Hays T. Watkins

Chairman and CEO (retired)
CSX
 
Interview Transcript

May 12, 2021

Brooks Bentz (BB):  Welcome to another one of the National Railroad Hall of Fame oral histories. It’s Friday, November the 5th, 2020, and we’re at the home of Darius and Stephanie Gaskins in Ipswich, Massachusetts, for what we expect will be a lively interview with Darius. He’s had a fascinating career in a Forrest Gump sort of path from West Point to time with Chuck Yeager to leading the industry through deregulation as ICC Chairman, and then putting theory into practice leading BN from a stodgy old railroad to industry leader in innovation.  I had the distinct pleasure of working in his organization after having been with a series of bankrupt railroads in the Northeast, and the energy and creativeness and the ability to take risks was distinctive. So, thanks for your time and having us in, and let’s start at the beginning. You were born in 1939. Would you just take us through a little bit of the childhood experience in Virginia?

 

Darius Gaskins (DG):  Well, I was actually born in the District [of Columbia] and lived in an apartment with my parents, and my mother was anxious about raising children in the District of Columbia, so she insisted we move to Great Falls [Virginia].  When I was two, we moved up to Great Falls, which was an interesting time. It was 1941, about the time Pearl Harbor came and all these things were going on and Washington was on a wartime footing.  We had blackouts, we had gasoline rationing, we had all those things.  Those were my formative years; I grew up in World War II.  Then, my mother-- I went to grade school in Vienna, Virginia, and then went to a different one -- but my mother got impatient with the school system in Fairfax County, which is kind of ironic because Fairfax County now has probably the best school system in the whole country. But at that time, it was largely dairy farms, and she didn’t think it was quite up to snuff. So, she sent my older sister to a fancy school, and she sent me to Sidwell Friends, which was a school in D.C., which was a shock for a country boy with no concerns in the world to go to Washington, D.C. with all the children and daughters and sons of rich and famous people, politicians, etc.  But it was a good experience.  It was a good school.  It’s a Quaker school, and obviously I got the full dose of Quaker meetings and, you know, the way they think about things. So, my next stop was West Point, which was quite a little different animal.

BB:  So how did you A) decide on West Point, and B) get the appointment?

 

DG:  Ah, there’s a story.  Because I lived sort of inside the Beltway, or close to the Beltway, I thought Washington was the center of all things. The military seemed to me to have the right attributes: they were trying to defend the country and make it safe from the Communist menace and all those things.  I saw successful military figures there, and I thought, Gee, I think I’d like to do that.  So, that was my notion.  It created a little conflict at my school because Sidwell Friends, first, they’re pacifists, and second, I was a very good student.  They thought it was terrible that a good student would go to West Point. [laughing] Maybe a mediocre one, but not a good one.  So, I got a lot of blowback from my teachers.  And to get the appointment was relatively straightforward. My mother by this time was fairly prominent in the Republican Party in Northern Virginia, and she went to our local congressman and said, Can you get my son an appointment?  He says, Well, he’ll have to take the test, but yeah, I think we could probably work that out. I took the test, and I got an appointment. So that’s how it happened.

 

BB:  And how was your West Point experience?

 

DG: Interesting. [chuckles]. It was quite different than the Quaker high school. But I didn’t find it very difficult because I had the ability to stay out of trouble. I mean, at West Point, if you get exposed as a troublemaker or somebody that can be picked on, they’ll pick on you. So, that didn’t happen to me.  I just sort of slid through it.   And I enjoyed most of it.   I mean, it wasn’t great getting up at six o’clock in the morning and marching all the time and doing that, but it was alright, and I enjoyed the experience.  Made a lot of good friends there.

 

BB:  So, when you come out, your commitment to the Army was for four years?

 

DG: Well, at that time, you had the sort of three years in any branch of the service, but I had a strategic choice to make. I was set up to go in the Army, but at this time, Vietnam was starting to heat up a little bit and there was garrison duty in Korea, which was not very pleasant, or Germany, which was very pleasant.  And then the Air Force, because of Sputnik and everything else, they were trying to gear up to respond to the perceived challenge of the Soviet Union in space, and so they were training a lot of people in aeronautical and astronautical engineering. They told me, Well, if you come with us, with your class standing and so forth, we’ll send you to graduate school. You don’t have to go to ranger school, you don’t have to jump out of airplanes; we’ll send you right off to a nice university where there’s coeds. [chuckles]. So, I put my hand up [and said], I’ll go for that. So, they sent me to the University of Michigan for two years. I studied aeronautical engineering and what they called instrumentation engineering at that time.  It now has a different name. But it was all involved in the space program.  It was all geared toward the skills you needed to have as an engineer to put a man in space, get to the moon, whatever your mission was.

BB: So, when you come out of there, are you then in the Air Force?

 

DG: Yeah, I was in the Air Force. I left West Point, I was commissioned to the Air Force as a second lieutenant, went to graduate school for two years -- by that time I was a first lieutenant -- and my first assignment was Edwards Air Force Base, which is the basic testing center for the Air Force in California’s Mojave Desert.  At Edwards -- this is kind of the interesting thing -- it wasn’t like I figured this all out, things happened to me and I reacted to what happened to me.  At Edwards, my first assignment was the Dinosaur Project, which was a project that the Air Force had. They were going to put a vehicle in space and orbit over the Earth and be able to fly it back down and land it at Edwards Air Force Base. The avowed purpose was to spy on the Russians, basically.  At this point, we had U-2 [spy plane] flying around, Gary Powers had been shot down, and we had the SR71, which was called the Blackbird, which was a surveillance thing. So, surveillance was very important. And that was the mission, but it was going to be tricky because to be able to launch, get into orbit, and come back down was a technologically different task. Because of budgetary matters, I got there in like June, and I think it was in October, the President at the time, Kennedy, said, We’re going to cancel that program. We’re not going to do that anymore. So, there I am.  I’m at Edwards Air Force, my first job, it’s gone.  So, I ended up getting a job at the test pilot school, and I served there for four years.  Because I had been to graduate school, I owed them some more time.  I was obligated to stay until 1967, and when the time came, the Air Force was not going to be going to the moon, that had been decided.  We did have some secret projects involving space flight. But they didn’t look real attractive to me, and I said, [I] made a bad choice. I think I will go do something else.

 

BB: So, when did you meet Stephanie?

 

DG: I met her before, when I was in college at a model UN. She was a Political Science major at Mount Holyoke, and I would do anything to get away from West Point for the weekend, so I was at this thing, arguing -- the issue of the day was, ‘Should we recognize Red China?’ That was the issue of the day. Somehow, that issue keeps coming back. [laughs.] Different form, question’s a little different, but it’s very similar. We’re still grappling with that.

 

BB: And that was in Canada, right?

 

DG: Yeah, it was in Montreal.

 

BB: Montreal. And she just appeared there as a vision?

 

DG: Well, she came with a busload of other women from Mount Holyoke and I was there with three or four cadets, and it was -- we met.

BB: Okay. But that’s a leap from that to now having five kids and living --

 

DG:  Well, that’s-- it took a while to get totally embroiled in this thing [laughs].  I graduated, I wasn’t going to get married, and I was at Ann Arbor, and we had a tragedy in her family.  Her mother died suddenly, and Stephanie was at 6s and 7s, so we decided to get married at the point, rather than --

 

BB: While you were in Michigan.

 

DG: Yeah, while I was in Michigan.

 

BB: So, she got to go to Edwards Air Force Base with you.

 

DG: Yes, oh yes, we were partners from then on.

 

BB: And how did she like living in the desert?

 

DG: She never complained. I don’t think she was wild about it, but she found good things to do almost anywhere she went. She loved to hike, and there was good hiking there. Lot of friends. We made good friends.  And she had two children by this time. She had a daughter and then my son was born in ‘66, and so we had two children at Edwards.  It was a good life, it wasn’t bad. I travelled around the world doing things, talking to people about one thing or another, and she got left behind but that was standard for a military wife.

 

BB: So, she’s out in the desert and you’re off doing exotic trips?

 

DG: Well, I was, yeah. I was in London, I was in Stockholm, I was in Italy, some of the tough duty spots, yep.

 

BB: So, after the Air Force, you go back to Michigan for your doctorate?

 

DG: Yeah, again, a fork in the road. I was not trained for what I wanted to do, okay. Because I -- remember, I grew up in Washington, D.C.  I always thought the government was important, had an important role.  And I realized that the skillset you need to be involved in policy and the government is not aeronautical engineering.  That’s not right at the tip.  It’s more important to either understand political science, international affairs, or economics.  And I liked economics better than everything else, and I was good at it, though I had had very few courses. So, I applied to graduate school to get a PhD in Economics. I didn’t even want to get a PhD, I just wanted to get a degree in Economics so I could go back and work for the government in some policy role, that was my goal.

 

BB: You hadn’t picked out an agency or a department or anything like that?

 

DG: No, no, no, I just…I wasn’t sure what the opportunity would be. Turns out, first, the fancy Economics Departments in the country didn’t let me in. They looked at me like, Who are you? What are you thinking coming to Harvard, Yale? What are you, crazy? So that didn’t work. And then I had been a good student at Michigan, so I called up an engineering professor of mine, and said, Can you help me out here? I’d like to study Economics, and you remember me. He said, Oh, yeah, I remember you, Darius.  So, he called over to the Economics Department and said, You should look at this guy, he’s pretty quick. And they took me in. I had no money.  I had G.I. Bill, a little savings, but I was a good student, and they recognized that, and they started giving me money. Fellowships and stuff like that.  I basically did quite well financially when I was in graduate school and it only took me three years to get a PhD in Economics.

 

BB: So, you’re in Michigan with Stephanie and two kids and limited income.

 

DG: Yes, living in a little small house, yeah, it was not all pleasant.

 

BB: Right.

 

DG: But it wasn’t bad. We had everybody else that was impoverished like we were.  A dentist, across the way, good friend of mine. We had a lot of friends. We lived in the student housing, basically.

 

BB: So, when you get through, you then go to Berkeley, before…

 

DG: Yeah, well, that was a fork in the road.  I fully intended to go to Washington, and I now had the pedigree, right? I had a PhD, not just a Master’s, I had a PhD. But the academics at Michigan said, No, you can’t be going to Washington. We’ll introduce you to a few people, but you can’t be doing that. We got an opportunity to put you in the big time, son. So, they wanted me to interview at Berkeley, Princeton, and so forth and so on, and those schools offered me a job, at which point I had to decide. Would I want to go to a…Berkeley was a very fancy, and so was Princeton, a very fancy Economics Department.  And I said, Well, maybe I’ll try this academic thing for a while. I think I can handle it.

 

BB: What was your PhD thesis on?

 

DG: It was a theory of pricing for a dominant firm or a monopolist.  How do you maximize your profits over time when people can enter your industry depending on what prices you charge?  So, it was just a theoretical thing, but I had had the mathematics I had learned in the Air Force about Pontryagin’s Maximization Principle, and I applied that to this problem and got a very interesting answer. That was my dissertation, basically.

 

BB: Good grounding for later at the Commission.

 

DG: Well, it kind of enters in every once in a while.  I won’t say that any railroad is really a monopoly, but there’s always a threat of entry in every market that you have, so the tradeoff that you have between, you know, making profits in the short run and getting unwanted competition in the long run, it’s always there and you have to think about it.

 

BB: Right.

 

DG: But…so I went to Berkeley.

 

BB: How did you pick Berkeley over Princeton?

 

DG: Probably a mistake.

 

BB: [laughs].

 

DG: It was a slightly better department.  It had more Nobel laureates, and it was more mathematical. So, I felt a little comfortable with it. But Princeton was closer to Washington, and actually, with hindsight, maybe I should have gone to Princeton, not to Berkeley. Because I really cared about public policy.

 

BB: So, you’re at Berkeley during the time--

 

DG: 1970 to ‘73 was my first tour there.

 

BB: Right, and Vietnam is going great guns --

 

DG: Well, I walked on to campus in 1970 and you could smell tear gas in the air because the students had just had a riot and they were attacked by the police with tear gas.

 

BB: Protest, you mean.

 

DG: It was a protest, yes.

 

BB: [laughs].

