Greetings!
Hot enough for ya? Now, I know that is a pretty dumb thing to say (or in my case, type) but what’s interesting is that the condition applies to readers from BC to Maine….
From the Tweets:
RR service is an issue (again); STB/Congress/shipper anger is rising (& a bad omen for CN+KCS – the Senate remembers UPSP, for instance ). ALL supply chains & modes are tight, but RR (especially eastern) service was actually called “criminal” at last week’s ASLRRA conference in Louisville; Class One RRs are seen by many shippers and shortlines as understaffed and lacking resiliency….a far cry from the praise they engendered in the second half of last year (during what I referred to as the “shark’s tooth” traffic pattern).
The alleged Rail-service “culprits” are C-1 Rail management (teams/decisions & “weak benches”) plus Wall Street (the OR “cult” and too much headcount reduction, a theme picked up by both the STB and the House T&I Committee and shipper trade associations) & their co-conspired progeny, PSR. In fact, RRs & investors have tried to move on (from OR to Growth/Technology/ESG) but….There’s some truth to the growing chorus of accusations – US RRs, after a solid 2H/20, operationally are still in PSR 1.0. And, in any event, politically….Perception = Reality –– what may be bottlenecks in the ports & C19 problems are seen as systemic RR issues
Infrastructure – back in our political future? The latest deal proposals include ~$579B for “traditional” infrastructure, including $109B for roads & bridges (the most “traditional” of all), $55B for ports & waterways….plus Amtrak expansion and EV research, etc….
Holidaze: As we prepare for the wild, raucous celebrations surrounding Canada Day (as opposed to the rather restrained, prudent affair surrounding the 4th of July a few days from now), it’s time to sum up the latest KSU “War of the Words” following Monday’s last day of commentary (and prior to the end of rebuttal on 7/6). The deal dominated discussion at the first ASLRRA (shortline) regional conference in KCM two weeks back (as I wrote); from my “fireside chat with Pat & JJ to mealtime (and ballgame) conversation it was all about the merger, which made sense from both a timing and location perspective. It also brought forth the theory that the CN application for the KCS Voting Trust might be rejected by an angry and interventionist STB as a way to prevent that – and more importantly, future – rail consolidation. The KCM meeting, without input, of course, from the five (5) folks who will actually make this decision, raised my own outlook to “jump ball”.
The battle for KSU – Almost to the end of the “War of the Words”; nothing has proven definitive but there were a few surprises. The last days of commentary – pre-Rebuttal, which lasts till July 6 – offered up a flurry of letters, press releases, etc. As has been noted, there seems to be an emerging regional bias (northern plains for CP; the gulf coast for CN) as well as a general sense of merger fear (NITL, ACC, Cargill, etc). Not in play is the province of Quebec, but the bill in their assembly designed to “bolster French” within the province requires companies with over 25 employees to form “Francisation Committees”. It does make one wonder how the folks from KC or Mexico will react to the nouvel world of Georges Orwell….
So, for CN+KCS:
- “Over 1650 letters of support” including from
- Congressman Sam Graves, the ranking (i.e.; minority) Member of the House T&I committee – but as he is from Missouri you’ll need to, uh, show me how that isn’t to be expected….
- Former STB Vice Chairman Clyburn and the former STB Chief Economist
- 3 Governors, 28 Mayors, 11 Members (of Congress)
- Some important but local Unions, including some 3 from SMART, going against their national (below)
For CP or/and against the CN Voting Trust application:
- SMART, the national conductors/brakemen union, as mentioned in my note last week – as well as the local representing KCS, which is interesting
- Amtrak! This is big, in a cover sort of way, as is SMART – but like SMART’s reasoning, I just don’t get the explanation – in this case, the divestiture of the Louisiana lines could hurt passenger service. For one thing, the buyer wouldn’t necessarily be some small player, as ATRK seems to suggest, but also, this arguing for single-line service continuation here in order to prevent it elsewhere seems circular, or even helpful to CN. But who reads the details of these letters, anyway?
- The entire North Dakota delegation (sounds better than saying “both of ‘em” – joking)
- Prairie Socialism? Shippers from South Dakota, including a long letter from the SD Grain & Feed Association, which cites three objections in a long letter:
- The issue of “existing competition between” KCS & CN (solid but, as JJ pointed out in KC – see attached, show me an example) but also that
- This (CN) deal would preclude the other (CP) deal….yeah that is the way it goes. CP will cite this, too. This is a real insight into this process – the SD G&FA is like other shippers/shipper groups who (rightly) look to their advantages. CP+KCS helps Ag in the Dakotas, so they oppose the other deal, which is essentially neutral to them.
