Greetings!
Wheat kings and pretty things
Let's just see what tomorrow bring
/The Tragically Hip (for those of you in the USA) – where are the Wheat Kings now that we need them, with global crop issues in the grain?
First, the sad news: CSX Announces Death of Executive Vice President Mark Wallace - CSX.com It's with heavy heart I read about the passing of CSX's EVP Mark Wallace, who came through the PSR experience with EHH from CN to CP to CSX. He is the 2nd major RR talent to recently pass way too quickly following BNSF's John Miller, both of whom could eventually have achieved higher rail office.
Speaking of which, one of the railways’ (four) big succession issues was answered today (12/2) and it wasn’t the one that might have been expected:
NS names Alan Shaw to succeed Jim Squires as CEO next spring; he is now President as of today. It isn't a surprise, totally, that JS is retiring early (before being aged out but after the NS HQ move). It also isn't a total surprise that it's AS, given his tenure at the "C-Level" ) vs his peers there and his success at "yield up" etc. I have long said that succession issues were major ones for the industry - and this solves one of the big 4 outstanding issues (leaving UP, CSX - and, of course, CN). This issue has of course been impacted by the pandemic - a lost 18 months where, in the past, RRs highlighted and spot-lighted future CEOs - as NS did with JS - so that announcements didn't come as a surprise. I do heartily approve of a CMO running the railroad (nothing against COOs, here or elsewhere), joining CSX, KSU, and (for now) CN – though Alan has intermodal ops experience on his CV which is very helpful. Is it notable that Alan’s VT degree brings back the Virginia legacy to NS leadership (even as they now domicile in Georgia?)? Also out of NS:
- Our friend Ed Elkins replaces Alan as CMO – having carload and IM experience this is an excellent choice; he will be replaced by “Leggett” Kitchin whom I had the pleasure of having on my IANA EXPO panel but now goes to Industrial Products (manifest).
- Jeff Heller - VP of Intermodal/Automotive, and Mike McLellan’s successor, will also retire (March 1) which is a loss, and will be replaced by Shawn Tureman.
- Meanwhile, as mentioned NS is in hot water with the STB (I guess it’s their turn) over service and hiring and listed a series of tactical efforts to turn that around at this week’s equity analyst conference.
It is ironic that NS has "solved" its succession issue before CN did (rumors and newspaper discussion on who they might pick abound, with candidates likely and far-fetched). CN meanwhile brought its big 3 leaders to an analyst conference this week to talk about tactical issues, such as Vancouver recovery, while sort of downplaying the Big Fight (vs TCI, naturally); CEO JJ Ruest’s speech at RT21 on (defending the Mothership’s idea of) “The Railroad of the Future” seemed to draw a line in the sand, but I remain….a bit confused. Meanwhile, at the same conference, UNP lowered its’ 2021 forecast (bowing to the inevitable so therefore not “news” IMHO) – volume gains of +4% RTM (from 5%), productivity gains of $250mm (from $350mm) and annual OR improvement of 150bps (170). Interestingly, UP cited its international intermodal decline, noting that increased transloading at LALB (see below) hurt them in share (vs BNSF) as they lean toward “intact” (40’ INTL boxes) moving eastbound….
Common Carrier Obligation to the fore – will Matt Rose be proved right? On his “goodbye tour” of valedictory speeches (only slightly less long than Elton’s “Goodbye to Yellow-brick Road” tour of 2017-present) in 2019, Executive Chairman Matt Rose of the BNSF warned us on a number of topics, such as the need to be self-reliant and focused on advancements, with significant big-tech support, in IT as the trucking industry embraces EV & AV models, for instance. But he also warned specifically that an over-reliance on the (“Cult of the”) OR, with a chosen focus on margin over one of growth, and the related de-marketing of certain business, would eventually prove to be problematic for railroads politically and ultimately for their shareholders. (Adriene Baily of Oliver Wyman noted at RT21 that after a certain point, cost over-focus becomes value destructive). Not only because one can only improve efficiency by so much and growth is critical for companies and industries – but because the rail specific “Common Carrier Obligation” could be used as a weapon against them, should they become too obvious in their strategy. That time may be coming….
