Ask The Experts: May 15, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: What are your thoughts on Canadian National’s (CN) Q1/19 Report?
A:
Canadian National’s Q1/19 (slight) earnings shortfall made it the second railway – and the second, of two, Canadian Railway, to report below-consensus results – but, as with CP, they harsh winter added to the other distortions (trade, Albertan market interference, etc) to make this quarter’s results hard to decipher and less important than CN becoming the second Canadian to reiterate full-year expectations despite the slow start.

A field day for the (cold):  CN’s CEO JJ Ruest informed us that CN faced ~7 weeks of Tier 3 and even Tier 4 cold – in light of that a 17% increase in adjusted/diluted EPS and an 11% revenue increase that matched the cold-brewed 11% expense increase was actually pretty darned good  (1% of the expense was a PTC charge).  The (adjusted) OR actually improved 60bps to 67.2% - but remember last year was the congestion-winter of CN’s discontent.  Volume was up 1% - you can track the weather impact on their slides, plus the “nosedive” in CBR due to the provincial government’s heavy-handed market interference.  Operating metrics declined in many categories (train velocity down 1%) but showed improvement in dwell (-12% versus last year’s congested performance) and car velocity (up 8%).  The injury and accident rates ticked up, too.  CN didn’t delineate the winter hit to earnings, which on the one hand would have made all of our lives easier, but on the other is a cool way of saying this is just….the rail business.

There’s something happening here:  Resiliency and recovery – along with “railway” one of the Three Rs of CN.  The railroad is now fully fluid, the outlook looks bright – high single digits for the FY19 means quite a strong last 8 months of the year – but CN believes that will happen even if CBT doesn’t ramp back up to December (pre-Albertan interference) levels.

Q:  How is the Surface Transportation Board (STB) working to increase transparency in the industry?
A:  At both NEARS and ASLRRA there was discussion of coming Surface Transportation Board (STB) activism.  In fact, the STB will hold a hearing in DC on the increase in assessorial/demurrage charges (some of which is the actual imposition of existing contractual requirements) on May 22 in DC.  New Vice Chairman Patrick Fuchs spoke, to positive reviews, about these concerns, as well as more use of “Rule 11” pricing (think unbundled/transparent interline 7 switching bills), which add to transparency but bring not insignificant new information complexities….My fears are that, although the recent PSR transformation efforts have compared well with CSX rapid revolution, the well has been poisoned by the latter’s experience - even if it did what it set out to accomplish – better service metrics….and that the STB’s seemingly forgotten caseload includes the reciprocal switching/access decision in a world that seems judicial but is actually highly political…

Q:  What is Canadian National’s (CN) philosophy on OR?
A:  CN’s CEO JJ Ruest explained that lower OR can be achieved, for sure (and CN has the most annual gold records in this category in modern times) – but it “depends on how much risk you want to take on”, defined here as risk of demand as well as “harsh conditions” (to which I would add political).   Describing OR as a “one trick pony” (and the new PSR-led focus on it a “limbo contest”), Ruest continued: “what you’re seeing from CN is a more balanced scorecard – EPS growth and especially ROIC - than strictly pure PSR”.  OR isn’t unimportant or useless, it’s just not the be all and end-all.

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Alison Babcock
Ask The Experts: May 8, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: How do you interpret Canadian Pacific Railway’s (CP) Q1/19 results?
A:
The rail winning streak is broken.  I (we) didn’t see this coming, although perhaps we should’ve – CP’s Q1/19 results came in some 5-7% below Streets (Wall & Bay) consensus and their OR increased by 180bps as severe February weather knocked even this cold-weather warrior for a loop (and, tragically, led the three fatalities).  But like UNP before them they have fully reiterated their FY Guidance issues in January - said CFO Velani:  “We can absorb this difficult first quarter and still over-achieve (for the full year)”.  But this breaks this quarter’s rail hit streak at 3 (it sure appears that NSC posted a big W, bringing the scoreboard to 4-1 so far in the quarter.)

Q:  Keith Creel thinks there will be consolidation because “the industry will run out of capacity.” What are your thoughts on this?
A:  I know that Keith Creel is an actor in the drama (and I am merely an observer), but I don’t buy it.  Given that the rails are (mostly) all converting to PSR, and just beginning to look at the benefits of PTC (especially on capacity), and with the increased free cash flow generation (and the PHR view of Capex, as CNI will discuss next week), I don’t see that capacity shortage coming in our lifetime, if ever.  And, of course, the “pro-competitive” risks to offset any such gains in capacity are huge.  This is why Matt Rose has gone from being such a leading advocate of KC’s position to his current one….

Q:  What do you think about Norfolk Southern’s (NSC) Q1/19 results?
A:  By now this is well-known:  NSC blew away Street estimates with what one wag at “SeekingAlpha” called “a perfect quarter”.  True – they set records in railway operating income, net, EPS ($2.51, up 30%YOY) and Q1 OR 66% (-330bps).  And that EPS record was also fully 15% higher than consensus estimates, a bit reflecting skeptic concerning NSC’s level of commitment to PSR.  For me, that went away following their excellent, long-awaited Investor Conference mid-quarter (3/1).  All of those targets (including achieving a 60% OR by 2021) were reiterated ‘with confidence”.  Clearly they are seeing operating improvements following their “clean-sheeting” process – velocity up 14%, dwell down 23% - and no mention at all of weather issues (till the Q&A) in the webcast..  Management stated that changes were “ahead of schedule”, allowing for a confident roll-out of “Top-21”, the PSR, single-system plan which is to be fully implemented by July 31 (when, it was hinted, we can expect some decisions on yards and terminals, a sop to those who see “Hump Yard Closure” being the sign universal PSR progress).  Much of the Merchandise system was “sped up” to the intermodal speeds of 60mpg (from 50) to better co-mingle business and break down unnecessary unit train businesses.  Volumes (flat) reflected the slower economy, tough comparisons (especially in intermodal and export coal) and rolling events (trade, etc).  Price wasn’t delineated of course – but seems to be strong and, as CMO Alan Shaw stated, NSC is “fully committed to testing the upper limits of market-based pricing”.  All good – great, even.  But….some darker thoughts creep in after 24+ hours….

