Greetings;
Travel took me away from the second week of earnings but allowed me the perspective from distance (ie, an ability to reflect rather than react). I will take on the Canadians (and Mexican) next, and wrap up after BNSF reports via Berkshire, perhaps over this coming weekend. Norfolk Southern was the only rail that failed to beat (reduced) expectations, but produced perhaps the most upbeat webcast….But despite what’s usually a focus on earnings, DC managed to get our attention….
- But first, from the Tweets, this just in – the House T&I Committee weighs – again - in on rail service, with a proposed bill: Facts on Rail Service Legislation 2 pages.pdf (house.gov). Note – no price increases during rail service emergencies (despite inflation or on shippers not having issues, or….But, I am working under the assumption that this has zero chance of becoming law but is a(nother) sign of DC attitudes toward the group, a symbolic and loud shot across the bow. DC sources tell me that my (and their) confidence is tempered only by the possibility of further service deterioration that would anger farm belt GOP enough to seize on the “bill-at-hand”….
- Late last week: A Big win for rail labor – and this before contract resolution - as FRA, as expected but against all logic (or modal fairness) essentially mandated two-man crews despite the obvious (and government-mandated) PTC development etc. Railroads are known to be negotiating for one-man crews (conductor on the ground) in the (US) national bargaining….Given the government (via the DOT, in which the FRA resides) subsidy of trucking technological advancement, it’s painfully clear that the US rails have a big uphill fight to achieve the benefits from technology progress….
- Speaking of the subsidized trucking efforts, in EV and AV, the headline in today’s WSJ, “(TuSimple AV truck) Crash Raises Red Flags” is….interesting - Self-Driving Truck Accident Draws Attention to Safety at TuSimple – WSJ
- And: They’re baaack? 3 hump yards on 2 RRs (NS-2 – see below; UP -1) are being re-opened (temporarily? Unclear) to help with fluidity (and the inexperience of the new graduate crews – remember the skill needed for flat switching as discussed earlier in the summer, after NARS). Closing humps was for a while “proof of intent” re: PSR (along with hiring Canadians and based on the Q&A on the NS webcast, that desire is still out there!), a sign that the US rails were indeed serious way back in 2018-19 - and perhaps one true example where Street naivete and OR demands might actually have hurt operations. I remain unconvinced by the STB or even usually reliable Trains magazine (“Wall Street Holds the Rails hostage”) that every issue relates to the diminished Cult of the OR!
- Note: The STB has scheduled hearings on the CPKC merger for September 28-30 in DC, with the possibility, DC sources tell me, of a day in Chicago at Senator Durbin’s urging; Chicago will be a focus despite its seeming not a major factor in the deal from a rail freight perspective (note, for example, that Congressman Raja is having a town hall meeting on August 8 just on the CPKC….I may go to the first two days of the DC hearings, use my laptop for the remainder!
Norfolk Southern broke the Q2/22 pattern by, ever so slightly, reporting results below Street consensus estimates. They were in line with their American peers in reporting a tough service quarter (dwell up 21% and velocity down 13%), big hiring and training efforts, and incremental improvements as a result (though they won't hit their hiring goals, according to their plans, till 2023 as opposed to CSX by quarter-end). Volumes were down 3% but revenues up 16% on yield growth of 20% - some of that was Fuel Surcharges and we need to remember that, for Q2, the 117% spike in fuel expense was a net headwind. Core OR was flattish and FY22 OR target was adjusted up to +50-100bps. Capex will be at the “high end of the guidance range” (~$1.9B) due to inflation – so that’s good….
Some thoughts, reflections – and really, more questions:
- Operations were poor, as was expected and measured in the weekly metrics. Crew starts matched the volume (-3%) – but what if they didn’t? what is the relationship in the summer of 2022 of crew starts to volume potential? July numbers in velocity and dwell were better, and there were 224 more “Qualified T&E” personnel in the field. Safety numbers improved, accidents by 15% YOY, P/I (personal injury) by 36%
- Is the hump comeback a sign of pulling away from PSR as some suggested? (It really never was a “central tenet of PSR”). Is that plus the 3% increase in locomotives a sign of physical capacity constraints as opposed to labor-only? Or is it, as I have suggested, a sign of the lack of experienced crews to handle the challenges of flat switching? Is it to be permanent? No answers, yet….
- NSC didn’t answer the employee plans in a recession (which to be clear was not forecast) – put as “what are your plans for the 1000 new T&E folks if we get a downturn?” But then N/A was better than the answer I heard from UNP, though I think that might have been a mistake….
- Just what is TOP/SPG, anyway? This much-vaunted plan, focused on Intermodal, begun in Q2/22, is about simplicity and balance….well, what plan isn’t? In trade press interviews VP of Network Planning & Operations Paul Duncan, a prize recruit out of BNSF, talked about achievability which lends itself to consistency (all good; always good).
- Not to pick on the presentation by COO Cindy Sanborn or Paul’s explanations but this cries out for details- I am not the only analyst to be confused or confounded here and given the relative inexperience of the financial community, like new T&E and switching, here some back-to-basics understanding would be very useful (an Investor Day at long last?).
- Apparently, about 90% of the scheduled train schedules were “adjusted”….meaning schedule inflation a la the airlines? There do seem to be some green shoots – trains are longer, aided by Distributed Power (the goal in IM is ~”10-30 cars” per train start) and July is showing on-time arrivals up, etc.
- Domestic intermodal was a bright spot (+1%), a green shoot with few neighbors (chemicals, autos) so the timing for what I will call TOP/SPG/? is good…
- interesting that the NS intermodal experience was so unlike CSX’s, which reported strong international and weak domestic (NSC - domestic up – 1%, international down 14%, total -4%)
- On coal they were similar – overall down 4%, but exports' narrower decline (-1% versus CSX -7%) allowed for a big yield boost (RPU up 34% - how much did that flatter the quarterly results??). Both eastern carriers see continuing coal opportunities near term, with sequentially declining yield growth….
- Projections of flat volume (after a first-half decline of 4%) means that NSC is another carrier sticking to the second-half rebound the rails in general projected back in January, a lifetime ago. For NSC that is really a Q4 load, and the signs of real improvement remain hard to find. They remain confident in the face of some investor skepticism that the new crews, the TOP/TPG(?) – and of course, the easier comparisons will see them through…..
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18