 

DG: And I said, Ooo, maybe this is not-- maybe I didn’t figure this out real well. [chuckles] And it stayed a lively place, I mean Berkeley was very lively in those days. We enjoyed it, we made a lot of friends there, and we enjoyed the life.  But I really wanted to go to Washington, so after three years, I asked for a leave of absence, and they gave me a year off and said, Yeah, you can go to Washington, take a job. At which point, I put my name back in the hopper for some policy-related jobs --

 

BB: And which hopper would that be?

DG: Well, you have to know somebody. You know, I had my thesis advisor knew people at OMB, so he was pushing my name for a job at the Office of Management and Budget. But I also had a classmate from West Point who was a policy guy who had been at HEW and then had moved with Rogers Morton, the new Secretary of Interior, to Interior.  So, I put my hand up, I said, Hey, you know, I’m interested in natural resource policy, and that’s kind of what my strength is.  Do you have anything for me?  And I went back, and they interviewed me, and they said, Yeah, we can use you.  So, I got there in like September, I think, of 1973.  I think that is the right time.  And just about then, the war in the Middle East, the Yom Kippur war had occurred, and the price of oil had gone through the roof and everybody was running around Washington like a chicken with no head because what’re we gonna do? We had oil prices going up; because of some policy responses, we had gas lines; we had all kinds of bad things happening because we were highly dependent on oil.  So, my boss, who was the Assistant Secretary for Policy, said, What do you want to do? I said, I think I’ll do oil policy. He said, What do you mean? I said, Well, you’re sitting on the Outer Continental Shelf. Interior controls it.  And there’s potentially oil and gas there, and we’re producing a lot already but we kind of go real slow with it. Why don’t we, in response to this national emergency, why don’t we have an accelerated leasing program? And people said, Well, that’s a good idea. So, then I gave speeches and wrote papers and the next thing I know, I’m in front of Congress and we’re trying to accelerate leasing on the offshore.  And it was pretty controversial, because people in California didn’t want it. They had already had a spill in Santa Barbara.

 

BB: I remember that, yeah.

 

DG: People on the East Coast didn’t want it then and still don’t want it.

 

BB:  Right.

 

DG: And there was controversy about Alaska because there had been a -- about that time, there was a spill. Valdez spilled in the Gulf of Alaska. So, it was a controversial program, but it was good grounding.  I got a chance to talk to a lot of people, make arguments, fashion a program that looked like it was arguably in the public interest, and we tried to accelerate to leasing ten million acres a year, which is a lot of land.  We had some success but there was a lot of blowback. I mean, we got a lot of opposition. I was in that, and I was involved in it, and this was in the Nixon Administration. It was one of the few positive things that they were doing on energy. Everything else was negative, you know, they were creating gas lines, they were holding down oil prices, they were doing all these things that were not very good for the country, for the economy, anyway.  But this was potentially a positive because you could get more drilling activity, presumably find more oil and gas, that was the theory. So, I stayed and worked another year, and I moved around in Interior. They created different jobs for me, but I was always focusing on mineral policy, particularly the offshore stuff.

 

BB: And this is during the Nixon years, which obviously unraveled. How was it for--

DG: Well, that was-- lunch was entertaining. The Interior building is about two blocks from the White House, so we’d get lunch, we could take our sandwich and go over and sit across from the White House in Lafayette Park and watch the, you know, the soon-to-be-indicted people going in and out. It was fascinating.

 

BB: Was there an effect on day-to-day workflow because of all the turmoil?

 

DG: No.

 

BB: Didn’t impact it.

 

DG: We were in a favored position because what we were doing was not seen as a threat by either the Congress or the next administration. The environmentalists felt threatened by us, but not any of the normal interest groups that care about mineral policies.  So, we were able to press ahead.

 

BB: So, did you then go back to Berkeley?

 

DG:  Yeah, I had told them I’d come back so after two years, I went back to Berkeley, served for one more year as an assistant professor, and I said, Nah, I can’t. This is too dull for me.

 

BB: Too theoretical.

 

DG:  I had really had the bug at that point, so I was committed to policy in Washington.  And my next job –– again, my thesis advisor had been the Head of the Bureau of Economics at the Federal Trade Commission, and at this time they had a whole bunch of lawsuits involving people like Kellogg’s, the cereal maker, oil companies, they were suing everybody over one thing or another. So, I went back there to replace my thesis advisor as the Director of the Bureau of Economics at the FTC, which was an interesting job, but it was a difficult time because we had all these cases and it pretty much didn’t make any sense.  I mean, we were doing it in reaction to political pressures and we didn’t always think them through real well, so we found ourselves with a situation where we had some, what I consider to be unwinnable cases. So, one of the things I did in that job was I convened a panel of experts to look at the so-called Exxon case, which is a case against the oil companies, and I said, There’s a stable here and there may be a pony in this stable, but there’s a lot of other stuff here. Could you figure out what the theory of this case should be? And if it’s not what we’re pursuing, we’ll shift it over. They were all well-known people in the energy field, and they met over a period of time, and they came back and said, Well, Darius, you know, if there’s a problem, it’s nothing to do with this case. You’re not going to solve it with this case; it has to do with other government policies. You should drop the case. Which I thought, Well that’s a bombshell. I can’t wait to tell the commissioners that we should drop this case. Well, it never got that far because my counterpart, who was the head of the lawyers at the FTC, said, Not so fast. You people have signed a Non-Disclosure Agreement and I want every copy of that draft report in my office, and I’m going to put it in a safe. And that was the end of it, as far as he was concerned. I was stunned because I thought up until then–I was kind of a naïve guy, you know–you study something, you look for an answer, you get the answer, you give it to the powers that be. Well, sometimes, they don’t like that answer so that one didn’t go anywhere, the case didn’t go anywhere either, so no real harm was done. Just a lot of wasted lawyer time.

BB: Think that stuff’s still in a safe down there.

 

DG:  Well, no, eventually it got out. And the oil companies knew about it, I mean, they knew about it all along so if they had ever gotten into real trouble in the court, they could get this because the lawyers had it, so you’re supposed to turn that over to the other side, right? Some kind of legal procedure, but they didn’t.

 

BB: So, you went on to the CAB? How did that transpire?

 

DG: Well, same deal. I was interested in policy. Oil policy was not going very well. I mean, we didn’t accelerate leasing very much. We still had price controls on oil and gas, which were hampering a lot of things. So, I was looking for something else to do, and then again, bump in the road.  There was an election, and Jimmy Carter was elected president, and of course he’s going to replace all [the previous administration with] his appointees, and his appointees with the Chairman of the FTC. Well, he brought in Mike Pertschuk, who was a staffer for the Senate Commerce Committee, and Pertschuk had a much different view about economics and about antitrust and about competition policy than I did.  And he told me that he really thought I should find something else to do.

 

BB: [laughs]. Created an opportunity for you.

 

DG: He created an opportunity. Again, I was a little naïve, because I said, Well, I’m not a political appointment. I just got a schedule C job.  He said, No, I think I’d really feel better with my own man. So, I got the hint, so I then started looking for a job. I talked to MIT and they offered me a job. I talked to OMB again, and then Fred Kahn, who was a famous economist who was responsible for deregulating the airlines, called me. He had been appointed to be the head of the CAB, and he was shocked to find out they didn’t have a Bureau of Economics. They were in the business of regulating the economics of the airline industry and they didn’t have any economists!  All they had was lawyers. So, he said, Would you like to come over here and create a Bureau of Economics?

 

BB: Now is this the same as Fritz Kahn, who was--

 

DG: No, Fred Kahn, Fred Kahn. This was Fred Kahn, Alfred Kahn from Cornell.

 

BB: Got it, okay.

 

DG: This was maybe before your time. He was real famous in the ‘70s. Worked for Carter, and was the Chairman of the CAB. He had been the head of the PUC in New York State, and had written a book on regulation, economic regulation of utilities primarily.

BB: Okay.

 

DG: But he was a very articulate guy and was quite famous at the time on the talk shows in Washington.

 

BB: So how was the experience at CAB, as the new economist?
 

DG: Terrific, terrific. We were trying to figure out what to do. There were all kinds of pressures, and it was good.

 

BB:  So, this is prior to deregulation, but not a lot prior to it.

 

DG: Well, it was deregulation.  If you’re thinking about regulation of transportation, it was the first step of deregulation of transportation.

 

BB: And did that happen during your tenure there?
 

DG:  Yes. What we did is, we had a series of cases before the board, and we–– the most famous one is the Midway Case. Midway is a relatively unused airport in Chicago. The board was trying to stimulate use of this facility, and we had an applicant, somebody that promised to come in and provide low-cost fares to a lot of destinations. The other carriers, the incumbent carriers at O’Hare, which is the neighboring airport, said, Not so fast. We want that slot, and we are better positioned to handle it.  So, they all applied for the same authority, and in the past, before this decision, the board had always chosen one, and told the others to go pound sand.  So, there was a famous meeting with Kahn, and we talked about all the options and I proposed we let them all in. We couldn’t be picking winners and losers, we just had to let them all in and see who could handle it, and he was persuaded. And that started the whole avalanche, that and a few other little stories.

 

BB: So that started it, but then it became institutionalized.

 

DG: Well, Congress got in the act and they passed a law. At that point, there was a major fear that because we had done it administratively, that the next administration, if they had a pro-regulation Chairman –

 

BB: Could reverse it.

 

DG: – could reverse it, so we needed legislation. That was the perception. I don’t know if that’s right or not, but that was the perception. So, they actively, at the same time we were doing these things administratively, they pursued legislation on the Hill, and that was a big time. That drew in Teddy Kennedy, it drew in Stephen Breyer.  I mean, there were a bunch of relatively heavy hitters that got involved in this on the side of deregulation, which is fascinating that they picked airline deregulation as the door they wanted to open first, but they did.

 

BB: And this was bipartisan support for this?
 

DG: Pretty much, pretty much. It was just the vested interests were– the so-called legacy carriers who had all the routes, they sort of resisted it at first, and the international carriers resisted it because they wanted to carve this market up and they had their own international agreements. But what happened was, in the politics of this very early on, Pan Am, who was one of the biggest of the legacy carriers, looked around and said, This is not working very well for us because we’re the biggest, we have all these routes, but we can’t get any more. Every time we apply for one they say, ‘Oops, we got to let this other guy in because you’ve had too many.’ We don’t think that’s fair. So, they decided they were for deregulation. Once they did that, it sort of–

 

BB: Opened the floodgates.

 

DG: No, I’m sorry, it wasn’t Pan Am, I misspoke. It was United that took that position.

 

BB:  Right. So, it’s interesting that you’re in a Democratic administration and most people would say they would be more pro-regulation than deregulation. It’s interesting that the germination of deregulation that then went to trucking and railroading, stemmed from Carter.

 

DG: Yeah. It all happened on Carter’s watch. Well, that’s an interesting question: why then and why weren’t the Republicans on board? “Why then” was because you’d had a bunch of academic research that had been done that argued that some of these industries just shouldn’t be regulated, particularly airlines and trucking. There were strong arguments that it didn’t make any sense to regulate and they do just fine as competitive industries. There was some evidence, actual evidence: there was, in the state of California and Texas, you had some intra-state airlines that were not regulated, and they did very well.  Like PSA and Southwest Airlines, people really liked to fly on them. So, there was evidence that deregulation really helps in some situations. So, there was a stimulation from the academic side, and then you had people like Fred Kahn who were just trying to make sense of this regulatory thing and it didn’t make any sense to him.  So, it sort of proceeded. And once that caught on and the low fares…The signal feature of deregulation of the airlines in the early years was fares were brought down very rapidly because there were people like Freddie Laker who wanted to come in and dump capacity into these markets and take people to where they wanted to go, what a novel idea. [laughs]

 

BB: [chuckles] Right, right.


DG: So, he disrupted the industry, and then it caught on, and then people said, Well now, wait a minute, what about trucking? Maybe we should take care of that. And that one, same thing, there was academic research that said it was probably a good idea. The political opposition was much greater in the case of trucking because you had the Teamsters who had organized all the big LTL carriers, and you had the American Trucking Association, which was a very effective political organization.  So, there was big political opposition, but Carter appointed me to the Commission and made me Chairman. He nominated two other commissioners who were like-minded, and we deregulated trucking.

 

BB: So, it’s interesting because the Teamsters had a vested interest in –

 

DG: In the system as it was.