  • Junk in with the jewels – of the $131mm in increases “Income from Railway Operations”, $16mm came from fuel (normal waxing & waning of oil prices); higher than “normal” gain on real estate sales (the sale/leaseback of the Atlanta HQ) added $11mm; increased capitalized labor added $8mm; and increased assessorial charges another $23mm.  Factor in the lower-than-normal tax rate of 21.4% and the 17% YOY decline in shares outstanding (due to their buyback program, of course) and you see that, while still goo, maybe great, perfect might be a stretch.

  • We can only know what we see – NSC produced ~10 slides in their presentation as they appear to be succumbing to the PSR-philosophy of “Greatest Hits Only – No B sides”.  And in the 5 operating KPIs, which we were set up to focus on from the Investor Conference, there was….no new data, just the 3/1 slide repeated, with some color (much of it “we’re on track”).  Expenses were  - matching volumes – helped by fuel and hurt by a 6% increase in purchased services despite intermodal volumes only being up 2%.  There was no safety – a historic NSC strength – data.  I thought this was all over after the First of March; hopefully this is an aberration.

  • Intermodal Angst – Mine, not their.  NSC has the best IM franchise in the east, as they duly noted (without mentioning the “Corridors” at all).  The Q1/19 International volume growth of 10%, tariff-affected, is obviously not sustainable (secular growth should be, as stated. “GDP+” – or better).  The domestic Q1 decline of 2% is slightly worrisome – although of course comparisons are very tough.  The mention of “lane rationalizations” was also a concern – a big (and necessary part of CSX’s strategy, but for Norfolk?  It is apparently been focused not just on pricing but complexity (also key to ROI).  But then Shaw noted that it was small in scale, and that it had been done every year since 2013!  So far, so good.  But then the CMO said, in discussing merchandise (always a PSR focus) and IM, that NSC’s “primary focus was on their “Yield Up” process – not on volume.  And this after considering all of the service improvements to flow from Top-21 (not to mention the lower cost base to come from PSR).  Compare this to KSU’s “Service Begets Growth”/PSR manta.  Maybe just words, but “semantics begets Tsuris”….

This was a fine way for Norfolk Southern to leave the post-Investor Conference starting gate – it just wasn’t….perfect.  Lets see how the Top-21 implementation goes as we look to the summer.

Click Here to learn more about Tony Hatch and ABH Consulting.

Alison Babcock
Ask The Experts: May 1, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: How is Kansas City Southern (KCS) interpreting Precision Scheduled Railroading (PSR)?
A:
KCS reveals its PSR Mantra – “Service Begets Growth”!  The subset to the code was four-part: Customer Focused; Facilitate Growth; Improve Asset utilization and (4th!) Improve Cost Profile”.  And yet, despite that unusual (refreshing) PSR ordering, KSU shook off any doubts that I might have had by going full bore on the concept (4 full slides, as compared to just one in the January webcast) and having their Chief PSR Officer as a major component of the broadcast/Q&A.  KCS was also impacted by the weather events sweeping through its largest interline partners as well as those specific to its unique location – trade distortions and tariff fears, teacher strikes, etc (there was little to no discussion of politics on the webcast).  But with the exception of, after the 1% decline in units in Q1/19, reducing FYG for volume by a point (to +2-3%; 70% of the book still is classified as “favorable”), the remaining targets were unchanged.  But my biggest takeaway was a bold view of PSR as a growth-driver (something that EHH always espoused); of looking at change not to please the lowest common denominator (“our approach is not to – just - close yards”) but to achieve their credo – Service begets Growth!

  • Mr. Fahmy noted their were “a lot of fruits still hanging”; presumably including some that are low-hanging.  I must say my only reservation was not his discussions, for I have a long-lived respect for Sameh; it was a lingering sense that a lot of the clear progress being made was coming from he and COO Jeff Songer (& team) and less from a systemic change – there was great stock taken in “exception reporting” (as there should be, I assume) but I think the market, having seen KCS rise, slump and rise again (like the House of Stark – which would make UNP Lannister?) would like to see changes that clearly could survive the loss of great PSR warriors.

  • Q1/19 Operating Metrics improved sequentially and YOY – dwell by 5%/16%; gross velocity by 11%/13% (KCS changed their reporting of this from net); and car-miles/day by 5% (YOY) – and with it the looked for net reduction of the locos (by ~100) and rail-cars (“1000 identified”).  PSR initiatives so far have accounted for ~$19mm in 2019 savings (which will grow to $25mm in annualized savings) – at a cost of a Q1/19 charge of $67.5mm.

  • KCS had the usual non-value accounting issues – in this case Mexican tax reform creating a GAAP change; they also effectively downplayed the Mexican government study on market dominance (covered before).  CEO Ottensmeyer strongly stated in the face of numerous questions that fact that there is one KCS – not a US and a Mexican system joined in Texas.

  • The KCS growth opportunities continue to show promise despite all of the political haranguing, etc – cross-border volumes were up 13% (revenues +18%) while “energy reform” related volumes grew 188% and revenues 164%.  Cross border IM volumes grew a less robust 5% (revenues dropped 6%) but recent border disruptions and the long truck lines they engendered are seen as, in effect, a marketing opportunity for CBI.  Lazaro was still dismal (-26%).

