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Alaska Railroad Moves Forward

O’Leary optimistic for growth

Alaskan Railroad CEO Bill O’Leary’s mantra is for growth, and he is optimistic about the corporation’s future.

Alaskan Railroad CEO Bill O’Leary’s mantra is for growth, and he is optimistic about the corporation’s future.

© Chris Arend Photography

It’s been a long season of change for the state-owned Alaska Railroad Corporation, and it’s not over yet. But with a new CEO at the helm and increased interest in a few of the railroad’s services, there are glimmers of hope on the horizon.

The Alaska Railroad is a smaller entity today than it was six years ago. Three rounds of layoffs have left the company nearly one third smaller than in 2008. While the corporation has seen declines among several freight customers, the biggest hit has been from its historically largest customer, the North Pole refinery.

“We’ve reorganized, we’ve gone through significant restructuring, and that’s just the people side of the house. We’ve also taken an immense amount of cost out of our non-personnel cost, to the extent we can,” says Alaska Railroad CEO Bill O’Leary.

“We have a renewed, aggressive focus on revenue generation right now. We’re not going to be able to cut our way out of the situation we find ourselves in right now. If there is a mantra I’m trying to push right now, it’s that we’re going to grow our way out of this situation,” O’Leary says.

 

An Alaska-Owned Railway with an Alaska-Born CEO

Bill O’Leary was born and raised in Fairbanks. He went to high school there and graduated from the University of Alaska Fairbanks with a degree in accounting. He has been at the Alaska Railroad since 2001 and CEO since November, but his connections to the railroad go deeper.

From its very beginning, the Alaska Railroad has been a public entity. Owned by the federal government from its early days, the State of Alaska bought the railroad in 1985 for $22.3 million. Throughout its history, the railroad has been a key figure in Alaska’s development, from supporting the war effort in World War II to helping build the trans-Alaska oil pipeline in the 1970s.

Although it’s owned by the state, the railroad doesn’t receive operational funding from the state. It relies instead on revenue from passenger service, freight hauling, and real estate, primarily. As the owner of the railroad, the state has the ability to conduct financial or performance audits. O’Leary helped write some of those early audits when he was fresh out of college and working for the Alaska Legislative Budget and Audit Committee.

“At that particular time, the railroad was of interest to the Legislature. It was relatively soon after the transfer [of ownership] to the state, so the railroad was still kind of figuring out its place in the world, not only within the state government but also in general,” O’Leary says.

The committee presented reports to the railroad suggesting ways to make it run efficiently. Whether those recommendations were followed or not (some were, some weren’t), it was a unique way to get to know the railroad, O’Leary says. He spent a lot of time evaluating many aspects of operations, from procurement practices to real estate activities.

After ten years at Legislative Budget and Audit, he moved to the financial controller position at the Alaska International Airport System. That’s the umbrella agency that oversees the Anchorage and Fairbanks International airports. O’Leary spent three years there before taking the chief financial officer position at the railroad under then-CEO Pat Gamble.

Gamble stepped down from the job in 2010, and O’Leary was interim CEO for about six months while the board of directors conducted a national search for a new leader. O’Leary applied for the job, but Alaska Railroad Corporation board members said he wasn’t ready for the role yet.

“We did feel there were some areas Bill needed more experience in,” says longtime board member John Binkley.

The board hired Christopher Aadnesen, whose resume included time as the assistant general manager of Union Pacific Railroad, CEO of Estonian Railways in Europe, and founder of the first privately run railroad in Mexico. But Binkley says Aadnesen didn’t plan a long-term career in Alaska. The board, whose long-time goal has been to hire an Alaskan from within the corporation to lead it, saw an opportunity.

“We made a strategic decision to work with Mr. Aadnesen to get Bill a greater depth within the organization,” he says.

O’Leary became chief operating officer, with a bevy of new roles: head of rail transportation, engineering, mechanical, safety, labor relations, marketing, customer service, and grant administration. In the three years Aadnesen was at the railroad, O’Leary was immersed in leadership training. When Aadnesen announced his retirement last year, Alaska Railroad Board Chair Linda Leary says the decision was an easy one to make.

“We have someone who has a strong financial background, as well as his experience on the operational side and having grown up in the company,” Leary says. “The key is the financial side, to kind of guide us through the tough times like we have right now. And he’s well-respected, by not only the employees but other business leaders in the community and by the Legislature.”

“Being the CEO is really about leadership, and Bill is a great leader,” Binkley says. “For a corporation to be successful, there are thousands of decisions that need to be made every day by all of the employees of the organization. And for an organization to be successful, those cumulative decisions have to be correct. For success, the CEO needs to be clear about the direction the organization is headed, give the employees the tools to do their jobs, and inspire confidence in them to make them confident enough to make good decisions.”

