Margin and capital efficiency improvements have created billions of dollars of shareholder value: The railroad stocks have greatly outperformed the broader market in the past 15 years, which took place despite the major deterioration of coal volume, the railroads' historical business. Arguably, that stemmed from Canadian National (CN) Railway's acquisition of the Illinois Central in 1998, which brought legendary executive Hunter Harrison to CN. Led by Harrison, who was appointed CEO in 2003, CN's margin went from worst to best among its Class I peer group. Ever since, investors have asked (and demanded) that other railways perform with industry-leading margins. That led to Harrison being installed as CEO of Canadian Pacific Railway in 2012 following a proxy battle led by Pershing Square Capital Management, his appointment as CEO of CSX in March 2017. Although Harrison passed away in December 2017, the other Class I railways (with the exception of Burlington Northern Santa Fe, which is discussed below) adopted their own versions of PSR, often employing executives who had worked alongside Harrison. 

PSR has created capacity on the railway networks: An efficient railway has less equipment sitting idle in classification terminals, a more fluid network with less congestion, and fewer redundant resources that create inefficiencies. With railways running more efficiently, fewer pieces of equipment are needed, enabling the railways to operate their newest and most efficient pieces of equipment. Having fewer redundant or unnecessary employees on the railway also contributes to efficiencies, but not necessarily to a culture of safety.  

It's short-sighted: Many argue that PSR is short-sighted, placing near-term improvements in margins ahead of longer-term concerns. By steeply reducing headcounts and capital expenditure budgets, the railways may not be able to effectively handle a surge in rail traffic volume in a strong economy. Associated cuts to capital expenditures often lead to less redundant capacity built into the system, which can lead to service disruptions when there are weather issues or seasonal surges in freight.  

It's antithetical to volume growth: PSR places undue focus on a railway's margins and operating ratio. One way to improve margins is to walk away from business with lower associated margins. In many cases, that would violate the railway's common carrier obligation, but it is relatively easy to do in the intermodal revenue segment, which is deemed competitive with the trucking industry by the Surface Transportation Board (STB). Accordingly, CSX, Union Pacific and Norfolk Southern have all de-marketed intermodal lanes that were presumably less profitable than their intermodal lanes with denser volume and most of their carload traffic. 

While that may be a question for BNSF and its owner, we believe it is related to the railway's private, rather than public, ownership and its owner's objectives. When Berkshire Hathaway acquired the company in 2009, the investment firm described the railway as a "100-year investment." While that was likely an exaggeration, the point is well-taken that it is a long-term investment. A railroad investor's primary objective with a very long time horizon is to not be economically re-regulated. The best way for the railroad industry to avoid economic re-regulation is to provide strong service levels. The risk of heavier-handed regulation increases when railroads increase prices each year greatly in excess of their pace of cost inflation regardless of market conditions while providing poor service – that highlights the lack of alternative modes of transportation that many railroad shippers face. 

If BNSF was publicly traded, it is likely that management would be pressured by activist shareholders to adopt a more PSR-like approach to cost management. There might even be an attempt by shareholders to replace the management by proxy with managers with "PSR experience." That was the case referenced above with Canadian Pacific Railway in 2011-2012 as a proxy battle led by Pershing Square Capital Management replaced CEO Fred Green with Hunter Harrison. But, we'll likely never know, assuming that Berkshire Hathaway holds on to BNSF for an extended period of time.