Monthly Archives: July 2014

Berkshire’s AirCare Travel Insurance is Money in the Bank

(BRK.A), (BRK.B)

Missed your connecting flight? Sitting on the tarmac unable to take off? Berkshire Hathaway has made a big bet that you’re your travel delays, delayed and lost luggage, and missed connections are money in the bank—yours and theirs.

This past January Berkshire Hathaway Specialty Insurance acquired the assets of the Noel Group’s MyAssist and Insure America in order to move into an area of travel insurance that is different than traditional trip cancellation policies. This insurance focusses on the little inconveniences that bedevil air travel.

Money in the Bank

The innovative AirCare Travel Insurance product is sold for only $25 a domestic flight, and its key feature is real-time monitoring of your flight status and direct deposits into your bank account.

Berkshire Hathaway Specialty Insurance promises that their AirCare Travel Insurance will “start rebooking a missed connection automatically. Help replace lost luggage quickly. Even save you a seat in the VIP Lounge.”

All that sounds nice, but it’s the money in the bank that is the big hook. No paperwork, no submitting receipts or claim forms, the real-time monitoring means that while you are working on rebooking your flight a deposit of $50 is hitting your bank account if the departing or connecting flight takes place two or more hours after the originally scheduled flight. The money only goes up from there. You receive $500 for flight delay that causes a missed connection, and $1,000 if you sit on the tarmac for more than two hours.

Lost and delayed baggage pay-outs include $500 for misplaced luggage that is delayed by more than 12 hours, and $1,000 for bags that are lost or stolen.

In addition to direct EFT deposits, travelers can get the more traditional check in the mail, and another innovation enables travelers to get their funds deposited into their PayPal account in lieu of a bank account.

Weather or Not to Buy Insurance

The convenience of AirCare Travel Insurance is that it can be purchased through a mobile app and charged to a credit card even as you sit in the airport. Purchase rules only require that it only be an hour or more before your scheduled departure and that there not be an active weather warning in effect. This means that as long as the airport is open you can place your bet on your flight being delayed.

Ramping Up Big Time

The new Berkshire Hathaway Travel Protection unit is headed by Noel Group’s John Noel, the man who became a leader in modern travel insurance when in 1985 he launched Travel Guard insurance from his basement home office.

Currently the company has 150 employees at its headquarters in Stevens Point, Wisconsin, and they are looking to hire 2,000 employees in anticipation of strong demand for the new insurance product.

How big is the Market?

The market is huge. John Noel points to the 660 million domestic air travel segments a year, and the 30-percent of all travelers that currently purchase a travel insurance policy, as an indicator of the potential market. That market will even grow larger as an anticipated expansion covering international travel is added on. It’s a total market that currently has no competition, is not covered by travel riders provided by homeowner’s or auto policies, and even if others enter it Berkshire Hathaway Specialty Insurance has positioned itself to be the market leader.

Sounds like money in the bank.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

BNSF Strikes Union Deal to Cut Costs with 1-Person Crews

(BRK.A), (BRK.B)

BNSF Railway will dramatically cut crew costs on certain routes under a new agreement with SMART, the Transportation Division of the Sheet Metal, Air, Rail, and Transportation Union.

The newly announced agreement will allow BNSF to employ one-person crews over roughly 60-percent of its routes, instead of the standard two-person crews, provided that a remote-site-based Master Conductor is using monitoring technology known as Positive Train Control (PTC).

The trains would have a locomotive engineer but no other onboard crew.

The Coming of Positive Train Control

Over the last several years, the Federal Railroad Administration has been reviewing PTC plans from 41 railroads, covering both passenger and freight railroads. The FRA approved 24 plans without conditions. Additional plans were approved provisionally, and two were denied without prejudice.

The Rail Safety Improvement Act of 2008 (RSIA) mandated that Positive Train Control (PTC) be implemented by the Nation’s railroads by December 31, 2015. Railroads requiring PTC are the Class I railroad main lines, which are the rail lines that transport 5 million or more gross tons annually.

As detailed by the Federal Railroad Administration, “PTC refers to communication-based/processor-based train control technology that provides a system capable of reliably and functionally preventing train-to-train collisions, overspeed derailments, incursions into established work zone limits, and the movement of a train through a main line switch in the improper position. PTC systems are required, as applicable, to perform other additional specified functions. PTC systems vary widely in complexity and sophistication based on the level of automation and functionality they implement, the system architecture used, the wayside system upon which they are based (e.g., non-signaled, block signal, cab signal, etc.), and the degree of train control they are capable of assuming.”

