With revenue drop projected, Alaska Railroad explores alternative moneymakers

A larger-than-projected drop in revenue this year for the Alaska Railroad has president and CEO Bill O'Leary exploring ways to strike real estate deals on railroad property and run more beer trains and other popular specialty passenger excursions.

Also heavy on O'Leary's mind is how the railroad will pay for routine maintenance of thousands of train cars and hundreds of miles of track should the revenue drop continue over the long term.

Much of the loss would be due to the closure of the Flint Hills refinery near Fairbanks in mid-2014. The railroad used to carry jet fuel and petroleum products from the refinery to the Port of Anchorage.

"This was our largest customer overall and a really big deal to the railroad," O'Leary said Friday in an interview with Alaska Dispatch News.

The railroad transports diesel from Anchorage north to Fairbanks for Flint Hills, but it's a small fraction of what it once moved for the company.

A dramatic drop in coal exports from the Usibelli Coal Mine near Healy is also set to take a toll on railroad revenue. Trains take coal from the mine to Seward, where it's loaded onto ships for export to Asia and South America. O'Leary pointed to a global oversupply of coal and a strong dollar, which makes U.S. products more expensive on world markets, as key reasons for the decrease in exports.

Total revenues were $190.7 million in 2014. The larger-than-expected decrease in coal freight and drop in petroleum freight will lower total revenues enough that net income will likely suffer by more than was estimated, O'Leary said. In its latest annual report, the railroad projected $11 million in net income in fiscal year 2015, but O'Leary said the actual figure will likely be closer to $9 million. That would represent a 35 percent drop from the railroad's $14 million net income in 2014.

Overall revenues are on track to suffer enough that O'Leary has some concern about the railroad's long-term ability to pay for the routine maintenance of locomotives, train cars, track, railbed, bridges, depots and other buildings.

"We do a good job with maintenance, but it becomes challenging over the long haul if revenues stay down," he said. "It's not that we're not investing enough or not keeping it all in good shape, it's just that it takes constant care and feeding."

The railroad is also paying for a chunk of the $160 million cost to upgrade its train cars to meet federally mandated safety standards.

One bright spot, what O'Leary refers to as "his happy place," is the state corporation's barge service, which moves much of the pipe and many of the drilling modules and chemicals used by the oil industry on the North Slope.

"With all of the work that has gone on on the Slope in the last couple years -- exploration, maintenance and repairs -- that line of business has been really strong," he said. "The question is will that continue if oil prices stay low? There's been no drop-off yet, but it's something we're keeping a close eye on."

Passenger service is also on the rebound now that the drop of big-ticket travel -- like trips to Alaska -- during the global economic downturn has largely lifted. But that only accounts for about 15 percent of revenue, while freight brings in about 50 percent.

O'Leary said the railroad has been working to pare down expenses. As the Flint Hills refinery stepped down production in the last five years, the railroad gradually cut about 300 employee positions.

"But there's a limit to how far you can go on the expense side," he said.

With federal and state government coffers virtually on lockdown, O'Leary is focusing on other ways to raise revenue from the railroad's three main lines of business: freight, passenger and real estate.

The railroad holds about 18,000 acres of land available for uses beyond railroad operations. O'Leary is hoping to land a real estate deal related to railroad property along Ship Creek, north of downtown Anchorage.

"We're talking to lots of folks," he said. "I'm guardedly optimistic about some things, but nothing we can talk about at this point."

For now, he's making the sales pitch.

"We've got some terrific tracts and parcels of land with outstanding development opportunities for commercial real estate, something mixed-use with housing, retail and commercial office buildings." O'Leary said. "These are the last large tracts of land left, certainly in downtown, and in the Anchorage Bowl. It's got a lot of potential."

The railroad may also try to attract more passengers during the offseason by expanding the schedules of its popular themed train rides. Excursions like the Ski Train, Holiday Train and Halloween Train typically fill up fast, with tickets running from $50 to $150 and higher.

"We're looking at more beer trains, holiday trains and ski trains," O'Leary said. "Passenger travel is an area where we try to expand where it makes sense."