 

Losing Customers and Employees

Inspiring confidence and satisfaction among Alaska Railroad workers is something the board is focused on right now. Losing workers—especially one third of the employee pool—is hard on an organization.

The Alaska Railroad is among the state’s largest employers. O’Leary says the number of employees is around 600 year-round, with another 150 or so added for summer activities. Those are today’s numbers, down from the peak of around 1,000 workers in 2008.

The primary reason for the layoffs is the declining production—and now full closure—of the Flint Hills refinery in North Pole.

“That has been our largest customer, and it’s really been the backbone of our freight service between Anchorage and Fairbanks,” O’Leary says.

The refinery grew rapidly in the late 1990s and early 2000s, he says. Production peaked between 2003 and 2004. At that time the cargo division of the Anchorage airport was also growing, and Flint Hills supplied much of the jet fuel for those planes. The company was also exporting naphtha to Japan. Naphtha is a refined fuel often used to make lighter fluid, fuel for camp stoves, and many other applications from high-octane gasoline to cleaning solvents.

“It was growing a lot and we had meetings with [Flint Hills officials] about expansion,” O’Leary says.

Two fuel-carrying trains were moving round-trip between Anchorage and Fairbanks each day at the peak of operations, sometimes with a third train to transport non-fuel cargo.

But the high didn’t last. In 2005 and 2006, O’Leary says the volume of refined product began dropping, partly due to economic in-state refining issues and partly due to the looming world-wide recession, which brought a significant drop in air-cargo traffic.

By last year, the railroad was moving about one-seventh the volume of refined product being moved in 2003 and 2004. Even at one-seventh its volume, O’Leary says Flint Hills was still the railroad’s largest customer. The Alaska Railroad is still sorting out what its freight lineup will look like as the refinery finalizes its shutdown process. The number of trains running between Anchorage and Fairbanks declined from two daily, to one per day, to the five-day-a-week service being offered today.

Exported coal shipments have also slowed. Usibelli Coal Mine, operating at Healy, ships coal north to the Interior military bases and south for export to Chile, Korea, Japan, and elsewhere. Local coal shipments, O’Leary says, have held steady while prices on the export market have dropped. The drop happened more recently—in 2011 and 2012 Alaska Railroad moved more than a million metric tons of coal, but O’Leary estimates the railroad will move about half that this year.

Are more layoffs likely? O’Leary says the corporation is in a position where, if it cuts significantly more people, it will be harming the railroad’s ability to do its work safely and effectively. Now, he says, it’s time to turn the focus toward finding new sources of revenue.

“We’ve got our three overall lines of business—freight, passenger, and real estate activities. Each one of those is really focused on, ‘What do we have right now, what can we grow from right now, and what new opportunities are out there?’” O’Leary says.

It’s also time to heal, he says. Alaska Railroad workers tend to be enthusiastic about their jobs and their love of railroading, but even a love of the industry can be obscured when layoffs loom. O’Leary says he wants to help everyone at the railroad get ready to move forward.

“I want to get us out of the level of volatility that we have had and really prepare the organization for whatever is coming, whether it be a big gas line or expanding passenger service. I want to look inward to the organization and just make sure… that this is a place where people want to work,” he says. “Alaska has a big future ahead of it and we want to be an integral part of it, here.”

 

Growing a New Future

One of the most obvious ways to increase revenue is by tapping into the railroad’s roughly thirty-six thousand acres of land owned along the Railbelt. While much of the land is used by the railroad, O’Leary says there are significant holdings in Anchorage, Seward, and Fairbanks that might be better used for revenue generation.

The Alaska Railroad and the Municipality of Anchorage have been talking about using the railroad’s Ship Creek land, which extends to the public use dock, for decades. The municipality recently went through a new visioning process in which it considered three ideas for the property: as an extension of the Anchorage downtown, with a winter garden/market hall as a centerpiece; tapping the area’s recreational and economic features; or focusing on the waterfront features, which could include a transit center that will increase pedestrian use of the area.

The big questions, O’Leary says, are how to get the project from studies to reality and who pays for what.

O’Leary says there are plots of land in Seward and Fairbanks that are potential revenue sources. Expect to see movement in those areas, he says.

“Real estate is kind of ‘watch this space’ right now—hopefully in a year it’ll look different,” he says.

On the freight end, there are some positive trends to report. Rail barge traffic is up by 15 to 20 percent over last year, he says. Most of the increase is directly related to ramped-up production activities on the oil field, correlating with Senate Bill 21 oil tax revisions that passed during the 2013 Legislature, O’Leary says.