 

BB: – in the system as it was, and the big carriers did.  And you didn’t really have what you have today with the truckload proliferation.

 

DG: They couldn’t operate, they couldn’t get a license to operate.

 

BB: Right.

 

DG:  It was very limited entry, and one of the early things that happened was that my predecessor, Dan O’Neal, decided that we really ought to free up entry because we were having a problem with rising gas prices.  We needed to have a more rational freight system.  So, we shouldn’t have these empty trucks running past each other so, let’s open this up and create some procedure -- Master Certificate, he called it -- to let people get routing authority so they could operate more efficiently. We were well on the way to that and the teamsters got really upset with that, and they nudged Congress to tell us to stop. We wrote back politely, Yeah, we’ll stop, but we’ll only stop until next June.  Because, you know, we have to get on with this; the nation needs a more efficient transportation system. So, you give us some direction, and we’ll follow your direction, but if you don’t give us any direction, we’re going to go right down this road we’re going. That changed the dynamic of the legislation because the teamsters could not delay anymore. See, if they did delay, we would go ahead, so they had to get a piece of legislation, then they lost control of the process and we got pretty complete deregulation of the trucking industry.

 

BB: Now, you made a sort of diversionary trek over to the Department of Energy between CAB and ICC, right?

 

DG: Yep.

 

BB: And what prompted that?
 

DG:  Energy prices. That was the biggest mess of all.  I mean, airlines, it was nice to deregulate them, it was nice that airfares came down, but it wasn’t crippling the whole economy.  What was crippling the economy is we had price controls on oil.  We had this silly game where you had to wait in line to get gasoline and small refiners were lining up for their special allotment. I mean, it was ugly, ugly, ugly. Everybody in the government that was an economist said, This is not very good. We can do better than this. But it was pretty hard to deregulate oil prices because we were fighting inflation at that point, and you were afraid that if you deregulated, the oil prices would run up, and the oil companies would make a lot of money. You can’t have them making money, that’s evil.  So, there was a lot of opposition to deregulation, but we solved the problem. We argued that prices won’t go up so much, and by the way, we’ll put a tax on these guys. We’ll put a profits tax on the oil companies, so if they make a lot of money, we’ll get a lot back for the Federal Treasury. We ended up getting like zip back because they didn’t go up, they came down after deregulation, which is another whole story. But that was a tough political fight, but we had the analytics. We had all kinds of modeling activity in the Energy Department, and we created the scenarios of what would happen, and we persuaded the White House that they could bite the bullet on this particular subject. The sweetener was the Windfall Profits Tax because they knew that they could say, We’re not giving this away to the oil companies.

 

BB: So, James Schlesinger is the boss at DOE.

 

DG: Yeah.

 

BB: Is he the same one that then took on the CIA job?

 

DG: Yes, same guy. But he had been in the CIA before, I believe. I get confused –

 

BB: Yeah, which way it went. So, deregulation when you got to the Commission. Well, I guess I’m interested in learning how you got to the ICC from DOE. Did somebody come knock on the door and say, Come on over here?

 

DG: Yeah, yeah. There was a woman lawyer who was very important in the Carter Administration. Her name is Mary Schuman, and she’s married to David Boies, the antitrust lawyer.  That’s an aside. She was very able, and she had her heart really into this deregulation thing. They knew they wanted to deregulate trucking, but they weren’t sure they could get it done. So, she came to me and asked me if I would take the job.  And I said, Sure! It’s the job of a lifetime!  Why wouldn’t you take that job?  So, I took it.

 

BB: So, I was at the Boston & Maine at the time, and we were one of the few Class 1 railroads that was supportive of deregulation because we were in bankruptcy and we saw that as a path out.

 

DG:  Well, a lot of railroads thought it was a path out. In fact, let me just introduce – I’ve been talking about airlines and trucking and energy. Those were all cases where we anticipated competition would drive down prices. In the case of railroads, we didn’t think that was the case. We thought railroads have had their rates suppressed for years because of the regulation of the ICC. They regularly turn down general rate increases, and most of us were convinced that if you ever got the government out of this to let up a little bit, rail rates were going to go up, and that was a desired thing because the railroads were virtually bankrupt. You had had the Penn Central bankruptcy in 1970, which is the biggest financial bankruptcy we had had in this country’s history. And after that, we had all these other railroads that were falling apart: the Rock Island, the Milwaukee Road, I mean, we had bankrupt railroads all over–

 

BB: All over.

 

DG: –all over the place. So, the motivation for railroad deregulation was, we got to save this industry. So, we got to take some of the restrictions off, we got to give them the ability to raise prices, we got to give them the ability to exit markets where they can’t make any money. That was the general thesis of the Staggers Act. [There] was pretty much agreement among the railroads and the regulators and the White House on that subject. There was some disagreement. Some railroads wanted to keep rate bureaus because they didn’t see how you could possibly make rates unless you got guys in Chicago with green eyeshades that know more about rates than anybody else. If you don’t have those people, you couldn’t make rates. Well, you can actually make rates [chuckling], you can do it. The industry learned how to do it. But there wasn’t major opposition to the Staggers Act. It wasn’t a hard-fought thing, whereas the other ones I’ve talked about, there was substantial opposition.

 

BB:  Well, I recall a time at the B&M where, in intermodal, we looked at it as a real opportunity, but it seemed very simple, right?  We were regulated, now we had no shackles on and we could go out and do whatever we wanted.  But in reading the article that you wrote about the thought process behind the economics of deregulation, it’s a lot more complicated.

 

DG: Well, it is because no economist can make an argument that [the] railroad industry is perfectly competitive because the definition of perfect competition is there’s lots of people that’ll do it, they all can enter a market at low cost.

 

BB: Like trucking.

 

DG: Yeah, like trucking, that’s very competitive! Not the railroads. I mean, these railroads were built over a hundred years, and if you didn’t have a rail track somewhere, you’re going to play hell building it. There’s only a couple exceptions to that. BN itself built into the Powder River Basin to get access to the low-sulfur coal. That was the only new entry in the whole business. Now, there’s minor entries, you know, because of the ports and containers coming on the West Coast. We put infrastructure in, but people didn’t lay down main track. They weren’t in the business to put new track down in the 70s.

 

BB: Right, right.

 

DG: They were trying to withdraw.

 

BB: And so, there was always a very cumbersome process. I worked in my days with Norfolk & Western, and in Operations Planning, one of the things we did was the economic impact of the abandonment cases that we had to file in front of the Commission, and it was extremely complex, seemed to go on forever, and a lot of it got turned down. How did that– that changed radically.

 

DG: In the Staggers Act. That was one of the major drivers. The President of Yale at the time, Rick Levin, had written a very good article about the problems of the railroad industry. And he highlighted the fact that one of their biggest problems was they couldn’t get rid of excess capacity. They couldn’t abandon lines that they couldn’t make any money on. And it was the very process you talked about:  the Commission would typically turn them down when you tried to, there’d be community opposition beating on the Commissioner’s door, and they’d give in. They’d say, You can have your rail service. Didn’t cost them anything, it just was killing the railroads.

 

BB:  Right.

 

DG: So, one of the major themes of the Staggers Act was, we’re going to free up this abandonment process. Would it be so easy, because we thought in the railroad industry– now, I’m putting on a different hat by this time, I got ready to apply the Staggers Act, I was working for BN. We tried to abandon a bunch of rail lines, and we caught holy hell for it. Not from the Staggers Act, not even from the Congress, but from the local communities because they didn’t want to give up rail service! And we said, We’re not going to be able to get through this. We can’t have the whole world mad at us. So, we’ve got to come up with a better deal. And we did.

 

BB: Short lines.

 

DG:  Short lines, yeah. The story that really puts a highlight on this is, we would’ve had to abandon a lot of lines in North Dakota. If you look at North Dakota, there’s like spaghetti, all the rail lines reaching out to all the grain elevators. And we got to rationalize this, we got to abandon some of these lines. So, we were willy-nilly abandoning lines, and the Commission was saying, Fine, abandon them. And then we ran into the Senator Mark Andrews, who said, Not so fast. I don’t want you to abandon any more than 350 miles of North Dakota railroad, and the way I’m going to stop you from doing that, no matter what the Staggers Act says, I’m going to pass an appropriations rider that says the ICC cannot spend a dime on any case involving an abandonment of more than 350 miles in North Dakota. Now, that particular amendment probably was unconstitutional, I don’t know, but who’s going to fight about it? We said, Okay, we’ll go to Plan B because we’re not going to fight this guy over this. So, we didn’t abandon any more lines, we just created short lines and sold them to local entrepreneurs. The process was facilitated because, under the Staggers Act as it was interpreted by the Commission, a purchaser of a rail line did not have to take the labor contract from the guy that sold it to him. So, you could take a line that had to be served with five-man crews, sell it to the local druggist; he can operate with two people, non-union employees; and he can actually make money.  Whereas you as a Class 1 railroad couldn’t because of your labor contract.  And that was the driver of at least Burlington Northern’s short line sales. We did a lot of them. Most of them survive to this day, most of them make money, most of them have increased traffic over where they were when we sold them. Not a lot, but some.  And we didn’t have to abandon them, and we didn’t have the communities mad at us.

BB: I think, you know, when I look at my time at Penn Central, limited, but the company had 100,000 employees, I think, at merger day, and when Conrail was finally fileted and sold to NS and CSX, it was down to 23,000 or something like that.

 

DG: Yeah, I don’t know the exact number, but if you look at the Class 1s, I mean they cut their employment in half. But that was largely crew consists. You got most of it that way. You know, under the labor contracts that existed up until Staggers, you had to have four or five people on a train, and had to have a caboose, and had to have all these things. That was part of the labor agreement, and so you had to renegotiate your labor agreements, fight your way through it, but eventually the railroads got down to a crew consist of two people, consistently. They’re relatively highly paid, but it’s a big difference paying two people to run a train than paying five.

 

BB: Five or six, some places.

 

DG: Yeah. I think the statistic when I went and joined the BN, we had an average of 5.2 people on a train, because some places we had to have six because of a local codicil or something in the labor agreement. They now operate at two people.  And there’s been serious consideration given by the railroads of going to one person, but I don’t think it’s going to happen any time soon. There’s thought about autonomous railroading where you can operate with nobody. I just think, I mean, it’s a little bit beyond the political realm, I just don’t think it’ll happen.

 

BB: Yeah, and I want to get to that sort of toward the end where we talk about the future because I think there are obviously some pressures being brought by autonomous vehicles on the highway that are going to impact rail competition.

 

DG: Yes, they will, definitely will.

 

BB: So, back to the halcyon days of the 70s. Reagan gets elected.  Here you have a conservative Republican free market economist who comes in and says–

 

DG: Not so fast. [chuckles]

 

BB: Not so fast.

 

DG: The actual story is, the ICC is way down on your list of important positions in most governments. It’s sought after because you have a nice office and you have a dutiful staff and stuff like that, but it’s not a big deal. New coming administrations don’t come in and say, I’ve got to pick the right ICC Chairman.

 

BB: No media spotlight on you.

 

DG: [chuckling] No, no. So, it’s normally not a spotlight, but we had created such a firestorm with motor carrier deregulation that some supporters had gotten to President Reagan and said, You’ve got to appoint somebody that will really be good on this issue. And they appointed a guy from Nevada, a labor lawyer from Nevada, Reese Taylor, and he was determined to slow this thing down, get a little rationality in this rushed deregulation. Well, he wasn’t able to stop it.  It was Katy bar the door.  We had already opened the gates for free entry.

 

BB: It goes back to the counter-intuitiveness, as the Democrats pushing deregulation and the Republicans slowing it down, it just doesn’t–

 

DG: Well, I think it all has to do with political pressure.

 

BB: Sure.

 

DG: I mean, good free market Republicans have donors and important interests in their communities that have interests that are perhaps not the public interest, so you get that all the time. I don’t think the Republicans are any worse than the Democrats, but it is ironic that the people that opposed deregulation of surface transportation were Republicans.

 

BB: Were Republicans. Okay. Before we dive back into content, I just wanted to point out that we’re in a very nice room with a portrait of Stephanie’s grandmother painted by her grandfather.

 

DG: Yes.

 

BB: In 1899, I believe?

 

DG: Yeah.

