Incorporated: 1887 as Kansas City Suburban Belt Railway
NAIC: 482111 Line-Haul Railroads
SIC: 4011 Railroads - Line-Haul Operating
The Kansas City Southern Railway Company (KCSR), based in Kansas City, Missouri, is the primary operating unit of holding company Kansas City Southern, a public company that also operates Kansas City Southern de Mexico, S.A. de C.V. (KCSM), and the Texas Mexican Railway Company. Linked together they create a major north-south rail corridor for commerce between Mexico and the United States. The parent company also owns a half-interest in Panama Canal Railway Company as well as controlling other transportation subsidiaries. KCSR is comprised of 3,226 miles of tracks spread across ten states: Alabama, Arkansas, Illinois, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee, and Texas. The line hauls intermodal containers, motor vehicles, coal, and such general commodities as agricultural and mineral products, chemical and petroleum products, minerals, and forest products.
19th-Century Origins
KCSR was founded in 1887 as Kansas City Suburban Belt Railway by Arthur Edward Stilwell. He was born in Rochester, New York, the grandson of one of the founders of the New York Central Railroad, Hamblin Stilwell, who was also involved in the founding of the Western Union Telegraph Company and the building of the Erie Canal. As a child, Arthur Stilwell was asked by one of his grandfather's friends, Commodore Vanderbilt, what he would do when he grew up, and he replied, "I'm going West to build a railroad!" He took a circuitous route to railway building, becoming a printer and then the publisher of advertising-supported railroad timetables before moving to Kansas City where he planned to realize his long-held dream. To raise the necessary capital he formed a trust to sell lots and houses on the installment plan, a venture that made him a fortune. In 1886 one of his shareholders, former Kansas City Mayor Edward Lowe Martin, told him of an option he held to build a belt line railroad intended to link all of the railroads that came into the city, but it was set to expire in two days. Stilwell was able to raise the money required to begin construction, the "belt line" was incorporated in 1887, and it began operations in 1890.
Stilwell's grand scheme was to build a railroad that would extend south to a port in the Gulf of Mexico, thereby challenging the supremacy of the eastern railroads. Although he claimed to be the originator of the idea, in truth the concept was apparent to anyone with a map. To his credit, however, he was the first to succeed. Even as the Kansas City belt line was being constructed, Stilwell began acquiring small lines and securing charters to the south of Kansas City. In 1893 he formed a company called the Kansas City, Pittsburg & Gulf Railroad Company (KCP&G) to consolidate these lines and extend them to Texas, where he terminated the line at the Gulf port city he built and named after himself, Port Arthur.
Emerging from Bankruptcy Under a New Name: 1900
The 800-mile KCP&G was completed in 1897, funded in large part by Dutch investors. Kansas City became a major grain city because of the new railroad, which prospered immediately, but it quickly became apparent that it had been hastily constructed. Due to poor grading, a lack of ballast, and poorly built bridges, the KCP&G suffered regular derailments. Moreover, it lacked an adequate supply of locomotives and rolling stock. Stilwell was unable to arrange further financing and in April 1899 the KCP&G went into receivership. A year later the line was reorganized by eastern financiers and was renamed The Kansas City Southern Railway Company. Stilwell was also removed as president. He would go on to build another railroad, the Kansas City, Mexico & Orient, which was to connect Kansas City to the Pacific Ocean. Although never completed, it was eventually incorporated into the Atchison, Topeka and Santa Fe System.
After Stilwell's departure, KCSR soon enjoyed good fortune when in early 1901 oil was discovered near Port Arthur, establishing the Spindletop Oil Field and setting off an oil boom that provided a great deal of business for the railroad. Oil fields developed near the KCSR line in Louisiana and Arkansas, and refineries were built at Port Arthur and Shreveport, Louisiana. Lumber mills south of Shreveport and elsewhere provided a great deal of business as well. In 1939 KCSR expanded its scope by acquiring the Louisiana and Arkansas Railway Company, the addition of which allowed the line to reach Dallas and connected Kansas City to New Orleans. Soon luxury passenger service was provided between Kansas City and New Orleans on the famed Southern Belle, which was regularly used by Kansas City's favorite son, President Harry S. Truman.
In 1941 William Neal Deramus, Jr., was named president of KCSR. He had worked his way up from the bottom, dropping out of school after the eighth grade to take a job sweeping a station and tending the switch lamps. He then studied Morse code and became a telegraph operator and began learning the railroad business. In 1909, at the age of 21, he joined KCSR and began his steady rise through the ranks, playing a key role in keeping the line solvent during the Great Depression. Deramus became chairman of the board in 1945. Under his leadership a long-range improvement program was instituted and KCSR was able to increase freight and diversify into other areas at a time when other railroads were beginning to suffer. The company was also an important innovator, developing ways to control parts of the lines through microwave transmissions and computers to streamline accounting systems.