Q:  It appears that Union Pacific (UP) has not been recently concerned with growth. Do you find that to be true?
A:  It’s not that Union Pacific isn’t concerned with growth – they in fact had to defend that accusation and did so with conviction – its just that their presentation was more traditional PSR, if revolutions can have a tradition, cost and productivity and operations focused.  The fact that they reiterated their 2019 FY Guidance in the face of the 15 cents/share hit to earnings  from the flood is remarkable in of itself.  However, the faced their baying hounds on issues of OR – and capex (asking if PSR would allow UNP to spend – well - below 15% of revenues) with a different attitude, just as assured of course, but focused on productivity.  I have always said there are multiple ways to skin a raven.  It is curious. However, that the financial community seems to be unsullied, as it were, by the PHR rail experience in Canada (growth pivot backed by spending, high ROIC), even as Vena was a big part of it….

For UP, Specifically:

  • The fact that UNP reiterated its FYG on volume (low single digit, after Q1/19 started out as down 2%), pricing (Q1/19 “core price” gains of +2.75 were a step forward for UNP – though probably would rank in the bottom of the league tables); and OR (“sub-61% for 2019 & below 60% for ’20”) – after the weather ravaged first quarter was, and was attributed to, a sign of PSR working and resiliency being built into the network.  UNPO is almost entirely behind the operational and financial impacts of the storm and flooding….”We are moving traffic as presented”, noted the COO.

  • Most specifically, the reiteration of the FY19 UP goal of $500mm+ in net productivity gains (savings) was truly noteworthy – given that Q1/19 produced “only” $60mm in such savings (fleet size, train length, car hire, etc) and was matched by $60mm in “operational challenges.”

  • Despite those challenges, 4/6 of the KPIs listed by COO Vena showed improvement (best – dwell down 19%), though safety, not highlighted, suffered (P/I up 22%).  It seems that they are making quick progress, without straying form their “measured approach” politically….

  • Hump removals!  Give the people what they want – UP reversed its strategy (after one quarter of a new COO) and closed/repositioned two humps, will add a third (it sure seems like a Chicagoland IM yard) and – after saying they were committed – stopping construction on the Brazos (NM) yard.  As CEO Lance Fritz correctly noted, PSR (or UP2020/G55-0) is “evergreen” – as it should be.

  • More bread for the masses – with locomotive  productivity up 6% in this difficult quarter, the stored-power roster reached 1900.

  • The volume story was mixed – and I sensed an increased concern about the economy even if CMO Rocker was questioned about being perhaps over-optimistic; only CBR, industrial products  and international intermodal (“Tariff pull-ahead”, which may distort numbers till towards the end of Q2) looked good – but as stated in my “Preview” (and inherently obvious), this quarter’s volumes, especially for UNP (and BNSF) are hard to extrapolate from!

  • Capex conundrum – while being asked if they were able to reduce their spend (on a %/revenue basis), UNP will take the “savings” from Brazos (etc) and reallocate the funds to sidings on the Sunset etc to accommodate longer trains (clearly coming – train length was up 7% for Q1/19).  But I remain questioning – if not fully skeptical, given the known unknowns - about the long term, comparing UP’s PSR revolution to the ”Golden Companies”, the PSR 2.0 (or PHR) railroads up in the North, despite Vena’s claims of building a railway to last (“two, three, four and even five years out”; emphasis of course being my own). 

Click Here to learn more about Tony Hatch and ABH Consulting.

Alison Babcock
Ask The Experts: April 24, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: Will the adoption of Precision Scheduled Railroading (or whatever each railroad calls it), as it is now being adopted by most Class I RR’s, make mergers of Class I’s more likely?
A:
No.  While working on one single operating philosophy, PSR, would seem to make a combination simpler, in fact two thoughts emerge.  One, it would eliminate the supposed advantage of bringing PSR from one carrier to the other (the ostensible reasoning behind the proposed merger of CP under Hunter Harrison and an Eastern carrier).  Two, operating to a schedule on both sides of an interline meet would obviate one of the supposed needs for consolidation, improved reliability, assuming the two railroads mesh their schedules (easier to do than meshing non-scheduled operations).  Finally, most of the rail leaders ascribe to what retired Executive Chairman Matt Rose of the BNSF has been saying as he changed his own mind about rail consolidation:  any supposed benefits of a merger, after great expense (and given the not untroubled history of post-merger implementation issues) would be overwhelmed by regulatory, operational and financial risks.

Q:  Why will it be so hard to extrapolate intermediate-term trends from the results of rail earnings in Q1/19?
A:  Four over-riding trends make up the answer, one self-induced, one economic, one political and one an “act of God”, all of which conspired to produce the worst quarterly traffic results for North American rail in 3 years – overall car-loads and intermodal, US & Canada, were down 1.1% for the quarter – which started off fine then plummeted in March (down 3.9% - only 4/20 US commodities showed gains, and 7 Canadian).  Once again we heard the cry “Thank God for CBR” – Petroleum/Products were up 21%!  And we know that will last, right?  Pulp & Paper was up just over 2%; metallic ores “up” 0.3%, waste +4% - and that’s about it.  in this context, the fact that intermodal was only down 0.4% was sort of a moral victory – although, as suggested by RTI,  when compared to truck tonnage (not units) which continued to grow, that’s cold comfort indeed.  And when one looks at grain (down 3% - -11% in March); coal (down 7% Q; -17% in March); the (temporary?) reversal of the chemical resurgence (-0.3% for the quarter), etc, etc – the uninformed mind might start to reel….

