Greetings;
Well, we may have found out a few things about rails in the past 24 or so hours:
- Perception does indeed equal reality (and the initial perception was, as one major supplier said to me, “this is really bad news for our industry, right?”. Well, it’s not good to be called out by the White House, but in reality, this doesn’t mean much….
- The markets may be a tad….jumpy
- One Railroader joked while the shares were plummeting that “Hunter may have saved the industry – and maybe killed it too!”. A gross overstatement but not un-funny…..
- The real “enemy” of the rails might not be and of a) the STB b) The President or c) the rails themselves but surprisingly d) The Walls Street Journal! See the impact on KSU after their scoop on the Executive Order came out, at the bottom….
Now, I don’t really mean that, but the WSJ broke the story about an impending EO last Friday when everyone was at the beach. The Journal yesterday (everyone back from vacation) then broke the follow-up story that the EO would include rails (and maritime and Big Ag, maybe) online yesterday complete with two pictures of trains and none of ships or stockyards, or Googles or Apples. In today’s print version, which at least includes commentary by the AAR, it takes until paragraph nine for the article to state that “the call to crack down on ocean carriers and (rail) freights is (but) one facet in a multipronged Executive Order (emphasis and added words, mine)….In fact, it’s said by some in DC that the rails were a later addition to the club. Supply chains and their “fragility” – and their inflationary impact – have been front-page news for a while now….
Note that the scoop and the EO do not say anything about the railroads that the STB hasn’t already (surprisingly) said in its recent decisions, public speeches, etc.
Some Thoughts and Reminders:
- The STB is an independent body – the EO has NO real impact (of course the five members are influenced by outside events, 3/5 are Dems or will be with the newest to come to an actual Presidential appointee) – this is like a “statement of attitude” not a directive; the keyword is “encourage”
- Read for yourselves: FACT SHEET: Executive Order on Promoting Competition in the American Economy | The White House. You have to go to page….eight. for both (2) paragraphs. Here they are:
Rail: In 1980, there were 33 “Class I” freight railroads, compared to just seven today, and four major rail companies now dominate their respective geographic regions. Freight railroads that own the tracks can privilege their own freight traffic—making it harder for passenger trains to have on-time service—and can overcharge other companies’ freight cars. In the Order, the President: Encourages the Surface Transportation Board to require railroad track owners to provide rights of way to passenger rail and to strengthen their obligations to treat other freight companies fairly (italics mine).
Pretty scary stuff, huh? “Amtrak Joe” looking out for the passenger, as expected (and remember Marty Oberman was Chair of Metra). And “treating other freight companies fairly”. Nothing more terrifying than “fairness!
Also:
- The idea of reciprocal switching is already a semi-“live” issue before the Board, and this is encouraging in that regard – but it’s been noted that due to Board member turnover, etc, the process will have to begin from scratch – we are talking years here, not days
- The STB, in fact, is….pretty busy….
- One possible – actual – outcome might be a hearing on the issue of concentration, duopoly, etc (Marty Oberman, the STB Chairman, actually uses the term “monopolistic”)
- The onus on ending non-compete contracts might be extrapolated to the paper-barriers in short line deals (essentially a non-compete between selling, usually big, railway and buying, usually short line railway); the STB has already opined against these contractual agreements (see the CSX-CN Massena Line case, again)
- Rail service has been lousy of late – see my earlier reports – but as one shipper/thought leader said – “it’s nothing we haven’t seen before”! Now, that’s not a great thing but points out that we are hardly in a crisis. In fact, in Q2/21 while rail velocities were mixed, dwell improved across the board. They aren’t where they should be/need to be but This. Is. Not. A. Crisis.
- The coming GAO study on PSR (as “commissioned” by the House T&I Committee) is another sign of perception here – on Wednesday the AFL-CIO opined that their members “eagerly await” the study; we note also that (per the Jacksonville Business Journal) CSX does not pan to implement PSR on the Pan Am per its renewed (3rd) application!
M&A Impact? The timing was interesting (but I would posit coincidental, supported by what I have read and heard). But not everyone took it that way:
- The WSJ’s own “Heard on the Street” (“Will Biden’s Order Cause a Train Wreck?” – not too alarmist!) stating “You can't say they (CN+KCS) weren’t warned….”
- Railway Age (etc): Biden Targeting Class I Rail Mergers? Report (UPDATED) - Railway Age No, this is not targeting rail mergers per se but the perception of further rail consolidation (even in end-to-end mergers, a reality that isn’t biting here) is or would be harder to explain, especially in a sound-bite
- Some arbs etc fear that the EO would change the economics of any potential merger – I disagree (see above)
- This could serve as further, maybe even the ultimate cover for the STB vis a vis the Voting Trust decision for CN+KSU if you follow the “STB-will-deny-the-VT-to-prevent-having-to-deny-the-actual-merger” theory I have heard from some (hardly all) interested inside (little-i) observers
- Ironically, the two suitors for KSU, CNI, and CP, both live happily in a reciprocal-switching world in Canada – and I am guessing that if that condition were put on acceptance of the KSU merger, both/either would readily agree!
Spare a thought for the poor steamship lines, one of the worst ROIC performers in the 21st C, showing that concentration does not necessarily lead to higher rates (through a cycle) finally through highly – highly - unusual events having some pricing power, performing rather poorly but performing - and they get called onto the carpet by the President!
Back to normal business next week, including earnings (leadoff – KSU in a week!), traffic, and maybe, maybe, more from the STB….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18