New weapon at his disposal? As noted, in his speech at RailTrends 2021, STB Chairman Martin Oberman polished his arguments that he has been delivering all year (notably at NARS) – rails are duopolistic (maybe monopolistic), too much “in bed with Wall Street” using funds that could be dedicated to growth on share repurchases, cutting costs, particularly headcount (and now finding themselves short of crews) in order to lower the OR etc. But this time, at RT21, he revealed something new. As I wrote in my RT21 Review:
- Sanimax case allowed to proceed – This could be BIG, and it wasn’t well-noticed but the Chairman made special mention of it - a Minnesota shipper case argues that the UP’s poor service amounts to a violation of their common carrier obligation….as Matt Rose warned way, way back in 2019, the CCO is the potential Achilles heel of the PSR crowd and price/de-marketing – another reason the rails better walk tall (follow their stated growth re-focus and improve service) and quickly.
- The CCO is not, I believe, actually “defined in a statute”, and the AAR is expected to file on this….What is the rail obligation to provide a timely response and a reasonable rate to proposed freight tendered to it? This, like the “reasonable rate” application in the reciprocal switching proposals (set for DC Hearings March 15-16), and the undefined “revenue adequacy” requirements in rate (etc) cases – is and now perhaps will be the subject of intense debate.
- Perhaps it was intentionally left vague, as the “enhanced competition” requirement for “new rules” rail mergers was?
- How will the shipper trade associations respond – as if we didn’t know (always recall Churchill’s rail/shipper maxim*!)
- I view this as another tool by which the STB intends to become more active (not to say “activist”) in the rail industry. This Board, with 3/5 Democrats, differs from the last not at all in intent (see former Chairman Begeman’s dislike of PSR) but does in intensity and with the Presidential Executive Order as cover, if not groundbreaking (nor singling out railroads)**.
- Its immediate, practical threat is nil, as at present the STB regulatory authority covers essentially three industries, one dying – and only that business under tariff not contract. The STB is king in rail M&A and can look into specifics (demurrage, fuel surcharges, etc) – but mostly through hearings and at best a lengthy, court reviewable rule-making process (see reciprocal switching). Mostly what it does, aside from the very, very busy M&A agenda, is shine a big spotlight on issues via hearings….but this is a possible tool by which the STB can fulfill its admitted mission of “helping the rail industry” (by which they mean the rail shipper) by extending their own footprint.
- As stated, the AAR will weigh in, as their CEO did at RT21 as reported in Trains (and in my attached “Review”) AAR President and CEO Jefferies addresses myriad topics at RailTrends - Logistics Management (logisticsmgmt.com).
- “Never let a good crisis go unused!”
- ** Remember also that rail regulatory issues are very different from general, partisan regulatory issues – what is the Democratic or Republican side of Dow Chemical (or Ford Motor or ADM or…) vs Union Pacific?
Abh LIVE! Tune in to The Stockout on FreightWavesTV this Friday at 3 PM ET for a conversation with myself and Mike Baudendistel, where we'll be talking about XYZ. Go to tv.freightwaves.com to watch it live! Also, the annual Northwestern/NUTC Sandhouse Luncheon at Mangianos in Chicago is virtual again this year (lunchtime on 12/7 – you’ll have to provide your own pasta!) – see below the signature for the details….Next month will begin the travel – to the NRC for lots of Capex discussion (2022 Annual Conference & ExhibitionNational Railroad Construction and Maintenance Assoc. Annual Conference (nrcma.org) ) and then to the Great God (of Regionals) that is MARS: TENTATIVE TOPICS & SPEAKERS (mwrailshippers.com)
A Supply Chain Free Verse:
LA/LB (no more metering!) see progress;
Despite periodic regress;
DOT & Porcari visit to digest.
While the rails seek cress, chassis & the truth,
Target & Walmart (and JBHunt) soothe….
The FTC analyzes while the White House Convenes
Christmas is coming, they say, no smokescreens
Container rates dip (hooray!)
(though it's still 2X 2019 rates they pay!)
But ProLogis scares (’23?), Vax-deniers shock us - while Omnicrom rings the doorbell
When will this be over, we ask though only time will tell
The news and the TV talkers of crisis still bray
But Christmas (and Hanukkah and Kwanzaa etc) will come our way!
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18