On track for a new challenge
After four years of driving change at KiwiRail, departing chief executive Peter Reidy’s next mission is heading Fletcher Building’s struggling construction division. Is this man a glutton for punishment? “It’s a very strong leadership and culture challenge, rebuilding market trust and people’s confidence,” he says diplomatically. “It’s an exciting challenge, as KiwiRail was when I came back from Australia to New Zealand.”
Before joining KiwiRail, Reidy was with construction company Downer for seven years in Australia, working across a broad range of infrastructure — roads, mining and rail.
KiwiRail is also a very large infrastructure builder, he says. “We’d spend $300 million a year on capital for infrastructure upgrades. So it’s not uncommon territory.”
His next move is also personal, he says. “My father spent 42 years at Fletcher. I grew up with Fletcher and so there’s a bit of wanting to get in and make sure it’s strong for New Zealand again.”
Reidy’s father Bill — who passed away two years ago, aged 90 — had a long career with Fletcher Holdings and then Fletcher Challenge, including 15 years as group general manager of Fletcher Steel and director of Pacific Steel.
“We spent many years as a family at the Fletcher Christmas family picnics and I worked in the steel mill and wire mill in my teenage years during holidays,” Reidy says.
There’s certainly a sense of homecoming about his new role — as there was with his return to New Zealand to take on KiwiRail.
“The whole reason I came back for this job was for NZ Inc. For New Zealand to grow, it needs a strong transport system. And the same for Fletchers, for New Zealand to grow it needs a strong Fletchers.”
Despite a rotten couple of years which has seen Fletcher Building’s losses mount and its market value drop by about 40 per cent, shareholders will be optimistic that its divisions like construction can be returned to profitability relatively quickly.
Fletcher is restructuring its businesses under new chief executive Ross Taylor, which means getting the construction unit back on track after it took on a number of unprofitable projects in its building and interiors business. At KiwiRail, things are not so simple. Reidy concedes the rail operator will probably always require government support because of the enormous infrastructure costs it faces.
There are bright spots in the most recently published results (the half-year to December 2017) including a $15.3m operating surplus — up 39 per cent on the prior year — and it is on track to meet its full-year operating surplus target of $30m-$50m.
But there is no avoiding the bottomline loss of $193m for the period.
“The business will never be profitable in terms of supporting the infrastructure,” Reidy says.
It is profoundly hampered by legacy assets — including track and engines — which have been underfunded for 40 years, he says.
There are also some inherent geographical issues in New Zealand that don’t help matters.
Basically, the country is the wrong shape.
“It’s very difficult. It’s long, skinny, lots of tunnels. It’s very hilly and we’ve got narrow-gauge rail.”
Essentially, that means we can’t stack trains with double-decker containers or 150 carriages like they do across the wide expanses of Australia and the US.
We also don’t have the freight volume they have in Australia, where 90 per cent of freight is coal and iron ore.
“So we’ve got a liquorice allsorts here and we’ve got to live with what we’ve got,” Reidy says.
“It’s a mixture of light freight, heavy freight, passenger tourism, so it’s not an easy business to make money.
“We’re an SOE so we have a strong commercial focus.” Even though KiwiRail is state-owned, targets like revenue growth, margin growth and customer engagement will always be the starting point, he says.
But part of his mission in the past four years has been to shift the conversation about rail to one that looks more broadly at its value to the nation.
The nature of that conversation had shifted to being about “the value of rail and not the cost of rail,” he says.
“What you are starting to see now are targets for environment, targets for emissions, connectivity to community, targets for trucks off the road,” he says. “So it’s more of a holistic view of performance. Which I think is better for the business.”
Challenging though it was for KiwiRail, the 2016 Kaiko¯ura earthquake that cut the main trunk line from Picton to Christchurch played an important role in shifting the public perception, he says.
“When the earthquake happened, New Zealand really understood what happens when rail is not there,” he says. “The cost to New Zealand is significant. When that happened and rail wasn’t there, freight rates went up 20 per cent. Supermarkets could not get their goods into regions.
“How much money does that road make? No one knows because it’s critical infrastructure,” he says. “We make good money in terms of the operating performance but the infrastructure is core for New Zealand. People are starting to see that now.”
It does seem that Reidy is leaving KiwiRail just as the fair winds of political support have started to blow its way.
The current Government has actively shifted its transport policy focus from road to rail.
But Reidy says the change was already under way and even National had started to better understand rail’s value.
“The last Government was very supportive, they put a lot of money in. And towards the end of their tenure they were starting to talk about how we fund rail differently,” he says.
“This new Government has picked that up and we’re looking at a longerterm funding arrangement.”
There is a more integrated focus on funding road and rail together.
That change is part of a “renaissance for rail” which is taking hold around the world, he says.
“You’ve only got to look at traffic from Hamilton to Auckland on the Southern Motorway at 6 in the morning.
“People are saying how do we get on to public transport? Aucklanders took 20 million train trips a year — 10 years ago it was 4 million.”
That growth is starting to flow on to trade and tourism.
Tourists’ use of rail is up 20 per cent, container growth is 18 per cent, forestry 12 per cent and overall passenger growth 18 per cent. The Interislander had its best year ever in terms of numbers across Cook Strait, he says.
“So I’m really positive about the growth shoots coming through. We’re seeing strong growth in things like that [although] we’ve seen a decline in coal and liquid milk which is the historical mix of what freight used to be.”
Reidy says he’s also proud of the workplace culture he’ll leave behind at KiwiRail, including “a very strong, trusting relationship” with the Rail & Maritime Transport Union.
“They are famously tough,” Reidy says. “More than 75 per cent of our people are members of the union.”
KiwiRail adopted Air New Zealand’s high performance, high engagement strategy with great results.
“It’s all about leaders letting go and your frontline workers taking ownership of problems,” Reidy says. “The last pay deal we did, we negotiated that in four hours. What it means is we deal with all the issues like fatigue and rostering in fully worked programmes with our people. So when you sit down to negotiate it’s just a rates and date deal.”
When Reidy started at KiwiRail in 2014 it was four years into a 10-year turnaround plan which he describes as overly ambitious.
“It was looking for revenue growth of 10-15 per cent per annum.”
KiwiRail now has a clear five-year plan, he says. It includes more commuter services such as developing the Auckland-Hamilton route.
“I think that’s really strong and we’re talking with government about that now and investing in regions,” he says. “We’re doing a lot of work around tourism.”
Reidy hopes to see an Auckland to Wellington tourism train running every day and stopping in the Ruapehu district.
“Then of course we are making decisions about new ships for the Cook Strait. It’s big money.”
What’s needed too is longer-term funding to lengthen the horizons for planning, he says.
“We’ve only got two-year funding. We used to have one. We really need fiveyear rolling funding . . . and investment in the assets.”
The locomotives in the South Island are 48 years old, he notes by way of example.
“We need to invest in the core. Then you can start to expand out into more regional activities. It’s about making sure assets are fit for purpose and I think if the Government can do that it will be a very strong business.”