- Finally, they cite “financial integrity”, and the large premium that CN offered over the CP proposal – which is typical of the strange anti-business independence streak historically seen in the Ag states/prairie provinces, whereby hard-core conservatism bumps up against almost communistic interventionism (see Canadian grain transport history). Here SDG&FA argues against a VT in order to get to a long debate on the merits of the actual merger benefits (the review by the STB); if CN+KCS pass that muster “only then should (in this case CN) shareholders be allowed to spend billions of dollars” on the merger….allowed! Is all klar, herr Komissar?
CP’s Response: Continuing their politically savvy reading of the tea leaves, CP argues the following, which I would score as 2 hits and 2 misses:
- Over 340 shipper letters support them
- CN would take on $19B of additional, deal-related debt, which could (could) lead to under-investment and/or rate increases (note – CP is a proud yield-up player, and price increases are part of the overall rail investment thesis. The South Dakota Collective labeled it “jacking up rates”!)
- Stated that a VT would destabilize the industry (a note that will be well heard in DC – and frankly one that is hard to disagree with) by “creating immediate pressure for further downstream consolidation in the industry” (follow-on effects! M.A.D.!) by:
- Setting a precedent (“road map”)
- Forcing CP to “reassess its strategic options”
- (left unstated but implied) forcing Keith Creel to reassess his strategic options (with, again, no announced succession plans at any other Class One railroad except BNSF)
- Eliminate the potential for the CP+KCS merger. Again, duh! Actually, it would be the VT allowing the higher offer to prevail
- “Against all of this harm, CN has not put forward any public benefits associated with the Voting Trust” – which, actually, rings true – depending on what the (ambiguous, intentionally so) definition is! Left alone, that is a hit, but CP adds that the deal is “shareholder first” and “elevates private benefits over public interest”….well-positioned (even if it rankles this Democrat/capitalist, who believes that balanced stakeholder focus leads to shareholder gains, that regulators can assume power over owners in a free marketplace.
- CP’s evolving and sophisticated underdog political effort is….somewhat cynical (after all, Creel argued to shareholders that the CN offer was “fool’s gold” and now argues essentially against shareholders’ primacy) but I think is a song meant to be heard by those 105 folks in DC (the STB and their bosses in the Senate).
So, let’s see what CNI & KSU say after the holidays….
Rail Service Issues Heating Up - Old themes re-emerge, unfortunately: The tenor of the second ASLRRA (short line) regional last week in Louisville was so, so different than the first. This one, In L’ville, the talk was all about rail service, particularly in the east/southeast. And, what about the service? What was the thinking? One description: “criminal”. OK, that’s a strong word, but you get the idea. And don’t think that perception, as discussed in L’ville, won’t impact the decision on the KSU deal as discussed in their hometown….
Now, one never expects to hear sunny talk from rail shippers (and here I classify shortlines as shippers or partners) – but this was extraordinary. And reminiscent of bad old days that I had expected changed investment themes (above), big Capex, increased tech spends, and the successful implementation of PSR would put into the past. We can say this – without PSR implementation in the US in 2017-19, 2020 would have been a whole lot worse.
But perhaps the rails weren’t able to get enough distance from the pandemic effects to develop the resiliency/redundancy necessary in a world facing supply chain issues everywhere. But with storm clouds gathering in DC, this has to be put right - and fast – as it puts railroads in (and on the wrong side) of the debate over globalization, supply chain resiliency, JIT vs. JIC, etc. Simply saying it’s a supply-constrained growth story, or blaming Covid, or drayage, or weather (see chemicals) – ain’t gonna cut it, not when the STB Chairman can say – publicly – “PSR is failing shippers. That’s simply a fact”. Or when the House T&I Chairman dire
Some other thoughts:
- Maybe Bill Stephens was right-er than I thought (see last week’s piece). I still think PSR enabled IM growth in Canada etc. Also, I should belatedly throw a shout-out his way for the May “Trains” article on Ron Batory’s tenure as FRA Administrator, as transformative in 2 short years and any, ever….
