NARS and Reflections on Rails' Troubled Spring

Tony Hatch - ABH Consulting

May 17, 2022

Greetings;

The railroads continued to take a public beating last week as expected at both NARS and the House Transportation & Infrastructure Hearings. At the former, the rails got to punch back (a little), while at the latter the T&I Chairman, the retiring Congressman DeFazio, actually took on the STB (!) for moving “too slowly” (as opposed to those imitators of The Flash in Congress). Unfortunately, they found common ground in bashing the relationship between Wall Street and, apparently somehow exclusively, the railroads, whose progeny, share buybacks, are the root of all evil in the whole wide world. In fact, at NARS, STB Commissioner Fuchs was asked (see below) if the STB could do anything directly to stop share repurchases (holy communism, Batman!). I am sure his answer was solid (they always are) but I couldn’t hear over the sounds of my own weeping at the sad state of the world.

For those worried about rails under-spending (which would, one assumes, be why folks are concerned about share buybacks), see the table at the very bottom, noting the huge CBR ramp up in 2015 (showing, hate to say it but it’s true – rail responsiveness) and note the fact that the planned Capex is set to be up 10% this year.

The rails have entered a (forgive me) “perfect storm” of their own charting (PSR implementation issues) meeting a (please remember) unprecedented ongoing pandemic, which created global labor and supply chain issues - while being monitored in a too-specific, singular mode regulatory and legislative review process by a Board predisposed (going back at least to 2017) to like trains but hate railroads, a White House concerned with consolidation (in other industries on the main) and facing high levels of inflation while seeking “solutions” (and scapegoats). The railroads' response has ranged from tried and true (increase the T&E pipeline, in difficult times) and poor (see “Room Reading”) and less-than creative at first….

North American Association of Railroad Shippers, an organization close to my analytical heart, held its annual meeting in KC last week. Several really important points came through in the presentations:

The railroads acknowledged their issues (Apology Tour II) then stayed on message – the themes remain 1) service recovery (BNSF adding 1800 T&E) and 2) growth – not OR! The rails were pretty well-represented by the CEOs of both BNSF and CSX (CP’s Creel temporarily felled by C19; the others….missed. it would have been interesting, perhaps even theatrical, to have UP there to talk about their metering/private car limits, etc).
CSX’s Foote also pushed back on emerging “givens” on PSR itself (Trip Plan Compliance comes from PSR!) and the sense of timing and therefore the root causes of the current set of issues, mostly misunderstood (sometimes purposely (CSX was running the best-ever in its history by year-end 2019!) – he also pledged to, as crews move from training (and cost) to revenue service, “re-establish (that 2019) ‘basecamp’ by year-end.”
STB Commissioner Fuchs discussed the coming information flow on First Mile/Last Mile (heretofore FMLM), and actually had some praise for rails, notably short lines (so important in FMLM) and host-railway KCS. He noted the Board’s independence, and its desire (call me a Missourian since I was in KCMO) to let private sector solutions prevail; to let rails improve on their own terms, and set their own 6-month schedules. From his lips to God’s (er, Marty’s) ears, as they say…..
For KCS, COO John Orr pinch-hit and defended PSR as the foundation (easier to do after Patrick’s praise) and brought out, correctly, CEO Pat Ottensmeyer’s mantra “Service Begets Growth”. One nugget from John was his prediction of a simpler, cheaper, and more effective cloud-based solution for Mexico (and for Canada) to expand the benefits of PTC.
Two customer/fleet owners brought interesting points to the discussion:

1. KBX (Koch) had an excellent presentation (attached) on the root causes of the current service situation, with slight disagreement with Jim F’s thesis, noting the disparity in staffing at the time of the surprisingly strong and fast volume recovery, while adding something I had not thought about to the discussion mix:
  1. The closure of Hump Yards! This was a big deal when the Cult of the OR (I am taking this back, Rick) and PSR 1.0 was in full force and was a big part of the superficial understanding of Hunter’s magic. But as KBX points out, flat switching is slower – and harder – and when combined with inexperienced crews is a fluidity problem (to which perhaps I might add the dependence on running longer trains causing planning/congestion issues when cold weather prevents them)
  2. Essentially KBX thought that at the time of the pandemic’s first effects, PSR had created a certain rigidity in operations that must change
2. GATX, in the persona of my good friend President Paul Titterton (the “John Reed of 21^st C railroading”) also had some interested and pointed things to say about Class Ones – lots of tailwinds for sure (ESG, fluidity recovery, JIC, improved IT like Rail Pulse of which GATX is, of course, a founding partner) but also headwinds – FMLM, the service gap to TL, “prioritizing OR” (et tu, Paul T?). he went on to list some long term pressures and risks – EV/AV, regulations/legislation – and “Investors in railroads”!!

6. NARS is mostly manifest-biased but the best rebuttal, or solution to the rail service issues, and opportunities, came from intermodal, via the team of BNSF (IM head Tom G. Williams, the Hoosier Hellion) and Darren Field the Arkansas Avenger, and President of JB Hunt. They talked specifics (the fact that transloading in LALB costs ~1% in reported volume but not economics to BNSF; the virtues of the evolving JBHunt 360 tech platform; the big container capacity expansion underway) but what truly emerged was the sense that, after years of intramural fighting and arbitrations, what has emerged is greater collaboration, and the opportunity to truly revolutionize the sector using the freed capacity (the IMC business “lost” to UP) – in sum, BNSF + JBHT is “not a transactional relationship (but rather) a strategic partnership.”