So what happened? What is the true nature of demand (fair, in my opinion, but hard to quantify).  And what is the true nature of the rails’ ability to handle that demand?  We’ll get clues in the comments on the speed of recovery, but wont see hard facts till later in the Spring.   – self-induced, economic, political and, finally, an act (acts) of God….Making Q2/19 all that much more important a clue to the intermediate term performance of the rails.

  1. PSR – disruptions, de-marketing, etc.  This will be hard to quantify, but we do know, for example, that after dropping 7% of their base intermodal business in 2018, CSX plans to do the same this year (while trying to grow the remaining base, as they did last year).  What is happening in this regard to Union Pacific?  Norfolk Southern?  KCS?  Genesee & Wyoming?  The eastern carriers are showing good metrics – will the increased fluidity make up for lane closings (in the long term, yes).  Will demurrage increases make up for the volume shortfall?  No. The calls will tell all….right?

  2. Global/US economic slowdown….S&P 500 earnings are expected to drop 3-5% in Q1/19 (7/11 groups expected to show down results); full year consensus has already been reduced by over 5% from the start of the year.  The IMF reduced its full year global GDP forecast based on manufacturing weakness (tied in part to trade issues, below).  And there is no tax cut looming on the horizon….

  3. Trade fears and disruptions – As RTI also noted, business inventories rose 0.8% in January from December, putting some heft behind the anecdotal discussion around “pre-ordering” in front of tariffs/border closings etc.  The 5%+ increase in LA/Long Beach transloadings (up to 52.2% of the total) was also attributed to front-loading.  The disruptions in the export soybean trade show what harm is being done to business interests tied to trade.

  4. Polar Vortex into Massive Flooding – particularly felt the US Midwest and in western rail volumes – again, RTI points out that the effects of the flooding in Nebraska/Iowa (and Missouri) on BNSF and Union Pacific alone in just 4 commodities (Stone/sand, coal, grain, “other”) “account(s) for all or nearly all of the declines in rail carloadings in March” (although the drop in sand has secular elements as well).  The JB Hunt earnings “miss” was clearly impacted by BNSF’s weather issues.  The recovery is already underway – this is something the rails handle pretty well, but it will obscure any secular trends (PSR) though we may see a faster-than-normal recovery process.

Q:  What are your thoughts on the performance trends of CSX?
A:  CSX provided a rousing leadoff success for itself - and the Rail group -  in the face of the many headwinds discussed in the Preview (not to mention the obvious one that I forgot in looking at extrapolating Q1/19 results into long term trends – the seasonal weakness of the first quarter itself).  The CSX Q1/19 earnings headlines – a 31% YOY growth in EPS, 11% above consensus, and a 420bps improvement in the OR to 59.5% - are only partially overstated by the triple-benefits of real estate, successful resolution of both a “customer dispute” and a Railroad Retirement tax issue, which added up to somewhere in the range of 1.5 to 2 OR points.  Still a good job, worthy of the many congratulations echoing in the webcast (even if that’s not really appropriate), and a sign of how PSR is evergreen…. CSX has clearly set the expectations trend for its US peers, at least to the financial community (wait till we hear from Canada next week)o.  In terms of my key questions I didn’t get much joy – not much on price (“strong”) and very little data at all, in fact.  Capex was down 4% in the seasonally marginal quarter, which wasn’t bad given the decline in PTC spend as that buildout nears completion, but also against easy comparisons.  CSX reiterated its FY19 targets (low-single digit revenue growth and a sub-60 OR).  Naturally the “Dumb Question of the Webcast” award went to the habitual winner on the habitual topic of “Can’t your OR go even lower?”….Real estate and line sales combined to be 5% lower though CSX said there is still a healthy pipeline (and a ready list of buyers, I can attest).

CSX insisted, again and again and again, that PSR was designed to jump start their merchandise business (“the core”); that’s where they see the biggest opportunity (pricing is now still some 15-20% below truck).  In recent years it’s been anything but, but this is the PSR specialty (see CN).  The recent -3% annual CAGR in short line business was called “unacceptable”.  Q1/19 results perhaps show a turnabout – merch volumes up 3% (and revenues up 6%).

Click Here to learn more about Tony Hatch and ABH Consulting.

Alison Babcock
Ask The Experts: April 17, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  How is Precision Scheduled Railroading (PSR) impacting Short Lines?
A:  The highlight of NEARS, aside from coinciding with the Orioles Opening Day, was the “Short-Line Panel” with two members of the panel I put together at ASLRRA and RailTrends in 2018 – Pan Am and Anacostia & Pacific, along with local players Canton Railroad.  The latter noted one thing that comes with overall PSR adoption is “more work for the Short Lines that the Class Ones used to do” – citing rate-making, (local) marketing, and hand-holding”.  To which I would add, of course, pre-blocking and other first/last mile operations.  This new, “over the transom” workload will be met with some small carrier push-back, the panel said (although when I questioned their ability to push back hard against a carrier such as Union Pacific, they admitted that the leverage wasn’t exactly even).  It wasn’t of course, all sweetness and light as a renewed regulatory challenge could well be coming.

Q:  What is the future of the reefer boxcar market?
A:  The high cost reefer boxcar market could be revived if the cycle times improve from ~7x/year (!!) to once a month – something that could well happen with Precision Scheduled Railroading (PSR), unlocking a new market opportunity in a low current share environment.

Q:  What is the latest news on Class I rail line sales?
A:  There is hope of more Class One line sales (or leases), with CSX as a leader (although their process has been choppy: 2 done, 6+ to go; unsubstantiated fears exist that short term cash interests are competing with long term business development).  NSC and BNSF have ruled out sales, for now, but UNP might provide an opportunity as they accelerate through their Precision Scheduled Railroading (PSR) transformation.  I should note that as PSR was introduced to the mother-ship, CNI (when it was simply “Scheduled Railroading”), the effect was to lead to short line acquisitions.  That being said, there is a bit of a gold-rush mentality going on ….