 

BB: Yeah, and it’s a remarkable piece, and I said, We can sit in front of it. Before we move on to the railroading transformation from regulator to participant and performer under deregulation, one of the questions I had was, bipartisanship played a major role in getting deregulation through. I’m just wondering, do you think in the current environment, would something like that even be possible?

 

DG: Well, it would be possible if you had a common view of what the problem was, but the issue I see right now is that the two major parties, they don’t see the world through the same color glasses. So, it’s hard to see them deciding that this is the problem and this is the solution. If you can get to that point, yeah, you can work together. It’s not impossible. And there’s credit for it, but it’s just difficult right now because they have really diametrically opposing views about what the issue is and what one should do about it.

 

BB: So, deregulation, particularly in railroading, created some challenges for transition from an industry that was regulated in everybody’s lifetime, right? To now, what do we do with this [now] that we have it?  And managing that transition is something I’d like to talk about particularly as you went from being the ICC Commissioner to moving into marketing at Burlington Northern. I guess, before we do that, perhaps we could just go back to that transition. How did you get from the ICC to the railroad, and Dick Bressler, I think, who was Chairman of BN Industries–

 

DG: It’s an interesting story.

 

BB: Yeah, and we want to get to that, so–

 

DG: Yeah, I first met Dick Bressler when I was the Chairman of the Commission in 1980, late ‘80. I believe it was after the passage of the Staggers Act. He was a pretty conscientious CEO because he realized that a lot of the issues that the railroad had had to do with the regulators.  So, he decided it made sense as the new CEO to come see the regulators. So, he came to my office, and not too many CEOs came to my office, I mean, it wasn’t a common thing. In those days, anyway. And we had a nice chat and I asked him a series of, I guess, provocative questions. I said, You have a wonderful property there. You’ve got railroads that run all over the country and you’ve got this emerging coal franchise.  How come you don’t make any money?

 

BB: [laughs]

 

DG: [laughing] And he hmphed and hmphed, but he was well aware of the substandard economic performance. But we talked about political issues in general and the railroad business in general and then he left. Well, the election comes along, Reagan’s elected, he informs me that I’m not going to be the Chairman, he’s going to appoint Reese Taylor as Chairman. I still had a spot on the Commission, but I didn’t want to sit there in a chair and have somebody else run the place, so I said, Nah, I’ll resign. So, here it is January, I’ve got to decide what I’m going to do. Bressler had invited me to a policy conference of the railroad, and I went out and met all the railroad executives–

 

BB: This is after you’ve resigned?

 

DG: Yeah, I’d resigned. It was in February. They said, Would you be interested in joining us? We probably can find room for you in this organization. I said, Well, I don’t think that would be smart for either one of us because I just finished approving your merger, and you don’t need to have a lot of questions about that process, and I don’t want to have my integrity impugned by what appears to be a little short-term gain based on that, so let’s just say we had a nice conversation and that’s the end of it. I had a friend, same friend that got me the job at Interior, who was working for Natomas Oil and Gas Company.  He was the President of it in Houston, Texas.  He offered me a job. He said, Why don’t you come down here? We’ve got this company. We’re kind of small, but we’re progressive and we’ve got a lot of money from our Indonesian franchise. We’re going to make this thing go. I said, Okay, I don’t know much about oil and gas, but you know, it’s alright, I’ll do it. So, I went down there, and I was in charge of Marketing and Finance, primarily, for the subsidiary. I didn’t go to capital market and raise money; I just was worrying about how we bid on leases, how much we paid for things, and how we marketed our gas. We were primarily a gas producer. It was an interesting job. I learned a lot. But after about a year and a half, the Chairman of the holding company, which was in San Francisco, Dorman Commons, comes to me and says, Darius, I’d like you to take a serious look at running our coal company, which is located in Louisville, Kentucky. So, due diligence, I said, Fine, I’ll take a look at it. So, I travel to Louisville, Kentucky, I go down in this coal mine, which is a mile under the earth, [laughing] on my back, running around and they’re blowing off explosives down there, and I got a little bit of claustrophobia. So, I get in there and I come back out of the mine and I go back to Houston, and I say, Well, the guy wants me to look at it, I think he’s expecting an answer.  I’d better find something else to do because I don’t want to turn him down and stay here because that would probably not do me a lot of good in the future, and I really don’t like the coal business, particularly that mine. [laughs]

 

BB: Right.

 

DG: So, I got on the phone. I called the only people I could think to call -- because I didn’t want to be an academic at this point. The only people I thought to call were two railroads that had talked to me about potentially joining them. One was the Santa Fe, and one was the Burlington Northern. I called the Santa Fe.  I think I got Larry Cena.  I think that’s who I talked to.  He says, Well, I’ll ask, I’ll ask around, Darius. We’ll see what we can do. He didn’t get back to me.  About two months later, I ran into him somewhere, and he said, I asked around.  We didn’t have any real spot for you, so we didn’t want to pursue it.  But I called Bressler, and a week later, I get this call from Dick Grayson, who was the Chairman of the railroad for him, to meet him in Fort Worth.  And Walter Drexel, the current President of the railroad and I met there, and they offered me a job as the Head of Marketing. It was kind of a new position. They had marketing people, but they didn’t have an overall Head of Marketing. They didn’t give me everything, they didn’t give me the coal department, but they gave me all the other marketing departments: intermodal, grain, chemicals, so forth.  That’s how I got the job.

 

BB: So, you parachute into St. Paul at that time, right?

DG: Yes. Yes.

 

BB: And, you know, I’ve talked to some of the folks who were there before your arrival, and it was like, Okay, we have this new guy coming.  We don’t know what to make of him. Why is he here? One of the stories I got was that Dick Gleeson, who was running marketing at the time, had instructed his people to say, Look, we don’t know who this guy is or if we can trust him, so you go through me, no direct interaction. Which I think flies in the face of the way you operate, which is going to the people you want to talk to rather than through some pyramid.

 

DG: Yeah, it was awkward. Dick Gleeson was obviously threatened by…he was the VP of Marketing and I became the Senior Vice President of Marketing. I didn’t really have much beyond his scope, and I always asked questions. I couldn’t understand why they were doing what they were doing, so I just would ask questions, and it would make him real nervous. So, I knew there was some tension there and I had other people– the Head of Operations came to me and said, You know, that guy Gleeson, he’s peeing on your leg, you realize that? And I knew what that meant, and I said, Nah, that’s okay, we can handle that. It’s not the end of the world. So, he stayed in that position and I worked around him, and I got to know [Bill] Greenwood real well because he had a lot on his plate, and I thought intermodal has a lot of possibilities. I got pretty involved with the grain guys, enough to know that our grain franchise was screwed up and was trying to figure out what to do about that. Then, I started to do deals. I did what we call a Voluntary Coordinating Agreement with the Grand Trunk and another railroad in Michigan, to cooperate so that we would route our traffic together and put it all on one train. It would be a run-through train to service Detroit, basically, from our territory and from Detroit to back in reverse. It was kind of an interesting deal. It didn’t turn out to be huge, but it was novel. In other words, you didn’t have to merge, you just did a cooperative agreement. You know, you figured out what the rate structure was going to be and how you’d cooperate and run your trains, and it was just like a merger, but you didn’t have to go to anybody for approval, and you didn’t have to pay any money for it. So, it seemed to me like this was the way to go. We don’t have to actually have a big merger case before the ICC, we can just cooperate our way through this. Well, it turns out that was fairly limited because that’s the only– we only get two in my history. I tried forever to do one with CSX and I couldn’t get it done. I could get an agreement with John Snow, who was the CEO, but I couldn’t get it down to the marketing guys. They couldn’t buy into the concept that you have to trust these people. So, we never got anything really done, and we weren’t very successful with Norfolk Southern, either. Conrail, we did some stuff, but it was after I was gone. So, I was doing that kind of stuff and then trying to come to grips with this job, and it was a little difficult because people were nervous.

 

BB: So, at some point, you move up, and Bill Greenwood moves into your position.

 

DG: Yeah, I did a couple things that convinced Bressler that I was the right guy to run the railroad. I was pushing the abandonment cases, I had done the VCA with Grand Trunk, I had done an interesting reload operation with soda ash. Let me give you a little background on this. We were getting killed by the Union Pacific CNW because CNW had access to the Powder River Basin. And the Commission had ordered us to make room for them, to get out of the way and give them permission to build in.  So they, with their partner UP, came directly into the Powder River Basin, and we were already in trouble. Our rates had been too low, and we needed to get them up. But just as we were trying to get them up, they came in [as a] new entry. They had no business so they could be pretty aggressive, and it was ugly. It was ugly. We had price warfare with a major competitor.  So, it gave us a lot of trouble.  I’m sitting here with the Marketing Department, not the coal department, the Marketing Department, and I’m saying, You know, what can we do to get these guys’ attention, to let them know that these price warfare things, there’s two sides to them, right? It’s fun when you’re taking that guy’s traffic away, but not so much fun when he gets some of yours. So, I had one of my people figure out a way to build a reload center 150 miles from the center of their trona operation in Wyoming. They had a monopoly on trona. That’s what goes into soda ash, it makes bottles and all that stuff. They had very high rates, and they had the whole market to themselves because this was a world class deposit. We put a reload operation 150 miles away and ran trucks 150 miles and we went into partnership 50/50 with the family that was doing it, two guys. We got about ten percent of the market, and I told my people, I said, We don’t want any more than ten percent. That’s plenty. But I think maybe they’ll begin to realize that you’ve got to be careful about these things, you don’t want to destabilize, a term of art.  And Bressler thought it was kind of cute because we were getting hammered in the Powder River Basin and now we could do a little hammering back. Now, it was not the best deal because trucking is much more costly than rails, so we knew our costs were higher than the UP’s, but their rates were so high–

 

BB: You could do it.

 

DG:  We could enter right in here. You know that thesis?  Enter, you can enter. The rates are too high, we can enter.

 

BB: Yep.

 

DG: So that’s what we did. And a couple other things. So Bressler decided, long story short, that I’m the guy to be the President. Drexel’s going to retire; he didn’t like the railroad business much, and he’s going to retire–

 

BB: Where did he come from?
 

DG:  He was from Texas. He came from ARCO.  He was a treasurer at ARCO with Dick Bressler. He brought him in as a numbers guy. That’s what his primary function was. He never got into the marketing details, and he certainly didn’t get into the operating details because he recognized that he didn’t know much about that. And he didn’t like the railroad.

 

BB: [laughs] Perfect fit.

 

DG: So, it was not– I don’t think he was sad to go, but it gave me an opportunity.

 

BB: So, when you came into BN, what was your impression of the company and its profitability and cash flow and the things that you thought you needed to do?

 

DG: Well, it was interesting. I knew they were not making enough money, it was clear. And I knew the coal rates were way lower than they should be. So, if we could through the coal cases and fight the opposition from our customers, we could improve that franchise. I thought the people were pretty knowledgeable about the marketing of their particular products. Let me back up for a second. I didn’t create the marketing department the way it is.  It was created by Dick Bressler. When he came into the property, he said, This has got to be like a regular business, and we ought to organize our marketing in segments that correspond to who our customers are. So, you have somebody that deals with all the coal customers, and you have somebody that deals with all the grain customers, and so you had certain common characteristics. So, we need that kind of marketing department. And they were well on their way to creating it. They had some problems because they didn’t have a lot of experience making rates. Because prior to the Staggers Act, rates were made in rate bureaus.  So, you didn’t have mere railroad employees figuring out what to charge somebody, you left that to a gang in Chicago and they figured it out for you.  BN had a major influence on it, but it was primarily focused through one person that was sort of the head rate maker. The rest of the people were involved in other activities, not making rates. In terms of marketing, in the railroad business, making rates is key to everything!  That’s how you figure out what you can charge and how much money you’re making and all the rest. That drives everything. So Bressler had committed us to that path, but I don’t think we were very good at it initially.

BB: Took a while.

DG: Took some time.

 

BB: So, when you moved up, Bill followed you into the role of SVP or EVP of Marketing.

 

DG: Mmm-hmm. Yeah.

 

BB: And you jumped him over Gleeson to do that.