More on the Intermodal Front:

- - Maersk and Hapag Lloyd both reported big Q1/22 results and increased guidance for Q2 (and FY22) while looking for a unit slowdown in H2/22 (and a corresponding improvement in service) – the opposite of the general rail call for an improvement in service in H2/22 to lead to an increase in unit volumes
  - IANA April numbers take some of the color out of my green shoots thesis: While Domestic container numbers improved, it was only by ~2% (and with TOFC down fully 25%, total domestic IM was down 2%); International (IPI) was still down 10% so the total was down 6%
  - Trade Secretary Tai said that tariff relief was (reluctantly?) “on the table” as an inflation-fighting tool
  - China’s exports grew by 3.9% (by its own numbers) but pricing/inflation was up ~8% so therefore volumes were actually down in Q1/22 in part due to:
  - Shanghai’s shut down, which is still a cause of concern (FT & Freightos report that the port/city has lost ~45% of its dray capacity). The impacts are thought to last into next year, if, hopefully, decrease over time. Question, will its recovery and subsequent disruption correspond to the North American peak Season? Or will there be no peak season as lessons-learned and JIC mean “pre-buying” and increased inventories (as the NRF believes) will smooth that out….
  - There are now ~35 ships outside of LALB – what will the number be when I return in September for IANA’s Intermodal EXPO?

As the Ag turns! The USDA numbers surely roiled the markets last week (what prices are up 60% YTD) as the DoA and the world get a better handle on world conditions and the war impact. While Canada seems set to rebound (to “normal”), the US is concerned by a late planting season, making yield assumptions somewhat problematic. Total wheat production here is said to be down, corn even more so (beans up 5%). Many of the analysts/experts thought that the USDA over-stated world production (especially from LatAm) and understated demand, and therefore lucrative US/Canadian exports (AgResources thinks beans-to-China will surprise upside in H2/22). After India changed its mind and placed a ban on wheat exports, there is talk of perhaps, just perhaps, the US following suit (seems highly unlikely – especially with the White House increasing funding as part of its war efforts - but was mentioned by respected AgResource on “American Farm Journal” last Saturday. One thing never, ever heard on that weekly show – rail issues.

Also:

“The rise of battery raw materials costs has delayed (EV) cost parity by at least a decade”, Wells Fargo, as quoted in the FT’s assessment of their own “much more reserved” Future of the Car Summit”;

recall that the head of Volvo trucks said that C8 parity would likely never be achieved….

“(Shareholder) Activism is dying” stated Carl Icahn (this despite the fact that at 73 campaigns launched in Q1/22, it’s the busiest quarter ever); perhaps, like Ackman, they are simply becoming less confrontational….

Meanwhile, Third Point announced a stake in CSX

Rumors abound – hard to confirm or quantify – about BNSF facing a brain drain, due in part to their inability to reward leaders with stock options, etc. Berkshire Hathaway is said to be working on a solution….
The new hot trade phrase is “Friend-Shoring” (gag); meanwhile what is happening to “Near-shoring”? The AT Kearney Reshoring Index was negative for 2020 and 2021 (any day now….)

An IMF study of supply chains finds that reshoring is not the answer to security, supply chain diversification (and resiliency) is!

ATA Truck Tonnage up 3.8% YOY last month
S&P Global Insights reports shale companies estimated free cash flow this year will exceed the total of the last 20 years, yet US oil output remains well (10%) below pre-pandemic levels; rig counts are up some 20% but the big players ain’t budgin’ from their strategy

Diesel costs continued to rise even after gasoline prices moderated

Judging by the Prologis offer for Duke Realty, the Amazon quarterly comments did not kill the golden goose that is the logistics/warehousing sector;

Vancouver warehouses have hit the magical 99% occupancy rate, further adding glitter to CP’s “PSR Dividend” strategy with its Maersk Transload and auto-mixing centers in repurposed railway land in BC

Oh Mexico – no anti-business (anti-logic) moves by AMLO in the past few days but two things to note:

KCS reports that things have gotten back to normal, mostly, on the Texas border after Governor Parmenter, er, Abbott of Texas thought it was still 1838; the trucker blockades may – may have had some impact on intermodal “soft power’ but not yet on actual volumes
The Mexican response to the Texas F-Troop like maneuver was to re-chart the proposed T-Mec intermodal line linking Mazatlán to the US from Texas to New Mexico – since this line seems both uneconomical and unlikely it doesn’t really have a near – or likely longer-term rail impact
CSX may enter Mexico – OK by water via a proposal by World Direct Shipping (sounds like late-night TV) and the Port of Manatee

Meanwhile, CPKC released their responses to rail/shipper/etc challenges and the response was….nothing. Now that’s faith! More later!

Media:

The Sunday (NY) Daily News has a column called “The Justice Story”, about crime, not the retired right-fielder; this past week it was about the “Railroad Sniper”, a foamer-gone-wrong tale with tragic consequences. I had never heard of this: JUSTICE STORY: Trainyard terror across two states – New York Daily News (nydailynews.com)
Friday night must-see TV – “The New York Times Presents Elon Musk’s Crash Course” at 10 pm on FX, on testing AV and undermining public safety. I always wondered how public testing of driverless was allowed in some places; I will watch, after the Rangers game….

Speaking of the Grey Lady, here’s an interesting Opinion piece on the concentration of shareholder power in massive-&-passive funds: Opinion | BlackRock, Vanguard and State Street Control a Piece of Nearly Everything - The New York Times (nytimes.com); BlackRock, meanwhile, seems to be backing off its ESG demands of its holdings companies slightly, which the FT dryly noted was “quite the turnaround.”

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