Click Here to learn more about Tony Hatch and ABH Consulting.

Alison Babcock
Ask The Experts: April 10, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  Do you think the recent border closing threats will have a greater impact than the tariff situation?
A:  Border closing trumps any tariff threat!  Just as NAFTA 2.0 might be about to be addressed by Congress, and the China negotiations just might be heading towards “endgame” (with upside for US Ag possibly a part of the deal, even as China now targets Canadian canola perhaps in retaliation for the Huawei mess) , the White House has opened new fronts in North America.  The first was to press both Canada and Mexico for metals quotas (in return for tariff removal), threatening ratification votes in those partner countries, and causing the US Chamber of Commerce to state that “Tariffs are bad; quotas are worse”.

But that was nothing compared to the threat of a southern border closing – again, the US Chamber: “unmitigated economic debacle!”  Even the threat and some redirected TSA personnel has led to truck delays increasing (at El Paso 2 hour waits increased to 5-6 overnight).  So far, AMLO (who presented a balanced budget two days ago, to great relief)  has been friendly to POTUS and US – but given that his top economic/business backer, Ricardo Salinas, says that AMLO has issues with “trust & delegation”, and the USA and US-owned railroads are a constantly tempting target, I am not sure why provocation, in a period of slowing Mexican GDP (even the government reduced 2019E form +2% to +1.6%) is the best tactic at present.  Recently, it seems the White House is “walking back” some of the border closing threats, even noting that they would exclude trucks from the potential closing (no mention of rail!), what does this turmoil do to potential FDI?  “Security is more important to me than trade”, said POTUS.

Q:  What do you think about the current leadership changes in rail due to Precision Scheduled Railroading (PSR) efforts?
A:  Change is a constant – PSR personnel shakeups not always easy to decipher:  So, we covered a bit of CSX’s almost constant turnover; this week CN announced (along with a new steamship line, Zim, calling on Prince Rupert) self-described “sweeping changes….designed to forge closer links between operations and technology” (an interesting and helpful twist), and added strategic acquisitions to CFO Houle’s portfolio and operations/integration of new portfolio companies to that of SVP/Consumer Products Reardon.  Clearly we should expect to see more supply chain extension deals like TransX and ports in the future.  Meanwhile, Norfolk Southern’s personnel announcement was a bit harder to read.  Three announcements – EVP John Scheib added strategy; SVP Annie Adams of HR was named Chief Transformation Officer (?? Isn’t that the CEO?), and vanes A. Sutherland, who joined NS last year, was named SVP-Law.  One thing I don’t fully understand – and here I have to note that these guys are friends – but Scheib, in many ways responsible for the positive surprise coming out of the recent Investor Conference, has always been involved in strategy, clearly to NS’ benefit.  But this seems to mean that Mike McClellan, on the of the bright lights of the entire industry, now reports to John who reports to CEO Squires.  Anything that, in reality or perception,  marginalizes McClellan is not good for NSC.

Q:  Why have short lines been such a hot topic lately?
A:  The following developments are making big news:

  • “3i Group” announced an agreement to invest in (note) Regional Rail LLC, a small 3-line short line holding company in the Mid-Atlantic run by old hand/friend Al Sauer, ex-Rail America.

  • GWR, itself the object of rumor, admiration and desire, added two small-ish lines via long-term lease to its Midwestern ops, a bolt-on, contiguous line (classic old-school GWR).

  • Anacostia & Pacific’s Louisville & Nashville was named Short Line of the Year by RA, while GWR’s Rapid City, Pierre & Eastern (ne’ CP’s DMW-West) was named Regional; Railroad of the Year.

  • At NEARS there was both a Short Line Panel and an address by Gil Lamphere of Mid-Rail, plus days of convention (more on this later) ….

Click Here to learn more about Tony Hatch and ABH Consulting.

Alison Babcock
Ask The Experts: April 3, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  Why were intermodal volumes down in February and how will the weather influence investor commitment?
A:  IANA released its intermodal volumes for February and, like the AAR’s, it wasn’t pretty: Domestic down 4% (containers down 5%!), international down 2.4%. There’s a lot going on, of course – weather, trade, Chinese New Year, the economy (February manufacturing down 0.4%) – but truck tonnage (not units) was up 5.4% for last month. On the weather, there has been the usual investor over-focus on the near-term effects of the flooding in the Midwest….but it has been bad, in Nebraska and now Missouri. The FRA declared it an “Emergency Event” – for me it will be a good, if early, test of rail resiliency.

Q:  What is the latest in agriculture trade?
A:  Ag transport news – three kernels from the past week:

  1. Louis Dreyfus, the trading house and breeding ground for many rail/Ag managers, reported a turnaround positive earnings result, showing that the volatility, especially in soybeans, has been good for at least somebody….

  2. China’s trade fight extended to Canada – with a ban of canola imports (a $C2.7B product).  What a world….

  3. Last week’s congressional hearing revealed US grain share lost to Japan due to the US opting out of TPP (share lost to Australia, among others)….

Q:  How will U.S. railroads be impacted by the new developments in Mexican policy?
A:  AMLO turns his sights on the rails? A long political tradition in Mexico has been to blame the “Yanqui” (not always without cause, to be sure), and especially the “Yanqui railroaders”, before the revolution and the subsequent nationalization. I am not suggesting that’s what’s happening when the Mexican competition commission (“COFECE”) published a preliminary report on “effective competition in the market of freight railway….services regarding certain chemical/petrochemical products….in the southern region of Veracruz” – but the “straw dog” effect cannot be dismissed entirely. KSU reassured investors (if not editors) in a dense, legalese press release, that the worst case impact concerned only $3mm in revenues….

