Greetings;
On the road again
I just can't wait to get on the road again
The life I love is makin' music with my friends
And I can't wait to get on the road again
From the Tweets:
1) NARS – after yrs of pandemic & mos of M&A it’s almost refreshing to have something sorta new to worry about – for RRs, it’s the government/STB, determined to reign in the over-powerful (yet low market share) RRs & fix problems (ex. capex) that don’t exist (see report)
2) STB finally releases their 2020 (US-only) Rev Adequacy update – 5/7 C1 RRs show ROIs above the capital cost (7.89%) led by UNP @14.4%; only NS of the majors trailed (7.5%). Of course, the 2 Canadians mostly double the WACC – but that is PSR 2.0, & is not discussed in DC
3) KSU in a weekend non-surprise, deemed the CP proposal superior to CN’s, which has 5 days to respond; my best guess is CN will bow out gracefully, take its big payout and re-focus on growth and fending off TCI (remember, activists are 3-0 vs RRs in the 21st C to date and I suggest we all don't mistake an unpolished presentation (their letter to CN) with unprofessionalism – if history is a guide they will come well-prepared for battle and it’s thought they have 30-40% of the shares behind them…and then another shoe drops:
4) TCI starts a fight for CN, requests Special Bd Mtg armed w/slate of 4 Bd candidates (Lamphere + 3 surprises - maybe even SHOCKS) along w/ Vena as CEO-to be; the fact that 3 are former CN-related folks in the group of 5 not to mention a former top officer (Knight) of the UP means this will get unpleasant, fast
“Railroads remain a regulated industry despite Staggers – and ‘rhetoric’”
/STB Chairman Martin Oberman
“The Staggers Act was a transformational reboot of the railroad industry”
/CSX CEO Jim Foote
Greetings from The Port of Long Beach (POLA) and the annual IANA Intermodal Expo, one of the critical events of the year; where it looks like D-Day out of the window (~50 container ships in the harbor waiting to dock) – the hinge of the national supply chain issue (Container sector is so hot that ships rent for $200,000/day (freightwaves.com) and a growing consensus that “supply chain bottlenecks will continue (in?) to 2022. More on that later, first takeaways on the North American Rail Shippers (NARS) meeting last week in Chicago….
NARS was like a tennis match between the STB and the Railroads, with the shippers as the spectators. It was great to be on the road again, and 300+ railroaders, including many top execs, were happy to gather in Chicago. While of course, the deal was the subject of much conversation, with the VT denied there were only perfunctory roles to play – CP as the magnanimous (almost) victor, KSU talking only KCS – both in “Fireside Chats” with me (and CNI in a “quiet period” at home) – very different from the original agenda. In retrospect very quickly the tenor changed to seem like a volley between carriers and regulator-in-chief. And STB Chairman Martin Oberman has a big serve and volley game at present…..
- The Chairman goes off – crystalizes his thoughts on the railroad industry in a rather electrifying speech at NARS. I will precede with a reminder that, although we come from the same political party, we don’t agree on a lot (a further sign that STB and rail regulations are non-partisan) – but that try as I might (and I don’t, really), I truly like and respect the man. Sometimes it’s easier if the person on the other side of a political/economic argument is or can be demonized. Perhaps that’s the problem in America today. Anyway, the Chairman stated:
- Rail rates are up 27% since 2004 (and….?) while volumes peaked in….2006. that’s stark, and (with the coal caveat) hard to argue with. The latter, not the former ( don’t see the correlation despite the obvious sound-bite).
- “RRs de-emphasized growth while focusing on OR and (25%) headcount reductions''; he urged them to pursue profitable but less than optimally profitable traffic – my response, if OR (see “Cult of”) is overused, “profits” per se are useless – it’s all about returns! (see Tweet).
- Then the hammer – from the Chairman – since 2010 the railroads have spent $138B on capital – but $191B on shareholders ($114B in stock buybacks and $77B in dividends). That sounds shocking. But a) so what? b) the rails capex/per capita (as a % of revenues) is off the charts (say, compared to their own customers) and of course c) the rail network is the only sector in the US to get a good grade from the ASCE and finally, though issues of resiliency have merit d) so what? The Chairman further asked, “Where would rail customers, rail workers, and the public be if a meaningful portion of that $191B were reinvested in expanding service (etc)?” My answer, happy – for a very short while until the declining ROIC caused a radical shakeup of the companies….STB’S Oberman says US railroads reduced service, raised rates and derived $191 billion in dividends and buybacks since 2010 | AJOT.COM – written by an IM-focused reporter not super-knowledgeable about rail ops (see comparisons of west coast congestion today with carload decline) but it gets the tenor of the speech down, especially to those outside of the direct industry….
- Is it the job of an appointed official (no matter how smart, charming or well-intended) to tell private industry how to maximize its returns? This Democrat says it is not. But then I am an observer not a (the chief) Regulator with tools such as using the common-carrier obligations (as Matt Rose warned us). But one (other) takeaway is that the STB’s Chairman wants to see rails grow….
- Other issues to be taken up after the mergers (not just KSU but Massena/Pan Am/WC but issues on Amtrak, the Unita Basin, “paper barriers” (non-competes between Class One line sellers and short line buyers) – and of course Reciprocal Switching (remember, the likely outcome is hearings, hearings, hearings).
- The two major shipper addresses – from Bruce Chin, CEO of Chevron Phillips Chemicals, and Torri Stuckey, Head of North American rail for BP, showed some support for the Chairman’s views, but within the speech, there was praise for their respective partnerships with rail especially I the pandemic and polar vortex crises. The former noted that CPC’s biggest concerns “by far’ were ocean and that he was “more pleased” with rail than truck on capacity/consistency issues! BP clapped out his rail partners as well, although noting that there was a clear need for post PSR resiliency to be fair….