 

DG: Well, by this time, Gleeson– it was not working out real well with him. Personally, I was going to fire Gleeson anyway because once I’d picked Greenwood, I mean, it was a kick in the face. Not only that, but I didn’t think it was working well. The two of us were at warheads, at loggerheads. So, I was going to get rid of him, but I said, Well, let’s give Bill a chance. So, I called him in my office, I said, Bill, I’m promoting you, and that’s a congratulations, but now you have a decision to make. What do you want to do about Dick Gleeson? Greenwood thought for a minute, and he said, I want to fire him. I said, Fine, I’ll do it.  So, I fired him. That’s another huge story, but it turns out that Drexel, who was my boss, who hated railroads, liked Gleeson. They were pals, right? So, I go in to tell Drexel out of courtesy that I’m firing this guy, I’m going to fire him today, and he said, Do me a favor. Let me get out of the building before you do it. [laughs.] And I’ll never forget that, I mean, c’mon.  You gotta fire somebody, you might as well tell him, right? What are you doing, “get out of the building”? [laughs.]

 

BB: Right, right. Well, I asked Bill about this just this past weekend, and his comment was that when you asked him ‘What do you think he should do about this’, he thought it was a test.

 

DG: [chuckles]

 

BB: And then you volunteered to do it for him, so I think he felt like he passed the test.  And he also mentioned he used to carpool with Gerald Davies back and forth to work and that Davies says, I’m putting my money on Gleeson, and Bill said, I’m putting my money on Gaskins.

 

DG: See, I wasn’t part of that conversation.

 

BB: [laughs] And he said, I think that was a better bet.

 

DG: Well, Davies left, he went to CSX.

 

BB: Yeah.

 

DG: Yeah. Changed his name, too, you know, he used to be Gerald [soft ‘g’] Davies, now he’s got–

 

BB: Yeah, now it’s Gerald [hard ‘g’].

 

DG: Geraldo, or something like that.

 

BB: [laughs]. Okay, so he didn’t get the nudge from you, he just–

 

DG: No, I didn’t. I had hired a few people. I fired Don Wood later.  I fired my purchasing guy when I was CEO, but I didn’t fire too many people in the Marketing Department. But we did hold down, you know like, nudge people to get a different kind of person in the department, and I had to approve. We had to interview people and so forth and so on.  So, I was involved, but I didn’t dictate who they hired.

 

BB: I thought what was so interesting coming from Eastern railroading, which was mired in tradition and financially really struggling, how innovative, on your watch, BN became. Because I don’t think BN was any particularly different before you got there, but it sort of rocketed ahead of everybody else in terms of innovation.

 

DG:  Well, you know, it’s interesting, I don’t know. I can’t speak to it.  But I have read a series of books written by Earl Currie. I don’t know whether you’ve seen them.  Have you seen them?

BB: No.

 

DG: You should get them. They’re printed by Washington State University Press, and there’s a history of BN up until 1980, and then the history of BN from ‘80 to ‘95.  It’s fascinating.  It represents the classic traditional way of thinking of things.  Because he came up from that era, decent writer, and it’s a good read.  But the thing about that is that they hadn’t changed a lot.  They were still doing things that same way, but we just kind of kept nudging them.  We applauded things when somebody would take a chance, and they would work out, and Bressler was pushing that, too.  He hired Steve Ditmeyer to spend time just thinking about the future and innovation with respect to positive train control and everything else. So, it was kind of a progressive environment, pushing up against a lot of status quo, you know, people doing it the way they’d always done it. And they were uncomfortable, some people were quite uncomfortable with it.  They weren’t happy.  And that raises another issue: one of the things that we did – and I don’t claim credit for this, it happened on my watch, but I don’t claim credit for it – Bressler decided to break the company up. The first thing he did is he moved the holding company to Seattle. That made sense on the surface because you had forest products and you had this and you had Glacier Park Real Estate Company. So, he’s going to move the holding company to Seattle. Well, he gets that done. Then he comes down to the railroad and says, Look, I don’t want all you people in St. Paul. He goes to Bill Thompson, the Head of the Operating Department, and says, Where do you want the Operating Department to be located to best operate this railroad. I wasn’t with them on the thought process, but they picked Kansas City, which is kind of in the middle of the railroad in some sense. So, they moved to Kansas City. Then, the third thing was that Bressler says, he says, Okay, Gaskins, it’s your turn. Where do you want the Marketing Department to be? The Head of Strategic Planning, Mike Donahue, did the study and he came and talked to me. We talked about it. I have a different view of this than Bill does, Bill Greenwood. My view is that what tipped it was that I insisted that we put it someplace where we had access to an airport where people could fly out and see their customer and come back the same day. There were only two airports that really fit that bill. One was Chicago, and one was Dallas-Fort Worth. Because their route system was such that you could literally see anybody that you wanted to do business with on one day and come back the same day, so you didn’t have to be out of the office. I thought that was important. Now, it’s ironic because here we are a railroad, and ‘Where you gonna put the Marketing Department?’ and you put it somewhere you can fly!

 

BB.  Right.  

 

DG:  But we didn’t take trains to go see our customers, we flew to them. That was what I thought was the criteria.  Now it turns out, there was an alignment because Dallas-Fort Worth also happened to be in Texas, and it had low income taxes, no income taxes. And it was where Walter Drexler was from, and he ended up dealing with a former colleague of his and renting an office space downtown.  The office space downtown was a little awkward, it wasn’t the best place for a railroad, I didn’t think, but it was okay. Fort Worth turned out to be a good location.

 

BB: Yeah. Nice property.

 

DG:  But it was very disruptive. That was probably one of the hardest things we did because it wasn’t just my wife who was upset with it. It was every other wife in St. Paul because they had a house, they had family, they had neighbors, they had everything, and we’re moving the whole thing to Fort Worth. Now, they didn’t have to go, but you know, they had good jobs, and they wanted to keep their jobs. So it was, Okay, there’s the ticket! There’s your destination. [laughs] We’ll give you some help with buying a new house and this, that, and the other, but we’re going. I would say that eighty percent of the people actually liked Fort Worth because it’s a small town like St. Paul, and it’s kind of folksy, it’s got some nice attributes. A good twenty percent, their heart was in St. Paul and they went back as quickly as they could, or didn’t go, some of them didn’t go. But that was good for the company. Not good for the individuals, not good for their families, but good for the company because you got buy-in. The people that wanted to go really wanted to go. They wanted to stick with their job.

 

BB: Be part of this.

 

DG: They were buying into their job and their future with this company. I think that was a very important thing even though it was perceived as being brutal and unfair. But I thought, while it was brutal, it was the right thing to do.

 

BB: So, now that you’re running the whole show, you have issues with growth and top-line revenue and cost on the labor side. Winona Bridge comes to mind, as does Montana Rail Link. I think those are things we definitely want to touch on.

 

DG:  Well, let’s talk about it. Let’s just do labor strategy. Because this was awkward for me because I never really had my hands on the labor strategy. Never did because we had a Department of Labor Negotiations and they had a head of that and he didn’t report to me. We talked, you know, I knew what he was doing, but I didn’t control him. When [Gerald] Grinstein, my successor on the railroad, came in, he came in as a Chairman. I’m jumping ahead, but we had split the railroad off and he’s the Chairman. He immediately took over labor negotiations. That was his bailiwick, that was why he was brought in because he was going to solve the labor problem. So, I never really had my hands directly on the negotiations, so I didn’t get frustrated, I didn’t have to listen to it, I just wasn’t involved.  But I had a strategy, and my strategy was to get our labor costs down, and I could do it without a national negotiation or a strike or anything else.  I could do it through the sale of short lines, and I could do it through Winona Bridge, and I could do it through Montana Rail Link. I’ve already mentioned the short lines before. We sold this to local entrepreneurs who were all non-union and we tied the traffic to us through contract, and they were successful. That only took part of the cost out. Then we tried to do Winona Bridge, and the idea there was we were going to set up a subsidiary of the railroad, but separate from the railroad, and we were going to sell them the rights to operate trains between city pairs. They would pay us for that right, and they could then negotiate their own labor contract.

 

BB:   Would you comment on what Winona Bridge was?

 

DG:  Oh, yeah, it was a bridge at the Missouri River where there was a rail bridge across, and it was just a spot and we had to pick something and we said, Well, we’ll call it Winona Bridge. Because it was in the Northern Territory, it was part of our history. But that died because we tried that and the court said, No, no, no, no. You’re not going to get rid of your labor contracts through a double-breasting operation. We see our way through that.  That’s not going to happen.

 

BB: And which courts? Were they the state courts, federal courts?
 

DG: No, that was a federal court, federal court, yeah.

 

BB: Not the ICC or anything.

 

DG: No, no, it wasn’t the ICC. We didn’t get to the ICC. The court said no.

 

BB: You’re not doing that.

 

DG: Yeah, the UTU sued us in federal court.

 

BB: I see.


DG: I don’t know whether– we could’ve appealed. Maybe we could’ve won, I don’t know. But we didn’t have time for that, so we had to do it some other way. Now interestingly enough, we did Winona Bridge because we had already had success at the southern part of the railroad with our expediter trains. These were trains where we got agreement to run two-man crews under the normal labor agreement, but just two people on them. They were for short distances, intermodal movements of about 500 miles. They were profitable and we were growing it pretty aggressively, but we couldn’t crack the northern tier because the people in the north were most secure, they were the least sensitive to truck competition or anything else. They just had these jobs for life, and they didn’t see it the way we did. They didn’t see that we had an opportunity to make things better for everybody. They thought it [was] just, You’re going to take our jobs away from us through the guise of these expediter trains.  So, we never got expediter trains in the northern tier.  We got struck down by the courts with Winona Bridge.  So, we go to Plan C -- not A, not B, but C.  Plan C was – and now, I’ve got to back up here a little bit. We had a big problem in the northern tier of our railroad, and that was the state of Montana. Because there used to be three railroads in Montana, right? In 1970, the Burlington & Quincy and the Northern Pacific merged and then we put the Milwaukee Railroad out of business, effectively, through competition. So, it went from three to one, and it was a lot of bad feelings in the state of Montana. They were angry with us, and then we were trying to abandon facilities and lay off people and everything, and everything we did upset those folks.

 

BB: Sure.

 

DG: It was really annoying, I mean, they were yelling at us and they were taking punitive actions where they could. We also had in the state of Montana, we had some environmental problems. We had a place where we used to treat ties, and you put nasty stuff on ties so that they don’t rot, and nasty stuff, when it gets into the river or the aquifer or something, it’s not good.  So, we had a serious problem in Livingston, I think it was, with the residue of a tie plant. So, I’m looking at this whole picture saying, This Montana, this is bad. I’m not getting any headway with the politics of this. I can’t schmooze these guys because they’re mad at us and every time I try to do something to raise our profitability, reduce our plant size, they’re killing me. So, I was with my short line sales guy, we were flying across Montana, and I said – his name is John – I said, John, can you think of a big chunk of the railroad that we could sell to somebody out here in Montana, so we can sell it to them and they can deal with the political problems, the environmental problems, with the this and the that. I explained my concept, and he thought about it and he says, I think we should sell them the old NP line. That was the basis of Montana Rail Link. We got some investment bankers.  They went out and tracked down people. They found Denny Washington, who was a famous entrepreneur in Montana who had a trucking business and at that time was a billionaire, I think, or close to it. Very well connected with the state people. He had given a million dollars to the University of Montana for their football stadium. Everybody knew him. His wife had been…

 

BB: Miss Montana.

 

DG: Miss Montana, that kind of thing, yeah, when she graduated. So, he was a very prominent guy and a pretty good businessman. So, we went to him and we struck a deal. And the deal was, we’d give him traffic in the eastern part of the state, and he would haul it over to Sandpoint, Idaho, across the state, and he’d give it back to us. If he took any traffic on the line for his own account, he got to keep that, but he hauled ours for a fee, a negotiated fee, which had a complicated escalator in it and so forth and so on. That part of the deal was relatively straightforward. What was not so straightforward was what happened to the liabilities for the environmental thing and for the labor contract. Because the first this Denny Washington does, he says, Okay, I got this property. We had some lawsuits and, you know, a little acrimony. But he says, I have this property, so he sits down with the two unions, the UTU and the BLE, Brotherhood of Locomotive Engineers, and he says, I’ve got a deal here. I got this railroad and I need a contract. I want to use you and your people, I love unions, but I’m not sure I need both of you. Does either one of you want to take –

 

BB: The whole thing.