- Shippers have been grousing for a while – I should have listened harder way back in April at NEARS. But it has gotten louder and more public – the ACC letter, the Memphis letter, etc. on 6/21 the Jacksonville Business Journal (a hometown paper!) wrote “CSX Pilloried by Major Shippers”
- Hiring is an issue of course – see below….
- Are equipment shortages – domestic containers and chassis, truck trailers, etc – real or congestion issues?
This also ties rails in with the emerging perception of the specter of inflation. Fed Chairman Powell cited “Shifts in demand, bottlenecks, hiring difficulties and other constraints….” He did not mention PSR, per see.
Globalization? Slobalization? De-globalization? Near-shoring or supply chain re-organizing? This is a worldwide issue, and again, one of reality and perception. Remember, over half of North American freight railroading is trade-related, and a much, much higher percentage of its growth potential (see KSU; desirable target).
It’s an “Ever Given” that it’s been a tough year or so for logistics – NYT: “In Suez canal, the Stuck Ship is a warning about Excessive Globalization” read a headline in the spring, while just yesterday Ford announced six partial plant shutdowns for July due to continuing chip constraints. But, in the fullness of time, and despite bottlenecks (The Economist calls 2021 The Bottleneck Economy”) supply chains have worked. As the FT noted in the piece “Globalization & Its Mistaken Discontents”, the “ultimate lesson of 2020-21 might be (supply chains and globalizations) under-rated resiliency”. But it is important to recall:
- “Service down, Profits up” – a rail shipper lament? No, it’s the JoC discussing steamship lines….TEU rates have sky-rocketed – but this is after years (and years and years) of steamship lines getting poor rates and generating little ROIC
- Like all large capital investments, this – steamship rates, globalization, supply chain savings and returns versus occasional breakdowns, etc, etc - must be looked at through a cycle
- Retail inventories in April the lowest since stats began in 1992 – so the opportunity AND the congestion will linger….
- In case anyone forgot, $370B in tariffs are still in place on Chinese goods – and that is an inflator
Can I get a witness? Or a waitress? The lack of trained crews was one issue cited. But it seems to be a visible issue everywhere….Also remarkable in Louisville was the drastic shortage of service-industry workers. It’s a fun town, good for conventions (the Ali Center, H&B L’ville Slugger Museum, etc) – but it was most definitely not ready for prime time. What’s going on? US job vacancies are at their highest level in 20 years but unemployment is as well! Government relief spending? The reduction in immigration? Obviously the pandemic, but there was so, so much different than here (NYC).
What are the implications? If part of the rail service issues are crew shortages exacerbated by Covid (and laid off or furloughed employees going to build houses etc), how will this apply to them (or their customers)? Labor shortages have been blamed on government payouts ($600/week goes a long(er) way in KY than NYC – maybe that’s why you can find a waiter here); continued fear of C19 (Delta now a scary word); work from home/resource re-allocation….But how about immigration policy? Who do you think was supposed to (but failed) serve the 300 short liners breakfast last week, UK grads? The Economist, again, notes the “myth of automation” and wonders, is this a turning point – “Is Labor Gaining Ground on Capital”? And remember, that’s The Economist, not the Daily Worker….I didn’t start to write a treatise on Kapital, but….
On a related note, Intermodal EXPO in the fall in Long Beach will be fascinating….My next planned travel isn’t until after Labor Day – NARS, NEARS – and IANA’s “Intermodal EXPO” - Schedule | Intermodal Expo
Where on 9/13/21 there will be the following session: PSR 2.0 – Pivoting towards Growth – and, given the above, that’s already slightly embarrassing a title – let’s see how the summer plays out) - Precision Scheduled Railroading or “PSR” has become a dominant operating philosophy in North American Railroading. Now that the first phase of PSR adoption has been largely completed, and the rail networks have been streamlined and made more efficient, what will Phase II look like?
From an intermodal perspective, how can the new PSR world serve as a springboard towards growth? Moderator: Tony Hatch, Principal, ABH Consulting//Panelists: Leggett Kitchin, GVP Domestic Intermodal, Norfolk Southern Corporation; Jordan Kajfasz, AVP Sales & Marketing, Intermodal, Canadian Pacific; Kari A. Kirchhoefer, Vice President, Marketing & Sales – Premium, Union Pacific Railroad….
