Greetings from Louisville, for round two of the ASLRRA (short line association) pandemic “Super Regionals”, after being in KCM for round one a week and a half ago. Both are fantastically attended (300+ for each); clearly, folks are eager for “normalcy.” Oh, and by the way, that’s not a word, but rather a goof by Warren Harding in his campaign slogan. Anyhow, KC was terrific, well located given rail events. I will report back on Louisville (slides attached), but first glance suggests this town is not ready yet for post-pandemic prime time. The meetings will be great if they approach the level of KC’s, there is Bourbon, and museums dedicated to both Mohamed Ali and the Louisville Slugger. But KC had the Royals (see the photo from the owners' box occupied by ex-KSU Chairman Michael Haverty – see the article below) and the WWI and Negro League Museums. Oh, and open restaurants. And most importantly for this discussion, yielded lots of good discussions, a fireside chat I moderated with the CEOs of CNI & KSU, and in-person connectedness that had been missing for a year and a half.
The short lines themselves remain vigorous, entrepreneurial and of course increasingly highly valued, at least by the private (infrastructure) financial community, if not by their Class One partners (or so the little guys always say, but the complaints have more of a touch of anger to them these days given C1 congestion issues, lack of adequate resiliency, etc. While there I learned more about:
- Transtar lines were sold! This surprised the insiders, but Fortress, back in the game, seemed to get a good (more traditional) price for the US Steel line package
- RJ Corman seems to have found the secret formula to maximizing yield from rail and rail-adjacent properties
- Patriot, meanwhile, has gone through another round of management changes below the CEO (John Fenton) level
- The remains unresolved the three SL M&A cases before the STB (below)
So, the KSU saga continues, of course. Monday is the end of the comment period, and July 6 is the last day for CN (and KSU) “rebuttal”. In the meantime, more “War of the Words”, and now pictures – see at the bottom CP’s bizarre cartoon placed ion the WashPo and not, say, Politico, despite being targeted at only 125 or so folks (100 senators, 5 commissioners, 20 or so trade association heads). I still haven’t figured out which one of the characters is STB Chairman Marty Oberman….and I wonder – will readers know who’s who? Railroads have undergone a “renaissance”, it is true, but their national fame still pales with the days of the Gilded Age, when RR CEOs were celebrities and actual “robber barons” – see the other cartoon of UP’s Harriman from 1906. And so we’ll go to the Tweets:
SMART, the largest RR union, came out against the CN Voting Trust; they’re also involved with the other unions in national negotiations with the OVERALL rail industry. I must say that I disagree with the general thesis (higher debt= job loss; line sales = job loss; that could happen but it seems unlikely in an end-to-end merger). Naturally, I cannot judge the impact of this union letter (or others that may well come) on the five “independent” STB Commissioners - but it’s certainly (more) good cover if one believes that the STB is seeking ways to reject the VT….and plays well in CP’s “political strategy”. There have also been letters and comments broadly supportive of the CP position from the Freight Rail Alliance, the NCTA (coal), and Private Railcar Food & Beveridge Association, which allows me to once again shout PERFDA!
STB Conspiracy Theory: Bear with me here….That thesis, meanwhile – that the STB is looking to reject the VT as a way to kill the deal without rejecting the deal itself, is the central dark theory discussed in the halls and BBQ joints in KC by the short liners and their cohorts – requires the thought that the STB wants to reject the CN+KCS merger, but without a formal rejection? Why? Again, you joined me down this rabbit hole, so keep following. Because a rejection could provide as much of a blueprint, or roadmap, for future new-rules deals as an acceptance! Not to mention it could (would) be challenged in the courts and it would be time-consuming (the STB has three other mergers on its plate, all involving short line groups, one sold by a Class One (WC by CN to Watco), one bought by a Class One (PAR to CSX with allies in NSC and GWR), and one deal involving a short line moving from one C1 (CSX) to another (CN). Note the C1 names here – one is involved in the Big Deal (CN, of course) and the other is the whipping boy of both 2017 and today, CSX. Some thoughts:
- It is as if E. Hunter Harrison was still here at the table – the pushback on the WC lines, the Chicagoland mayors lining up (the J deal, again), - and now the Chicago Tribune in an editorial the anti-PSR feelings seemingly re-aroused everywhere
- The STB was no fan of EHH; neither was the Senate nor (many) shippers….so being still at the table isn’t great for CN.