 

DG: – all the jobs? And then there’s a cooker: we can only use two people on each train because we’re starting up, we need to have our costs [low]. Well, BLE put their hand up, We’ll do it! We’ll do it. UTU said, ABSOLUTELY NOT. We want that caboose on there, we will only take our jobs, we don’t want the BLE– So Denny said, Fine. BLE it is!  And he cut a deal with BLE. Well, what that did is, the UTU, they were our toughest opposition on jobs, and they had won up until that point. They had blocked us with Winona Bridge, they had blocked us with abandonments. They were very successful in holding the traditional consist agreement and keeping the little caboose on the end of the car. That was their dream. But this one broke the dam because at that point, we had a railroad operating in our account, for us, across the state of Montana with two people on it and no caboose! On top of that, Denny Washington offered profit sharing to these guys, so if they met certain targets, they got bigger bonuses, and they didn’t even want it. He forced them to take it because he believed in it. Now if you go out there and talk to anybody on the Montana Rail Link, they love it. They love that contract.

BB: Now, there are some people who second-guess that and say, Well, never should have sold it. We need the capacity.

 

DG: Absolutely.

 

BB: What’s your reaction to that?

 

DG: Well, every time you make a change, there are some people that figure that it was a mistake. I give it a couple classics, a couple classics. In the case of Montana Rail Link, we subsequently got two-man crews on the whole system, after six more years of Grinstein fiddling around and not getting it done. We finally got it, and at that point, people came back and said, Well, we should buy it back! Now that our costs are down, we can operate it better than they can. Well, they probably couldn’t because Denny Washington was paying a lot of attention to it. He’s a pretty good businessman, knows a lot about logistics and maintenance of locomotives and all that stuff. I’m not sure we could do it cheaper than they did, but we had an ironclad contract so you couldn’t break it, and moreover, we had an escalator in there, so we got our share of the gains. It was part and parcel with getting rid of our situation with Montana. We got rid of the liability with the tie plant. We got two-man crews on part of our system–

 

BB: Did he take the liability?

 

DG: Yes, he did. We guaranteed if it went over a certain number, we would pick it up, but he, quote, “managed,” it for us. [chuckles] And there’s nothing like having a local guy manage a problem.

 

BB: A well-connected local guy.

 

DG: [laughing] Yeah, yeah, as opposed to me sitting in Fort Worth like a dumb pigeon, right?

BB: [laughs]. So, the expediter trains…We were talking to Mark Kane yesterday and what was most interesting to me about that was, you basically started from nothing. I had gone through this in my days on the B&M when we were trying to revitalize the Boston-Chicago route that historically had B&M, D&H, Erie Lackawanna to Chicago. And that was no longer possible, so we tried to revive B&M, D&H, Norfolk & Western, and we had a meeting with Reggie Short, whom I’m sure you remember, and Jack Fishwick, who was the CEO in New York City to try and revitalize the service. Jack Fishwick’s comment to Allen Dustin, who was our President, and Mike Smith, who was our Marketing VP – we were all there together – and his comment was, When you give me the volume, we will run a dedicated train. Until then, it’s going to go in mixed freight service. Which was a non-starter.

 

DG: Yeah.

 

BB: So, the notion that you would take the risk of starting in a new market with no customers, but built an expense of running scheduled trains–

 

DG: Yeah, but it wasn’t that much of a risk because the train starts were not that expensive.  We already knew our customers pretty well.  I mean, you know, by this time, we were negotiating with the Hub Group and all, but we knew the intermodal customer fairly well so we thought we could get the boxes. It’s a risk, I mean, there’s risks in everything, but I always thought that was manageable. Because I knew the market was there, you could just look at the data, you know. There’s a lot of trucks going back and forth over that same distance, and all you need to do is put a competitive service in and you’ll get your fair share.

 

BB: But you still had to eat the losses until you got critical mass, and I –

 

DG: But that’s what investment’s all about! I mean, how do you run a business if you’re not willing to invest money in it?

 

BB: Right.

 

DG: Who could we get in the Powder River Basin? We built a rail line without a single ton of coal committed when we built it. I mean, we got the contracts later, but you know, you risk all the time in business.

 

BB: But railroads aren’t known for going down that path.

 

DG: Well, plus they were broke.

 

BB: Right.

 

DG: When a railroad is broke, then who calls the shots? It’s the controller, it’s the finance guy who says, We don’t have any money, Darius, we can’t do it. But BN, it turned pretty quickly. It was a cash-generating machine even though our earnings were substandard. We always had some cash, and in fact, we had enough cash that the holding company took $150 million or whatever it was every year and spent it on some other activity like oil, gas, or trees or something.

 

BB: [laughs]

 

DG: So, we had cash, but we just had to risk some of it.

 

BB: The other thing Mark mentioned, which I thought was insightful, was that you really endorsed information systems, good information, supported the development on the IT side of the business, and R&D.

 

DG: Well, it was a big frustration for me. Two things– let’s do the information systems first. I certainly wanted it. We wanted better systems than we had, and our systems were klutzy. They weren’t up to date. But every time we looked at one of those projects, they were pretty expensive, you know, so we were constantly struggling with what we could get done and actually get done. There was a revolution in computing at this point, information systems. The old style was, you’d contract somebody like Adventure or IBM or somebody to do it for you and then you would play cost-plus. Well, that didn’t work out real well because the sensors weren’t great. They kept the bill going and you got the thing that didn’t work, and it’s always a couple weeks away. That didn’t work well, and then along came Perot Systems, and they come up with this new idea. What we’ll do is we’ll give you a fixed price deal. That was hard to negotiate but it improved things somewhat. Then I was involved later, when I left the railroad, I was involved with a company here in Boston called Sapient that had this turnkey operation where they would commit to build a system, and they would take all the risks. The fee was up front, this is what it would cost, and they would do it all, and if there were overruns, they swallowed it all.  There wasn’t any of this claw-back thing. And they were very successful at it because they got really good at estimating what it would take to build it, and they farmed out their software activities to India, which was really quite clever because you got high-price people in IBM or San Jose or someplace like that competing with people in Delhi! And the Delhi people are well-trained and, you know, so… I’m not sure it’s necessarily great for the American workforce but it’s good to get control of your systems costs. So, long and short, we didn’t really get our systems under control while I was there. We were struggling with it, we made some changes, but I can’t say it was a great success in getting our information systems where they needed to be at an appropriate cost level. Now, what did you mention –

 

BB: R&D.

 

DG: R&D. Well, again, we played in that, but that was really Steve Ditmeyer’s responsibility. Bressler, he couldn’t believe the railroad didn’t invest in research and development, and so he specifically hired Steve Ditmeyer, who’s an MIT graduate, a railroad guy who ran the Alaskan Railroad System for a while, but who knew the technology very well. He had a whole series of innovations that he was pursuing, and Bressler supported it all along. We had one particular failure that was kind of interesting, and Bressler’s reaction to it was interesting. We tried to develop a trailer that would automatically take fancy cars like Jaguars or Porsches or something, and load them into a trailer, and the trailer would be put on a train and then we’d haul them to… but it was a robotic feature that would load them in, so you didn’t– because you couldn’t get them in there otherwise, you couldn’t get any in.

 

BB: Yeah, I remember seeing those.

 

DG: And it was run by a guy named Dallas Smith.

 

BB: Yep.

 

DG: And we spent a lot of money – I don't know, three, four, five million dollars – in developing this thing, and it didn’t work! [laughs] We got to the point where – and I should have known this, I was an engineer after all – it didn’t work because it was what you call an open-loop system. You’d tell a computer where to put the car, but then if there are any error messages that build up, they would accumulate. So, over time, it would make more and more mistakes and then pretty soon, it would make a catastrophic mistake and drop one of these cars on the ground or something [laughs]. So, we tried it a little bit and we said, Uh-uh, this is faulty. And we stopped doing it, at which point we had a big fight with the, quote, “inventor”–he was really a promoter, but he was an inventor–and we got out of it. I suspected Bressler would give me a real dressing down. No problem, Darius, just keep doing it. This one didn’t work, don’t let that inhibit you. So, he was a risk taker by definition, I give him credit for that.

 

BB: So, an inspirational leader, in many respects.

 

DG: Well, he’s not very inspirational in many other respects, but in that respect, he was far-sighted. Let’s put it that way, that’s the right way to put it. He didn’t much like the railroad industry, either. He really did think that oil and gas was the brighter future for the company.

 

BB: Well, he had come from ARCO, right?

DG: Yeah, he had, that’s where his background was. But he was a good strategist. I mean, after all, he hired me, how bad can it be? [chuckles] Gave me a chance.

 

BB: Exactly, took the words right out of my mouth. I recall one of the times that we were together, and it wasn’t very many of them, but we had had a show of equipment, including the Dallas Smith trailer in Birmingham. We had the new BN America red, white, and blue boxes, and you and I were on the company plane returning to Fort Worth. It was just the two of us, and you were sitting across from me, and you said, I have one question for you. And I said, Okay, what? And you said, What the hell is wrong with green? [laughs]

 

DG: [laughs]

 

BB: And I thought, Uh oh. Because we’d designed these red, white, and blue boxes to sort of describe a network broader than the railroad and I–

 

DG: Modern marketing. I kind of liked the green, but–

 

BB: No, you did, but what was– I had come out of companies that I would’ve described as militaristic in their approach to railroad management. Norfolk & Western being probably the most.  We had a guy in our training program that had his hair cut for the National Guard Summer Camp and it wasn’t short enough for the railroad, so the fact that the boss is sitting there asking this probing question was like, Okay, now what? But it was emblematic, I think, of the way the culture at BN is. It was a question, but you were like, Fine, do what you need to do to follow the path you’re on.

 

DG: Well, I understood why you wanted to have a distinctive vehicle, and I saw that marketing side of it. But at the same time, we were also changing the paint scheme on our locomotives, about the same time. It was the same deal. We had these beautiful green locomotives. Turns out they were dangerous because people–

 

BB: Couldn’t see them.

 

DG: –couldn’t pick them up! So, they ended up putting another paint scheme on it so that people driving at crossings in the rural areas could see the train was coming, and it was the right decision, but I still miss the green locomotives myself. [laughs]

 

BB:  You also were a supportive force behind Roadrailer, which I think was an interesting innovation, particularly in light of…the short haul market in trucking is where most of the freight in America moves, but we as an industry didn’t have a way to… Can you talk a little bit about what you thought of Roadrailer and how…I mean, BN made an investment to prolong its life and so forth.

 

DG:  Well, again, it’s an example of something that just didn’t work. You know, it’s been a while since I thought about why it didn’t work. I’ve been off with a subsequent technology called Rail Runner, which is another variant on this, which tried to do the same thing, and that’s been unsuccessful. We’ve been fairly unsuccessful in that market as well. So, this just goes with the territory. When you make investments in new technologies, sometimes they don’t work out the way you think they’re going to work out.

 

BB: But Rail Runner’s still around.

 

DG: It’s still around, and this is beyond the scope of this interview, but we’re currently trying to sell it to the British rail system because it has much more application in foreign countries than it does in the U.S. The reason is, we had to double stack clearances everywhere. So, if you’re going to run intermodal boxes, put them on a double stack train, load them up, get them there with two people driving the train, and I mean, that’s it. But if you’re in Europe or South Africa or India, there may be room for this bimodal technology. So, that’s what we’re pursuing.

 

BB: One of the other innovations -- well, there were a few of them that I think stemmed from your fertile mind – one was the way to manage the grain business. Could you talk a little bit about–

 

DG: Well, that was a terrific breakthrough, but I can’t claim that I figured it out. I knew we had a problem, and the problem was, we got our information about grain markets from our customers. These guys, like Cargill and so forth, they weren’t the smartest guys in the world, but they were a lot smarter than we were. So, we’d ask them what we should do with our rates, and the answer always came back: lower, lower, you need them lower. So, we’d end up…my favorite story: every winter, the Mississippi River freezes over. When it freezes over, you can’t operate barges. When you can’t operate barges on the Mississippi River, all you’ve got is trains.  And lo and behold, if you look at our rates on a seasonal basis, they were always lower in the wintertime than they were in the summertime.  And I said, What in the world are we doing here?! [chuckles] So, that started me thinking, and when I turned it over to Greenwood, I said, Bill, I didn’t solve this problem. It’s not satisfactory, I’m not happy with it.  Solve it.  We had gotten fairly close to our grain customers by this time, and we knew some people that were in the business but were not necessarily with Cargill, because they were our biggest grain shipper. We hired a couple of them to help run the grain department, and that was the challenge I gave them and Bill gave them is, Figure out what we do with these grain rates because we’re not smart enough to know where they should go. There’s a whole world out there where things are affecting grain shipments. We don’t have the apparatus to figure it out, but they do. And they came up with this idea. We’ll take advantage of what they know. We’ll create something called the COTs program, Certificate of Transportation. We’ll take forty percent of our capacity, and we’ll put it out for auction.