Barge traffic is a niche activity for the railroad. It allows companies in Alaska to have things like bridge beams or pipe made in the Lower 48. The goods can then be shipped from any city connected to a railway in either Prince Rupert, in British Columbia, or Seattle and loaded on a rail barge for shipment to Whittier. The loaded cars roll off the barge in Whittier and are taken by rail to their Alaska destination.

“We certainly saw an impact from SB21. We’ve had full barges, which we have not experienced in recent years here. It’s been a good thing and generally bodes well for the Alaska economy,” O’Leary says.

He says he hopes to increase freight use by increasing its marketing efforts. And although Flint Hills’ shutdown means shipments from the North Pole refinery will stop, Interior Alaska customers will still need refined fuel.

“[The Flint Hills shutdown] has really, in our mind, put the Interior fuel market and a number of markets into a state of flux. That’s going to be clarified in time,” O’Leary says. “The real question is: How much of that demand is going to be met by individuals using the Alaska Railroad?”

He says the company is taking a proactive approach; meeting with users to let them know the railroad can meet that demand.

 

PTC, the Railroad’s Albatross

An ongoing effort to meet a new federal mandate for railways that have passenger services is making the Alaska Railroad’s difficult financial situation even more problematic.

Positive Train Control, or PTC, is technology designed to stop a train before human error causes an accident or derailment. The requirement was passed by Congress in 2008 with the stipulation that the equipment be in place by the end of 2015. Non-compliant railroads could face fines or limitations on passenger service.

O’Leary jokingly calls it “the mother of all unfunded mandates” because the federal law requiring the new technology did not include funding. For Alaska, the cost to install the necessary equipment is estimated at $150 million, or roughly a year’s annual operating budget for the railroad.

To date, O’Leary says, the railroad has put about $65 million of its own and federal money toward the project and the State of Alaska has allocated $34 million as well. About $55 million more is needed to complete the project, plus an additional $5 million to $7 million a year to maintain it.

 

Passenger Service, a Love Story

While freight is the railroad’s largest source of revenue, passenger service, some would say, is where its heart is. It’s also a bright spot in the railroad’s future.

According to a McDowell Group, Inc. study of the economic impact of Alaska Railroad Passenger services, an estimated 373,700 non-residents traveled in Alaska by rail in 2012, spending about $100 million in the Railbelt. More than 40,000 Alaskans also traveled by rail.

Passenger services account for 17 percent of the railroad’s annual revenue and nearly two thousand jobs associated directly with the Alaska Railroad and with cruise lines, package tour operators, excursion providers, and other visitor-industry partners. The McDowell Group study estimated $50 million in labor income related to the railroad’s passenger services. And thanks to some projects in the works, O’Leary says those numbers might grow.

New this year, he says, the Alaska Railroad is offering direct-to-Denali trips. Typically, the Denali Star, with cruise ship coaches and baggage cars, leaves Anchorage at 8:15 a.m. every morning bound eventually for Fairbanks. Starting this year, Holland American and Princess Cruise Line passenger coaches and baggage will travel on a separate train departing at 9:15 a.m. and stop in Denali.

Passengers can easily travel on to Fairbanks if they choose to, but this offers a more direct connection for cruise ship passengers, he says. It’s a feature the visitor industry is excited about, which could mean more passengers for the railroad.

O’Leary says he’s also excited about continued growth on the Fairbanks end. While Southcentral has had several themed trains—the ski train, a Christmas train to Seward, and others—Fairbanks will likely have some new local train opportunities to consider in the future.

 

Positive Notes in Railroad’s Future

Other positive notes include the Northern Rail Extension, which would connect the Alaska Railroad to Delta Junction. The first phase of the project is done and a ribbon-cutting event is planned for this summer. The $180 million initial phase installed a vehicle bridge over the Tanana River—the longest bridge in the state—to allow military access to a huge year-round training area called the Joint Pacific Area Range Complex, or JPARC, used by the Army and Air Force. Future phases will extend rail from Eielson Air Force Base to Delta Junction, an eighty-mile project.

The $272.5 million, 32-mile rail extension connecting the Mat-Su Borough’s Port MacKenzie to the Alaska Railroad rail system is another positive note in the railroad’s future. The project is a partnership with the Mat-Su Borough and would allow bulk resource storage at the port, as well as providing room for transport and processing facilities. It includes the longest rail car loop in the state and provides Interior shippers a shorter route to tidewater. That project is underway and is estimated to be complete in 2017.

Ultimately, O’Leary says he’s looking forward to the future, with all the challenges it might bring.

“We’ve got a really great group of employees that are really dedicated to the railroad. That’s going to work for us,” he says. “It’s going to take some work for us to grow our way out of this thing, but… come back in a year.”

Rindi White is a freelance journalist living in Palmer.

This first appeared in the July 2014 print edition of Alaska Business Monthly magazine.

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