BNSF’s approved PTC systems include ETMS (Electronic Train Management System), which is a GPS- and communications-based system.

Cost Savings for BNSF

Crew costs have been steadily dropping over the past four decades. As recently as the 1970s, various states mandated as many as six employees per train.

Compensation and benefits are the railroad’s number one operating expense, just edging out fuel costs. Currently BNSF has 43,500 total employees, with roughly 19,000 of those working on train crews. Total labor costs were $4.65 billion in 2012. The average annual salary of a BNSF conductor is over $68,000, and BNSF operates 1,500 trains daily.

In moving to trains staffed with only a single locomotive engineer for a large portion of these trains, significant cost savings will be achieved, as the remote-site Master Conductor has the ability to monitor multiple trains at the same time.

However, off-setting at least a portion of that savings is an agreement with SMART to increase the pay of conductors and ground service workers.

Changes Needed to Union Agreements

In addition, future hiring procedures will need to be renegotiated, as BNSF’s current union agreements state that only promoted BNSF conductors can become locomotive engineers.

The new agreement between BNSF and SMART is subject to a union ratification vote that will begin in mid-August, with the final results announced in September.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: See’s Candies: Eastward Ho!

(BRK.A), (BRK.B)

If you are reading this on July 20th, it is National Lollypop Day and you can get a free lollypop at your local See’s Candies store.

If you are a Berkshire Hathaway shareholder, you can get something sweet every day from See’s Candies, as the wholly owned Berkshire Hathaway company continues to sweeten Berkshire’s bottom line with a steady stream of profits.

Acquired in 1972 for only $25 million, See’s Candies today has over $400 million in annual revenues with just under a quarter of that as profit. That means it annually produces four times its acquisition cost in profit. Pretty sweet.

See’s Candies was founded in 1921 in Los Angeles by Charles and Florence See, using the recipes of Charles’s mother, Mary See. Over almost a century, the porcelain-white stores with the white-and-black checkerboard floors grew to be West Coast candy icons.

Today, the company produces 26 million pounds of candy annually and employs over 6,000 people.

Recent annual revenue growth has been around 4%, and the company is adding 10-12 new stores per year.

Growing Eastward

Currently there are more than 200 company-owned shops in the western half of the U.S., and limited distribution in department stores, along with a handful internationally in Hong Kong, Macau, Taipei, and Tokyo, and pop-up stores for the holidays all across the country. But until recently, the place you couldn’t find a full-fledged store was east of the Mississippi River.

No wonder generations of Easterners have brought home See’s chocolates from their trips to California.

All of that has begun to change as See’s has looked eastward, opening stores in Ohio (in Cincinnati and Columbus) and two stores in Pittsburgh, Pennsylvania in 2013.

Supersizing

The other big change for See’s is in the size of its stores. See’s shops have long been under 1,500 square-feet and have featured a single candy counter. This works fine most of the year, but as some 50 percent of See’s business is during the end-of-year holiday rush (when customers grow impatient with waiting in line), the company is experimenting with supersizing some of its new stores.

November 2013 saw the debut of a double-sized, 3,000-square-foot store in Orange County, California, that featured two candy counters and four cash registers instead of the usual two.

Buffett’s Crystal Ball

The evolution of See’s was long anticipated by Warren Buffett, who believes that a solid business evolves over time even if it is meeting the same need.

In his 1996 Annual Letter he wrote:

“Today, See’s is different in many ways from what it was in 1972 when we bought it: It offers a different assortment of candy, employs different machinery and sells through different distribution channels. But the reasons why people today buy boxed chocolates, and why they buy them from us rather than from someone else, are virtually unchanged from what they were in the 1920s when the See family was building the business. Moreover, these motivations are not likely to change over the next 20 years, or even 50.”

Almost two decades later it’s clear that Buffett was right about the “next 20 years.”

Now it’s on to the next 30.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Will Natural Gas Fuel BNSF’s Future?

(BRK.A), (BRK.B)

The diesel locomotive is one of the most efficient transporters of freight, with decided cost advantages over moving similar goods by truck. According to CSX, moving goods by train is three times more fuel efficient than truck transport, and the Association of American Railroads (AAR) estimates that freight railroads move a ton of freight an average of 476 miles on just one gallon of fuel. Still, despite this advantage, BNSF and other long-haul freight railroads are looking for even greater efficiency and cost savings with the development of locomotives that run not on diesel but on liquefied natural gas.