 

BB: Why forty percent?

 

DG: Because we couldn’t get the ICC to permit us to do much more than that. We have to tiptoe the line, you know, because we were afraid that if we put it all out there, they would block it. So, we said, We want to just do forty percent. Ironically, the arrangement was, we auctioned it off and then we had a computer information system that kept track of the prices, and we’d [?] for prices, we’d get paid for that. Subsequently, the grain companies would buy and sell, trade between themselves and we would post the results on our computer. So therefore, we were able to keep track of the rail rates. What’s going on; shipments to the East Coast are going up; it’s because there’s demand. We didn’t see the demand, we just saw the rates go up. So, we got our information about our rate structure from the transactions that were entered into by the savvy grain customers, right? And they got to play what they liked to do, was trading, they were trading all over. So, it was a great success.

 

BB: One of the stories is that Cargill sort of instructed you to stay out of their business.

 

DG: Different story, but it was the same time. Yeah, they had a big position in grain, and they were pushing the railroad around. They tried to push us around and I said, Well, wait a minute, I’m thinking about going into the grain business. Maybe I should build a couple of elevators. I think with our transportation component, maybe we can play in this game, too. I wasn’t serious, obviously, but they went away. They didn’t bother us after that.

 

BB: The other aspect of it was the car, the cost of equipment, and the fact that during peak season, you had to bring in leased cars, and––

DG: Well, see, this was both a challenge and an opportunity. We had been capital-starved, in spite of how I said we had cash flow, but we had been pressured from the financial part of the railroad and the holding company not to spend it all on equipment. So, we tended to nudge our customers into buying equipment, and we’d do this by not having equipment available!  So, if they needed it, they’d buy it. And then we’d operate it on our railroad.  So, we had gotten to a situation where a lot of our equipment was in shipper-owned units. It worked when you were cash poor, but as we got to be a little more affluent, it didn’t necessarily make sense, particularly because we couldn’t control it.  If we’re not controlling it and they sit on it, then we don’t have the equipment to use.  We can’t use it most effectively. So, we resolved to kind of get out of that.

 

BB: Well, Bill related a story about you sort of sticking your head into a meeting he was having trying to solve the car supply problem and the fact that lease cars were so expensive during peak season–

 

DG: Well, here’s what’s the problem. We knew at that point we had money, we could buy some of these cars. The grain companies typically owned them, but they would lease them to us. That’s the game we were playing. But at what price? They were pretty good traders; you’d sit down to negotiate and the prices were always pretty high!  So, they were trying to figure out, how do we get this price down, and I suggested that we have what I call at the time a Dutch auction. It’s an auction system where you say, We’re going to buy a thousand cars, ten thousand cars, and we will pay the market clearing price. Now what that does is, everybody tenders a price that they’re willing to accept. You take the lowest prices up to ten thousand, and that’s the price that everybody gets. They can’t complain because everybody that takes it is getting a bargain. They were willing to sell it to you for five hundred, and you pay six hundred.  So, they’re happy.  So, we put this, quote, “Dutch auction” system in, and the big shock for everybody was that the cars were really cheap. Because they had a lot of cars and this particular auction process has the incentives that get people to tell the truth about their reservation price. Other systems don’t, when you go to a guy, I’d like to buy your house, you have a tough time figuring out what that price is. What he’ll actually take rather than have it sit empty was a lot lower than they were willing to reveal to us. So, it worked beautifully. That, in particular, really upset the grain companies because they were taking a beating on this. They had these cars under lease, and they were paying a thousand and they ended up giving them to us for three hundred. That hurts. But there was a glut.

 

BB: Right, right. Yep, the prices reflect what the market will bear.

 

DG: Yeah, you don’t always have to take advantage of other people’s misery.

 

BB: You guys also installed shuttle trains, which was I guess an innovation at the time.

 

DG: Not really. I mean, other people did it, but we pushed it hard. This gets back to rates. We knew that these big elevators were much more efficient, and they could load a whole train very rapidly and we could move the grain to destination. So, we knew we wanted to go in that direction, but how would we get there? Well, what we did is we’d just give them sufficiently low rates. We gave an incentive in the rate structure to build the facilities that would let them load unit trains. That’s all it took, and then they started raising money. They were doing all the financial part of this thing, and they were in, they were into the game. So, it worked out beautifully. Now, it did create some problems because some people, some elevator operators didn’t have either the courage or the finances to play in this game, and they got hurt. Because they were stuck with the high rates and they didn’t get the benefit, but you know, that’s what happens.

 

BB: Right, right.

 

DG: Now, at this point, the transition’s all complete and BN’s got a wonderful grain organizing system. I mean, they have all these efficient elevators of size that can load unit trains and we really move the grain quite effectively.

 

BB: So, the railroad is a part of a holding company, and the holding company’s not in love with the railroad.

 

DG: Well, they love us when we give them cash, but they don’t choose to invest heavily. Their choice of investing – this is in ‘87, ’88 – their choice of investing was to take the available cash and put it in oil and gas. El Paso, the oil properties we had, somewhere other than the railroad because they thought it was a better long-term return. They may have been right, but turns out with history, the railroad did pretty well. I mean, [Warren] Buffett ended up buying it and he paid top dollar for it. So, it was a pretty good investment from 1980 to 2006.

 

BB: So, the transition from when you were CEO of BN and you’re in Fort Worth, you’re reporting up to the holding company, and who was the person that was…did you report directly to Bressler, or…?

 

DG: No, Bressler had a troika. He had three people that were Vice Chairmen. This was his design, I always thought it was a little awkward, but this is what he did. He had somebody in charge of El Paso, somebody in charge of the oil and gas operations, and somebody in charge of the railroad, and we had a trucking company, too, which was folded in under the railroad Vice Chairman. I forget where the real estate property one [was], but there were these various companies, and they went through the three Vice Chairmen. The Vice Chairman when I started with the railroad was Dick Grayson. Then the Vice Chairman was Walter Drexel because I was promoted to President, he became Vice Chairman and he didn’t like it, so that’s when he decided to leave.  At that point – and I forget the exact year – Dick Bressler made what I consider to be one of his biggest mistakes.  He decided that Gerry Grinstein was a very smooth operator, and he could solve this labor problem for the railroad.  Because he had solved it with Western Airlines.  Entirely different situation, but he had solved it.  Got full credit for that. I would think that the jury would say that he didn’t do a very good job with BN because we were the last railroad to get two-man crews in the industry, the whole industry.  Part of it was because Gerry’s particular plan didn’t work out real well.

 

BB: So, there was a guy named Tom O’Leary that was involved.

 

DG: But not at the railroad. He was in charge of the oil and gas company.

 

BB: Okay.


DG: He had a different part of the company.

 

BB: Alright.

 

DG: And the real estate.

 

BB: And there was a period of time, which I’ve only heard a little bit about, where the railroad was going to be loaded up with a bunch of debt and you–

 

DG: It was loaded up with debt.

 

BB: But you took a stand.

 

DG: No, let me back up and give you the full story.

 

BB: Okay.

 

DG: There [were] a lot of attempts to do some financial engineering to improve shareholder return. One of the first attempts was, they were talking about doing a buyout, a leveraged buyout. O’Leary was running that proposal, and he had hired an investment banker and studied the feasibility of it, and they called all the heads of the operating units into a meeting and said, What do you guys think? It was the strangest meeting because I’m sitting there and everybody’s looking around, and they’re looking at me because they expect me to say…and I put my hand up, and I said, This is the dumbest idea I’ve ever heard. We’re talking about having a national railroad strike, and you want to load up debt on the railroad to pay some new investors? This is craziness! So, I threw up on it and the other Vice Chairmen and operating cats sort of followed along. So, we said, thumbs down, O’Leary was not willing to take it on his own initiative, and it died. So that was the first attempt. You could tell it was one of those things that comes up, people get ideas when they’re trying to financially engineer. Some of them make sense, some of them don’t. That one didn’t make sense. The next one was, we split the company in separate parts. Railroad would be standalone, trucking company would be standalone, oil and gas would be standalone, real estate would be standalone, and El Paso will go back to being a gas pipeline standalone. That’s eventually what we did. In 1988, we did that, and it was a great success by all accounts. The railroad flourished; El Paso had ups and downs, but they did fine; real estate failed, they couldn’t ever get any traction; but it was really good for the company. There was an episode in there that I consider unfortunate. In order for this transaction to work for the real estate company, they were told by their investment bankers that they needed a billion dollars’ worth of land to be a credible market presence in real estate. They had arguably $800 million’s worth of land that had been owned by the railroad but was peripheral. It was in industrial parks and stuff like that.  So, they came to the railroad and they said, We want more. I said, Well, hey guys, I can’t agree with that. It doesn’t make sense. Because their proposal was, they wanted to take control of the land that the railroad operated on and lease it back to us. That didn’t make any sense because we were trying to separate these two things apart and we needed our right of way, we needed to monetize that, we needed the benefit from it, we needed to manage it. So, I said, We can’t go along with it. There was a meeting in Dick Bressler’s office, where I was there and Tom O’Leary was there and Chris Bailey was there, who was a real estate guy, and Bressler heard the arguments and said, I agree with you Darius, that’s fine. You can keep your land under the railroad. Well, that’s what I thought was the answer. Well, it wasn’t the answer because then when the deal got ready to get done, we look at the documents and they have a bunch of land under the railroad included in going to the real estate company to get to their target of a billion dollars. I said, Uh-uh, not going to sign these documents. Bressler was confused, he said, Well, I thought we had an agreement! And we did, but it was not the agreement they asked me to sign. So, I just said no. I got my way, but it was, uh…

 

BB: Dicey.

 

DG: It was not a pleasant situation. Worst thing was that Grinstein was supposed to be backing me up, but he sent me to the meeting by myself, so what’s that all about? If you really think I’m on the right course, where are you? He wasn’t there. He’s not into confrontation, I guess. But it worked out.

 

BB: So, at one point–

 

DG: But the true– I’m sorry, I’m jumping ahead, but turns out the whole unfortunate part of this was that everybody found out about it. I didn’t do it, but there were people in the room, and word just spread over the railroad, so it was pretty ugly in the sense that, here it is: the holding company is supposed to do something, Gaskins says no, threatens to resign. I mean, you don’t need that when you’re running a company, it was not necessary. But it worked out okay.

 

BB: But it got overdramatized a bit, or just…?

 

DG: Yeah, I think the troops got up in arms. I mean, they liked me, they thought I was a hero, but it wasn’t good for the company to have a pissing contest between the holding company and the railroad.

 

BB: Right. Did it affect your relationship with Bressler in any way?

 

DG: Don’t know. [chuckles] Don’t know.

 

BB: Okay. And at one point, Grinstein migrates from Seattle into Fort Worth.

 

DG: Yeah.

 

BB: And I remember that because I was there, and that was the town– you said it was a small town.

 

DG: He was coming in to take hands-on control of the railroad because he had gone with the railroad and that’s all he had.  I think he had the trucking company still, but that’s all he had. He was coming to take charge, take charge.

 

BB: Can you describe the circumstances to the extent you wish about how that evolved?