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Alison Babcock
Ask The Experts: March 27, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  How are changes within Amazon affecting logistics companies?
A:  “You understand, Captain, that this mission doesn’t exist”: After announcing that they lost ~$600mm in annual revenue due to Amazon logistics changes, XPO Logistics then announced that they had “terminated” (their words) their COO.  With extreme prejudice, one can only assume.  Meanwhile, AMZN’s 10-K Report includes a discussion of their “natural competition” between AMZN and logistics companies….

Q:  Do you think it is important for railroads to stay involved in political affairs?
A:  “The (expletive) is piled up so high in (DC) you need wings to stay above it” - There are rumors that railroads are downsizing state and DC political affairs office (supposedly as part of their OR-driven cost focus); boy I sure hope not.  Given the PSR changes (and technology challenges) facing the industry, the need for good government representation (in a world of empowered regulators and a new congress)  is more important than ever (though we still have the AAR to “walk that wall”).

Q:  What is the latest in rail investment?
A:  “You either surf or fight!”  Two big rail interested funds are getting together as Brookfield is buying 62% of OakTree (the $450mm backer of Watco) – can only be good news for rail investment.

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Alison Babcock
Ask The Experts: March 20, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  What are some signs that the economy is slowing?
A:  The economy might very well be slowing, as expected, if rail traffic is any indicator (though we will need some time to unpack the impacts of the Polar Vorti (yep – “degree days” were up 17% last month) and the trade /”Lunar New Year” disruptions. That the overall market anticipates this is well known; the S&P 500 2019FYE has gone from expectations of ~6.6% earnings growth to +3/4% (FactSet) – since New Year’s Day!  The February Rail Time Indicator made for some alarming reading – quoth its author “On the surface rail traffic in February 2019 wasn’t very good”.  Indeed only 6/20 commodities showed increases in volume (US + Canada).  US intermodal volumes fell for the first time since January of 2017, a depressing month for us all.  US coal shrugged off the weather opportunity to drop 7%.  CBR helped, of course – the US Petroleum/Products traffic was up 21% - but Canadian CBR showed the Bizarro World impact of Albertan intervention, growing at half the rate of January.  No coincidence, the largest shipper, Imperial Oil (half the market) shipped nothing due to the collapsed spreads.  The most recent weekly results (3/9), showing for all of North America , were actually slightly worse (volumes down 4.3% (carloads down 6.3% and Intermodal -2.4%)….On the other hand, the American Trucking Association’s economist (Costello) sees a good freight year ahead, “just not as great as last year’s”.

Q:  What can we expect to see from CSX?
A:  CSX – Change Seems expected:

  1. CSX announced some (more) management changes, additive in this case with new positions created within Mark Wallace’s Sales & Marketing to include VPs of Marketing/Strategy and Sales/Customer Engagement; the former being headed by promoted IR honcho Kevin Boone (congrats!).  CSX has a long history of really engaging their IR folks and promoting them; in addition CEO Jim Foote served as IR head at the C&NW (where we first met).

  2. CSX stated in the related press release that there was to be “increased focus on port and short line development” – not just short line creation but developing short line related partnership business – which was over a quarter of the volumes historically but down to ~22%.  That fact and below came form conversations with attendees in Florida (3/3-5).  CSX admitted that they needed to refocus here and in merchandise traffic in general, and didn’t shy away from their plans to push down pre-blocking and to maintain the stick portion of the PSR plan (demurrage etc).  CSX service is measurably improving (velocity/dwell but also meets, dead-heads, re-crewing, etc.  CSX plans to increase manifest train size significantly in 2019 (by ~20%?) and at the same time achieve 95% reliability – a tall order.. 

Q:  What are the latest developments with U.S. trade?
A:  Trade – back to Crazy Town?  Even as the trade deficit – always a distraction  (and really, no way to view trade or the economy) but now actively “managed to” – has reached a 10-year high, the President stated yesterday that he was now in “no rush” to conclude a China trade deal.  The 21% drop in Chinese exports got a lot of “play”, but the timing of the Lunar New Year means that two month numbers, January/February, down 5%, are more realistic.  But it’s Mexico that wins this week’s “The president said wha?” award: after announcing in a UK roadshow a redirection of $2.5B from a controversial refining effort to Pemex (E&P) – and getting kudos for facing up to reality  - on Monday, yesterday AMLO over-ruled his own Finance Department to say he is going forward with the refinery plans!  This is important for two reasons – general confidence in Mexico (FDI was down 15% in Q4/18) and the refinery plans, as disparaged as they are by professionals, are an effort to reduce “dependence” on imported refined products from the US (on the KCS!).

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Alison Babcock
Ask The Experts: March 12, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  The Tennessee Valley Authority’s (TVA) board voted in February to close two coal plants. How do you think this will affect CSX?
A:  The announcement from TVA that they would close two coal-fired plants despite government pressure (to….keep them open) has an immaterial effect on CSX and is really more of a sign of the secular pressure on US utility coal from a cost – and political – perspective.

Q:  What do you think about Norfolk Southern’s Precision Scheduled Railroading (PSR) efforts?
A:  There has been some expressed concern that the coming headcount reductions will reduce institutional knowledge, break longstanding relationships and leave too few sales people (it was noted that there is only one salesman in the NE – but since its NEARS-superman Chad Grinnell, that may be all that is required).

