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Greetings from NARS Eve in KC - Observations on the State of the RR Industry Post Earnings & Hearings

Tony Hatch - ABH Consulting
NARS Logo Final Black Artboard 11 (Transparent) 1 Spacing

Greetings from KCM, on the eve of NARS;

First from the tweets, after the STB increased service reporting demands from the Class Ones after the amazing two-day hearings in DC, Transport Canada, ever the follower, decided to increase the amount of data it receives from CP & CN and the House T&I Committee decides, unsurprisingly, to join the party.  While being frustrated at all of this – the rails slow climb out of their hole, the government’s narrow, modal look at issues while ignoring the globality of the pandemic labor issues and the influences of other modes, etc – I must say that as an analyst I do like me some “more data”.  As for the frustrations, I found refuge from, to me, an unlikely source – the Op/Ed page of the WSJ:

I rarely read or recommend a WSJ Op/Ed but today’ “This Month’s Inflation Scapegoat? Inflation” is spot-on in noting the flimsy (“monopoly RRs”) sound-bite thinking….see This Month’s Inflation Scapegoat? Railroads - WSJ

 

NARS starts tomorrow in Kansas City.  The agenda is very compelling, and not just the 11:10 am slot tomorrow: NARS-2022-Schedule-of-Events-4-30-2022-.pdf (railshippers.com).    Also, as NARS “Person of the Year of 2019 – simply my greatest professional honor – I do love this one.  The North American Rail Shippers Association’s annual event is one of the red-letter events on the rail calendar, along with its sister organizations (NEARS, MARS, SEARS, SWARS, etc), IANA’s Intermodal Expo, AREMA/Railway Interchange, NRC, and last week’s short line (ASLRRA) conference – see below.  Perhaps I could humbly add in RailTrends (www.railtrends.com ) coming back to NYC this November?

 

The Short Line Conference was a blast – 1400 plus railroaders, all with a true, entrepreneurial growth focus.  None super happy with their Class One partners at the moment, although certainly more reasonable than the folks in DC.  One thought occurred to me – the renewed emphasis, from the STB to shippers, etc, on the “First Mile/Last Mile” might (should) create a renewed emphasis on the C1/SL partnership, and maybe, just maybe, create a renewed trend of short line creation as a market extender….

 

May (Pre-NARS) Top 5 Rail themes:  While I still have some catching up to do (with thanks to Chairman Oberman for creating my own version of a supply chain crisis), I thought it worthy to cover five broad themes I have seen from the earnings calls to the hearings to the responses to those hearings (and this is not merely an attempt to reclaim my intellectual capital in the “Cult of the OR theme”.

  1. Railroads are aware of the situation, even if their handling of it from a PR point of view has been….awkward (see my “Read the Room” comments pre-hearings).  In fact, the hearings were the start of the rails’ “Apology Tour II”….
    1. “PSR” may, unfortunately, be beyond salvaging.  The phrase is almost toxic, despite the fact that it actually worked and that the US rails, the latecomers to the party, had substantially completed Phase One (or “1.0”) by January 2020.  Several rails gamely tried to defend it – to deaf ears at the Board (and purposely plugged ones from the Trade Associations).

  2. The rails expect sequential improvement as trainees turn into crews (and remember, this is a global issue – the FT survey of container shippers suggests a further 15 months to full “recovery)
    1. Interestingly Maersk, in reporting record results and increasing guidance for the fourth time in 18 months, sees supply chain relief coming in a slower, more moderate second half
    2. The rails expect their ability to handle the still-robust demand to increase in the send half – all of the rails have a back-end loaded forecast for 2022

  3. The rails reported….decent financial results, mostly in line, despite obstacles self-imposed and otherwise (weather, strikes, the usual).

  4. One interesting, and possibly troubling theme in the calls, etc was a slight turn away from Intermodal.  Led by rather ignorant questions from analysts (playing the remaining vestiges of the OR Cult and ignoring ROIC), the rails were once again asked if IM was….even worth it.  And the responses were not always….great.  Parsing CN’s new CEO Tracy Robinson’s debut reveals some thought behind “curating the traffic base”, and “rebalancing” IM and carload growth,  IMHO that means lighting a fire under merchandise to catch up, not limiting IM!
    1. Despite the slowdown in eCommerce (see Amazon’s results and the stock market hit it applied to warehousing), IM is, must be the sharp end of the spear for rail, and in fact, the increase in Domestic IM in Q1/22 and especially in March is the best green shoot evidence of a coming inflection there is….
    2. IMC results were stunningly good (Hunt, Hub, Schneider) and their enthusiasm (and growth spend) was palpable

  5. Last war/next war?  The transcripts of the Q&A from the rail calls suggest that the rails “Pivot to Growth” and their “Growth/Technology/ESG” focus – initiated really in January 2020 but put on hold during the early Pandemic crisis, are what investors care about!  Sure there’s always the dumb OR question, but the Q&A was all about the immediate problem (service recovery) and the intermediate one – growth.  The rails have successfully turned investor focus (or vice versa) from the Cult of the OR (man why didn’t I TM that!),  or PSR 1.0, to the next phase as best described by CP’s Creel (the “Pivot”).
    1. Talk the talk – again, this (stating “We’re all about growth”) may seem farcical at the present time but it is the necessary first step in Investor (Stakeholder) Relations in asking to be judged by growth over margin
    2. My good friend Rick Patterson’s (Oi!Oi!OI!) brave STB testimony did borrow my Cult imagery (and to boot his writeup borrowed both “Read the Room, Rails” and – horrors – “Rail Renaissance” without attribution; all is forgiven as RP will return to RailTrends again this November and we plan to see Midnight Oil together soon).  BUT:
      1. His use of the Cult was, IMHO, out of date, describing the investor focus of, say, 2015-2019
      2. The idea that a growth-oriented CEO would not have the time required to prove out his/her strategy was in fact tested at Canadian National over the winter and the results were a rather decisive win for growth, or at the very minimum, balance
      3. If that strategy is doomed to cause regime change, then expect a lot of it as all of the Class Ones have made the Pivot, at least in Talk.  In fact, five of the six Class Ones are run by former CMOs (and that’s a good thing!).

 

Let's see how NARS transpires….

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18

 

 

I neglected to point out that, in my point on the notion that Rails may be turning perhaps ever so slightly from intermodal (if even true) that NARS will have, in addition to such luminaries as Katie Farmer, CEO of BNSF and the rail unicorn that is CP(KC)'s Keith Creel, an excellent rebuttal tomorrow here in KC from a panel featuring BNSF's head of IM, the irrepressible Tom G Williams, and his counterpart of JBHunt, Darren Field.  I am sure they will provide me with more than enough ammo to hold this particular line ... again, the agenda: NARS-2022-Schedule-of-Events-4-30-2022-.pdf (railshippers.com)

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