- The STB is still no fan of PSR (see letters to the STB from the American Chemistry Council, the city of Memphis), etc. This opinion is shared by the Chairman of the House Transportation & Infrastructure Committee. That’s also not good. And it is also shared by Trains magazine’s Bill Stephens, a superior journalist who allowed a mistake every once in a while, who wonders (attached) if PSR 2.0 as a “Pivot to Growth” (CP) is a myth because in Canada, the mothership and first spinoff, it only grew intermodal, grain and energy (and didn’t have the coal deflator). Ahh, yes, Bill, but it was able to handle all of that, fast and slow, long and short, in western Canada on the same system! PSR doesn’t itself generate growth (though by creating consistency and capacity – see yards and terminals and auto facilities that helped - it adds arrows to marketing’s quiver), it enables it!
- That anti-PSR sense is not good for CN, portrayed as the large-rail prospective buyer of KSU, the “mothership” of PSR, the owner of the J and the WC – and the railway suing the STB over the Massena line deal with CSX (which was accepted, by the way, just with “conditions” – remember that outcome). Ironically, CP is a PSR success story and CEO Keith Creel a PSR superstar (but shhhhh)….
- The fact that rails have, after a solid H2/20, entered the blame list for supply chain issues that have become front-page news, is not good for this merger (again, under this conspiracy theory, though the poor position that rails are getting themselves into politically is real enough)
- The STB is, in fact, no fan of current railroad companies (they seem to like rails enough, just not rail managements) – they are, to quote, “monopolistic”, borrow too much (“financial integrity” – a key issue in the merger) and spend on shareholders, too OR focused (PSR) – this hurts CN due to the case for too much leverage (as espoused by CP and echoed by informal STB commentary, though not by the rating agencies). CN can take some comfort that they aren’t the #1 STB target of the day – that would be CSX, whose Pan Am merger application was rejected as (“vague” and) incomplete, was singled out by the ACC in their complaints on overall rail service, revolutionized by EHH, remembered by the STB as the ultimate top-hat & a-waxed-mustache
- So, the STB wants rails to be less powerful, and not more and it surely doesn’t want the final round transcon US Big 4 mergers (neither do the Big 4) so “follow on effects” play a role in the “public interest”….
- Furthering the follow-on effect portion of the thesis (or just, in general), is that there is no known successor to (gently) aging CEOs at CN, KSU (no longer resolved, it seems, by the merger with CP, and with Brian Hancock’s rather shocking resignation, down one viable candidate), UP, NS – and CSX. The latter was dealt a big blow earlier in the year when CMO Mark Wallace got seriously ill; he has now been moved to “special projects” until recovery and in a broad shuffle, CFO Boone goes to CMO and Pelkey rises to CFO. Still, no heir apparent. And Keith plays Achilles-in-the-tent, at least to the STB audience….Frankly, if the Big 4 want to increase/ensure stability they would make their succession plans public….
- To that end, the CN/KSU position on the benefits of their single-line intermodal service might actually be a problem because:
- Premium IM can work with handoffs – see BNSF to NS with JBHT traffic
- CN & KCS also argued about the durability of their mutual admiration, dating back to their marketing alliance (emphasis mine)
- Single line service advantages are what would be argued is the reason for transcon, Big 4 mergers, as best articulated most recently by….CP’s Keith Creel, ironically
- See STB position on final consolidation
In the Fireside Chat at ASLRRA/Kansas City, the CN/KCS leadership did a solid job defending their positions. They obviously don’t buy into any dark conspiracy theories. CN’s JJ Ruest best articulated their position on the new (Digitalized) DSR, and specifically the 70-mile line sale mitigation against the argument that there is so much more actual north-south competition despite the distance between the two (KCS and CN/IC) corridors by saying, essentially, enough theory, what about any actual customers hurt (which to my knowledge hasn’t been publicly done); KSU’s Pat Ottensmeyer defended their PSR journey (“Service Begets Growth”), which has actually been praised by the STB, and then held up the world’s smallest railway map but correctly noting there was significant other C1 presence in the broad N/S middle region. Do transload customers count? Which ones? Do you ignore the $6B (estimated) trucking business in that corridor, which should be counted and which could be captured? Oh, and by the way, most of the railway (Big 4) interest is East-West….
