Between the lines: Brutal choices ahead for Tranz Rail

By DANIEL RIORDAN

Today is D-Day for Tranz Rail.

After three months of hard work amid intense market speculation, the company is releasing the first results of its strategic review to coincide with this afternoon's annual meeting.

Maybe the kind of paper clips the company uses are safe; then again, maybe not.

Managing director Michael Beard, who replaced Francis Small in May, has made it clear that all aspects of the company's operations are under review.

Top of the hit-list is thought to be the potential for outsourcing many of its services, including its interisland service, urban passenger services, track maintenance, and terminal operations and warehousing. In the United States, home of major shareholder Wisconsin Central, such outsourcing is routine.

There has also been speculation that the company might scrap its proposed Clifford Bay ferry terminal project at Grassmere, south of Blenheim. The most extreme scenario has the company exiting rail transport altogether.

Since launching the review three months ago, Mr Beard has refused to talk to the media. The rest of the company's management has been tight-lipped, adopting a neither-confirm-nor-deny response to each suggestion.

However, some of the analysts contacted by the Business Herald cautioned against expecting too many fireworks today, believing that details of specific changes would come later.

A central task of the review has been identifying just how much money each of the company's operations is making.

Mr Beard has told all staff that "walking away" from particular traffic or customers which were not delivering "acceptable returns" was a last resort, and the company would do all it could to turn those businesses around.

Already there have been changes. Four top managers were cut in August - some of them longstanding employees - in a move some perceived as responding to investors' demand for new blood.

Major investors are understood to be keen for a culture change at the top of the company, and a move from Wellington to Auckland would make that easier.

While being close to Government was a distinct advantage in the old days, today there's less reason to hover close to the regulators, and increasingly more reasons to be in Auckland, the country's commercial hub.

The financial community has welcomed Tranz Rail's blank-canvas approach to how it does business, believing that the company does far too much of its work in-house, tying up capital that could be put to more effective use elsewhere.

Broking house JB Were says that outsourcing the interisland ferry service and using chartered ships, for example, would remove Tranz Rail's biggest capital expenditure item and save it more than 50c a share.

That kind of reasoning sounds brutal, but it reflects the tough choices Tranz Rail management may have to make.

Understandably, workers are concerned for their jobs.

The vast majority of Tranz Rail's 4000 staff are represented by four unions, the biggest the Rail and Maritime Transport Union.

The unions are being briefed separately before today's meeting. Their leaders expect redundancies, if not immediately then in the near future as the first of the review's findings are implemented.

Certainly the company's share price has outperformed the market since Mr Beard took over, rewarding the company's willingness to embrace change.

Since May and Mr Beard's arrival from the Californian office of shipping line ANZDL, Tranz Rail shares have risen 46 per cent from their 12-month low of 265c, closing yesterday at 380c.

In that time the market has fallen 4 per cent.