-
-
- Interestingly, both shippers were Black, and they noted that wasn’t what they were seeing in our NARS audience – pointing out that the major ESG push by rails is often solely focused on the “E” and not (enough) on diversity. Again, to be fair to NARS, they did feature a “Women in Rails” panel and of course an address by Katie Farmer of the BNSF. But….point taken.
-
The Rails responded (some, to be fair, even before the Chairman’s speech) with a solid if less flashy and certainly less quotable (nothing from AJOT for example) defense of their capex, of PSR and growth plans, and more:
- Union Pacific (Lance Fritz, CEO) started on UP and ESG (“it’s in our DNA” , however, on an issue that predates Lance), noted that they didn’t have a crew shortage and that they had a 70% return rate on furloughed T&E workers
- Putting on his Chairman of the AAR hat, Lance noted the Infrastructure Bill was a win for rails, both in what it included (grants for R&D, grade-crossings, etc) and what it did not (mandated 2-man crews, etc), points echoed and expanded by Chuck Baker, CEO of the (short line) ASLRRA in his speech and by Ian Jeffries CEO of the AAR from the audience. Lance also kept rail ranks together, east and west (and north and south) by “reciprocal switching in its simplest form is the biggest regulatory risk” facing the rails (noting the disincentive for Capex, hardly the objective espoused by the Chairman) along with removing exemptions to (STB) regulation (such as rock, scrap metal, intermodal!)
- BNSF (Katie) opened with what would be a recurring return-serve theme – they have “A Bias For Growth”. She acknowledged the (constant) need for change and gave a shout-out to the speech from Adriene Baily of Oliver Wyman at last year's RailTrends – slides attached. She stated BNSF was unafraid of the EO, etc (“we face ‘enhanced competition every day running the largest IM network in the world”). Interestingly, she held out in a wait-and-see position on M&A (i.e. the KSU deal) noting that issues of unfettered trans-border access “give us pause”….
- KSU (who actually closed the event and of course couldn’t talk about “the deal" - this was before Saturday’s announcement) also returned serve to Oberman – noting that their PSR experience was created around “Service Begets Growth”. They (alone) have huge potential ahead of them – (CMO Mike Naatz) noted the huge disruption to balance from the auto shutdowns but sees the upsides in auto restoration and growth, refined products, grain, the new trans-border bridge (2023?) – and the increased operational changes under COO John Orr (following on the work of his predecessor Jeff Songer as well as the irrepressible Sameh Fahmy) using CN-refined techniques to increase fluidity in Monterrey and beyond….
- CP (CEO Creel and CMO Brooks) noted their increased synergies seen in the pending KSU deal – coming from Autos and Ag, of course, but also from the transload network – and with their SL partners (an area they think they can develop with and on the KCS). They noted that they found a gold mine, above and beyond their initial expectations, with the smaller CMQ deal, and they see opportunities expanding on both sides of the ball (ops & marketing) with the new N/S network.
- They also provided the best rebuttal to the STB in the case study of their Ag network – once onerous regulations (return caps, split benefits) were removed in the Prairies Provinces, their capex boomed and they created new, state of the art shuttle trains that were the key to their huge grain growth
- Speaking of short lines, Mike Miller of the largest SL Holding Company GWR gave us a much-needed update (volumes tracking 2019), a further explanation of Rail Pulse (“table stakes”) of which they are a founding member - and also rebutted some of the claims of the STB Chairman:
- “Resiliency is the cost of doing business” – ie; not just the OR – and noted that during the pandemic GWR had NO furloughs (and bought locomotives) and organic growth was the key to their future
- By showing their focus and success – and their relationship with their owner, the mega Infrastructure firm Brookfield - they also put to lie the thesis that financial buyers (and “Wall Street”) were bad for rails. Along with Berkshire Hathaway’s BNSF, they were the second private railway to present
- Norfolk Southern’s VP-Industrial Products Ed Elkins also talked about both Rail Pulse (I view NS as the “lead contractor”-they will be adopting it fully by 2023) and new business growth in the form of Thoroughbred Freight Transfer and “flex-freight, inroads into the B2C markets (mostly untouched by rail) with opportunities in food/canned goods/coiled metals, Ag, chems/resins) and looking into the LTL/LCL markets….
- CSX’s Jim Foote was en fuego (see quote), giving us a history of CSX from pre-EHH (not even fully integrated – in their words all of the predecessor railways were still, in effect, in existence – the L&N, Chessie, B&O, etc) to the creation in 2019 of pubic, visible Trip Plan Compliance measurements. They are ahead of 2019, after a period of retrenchment they are focused on growth (a pattern we saw under Jim as CMO at the CN “mothership” and by EHH and, especially Keith Creel at (“Pivot to Growth ''). A spirited defense of PSR, Jim noted that his railroad would have been “taken down” by the pandemic (etc) had they not gone through the painful but (yes) necessary restructuring. CSX is in the crosshairs of the STB (Pan Am (we hope to learn more at NEARS next week) and Amtrak and Messina….and often of shipper discussions but it appears that a corner has been turned.
Also:
- This doesn’t sound good: https: Union Pacific Corporation (UNP +0.0%) is under investigation by the Environmental Protection Agency along with the Texas Committee on Environmental Quality for concerns related to contamination and clean-up efforts at a hazardous waste site near Houston, Texas
- Echo Global Logistics sells itself to a PE firm (Jordan) for $1.3B
- Harvard will move to divest from fossil fuels; those guys usually know something….
- CN announced a Vax Mandate (but – so far – only in Canada)
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18