IANA’s “Intermodal Insights” asked me a few questions about the panel:
- How well is intermodal performing, based on the issues to be discussed in your session? Intermodal is struggling through all modes, and from the ports to the inland hubs. To be fair, the challenges are steep and unprecedented in some ways (the pandemic), but both the reality and the (as important) perception suggest the need for improvement….One of the key questions is – is LA/LB getting better, or not? Is this just a tight market that will last, or something systemic?
- Why are the issues that will be discussed in your session important for intermodal users and providers? We will discuss the ways that the panelists, representing railways in the IM supply chain, can improve their sector of that chain, through capacity additions, labor, and technology….(etc!)
- What are the most important next steps that will be addressed in your session to maximize intermodal’s benefits? Answered above – critical capital expenditures, the further application of technology, improved partnerships, and information sharing….
- Whether your session addressing a new opportunity or revisiting an ongoing situation, how will EXPO attendees benefit from attending your session? The railways are obviously a critical part of the global and domestic IM supply chains, offering labor/fuel/emissions efficient transportation in normal times (should we ever see them again) and in times of unprecedented stress. How the rails react to the challenges will say a lot about their future role.
Slowing growth and tougher comparisons -Traffic, etc - The AAR’s RTI will be out next week for a detailed dive into June, but clearly, volume growth is facing tougher comps; US carloads were up about 15% last month versus ~+20% for the first two months of the quarter. Truck tonnage was up 3.7% in May (note – tons and month). And IANA’s intermodal numbers, also for May, showed 22.4% YOY growth (Domestic +18% International +27%). YTD, Domestic is up 13%, international +19% (total = +16%). The compass makes this sort of meaningless, but it’s enough to strain the system and make the annual Intermodal Expo more interesting than ever (see below on both!). Meanwhile, as Jeff Kauffman (Vertical) has pointed out, and despite the high-profile deal talk, rail stocks have underperformed the market (S&P500) both in June (-4% vs. +2%) and YTD (while rails were up 9% the market is up 14%).
Cover shot: Speaking of the ASLRRA, and the shortlines:
- There were well over 300 folks in Louisville – an amazing turnout – easily a record - for the 2nd of two regional conferences and a good sign for all of us
- CSX’s Tom Tisa noted that shortlines represented ~1/3 of their merchandise business, a good reminder. CSX closed their Quality truck acquisition and expected to re-file their PAR deal with the STB imminently (but I wouldn’t want to be the CSX employee who hand-delivered that!)
- Kudo’s to Watco’s Rick Webb for being the cover-boy for RA’s 2021 Influential Leaders issue (also named, among others, Annie Adams, NSC; Michael Cleveland, BNSF; the irrepressible Jim Jansen of Herzog; Joan Hardy, CP; Matthew McClaren, CNI; Clark Ponthier, UNP; WAB’s CEO Rafael Santana – and CSX’s Mark Wallace, who we are looking forward to see return to the stage as well come out of hibernation (get well soon!). The fact that the AAR’s Ian Jefferies “only” ranked as a Runner-Up suggests election irregularities….
- Patriot announced that it divested the ports division from its rail portfolio
Lighter Holiday Fare:
- So, the combination, if not collusion, of Wall Street & the railroads is hardly new – see The Mad, Bad Business of Railroad Tycoons | The New Yorker – a review of two recent books on the post-Golden Spike development of the transcon railway networks. Entertaining, but perpetuates the myth that the government entirely funded the system’s creation (land grants, etc) while the second book (“Iron Empires” actually goes to great pains that the debt taken on by the UP et al (combined, to be fair) with bad management and corruption, led to the great railway (and Wall Street) collapse of 1893….
- I spent a weekend with this guy (the pitching coach then is a great friend – no mention of trucks or IM at the time, however: Manager’s Road Back to Baseball Took a Trucking Turn | Transport Topics (ttnews.com); speaking of trucking oddities check out “Ice Road”, Liam Neeson’s latest, with a great all-trucking country music soundtrack….set in the summer (!) in Manitoba
- WARNING - NOT RR-Related, rather family-related - That’s my cuz! Juul to Pay $40 Million to Settle Lawsuit Alleging It Targeted Teens - WSJ
- I just realized that AMLO’s famous “white elephant” project, the Maya Train, will be built and controlled by the Mexican Army!
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18