Deramus was succeeded as president in 1961 by his son, William Neal Deramus III. Although he held a law degree from Harvard University, he was very much a railroad man like his father. He started out working for the Wabash Railway and in 1949 became president of the Chicago Great Western, becoming the youngest person ever to head a Class I railroad. Despite his railroad pedigree, however, the younger Deramus recognized that given the rise of a national highway system and large truck fleets, the prospects for growth in the railroad industry were bleak, and he did not hesitate to seek opportunities outside of rail transportation. In 1962 he established Kansas City Southern Industries to serve as a holding company for KCSR and a variety of non-rail investments, including mutual funds, and radio and television stations.
KCSR was soon neglected. Following three years of losses, the line terminated passenger service in 1967. By 1973 the system was in dire condition and in need of major repairs. A new president, Thomas S. Carter, a civil engineer by training, was able to convince the parent company to invest $75 million to improve rail beds. He then used operating revenues, supplemented to a large degree by a 20-year contract to ship coal to Texas and Louisiana power plants, to make further improvements that helped to bring in more coal business. While the hauling of coal accounted for just 1 percent of the line's cargo in 1973, it grew to 20 percent in 1982 and 33.1 percent in 1991. Much of that increase in volume was due to the export of coal, a large amount of which went through Port Arthur.
MidSouth Rail Corporation Acquired: 1994
To grow the business Kansas City Southern Industries invested $500 million between 1987 and 1993 to buy new diesel locomotives and to upgrade track and facilities. KCSR also looked to expand through acquisitions. In 1987 it offered $2.6 billion for Southern Pacific Corp., about ten times larger in size, but the bid proved unsuccessful. The line enjoyed better luck in 1993 when it struck a deal to acquire MidSouth Rail Corporation for $200 million. The transaction was completed on the first day of 1994. The addition of 1,200 miles of track extended KCSR's territory to such areas as Meridian, Mississippi; Counce, Tennessee; and Tuscaloosa and Birmingham, Alabama. Moreover, KCSR obtained trackage rights into Gulfport, Mississippi, and was positioned to interchange with Norfolk Southern and CX, resulting in what would be called the Meridian Speedway, a major route linking the Southeast and Southwest.
By this point, KCSR's parent company was an unusual collection of railroad and financial asset management units. Kansas City Southern Industries decided to divest KCSR, which at the time was the 12th largest railroad in the United States. In 1994 an agreement was reached with Illinois Central Corporation to sell KCSR for $1.6 billion in stock plus the assumption of $929 million of debt, but just three months later the deal fell through due to Wall Street tepidness, and KCSR remained a part of Kansas City Southern Industries.
It was a time of consolidation in the railroad industry, which saw the creation of Burlington Northern-Santa Fe and Union Pacific-Southern Pacific, a pair of giant Class I railroads that in effect surrounded KCSR and threatened to choke off business. To meet the challenge KCSR brought in a new president and chief executive officer in May 1995, Michael R. Haverty, Santa Fe's former president. Like many of the men who preceded him in this office, Haverty hailed from a railroad family, the fourth generation to be involved in the industry. His great-grandfather began the association when as an Irish immigrant he began laying track for the Central Branch of the Union Pacific in 1860. Haverty began his own railroad career 102 years later, after becoming the first in his blue-collar family to graduate from college, serving as a brakeman on the Missouri Pacific. In 1967 he completed the line's management training program and three years later went to work for the Santa Fe, making his way through the executive ranks until becoming president and chief operating officer in 1989. In 1994, however, his relationship with Santa Fe chairman Rob Krebs soured and he left the company.
After taking over KCSR, Haverty was quick to begin a major transformation of the line, looking to take advantage of the North American Free Trade Agreement (NAFTA). It was ratified in 1993, eliminating trade restrictions between the United States, Mexico, and Canada, and promising to result in major changes to North American shipping. With the north-south orientation of most of its tracks, KCSR was uniquely situated to exploit the new business that was to develop. Moreover, Mexico decided to privatize its railways.
Haverty first acquired a 49 percent stake in the 157-mile Texas-Mexican Railway (operating from Corpus Christi, Texas, to the Mexico border), from Transportacion Maritima Mexicana S.A. de C.V. (TMM), careful not to acquire majority control in order to avoid the need for approval from the Surface Transportation Board. He then maneuvered to take advantage of the Union Pacific and Southern Pacific merger that was still facing approval, and ultimately secured trackage rights in Texas that would provide a key connection between KCSR and a Mexican railroad.
The first Mexican line to be privatized was Ferrocarril del Noreste (the Northeast Railway). In 1996 KCSR and TMM made a winning $1.4 billion bid to operate the Northeast Railway for 50 years, thus creating a rail corridor from Mexico through the heart of the American Midwest. It began business in June 1997 as Transportacion Ferroviaria Mexicana S.A. de C.V. (TFM), and was an immediate success.