A Game Changer

The switch to liquefied natural gas would be the biggest change since railroads shifted from steam-powered locomotives to diesel-powered back in the 1950s.

According to the U.S. Department of Transportation, Class 1 railroads, which include BNSF, used a combined 3.6 billion gallons of diesel fuel in 2012. In total the seven Class 1 railroads accounted for 7% of all diesel consumed in the U.S. during 2012.

Of those railroads, Berkshire Hathaway’s BNSF was the single largest consumer, using 1,335,417,552 gallons of diesel at a cost of $4,273,779,000. This almost $4.3 billion in fuel cost was one of BNSF’s primary expenses, representing 29% of BNSF’s total operating expense.

Here Comes Natural Gas

Using liquefied natural gas to power locomotives is hardly a new concept. Burlington Northern tested it in the 1980s, and Union Pacific looked at it again in the 1990s. The difference today is the tremendous domestic natural gas boom that has driven down natural gas prices even as oil prices have neared all-time highs.

In addition, pollution and global warming concerns make liquefied natural gas all the more attractive. Natural gas is the cleanest burning of all fossil fuels, and would not only help railroads meet the EPA’s Tier 4 air emission regulatory standards, but would also significantly reduce CO2 emissions.

Burning natural gas creates far lower amounts of sulfur dioxide and nitrous oxides than burning diesel fuel, and natural gas produces only 117 pounds of CO2 emitted per million BTUs of energy, as compared to a far heftier 161.3 pounds of CO2 for diesel.

Potential for Enormous Savings

While the environmental benefits are compelling, it is the cost savings that has railroads most excited. Natural gas production is booming and prices have dropped to roughly one-third of their 2005 price levels. Goldman Sachs estimates that for the next two decades natural gas will trade in the range of $4 to $5 per million BTUs, down from over $15 in 2005.

In 2012, energy equivalent pricing of Brent Crude oil, which is the global price benchmark for Atlantic basin crude oil, was roughly seven times the Henry Hub natural gas spot price, which is the pricing point for natural gas futures on the New York Mercantile Exchange. And the U.S. Energy Information Administration (EIA) is currently projecting that a substantial gap will continue to exist between oil and natural gas prices through year 2040 and perhaps beyond.

This isn’t about pennies, it’s about dollars. Lots of dollars. At current price levels, BNSF could save as much as $3 billion per year.

Fuel Supply Security

Liquefied natural gas also gives railroads and the U.S. fuel supply security, as it is a purely domestic product unaffected by Middle-East conflict. Currently, two-thirds of diesel fuel is imported. And, while Middle-East oil supplies dwindle, domestic natural gas production is growing.

For example, the 104,000 square-mile Marcellus field, which includes Pennsylvania, West Virginia and southeast Ohio, has seen its output grow by a whopping 10-times in just the past five years.

Cost of Conversion

Diesel locomotives cost roughly $2 million each and the cost of converting a locomotive to liquefied natural gas is approximately an additional $1 million. This cost may drop if liquefied natural gas becomes the standard rather than the exception, but even at current costs the average 20-year lifespan of a locomotive means substantial operating cost savings. BNSF has 6,700 locomotives, so some of Berkshire’s tens of billions in cash could be invested in-house to produce a mountain of cash over the next century.

Additional Hurdles

Besides conversion costs, the two other big hurdles are government regulations and upgrades to fuel delivery infrastructure.

The government has been moving slowly. The Federal Railroad Administration (FRA) is still developing the regulations for liquefied natural gas locomotives, with a particular focus on tender-car safety.

The other hurdle is the need for a new fuel delivery infrastructure to provide liquefied natural gas to train depots.

Neither of these hurdles looks to be prohibitive, as important environmental benefits provide the incentive to craft workable regulations, and railroads previously converted their infrastructures from handling coal to diesel fuel without much problem.

The big question is whether natural gas powered locomotives can really do the work of a diesel locomotive under all conditions. BNSF is working hard to find out. Four natural gas powered locomotives are being tested in high-stress environments, including the California dessert and the cold weather of the northern tier.

Summary

Despite higher initial capital costs, the long-term operating cost savings and environmental benefits of liquefied natural gas locomotives make them the likely kings of the rails well into the next century. BNSF should reap billions in cost saving over that period, which would make Berkshire Hathaway and its shareholders very happy.

(This article has been updated with new information.)

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.