KCS (and all of us) got good news from the Mexican elections – all though, of course, all sides declared victory in what was, in essence, Mexico’s midterm elections, AMLO was denied a super-majority, and the opposition (the traditional powers-that-be) was given a new lease on life. In particular, to quote the Times: “….the results will hinder (AMLO’s) flagship plan to return Mexico’s energy sector to state control” and the FT sees it as a clarion call to “tone down the anti-business rhetoric”. This is very, very positive for KCS’s (and FXE’s) refined products business, the fastest growth sector.
Traffic – Does. It. Matter? Probably not so much, given the strange comparisons to a pandemic, etc etc etc – remember what’s known as the “base effect”. In other words, what is your base year? It sure isn’t 2020! For example, in May, North American traffic was up 25% (carloads up 26%, IM +23%)/ Year to date traffic was up 12% (CL+7%, IM+17%). For May, 19/20 categories were up ((15/20 in Canada and Mexico, 18/20 in the USA). One reasonable – and impressive – comparison is US grain traffic, up 19% in May versus a real year, showing the enduring, possibly multi-year (“mini-super-cycle” despite – or help? – by Brazil suffering the worst drought in a century) according to Cargill & Viterra, etc in the FT) growth in grain (more on this next week).
Intermodal congestion – tied in with global concerns on supply chains, globalization – and inflation. So, after getting, say, a B+ or even an A- grade for their performance in H2/20 when business and volumes snapped back (the “sharks tooth”), rails in general and in IM in particular now facing the glare of shipper concerns, at the ports and inland (Chicago, Memphis, KC). One question – is there another domestic container shortage, which so hurt the rails in 2018 (when the added volume from the trucking issues came as TOFC and went back in 2019 as TBOTH (trucks back on the highway)? With experts like the Executive Director of the Port of LA saying that “the supply chain will be clogged until 2023”, the problem isn’t going away soon. The WSJ places a lot of the blame for shortages on the lack of capital spending overall over the past intermediate term – at least rails can't be faulted for that (or….shouldn’t be but the STB manages to find a way). Thoughts:
- Uh oh – the container ship order book surges to almost an annual record in the first 5 months of 2021. They just can't help themselves….
- RRs are in the spotlight, as I said, but Sea-Intelligence reports that 78% of the ships entering LA/LB are late (by on average 10 days)
- UPS looking at same day service (gulp)
- The government is looking at Supply Chain Task Forces – so far in mostly non-rail areas but….
- UP has restored some surcharges in LA/LB but has admitted (also) that a return to “historical fluidity” will take until next year (UP did score a notable win versus their arch-rival BNSF in taking some of the formerly exclusive Knight-Swift business)
Furthermore:
- Exxon, ESG, and activists – you know that resonated in railway board rooms; in addition, studies are showing that bad weather – unusual events becoming the new normal - is moving in the market’s perception from “bad luck” to “bad management”
- Rail inflation to jump to 7%+ by Q3/21!
- The AAR’s RTI notes that, despite the destruction of coal traffic, the average freight train movement pulled 3,817 tons in 2019, up from 2,923 at the start of the century!
- Progressive Railroading magazine, my RailTrends partner, named its’ 25 “Rising Stars” and the score was UNP 3, 2 each from CP, CSX, CN, and KCS) and one each from Watco, BNSF, and RJ Corman
- Retail sales disappoint – is the shift back to buying experiences from buying goods actually happening (it is in this household – live sports!)
- There was a time when RR leaders won shipper organization praise: CLICK HERE.
- The Boston Globe won a Pulitzer “for its extensive coverage of dangerous truck drivers and the failure of state governments to keep them off the road”; the WSJ asks “What if AV never arrives?” but Waymo & JB Hunt (ulp!) announce a test partnership in Texas after the former raised $2.5B
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18