Also in his first two years at the helm of KCSR, Haverty acquired the 400-mile Gateway Western line, which connected Kansas City to St. Louis and provided haulage rights from Springfield, Illinois, to Chicago over Southern Pacific lines. KCSR gained access to Minneapolis and the upper Midwest through an alliance that bought Canadian Pacific's Chicago-Kansas City and St. Paul-Kansas City routes. Finally, KCSR took over the 47.6-mile Panama Railroad Co. (despite its modest length, the world's first transcontinental railroad when it was built in 1855), which would be operated in the Canal Zone by subsidiary Panama Canal Railway Co. This assemblage of lines was dubbed the "NAFTA Railroad" by KCSR.
Kansas City Southern Industries made plans to spin off KCSR in a public offering of stock in 1997, but like the earlier deal to sell the line, it too failed to materialize. Instead, the line continued to build its Mexican business, which benefited from automobile parts and grain from the Midwest shipped to Mexico. KCSR also looked to do business with the northern member of NAFTA, Canada. In 1998 it reached a 15-year marketing agreement with Canada National and Illinois Central that generated significant traffic with pharmaceutical and chemical companies.
KCSR's Mexico-U.S. rail corridor, while successful, proved difficult to operate through multiple ownership, especially because TMM was struggling. Thus, in the early years of the 21st century KCSR moved to bring all of the assets of the NAFTA Railroad under single ownership in order to improve operational efficiency. Negotiations were begun with TMM and in April 2003 KCSR announced that it had reached an agreement to acquire a controlling interest in TFM for $400 million in cash and stock. Union Pacific Railroad, still smarting over KCSR's maneuvers during its acquisition of Southern Pacific several years earlier that resulted in the winning of valuable trackage rights, did its best to stymie approval of the deal. Soon the rival lines were exchanging charges of intimidation in filings presented to the Surface Transportation Board. Complicating the matter further, in August 2003 TMM shareholders rejected the sale. Months of intense negotiation followed and it was not until July 2005 that KCSR finally completed the purchase of a controlling interest in TFM. The Mexican government still owned a 20 percent stake in the line, but it too was acquired later in the year. TFM was renamed in December 2005, becoming Kansas City Southern de Mexico.
KCSR was able to upgrade Kansas City Southern de Mexico, allowing the company to take advantage of the surge in intermodal traffic, the railroad industry's fastest-growing market, fueled by soaring imports. East-west railroads were congested with trailer and container traffic, allowing KCSR to pick up business, essentially serving as a release valve, directing traffic to Mexico's Pacific port of Lazaro Cardenas. Not only did congestion make Mexico a viable option, but less expensive, nonunion labor was also available. As a result, KCSR was well positioned to grow its Mexican business in the years to come.
In 2002 Kansas City Southern Industries shortened its name to Kansas City Southern. Haverty served as chairman and CEO as well as heading KCSR. In 2006 Arthur Schoener was named Kansas City Southern's president and chief operating officer and CEO of KCSR, allowing Haverty, who remained CEO and chairman of Kansas City Southern, to groom his likely successor. Schoener had started his railroad career with Missouri Pacific Railroad in 1968 and became an executive with Union Pacific after its acquisition of Missouri Pacific in 1982, staying with the company until 1997 when he left to form a transportation consulting firm. In October 2007 Kansas City Southern made further changes to its executive ranks. Scott E. Arvidson became KCSR's chief operating officer, Schoener's number two man and his possible successor at the helm of the railroad. Haverty, meanwhile, remained chairman and CEO of the parent company with Schoener continuing to wait in the wings.
Principal Subsidiaries
Kansas City Southern de Mexico, S.A. de C.V.; The Texas Mexican Railway Company; Panama Canal Railway Company; Meridian Speedway, LLC.
Principal Competitors
Burlington Northern Santa Fe Corporation; Canadian National Railway Company; Union Pacific Corporation.
Further Reading
Aguayo, Jose, "The Little Railroad That Hopes It Can," Forbes, April 21, 1997, p. 58.
Frailey, Fred W., "Mike's Big Railroad: Remember the Little Kansas City Southern?" Trains Magazine, August 2003, p. 28.
Gallagher, John, "Bridging a New Connection," Traffic World, July 31, 2006, p. 18.
------, "KCS Names Schoener President," Traffic World, June 26, 2006, p. 27.
Galloway, Jennifer, "A Sale and a Partnership Derailed," Latin Finance, December 2003, p. 28.
Glischinski, Steve, "Kansas City Southern Fights Back," Trains Magazine, June 1997, p. 60.
"KCS Takes Century-Old Vision into the Future," International Railway Journal, July 2005, p. 20.
Vantuono, William C., "Mike Haverty, Railroader of the Year," Railway Age, January 2001, p. 33.
Veenendaal, Augustus J., Jr., "The Kansas City Southern Railway and the Dutch Connection," Business History Review, Summer 1987, p. 291.
— Ed Dinger