 

DG: Well, it was strange because I wasn’t paying too much attention. I had sort of had a time horizon in my own mind. When I had gone to the railroad, I told them I’d stay seven years. I went in ‘82. I told them I’d stay seven years. I didn’t have a contract, but I just said, I owe it to you to stay seven years. After that, I’m not sure what I’m going to do. And I really wasn’t sure what I wanted to do. So, time was ticking along and Gerry, when he came in, we had a conversation and he said, I hope you’ll consider staying longer than seven years. I said, Well, we’ll cross that bridge when we get to it. By the time my seventh year was in, he was glad to see the back of me, I’ll tell you that, so it was clear he wanted to take control of this. He kind of liked it. His labor strategy wasn’t going real well, but he didn’t know that yet. He and Lynn really enjoyed the life as CEO of the railroad, so they were the toast of the town.  Stephanie and I loaded up our goods and moved back to this house.  That’s what this is all about. It was not– he was happy when I left.  He was so happy, he put me on the board, which was very awkward.  I didn’t want to be on the board, and he said, Well, you really should be on the board. Well, he was being careful about things because he didn’t want it to be an overt breach, so he put me on the board. I went to two years of board meetings, and I said, Nah, this doesn’t make any sense because I’m not getting the full story about what’s going on. I don’t want to be critical of you because you’re my successor and I don’t think that’s helpful, so I’ll just get off the board.

 

BB: Maybe he thought he was diffusing that kind of criticism by keeping you.

 

DG: I don’t know, I don’t know what he was thinking. He tried to get me a job as the Dean of the Business School at the University of Washington, which I declined. I just had no interest in that. So, he has a way of trying to reward people at the same time he’s nudging you out the door. So, it was amicable that I left. I think the troops were not happy about it, but–

 

BB: No, as one of those troops I can say absolutely not. One question: during your time there for seven years, are there times when you got bored with being…

 

DG: It wasn’t too boring. I was getting tired of the meetings. When we first went there, we had all these staff meetings with Gleeson, and they were just dog and pony shows, and we weren’t getting anywhere. I found that boring, but once I was actually running things and walking around talking to people, I wasn’t bored. I wasn’t bored. But there was a phenomena that came over. When I was just the Head of Marketing, I felt like I could talk to everybody and I felt like I was getting a reasonable level of truthfulness.  I mean, people weren’t holding back.  As soon as I became the CEO, it was a different ball game. You could just see the gears running in their heads–

 

BB: That’s right. What’s he want?

 

DG: What’s he want me to say? So it kind of chilled the communication flow. Because we were on the same team when I was the Head of Marketing. When I became the CEO, well, we’ve got marketing, we’ve got transportation, we’ve got this, we’ve got that. Everybody’s got an agenda, and I’m supposed to figure out, you know… So, that part of it wasn’t the most fun.

 

BB: I’m reading this book now about the CIA called Spymasters.

 

DG: Yeah?
 

BB: And in it, one of the roles that the CIA Chief has is telling the truth to the President, whether he wants to hear it or not, and this takes the course from the beginning of the CIA after World War II up to the present, and it was interesting because that dynamic you’re talking about is very present in that environment, and how do you tell somebody who doesn’t want to hear the news the news and be truthful versus letting them know what they want to hear. It’s a challenge, I think, in many instances to get–

 

DG: I distinctly remember thinking about that, that my relationship with people is different today because I’m CEO than it was yesterday when I was just the Head of Marketing.

 

BB: I don’t think Bill felt that, though.

 

DG: Well, I’m just giving you my reaction. And I wasn’t putting the finger on him in particular, I was thinking about other people.

 

BB: Right, sure. So, when you left there, did you know what you were going to do when you came back to the…

 

DG: No. Nope. I had a nice retirement package. It kicked in when I was sixty-five, I think, or something like that. By the time I had gotten here, I had an offer from the Kennedy School at Harvard to teach there, and I did that, but it was a bad fit for me. It’s a good place, people are very smart, but it’s in Cambridge. It’s an ugly commute from here, and the students don’t get any smarter, they’re the same, you know–

 

BB: [laughs]

DG: –you do the same thing over and over and over again, and I didn’t really like it that much, so I did that for two years, and then I said, There’s gotta be something else. And then I formed a consulting firm with some people, and that was interesting. We did work for railroads and utilities and learned a lot about the consulting business and made some money, but it wasn’t really that satisfactory. In consulting, all you can do is, if they let you figure out what to do, then it’s fine, but if they don’t let you, you gotta just hush up.

 

BB: Yeah. And there’s that awkwardness in it of having the ideas and making recommendations, but not owning the solution afterwards. So, you did that for how long with Norbridge?

 

DG: Oh, I think it was like fifteen years with them.

 

BB: So, quite a while.

 

DG: Yeah, quite a while, and then we broke off. They gave me a nice party because it was clear they wanted me to ride off into the sunset, and I just rode off with a couple of the good guys [laughs], and we started another consulting firm which was more fun. The real problem for me was that all the people I knew were getting older and older and older, so my circle of people that I had a good relationship with, that would actually listen to what I said or ask me questions, there weren’t so many of them anymore, so it just atrophied. I was also spending a fair amount of time being on various boards, and that was interesting, and it was remunerative, but ultimately frustrating. Because if you’re on a board, you’ve got the same information problem. What do they tell you? You go to the board meeting, and they’ve got a presentation. Well, they’ve obviously thought about what they want to tell you, and they don’t tell you everything, right? Now, if you ask a couple questions, you can sometimes get a glimmer of what’s going on, but you don’t necessarily get it.

 

BB: No. Yeah, unless you have a source inside.

 

DG: Well, and you don’t want to do that, I mean, I’m not trying to talk about spying or anything like that. It’s just the flow of information is not the best.

 

BB: So, you’ve stepped back from board commitments.

 

DG: Yeah, I’m not on any. I retired myself from the Sapient board, I was the Chairman of the board, and we had some exciting times there, but I pulled back because we had a mandatory retirement at seventy, and I said, There’s no reason not to live up to that because, I mean, otherwise you’re going to have ninety year old people on boards. So, I just pulled back.

 

BB: Well, I’ve sort of gotten to the end of the questions that I have. Are there things that we didn’t ask or talk about that you would like to add?

 

DG: No, I don’t think I want to add. [laughs]

 

BB: Okay. So then, the last thing, I guess, is about the future. The big turmoil right now – well, there’s a number of things. The decline in the coal business is obviously impacting railroads. They’ve sort of wrung out most of the productivity gains.  It wasn’t hard to go from six-man crews to two, compared to going from two to one, or one to none.

 

DG: Two to one is a big deal. Yeah, one to none. They’re big steps. Big steps.

 

BB: There really aren’t too many more mechanical productivity gains, right? Locomotives are at their–

 

DG: There may be some. One thing I tried that didn’t work to my satisfaction entirely was that, we were in a game where we would buy locomotives and the manufacturers – there were only two of them – they would always promise the new locomotives were going to be just great and will never break. Right, well, turns out they’re never great and they do break from time to time, and then you’ve got to fix them. And the locomotives are not designed for easy fixing because the manufacturer doesn’t have to do that, you have to do it.  So I said, This is not making sense. We were trying to get rid of extra labor we didn’t need.  We weren’t the best necessarily at fixing locomotives.  We thought we were, but I was skeptical of that.  So, I came up with something called Power by the Hour–

 

BB: I remember that, yeah.

 

DG: We went to the two companies and we said, We’d like to lease a certain amount of tractive effort, and you guys provide it, and you maintain the locomotives.  All we want is them to pull, and we’ll pay you for every pulling thing. We negotiated, and they were delighted because this was a new deal, and they could hose us because they were smarter than we were about the financial terms. But my ulterior movie was to change the way they designed locomotives so that maintenance was a lot easier and more transparent. Not clear that we accomplished a lot with that, I mean, there was improvement over time, but I can’t claim that we made it happen. It didn’t take very long for the railroad to go back to acquiring locomotives on the same basis they had before.

 

BB: Tradition reigns.

 

DG: Yeah, yeah.

 

BB: But the other part is, on the car size and weight, I know Matt Rose said that he wishes we’d never gone to 286, that it beats up the track. And there was notion about going to 300,000.

 

DG: 310, yeah.

 

BB: Yeah, 310, and he said, Not while I’m alive, because of the impact on the infrastructure.

 

DG: Well, BN’s substructure is not uniformly the best. I mean, it’s a big railroad, runs over a lot of territory, and they built it when sometimes they had money, sometimes they didn’t, so they cut a few corners. He used to complain about that to me. He says, How come you didn’t fix the railroad up better? [I said], Sorry, Charlie, you gotta walk in my sandals. We didn’t have the cash to gold plate this railroad. [laughs] But there’s an issue there, and I don’t know the pros and cons. I don’t know what the optimal tonnage thing is. You’ve got a problem if you’ve got other railroads you’re interlining with, you know, if they have a different standard than you, you’ve got to coordinate that, you’ve got to negotiate it. I don’t know what the right answer in that is, and other than autonomous locomotives, you know, yard units or over the line, over the road. It’s out there, but it’s going to be difficult to get buy-in. You’re in a town out there with your dairy farmers and you’ve got this train coming through there that’s a mile and a half long with nobody in it, [laughs] and I think people might be a little uncomfortable. So there’ll probably be opposition to that. But it’s interesting, autonomous locomotives may be an easier sell than autonomous trucks, until trucks get their own right of way which is separate from everybody else. Because there’s much more interaction with trucks and passenger cars.

 

BB: Right. There was an interview on 60 Minutes with a woman who’s a scientist with one of the autonomous truck companies and she said, This truck– pointing at the truck that has this array across the top of the cab that looks like a fire vehicle or something, but they’re all cameras, and she said, This vehicle can make decisions fourteen times, I think it was or, twenty times faster than I can as a driver. So, it’s consummately safer in a variety of conditions. What it hasn’t solved is the perception of, you know… I think there was news, front-page news, when an autonomous vehicle killed somebody in Nevada, I think it was.  We can kill thirty thousand people a year on the highways, that doesn’t make the news, but one autonomous vehicle accident does. So, there’s that shift in culture away from fear of the unknown, I guess.

 

DG: Well, and I think you do have an issue that you never really resolve who pays for the highways, you see? Because the railroads have been saying for years that trucks should pay a bigger share for highway maintenance. I mean, it’s self-serving because we’d like them to have higher fees so we can raise our rates, right? But there is an honest argument that they do damage the highways and are not paying enough to maintain them. With the Highway Trust Fund where it is, we’ve got a problem anyway. There’s a knock to revenues. And nobody wants to raise gas taxes, that just seems to be a no-no. I remember, the Clinton Administration, they proposed a five-cent gas tax to go in to beef up the Highway Trust Fund. That proposal lasted one week, and then it was taken off the table.

 

BB: Well, didn’t Ross Perot talk about raising the gas taxes when he ran for President?

 

DG: Yes, yeah.

 

BB: But we’ve compounded the problem by higher fuel economy in cars.

 

DG: Oh yeah, more electric vehicles.

 

BB: And more electric vehicles, and now with this pandemic, people not driving as much.

 

DG: See, that’s something for some other policy entrepreneur.

 

BB: [laughs]

 

DG: See, when I was in the old days, it was easy. We knew what to do. Now, these are really hard questions. [chuckles]

 

BB: Yeah, they are. So, you don’t foresee autonomous trains?

 

DG: There’ll be some incremental progress, but I would say that, if you’re speculating about the future, you should be more concerned about the overall shift in the economy, where the weight of GNP goes down, where we don’t have to ship all stuff as far. We don’t burn coal, we put gas in a pipeline. A lot of things are going on that will tend to diminish the use of railroads, and that’s worrisome for the industry.

 

BB: It is. Sure.

 

DG: I don’t know what you can do about that, but that’s a fact.

 

BB: Times change.

 

DG: Yep.

 

BB: They are running autonomous trains in Australia, for example, very effective.

 

DG: Yep, the miners, they own everything.  It’s a closed loop.

 

BB: No grade crossings and no population centers.

 

DG: This is an aside, has nothing to do with this conversation, but the industry had a good success with eliminating fatalities from grade crossings. When I first got to the railroad, I looked at the numbers, and we were killing a thousand people a year, cars running into trains.  And that number is way down. We had a big campaign to go out and talk to the communities about it, change the color schemes on the locomotives, do all these things, and we reduced the fatalities.

 

BB: And eliminate grade crossings where you could, yeah. Yeah, it’s much safer for the employees and for the public than it was.

 

DG: Yeah, yeah.

 

BB: Okay. On that note, I think we’re a wrap.

 

DG: Thank you very much for this opportunity.

 

BB: Oh, it was great!