Greetings from yet another isolation following a wonderful trip to Chicago and the AARS, with lots of interesting short line (and therefore FMLM) insights), as well as side trips for coffee with America’s top rail regulator and a useful dinner and fun dinner with Pat Ottensmeyer of the KCS, who will share his by then close-to valedictory comments at RailTrends in the fall. I was waiting for an update on CN after my opinion piece, attached – but that took time.
CNBC Supply Chain Heat Map – The housing market slowdown is showing up in shipping data from China (msn.com) unveiled at the end of last month, new to me, simplistic but cool:
Rail Pulse: At the AARS (below) Stefan Loeb also gave an update on Rail Pulse (hopefully attached – it is strangely a very big file for reasons that confound me); R/P has pushed back roll out a couple of quarters but increased its fleet coverage by ~50% to ~30% with the UP on-boarding. The partners are all beginning sensor testing on 100 cars each; Watco is doing theirs on aggregate cars. There was lots of buzz about R/P in Chicago….
AARS provided a lot of short line and operational expert insight and continues to make me think that better/increased short line-Class One cooperation is a solution to the highly publicized First-Mile/Last-Mile service issues, recently seen as the number of switches/week (see UP-Foster Farms). Why do I think that?
- Watco’s example of what they call “3rd Generation” short-lining, involving intra-plant switching (Dow) and industrial switching (what they call the Dutchtown Southern with CN in Louisiana). In that example, they increased plant switches from the plan of 5 to 7+ (as needed) and grew carloads by 32% in the first year! As RJ Corman CEO Ed Quinn said in his thoughtful fireside chat on his company and on leadership, “We (short lines, RJC) do better in complexity”.
- RJ Corman, which I will visit next month, has become a fully three-part company – its traditional Contract Services, Short lines (increased from 9 to 18 and growing), and Logistics (which is where he puts switching and warehousing and the like).
- Watco still plays in the 2nd Gen SL space – see its newly acquired Wisconsin Central lines, where the same high-touch plan will apply
- There are many 3rd Gen opportunities out there - recall my note from REF which said there are 30-50 “Dows” potentially – and a multiple of that for Dutchtown's. Here’s hoping some C-1s see the light here before it’s shone on them too brightly.
- And there never seems to be an end of 2nd Gen SL deals about, with three known to be in the works
- Pat Ottensmeyer of the KCS was given an award by AARS as their person of the year, which he took to heart coming from an operations group and given to someone whose star-studded career started in finance. Pat is balancing working hard at the KCS, overseeing CP integration meetings, and adding hardware to his trophy case. Two thoughts from our conversations in Chicago:
- Single Line service advantages, as touted by the CPKC, come in large part because of trust in Capex – by which I mean the efforts to link Chicago to Mexico City could happen today, but would CP spend the needed big bucks in the Chi-KC leg in an alliance?
- On the other hand, KCS today serves as an example for the rest of the railroad industry which will not be able to merge into single-line service advantages – KCS has worked its’ alliances under Starling/Ottensmeyer with BNSF and especially UP – not to mention the NS and the Meridian Speedway….
Mexico – AMLO lives, at least until 2024 (supposed term limits). After it seemed with the rejection of his “Energy Reform” efforts by congress that a tide had been turned, but in the most recent elections his party’s control of governors actually grew and his approval ratings, immune to continental trailing economic growth, still hover at ~60%. Why does this matter? His economic policies have led to a 12% decline in annual FDI and his focus on energy has roiled what looked (looks?) to be a hot market for KCS – refined products. He is trying to roll back all of the reforms of the previous governments – see WSJ headline a few weeks back that summarized it all: “Mexico Aims at (Private) Energy Companies”
- Mexican energy prices are today ~40% higher than the US
- One result is an emissions level that is scaring away foreign business
- The shutdown – “at gunpoint”! - of a KKR-owned refined products (rail) terminal – because the terminal couldn’t prove that its (US-originated) gasoline wasn’t stolen (!!) is the example to look at – KKR has launched a $667mm lawsuit
- Pemex was granted $2B to pay off immediate suppliers – but still has $100B in debt
Rising Stars – AARS served as an odd partial reveal of the 25 Rising Stars as selected/overseen by my RailTrends partners Progressive Railroading magazine. Of note, the management of Pioneer came in to see their award winners; UP, KCS, and CN all had three winners, and Matthew Bolte, of Railway Equipment Company and scion of RT co-founder Steve, was also a winner! Congrats! Full report in their September issue.