Q:  How does Genesee & Wyoming’s (GWR) performance in Q4/18 affect future expectations?
A:  GWR – Making North America Great Again (for short lines) – riding strong (+6.5%), above Class One trend volume growth, Genesee & Wyoming beat earnings expectations by over 10% in Q4/18 (making it 6 for 6 for the Group).  However, they see volume decelerating (F:+2%), but they still expect a healthy (+12-17%) growth in earnings and a 100bps reduction in consolidated OR to ~80-81%.  In a shift from historic norms, they are presenting themselves as a “North American short-line rail holding company”, at 2/3 assets/sales and 80% of the bottom line. Nonetheless, the Street continues to focus on the “chronic under-performance” (from the webcast Q&A) in the UK.  Management would like us to view the Aussie operations, 51% owned, as, in effect, a dividend, with contractually-structured reduced variability (weather, etc) and run “almost independently”.  Their upside from the coal alliance with Glencore looks good over the next few years (more train sets likely ordered this year, back-stopped by future contracts) – but the intermediate-to-longer term is something to think about in light of Glencore’s astounding announcement that they were capping coal production at 2019 levels.  Both will be overseen in part by their former group COO (see below).  GWR won’t divulge Return on Invested Capital (ROIC)—seen as competitive advantage in M&A, not much discussed, either.

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Alison Babcock
Ask The Experts: March 5, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  Did Mexico experience an intermodal downturn last year with the unresolved NAFTA 2.0 and AMLO issues?
A:  Although Mexico has NAFTA 2.0 and AMLO issues unresolved, the Mexican Association of Intermodal Transport (AMTI) says that intermodal growth was 4-5% last year, led by cross-border up 11%.  What’s interesting about that is KSU, despite some late-year congestion challenges, grew 2X the cross-border market overall

Q:  What do you expect to see from BNSF this year?
A:  It will be very, very interesting to follow BNSF this year; it’s long time leader, the afore-mentioned Executive Chairman Matt Rose, will retire this spring and so far his railroad is the lone holdout from Precision Scheduled Railroading (PSR), potentially setting up the true test of growth potential and strategy, looking at the three rail models out there:  PSR, PHR (Post-Hunter, or PSR 2.0 – think Canada!)  and non-PSR.  BNSF does have three discreet unbalanced (what some might call “boutique”, though more like “big store”) businesses - Intermodal (AKA “Consumer Products”; Ag & Coal - and the bluest of blue chip customers in those units.

Q:  What is the expectation for coal production?
A:  The US Energy Information Administration (EIA) says that coal production will fall even faster than it had expected as recently as 2015, despite the so-called “end of the ‘war on coal’”.  The EIA expects another 20% drop in production  over the next 20 years, versus an earlier expectation of 18%.  Coal shares have been abysmal, reflecting expectations that coal will decline from 29% of energy share to 21% by 2035.

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Alison Babcock
Ask The Experts: February 26, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  What are your thoughts on current personnel changes in the rail industry?
A:  Personnel changes all over the industry!  Time seems to be moving faster….

  • Amy Rice, head of CSX Intermodal Ops, (formerly head of the CSX lines sales program) and the star newcomer at the CSX Investor Day last year, has resigned; after all of the praise heaped on her by her superiors, this is a shock.  There will likely be some more clarification on succession issues in CSX Ops soon.

  • John Orr, SVP and Chief Transportation Officer at CN, retired (announced today) after 30 years….one assumes he has the standard CN non-compete or he would already be a rich(er) man

  • GWR announced – after the webcast - that Dave Brown was longer serving as their COO (although he is still running important projects in Australia and the UK); there may be other ops leadership changes there, too….

  • Matt Bell was named head of the National Rail Construction (NRC) trade association; well-deserved, succeeding his old boss Chuck Baker, who is running the ASLRRA (short lines group)

  • KSU upgraded Sameh Fahmy from “PSR Consultant” to EVP-PSR!

  • Omnitrax, the short line holding company (part of the Broe Group) named two big rail players to its Board – our friend Dave Garin, retired Group VP/Industrial Products, BNSF, and Cameron Scott, the former UP EVP & COO; that’s pretty big firepower for an SLHC.

Q:  What happened with rail traffic in January?
A:  January was, for rails, a month of two directions, as noted by the AAR’s RTI.  There was strength in the first three weeks, weakness in the last two (Polar Vortex, government shutdown, trade uncertainty).  Note that two of the three are self-inflicted; for why the third had an impact see CN video, below).  For example, weeks 1-3 saw US carload growth of 8%, and IM of 6%; weeks 4-5 saw declines in both of 7%.  Overall, 11/20 commodities were up (US);  total (US + Canadian traffic (CL+IM) was up 1.9%, IM alone up 0.8%.  But the contrasts with truck was sharp:  the ATA reported that after a December lull, January truck tonnage grew 2.9%  (or 5.5% seasonally-adjusted); truck capacity grew even more (Class 8 sales up 40% for the month, YOY).

Q:  What has been happening with the Federal Railroad Administration lately?
A:  The Federal Railroad Administraion February PTC Update noted that all of the rails either met their 12/31/18 deadline or successfully extended for two years; 83% of the freight miles in the US are now covered. Nice guy/great railroader Ron Batory, the FRA Administrator, finds himself caught in the battle between the White House and California over, among other things, the Wall – he issued an order canceling $929mm in HSR (high speed rail) funding.

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Alison Babcock
Ask The Experts: February 19, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  Overall what are your thoughts on Norfolk Southern's Investor Day in Atlanta?
A:  This was a big meeting and it could have gone very badly – instead it was a great success.  The market liked what they heard right away (the shares were up over 3% on the day); upon reflection I would like to see more (of course) – more numbers, more info, more education of the shareholder base (on OR/Capex/ROIC, etc); that’s always the case.  But make no mistake - this opening salvo of the “Reimagined Norfolk Southern” hit the mark and then some.  I was looking forward to this for months – no, years – and like a perfect Christmas when one is a child, it was worth the wait.  Let’s just not wait as long next time.

