at going into a situation that is marginal that probably would not hold up to the litmus test of private-sector feasibility analysis." But Knapp notes that the railroad requires an enormous investment to simply function, let alone remain competitive.

The line can only lose so much "without degrading the whole property. We have to make profit or our whole investment goes down the tubes," he explains.

The trucking industry has been the most vocal party raising the issue of private-sector competition. But Hatfield has a disarming response: He views truckers as occasional competitors and frequent partners.

"We will compete vigorously (in some areas), but I view truckers as an integral part of a system that includes both trucks and railroads, working together where it makes sense," says Hatfield. The net result is a less-expensive transportation system that supports a more vigorous economy, which continues to generate more traffic for everyone, Hatfield asserts.

Agreeing, Spenard Builders' Buza says, "Having both makes our life a lot easier. It's good healthy competition."

The railroad also faces competition from less obvious quarters. For example, there's what Hatfield calls "commodity competition," which pits Alaskan resources against resources that are higher quality or closer to world markets. In the case of shipping petroleum products, volumes hauled by the railroad approach those sufficient to justify consideration of a pipeline between Fairbanks and Anchorage.

Hatfield says the railroad's service strategies are geared toward addressing all forms of competition, real or hypothetical. But, as is true for any carriers, even with the best of service, the Alaska Railroad can only perform as well as the economy in which it operates.

The railroad's freight revenue picture remained positive in 1991. Fortunes varied depending on specific commodities and markets.

Coal. According to Knapp, the railroad hauls about 700,000 metric tons of coal from Healy to Seward. Although the business generated about 20 percent of the railroad's nearly $52 million in freight revenues last year, Hatfield maintains that the cost of hauling over two mountain ranges to tidewater at Seward makes coal an expensive proposition.

"The profit margin is so thin, it's invisible," he quips. "We're not giving it away, but our margins are so thin that everything has to work absolutely perfectly for us to break even, and we are imperfect."

Although last year's coal-hauling revenues were down slightly from 1990, Knapp says there are positive signs for the future. "Japan has virtually no coal, but a huge demand; the same with Korea. By 2000, many coal-consuming nations without supply are going to have a significant shortfall. Is there going to be a market for Alaska coal? All indicators say yes."

Petroleum. Hauling petroleum products, chiefly those produced by Mapco Petroleum in Fairbanks, has become a very important part of the railroad's freight business. "All of the projections are for growth, and we are enthusiastic about that," says Hatfield.

He says expansion of the air-cargo industry, which uses more fuel than passenger jets, and efforts to market fuel to Pacific Rim countries are helping. Revenues from hauling petroleum increased slightly from 1990, to about $18.7 million in 1991.

Gravel. Revenues declined from nearly $4.7 million the prior year to about $3.3 million in 1991. Hatfield projects a modest state capital budget and an upcoming influx of federal highway dollars will increase gravel revenues substantially in the near-term.

Interline freight refers to the materials shipped from the Lower 48 via the two rail-barge companies operating services to Whittier. Products include everything from equipment and machinery, liquefied natural gas and animal feed, to frozen fish, scrap metal, newsprint and staple goods.

Interline revenues declined slightly last year, to $10.3 million, comprising about 20 percent of the railroad's freight revenues.

Trailers & Containers. Although revenues generated by hauling trailers and containers on flatcars between Anchorage and Fairbanks account only for slightly more than 12 percent ($6.3 million) of the railroad's freight revenues, Knapp sees this traffic as an area for potential future growth. Noting he'd like to do better, he estimates the railroad may have roughly a 30 percent market share.

Timber. One high-potential area for future growth is hauling timber cut in the Interior for Pacific Rim export, Knapp says. Shipments to test markets began in 1988. Last year, the railroad shipped 2 million board feet; another 3 million board feet are expected to be transported this year.

"In a global perspective, that's not a lot of logs, but it's a bit more than we were shipping before 1988, which was zero, and it's got the potential for more," says Knapp. "We hope that in the long run it will develop into a pretty good business. It puts people to work."

Although much of the political controversy surrounding state acquisition of the railroad has died down, allowing the line's approximately 600 employees to get on with the firm's unique economic mission, some critics still feel the state should not be in the railroad business. Hatfield doesn't expect opposition to dissolve and realizes his best defense is to carry on. The CEO's energetic, good-natured demeanor understates his fierce determination to push the railroad to greater effectiveness and profitability.

With freight revenues strong and promising new markets being cultivated, with passenger revenues climbing and real estate developments in full swing, the Alaska Railroad is reminiscent of a long freight train coming out of a steep and winding grade, getting ready for an open-throttle run across a flat expanse ... Hear that whistle?
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Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Date:Jun 1, 1992
Words:2097
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