CN, pourquoi si calme, eh? So, recently I wondered a bit about CN, winner of a proxy fight over its future, perhaps acting out the wishes of the loser – and I used the quintessential American band, the Beach Boys, as my reference (CN “Vibrations A’Happenin’” – attached). So I will catch up on some things CN, accompanied this time by the quintessential Canadian balladeer (Gordon Lightfoot) and his “Canadian Railroad Trilogy”. OK, so it’s really about the other Canadian transcon (on whose tracks I will spend some time next week), but it still applies (emphasis mine):
Oh the song of the future has been sung
All the battles have been won
On the mountain tops we stand
All the world at our command
We have opened up the soil
With our teardrops and our toil
Perhaps I should have used his “Steel Rail Blues”? CN insists not…
My worries about CN playing out the strategy of the losers of the proxy fight rather than as the winner comes, to be fairrr, from parsing comments here and there and filling in silences with fears (the plague of WHO). There were some things even of late that made me wonder:
- Why is the Chief Legal Officer – the architect of their M&A (etc) strategy - commenting on CAPEX, and not (in order) the CEO, COO, CMO, or CFO? "We continue to make significant investments in our network, technology, and capacity. We are building the premier railroad of the 21st century to do even more for our customers, railroaders, shareholders, and the communities in which we operate." - Sean Finn, Executive Vice-President, Corporate Services and Chief Legal Officer of CN.
- There appear to be lineup changes without the usual attending publicity – for instance, the upcoming retirement of James Cairns, EVP of (carload and bulk), perhaps tied to the creation of a single CMO, Doug MacDonald (that’s a guess – see lack of publicity)
The debate over growth versus margin, or what is the nature of capacity (say, in Western Canada), or price versus volume – are all existential questions for the modern railway. As one longtime expert whose advice I often seek noted, “growth is hard”. I summarize them, ignoring the unicorn, as operations versus marketing, but I know that is too simplistic. I had waited a while for a response and waited and waited till hier when I heard from the incomparable Paul Butcher, IR: (noting that they had retained a large portion of the CMA business – the portion that works for them, margin-wise) - “I definitely do not agree with your assessment that we are pivoting back to OR only.” And CN added a second daily westbound IM train from Halifax!
So….on to the next clue….
Meanwhile, I will be traveling by train from Calgary after Canada Day to Vancouver; reading “The Last Spike” to prep. I will be meeting with ports, transload, rail short line, retirees, etc on my trip. Tims and Exports to be drunk. Alberta beef and BC red. Details and insights to follow, eh?
RRs and the STB part trillion….I had the privilege of a sit-down with the STB Chairman whilst in Chicago and while we couldn’t of course talk specifics, I did sense a real frustration with rail compliance (service, sure; pricing power? That’s a debate. But compliance with orders for info?!?). There’s a real sense, from the AARS, the metrics, etc, that the hoped-for second-half fluidity improvement is not showing up in trend reversal (yet). This continues to be a major point of national discussion (WSJ “Rail Backup Adds to Bottlenecks at US Ports” – the PMA noting that boxes held for rail were up 18% in May over April). Two more events:
- BNSF announced it was limiting westbound carload freight to California for July; they had previously, along with UP, limited (or “metered”) eastbound boxes at times. This first merchandise limitation I can recall in a long while. It may make sense but it sure sounds lousy.
- 3 FMC Commissioners urged the STB in a letter to reject the CPKC – my reaction is to stay in your slip, yo! The reasoning is a) general rail consolidation and b) the fact that a more efficient CPKC, serving ports in Canada and Mexico – our allies and USMCA partners, recall – could lead to port share loss for the US. Maybe all the hype around the Lazaro-Chicago tests caused this? Two of the 3 Commissioners are GOP, BTW, a reminder that such issues as transport regulation are not party-bound. Nor is insanity.
Also:
- NEARS Summer Webcast (“Jason & Tony Show”): The NEARS.ORG Podcast: The No Bummer Summer NEARS.ORG Podcast on Apple Podcasts
- UP’s “Big Boy still rolls, er, rules! Chasing a Mighty Relic of Yesteryear: Union Pacific 4014 - The New York Times (nytimes.com)
- Maersk reiterated that while new trade barriers aren’t coming down, globalization isn’t dead but plateauing; they see TEU growth = GDP….
- Jack Welch isn’t having a good year, is he?
- Nothing under my sleeves: CSX somehow shows the worst velocity decline (to levels pre-dating PSR!) but the best Intermodal O/T (97%)
- Legislation against Big Meat (really a larger White House target in its Executive Order than Big Rail) has passed out of Senate committee….
- Here’s a headline that sums it up, Two more events:
- Courtesy of Bloomberg Business Week: “A Post-mortem on SPACs, and yep, they’re pretty much dead”
- One scary-ish thought – You might have seen the WSJ state-the-obvious headline about the industry moving south/southwest (weather, taxes, regulatory relief, unions, etc). That article could have been written in 1975. Anyway. Overlay that thought with what states are allowing AV testing on public roads, etc – and you get a tight match. And the bullseye in one state in particular hint – conceal/carry).
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18