Q:  What do you think it will take for the Norfolk Southern Top-21 Plan to be able to deliver results in years two and three?
A:  With 100bps coming out of the OR this year (and about 1/6 of the headcount reduction), there is a bit of trust required to believe that years 2 & 3 will deliver. Some of my suggestions are to simply build on what they shared – for example, to make a pledge to come back every couple or few years (a la Canadian National Railway) to update us and provide detail – even if we have to wait on the 2021 completion of this Plan and the official opening of the Atlanta HQ.

Q:  What are your thoughts regarding Norfolk Southern's target numbers?
A:  To hit the 60% Operating Ratio in three years means a reduction of close to 700bps – NSC uses 65.4% OR for the past (2018) year, while the Street sees that as more like 67% due to a big “lump” of RE sales in Q4.  In point of fact, that makes the goal that much more bold.  Yes, we saw huge OR reductions in the first years of PSR implementation before (CSX and CP), but from higher start points.  A key point here is that the OR target – and even the 5% CAGR level for revenue growth in the Plan period – were above Street expectations.

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Alison Babcock
Ask The Experts: February 5, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  How is Union Pacific (UNP) and its new “$8B COO” faring in its Precision Scheduled Railroading (PSR) conversion?
A:  So far, good progress. But one discordant note – recently promoted from CIO to CIO/Strategy Lyndon Tennison is now…. ”retiring” days after being lauded on the earnings call.  This follows the “WTH?” pattern of long-awaited Investor Conference in May, change the C-suite out 6 weeks later, announce the switch toward PSR not long after….this, uh, process, involves hard change but the behind-the-scenes aspect seems a bit muddled. Union Pacific’s big earnings outperformance made it 4-for-4 for the rails (later 5-for-5 – and with travel and general weakness, CN has made it, just, 6 for 6), but more importantly, as the most focused on PSR convert, they showed “good pro-gress” (as 10-day-on-property new COO Jim Vena repeatedly said).  UNP showed 39% YOY EPS growth (about a nickel above optimistic consensus, and lowered their OR 110bps to 61.6%.  Volume growth was 3%, which will shake out below the industry average – have they already been doing some PSR adjusting?  As CEO Lance Fritz stated, they are ahead of schedule on their new (gulp) G55/Unified Plan (UP)2020 plan launched before Vena’s onboarding, last October (and, to be fair, launched some 4 months after their Investor Conference).  They are accelerating into the PSR rollout, as EVP-Operations Tom Lischer stated, and expect to complete full geographic implementation by mid-year.

Q:  It seems like Canadian Pacific (CP) has been reaching all of their goals. What are your thoughts?
A:
  Canadian Pacific beat consensus in Q4/18 by some 6-7%, and last year by 41% (adj); their OR (adj) was 340bps lower to a (still hard to adjust to) 56.5%.  And still, there was talk about low guidance (“mid-single digit RTM growth, double-digit EPS growth”) and taking their OR even lower, on a full year basis.  Revenue growth was impressive (+18%) in Q4/18, but unit growth (the way I look at things) was more mundane - +5% (which will be more in line with the industry).  In that regard, the 8% increase in Opex and 10% in Comp/Benefits (headcount up 6% in 5% more cars handled) was….pretty good.  Pricing was obviously good (close to +4%; renewals more like +4.5%).  Operations/Metrics were stellar, actually – Dwell and Velocity improved by 6% and 3%, respectively, and safety was terrific (injuries down 14% and accidents down 31%).  Call it PSR, call it Canadian know-how – CP is running a pretty tight ship.  Their near term outlook has some revenue timing issues, no big real estate sales, improving more in H2 and into 2020 – but there are no dark clouds in their horizon.

Q:  What is the latest on the trade situation?
A:  
Ottensmeyer is a hero for his defense of NAFTA (1.0) and free trade, and it is true that NAFTA 2.0 was signed by all three nations.  But it hasn’t been ratified!  My best DC insider/expert things there will be a lot (a lot) of sturm & drang but that it will pass Congress.  But, still, it hasn’t yet.

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Alison Babcock
Ask The Experts: January 29, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  Bloomberg/BusinessWeek, in its 2019 Preview issue, listed “50 Companies to Watch” for the year – and not one of them was a railroad. What do you think about that?
A:
   With PSR transformations of varying degrees underway at, one could argue, at 5 of the 8 major railways (GWR inclusive), a reinvigorated regulatory approach in the US & Canada, not to mention the great impact that trade (or further trade disruption) could have on their volumes - BusinessWeek doesn’t think this year will an interesting one for railways? WTH?!? 

Q:   What are your thoughts on the Canadian Transporation Agency's investigation into rail service in British Columbia?
A:
  Sure, Canada is upset with being labeled a “security risk” (in steel and aluminum – and it was close for automobiles) by their heretofore biggest ally.  And yes, it is an election year.  But, for the CTA to launch an investigation into rail service in BC – not this time last year but now – seems silly.  At best.  Sort of like closing the barn door after the horse had run off, returned, washed itself, and put away the saddle.

Q:  How did the two big Canadian rails react to the investigation?
A:  
With justifiable umbrage.  CP’s Keith Creel said he and CP “take great exception”  Both carriers demonstrated that they have grown significantly over the winter time period in question in Vancouver (CN, for example, is up 10-11% in the last two months).  Oh, Canada, WTH?!?!

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Alison Babcock
Ask The Experts: January 22, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  Is rail going to see a new regulatory threat from Congress?
A:
  Joining a more aggressive STB and RTA, Hill sources here tell me that the presumptive Railroad Subcommittee leadership in the New Congress plan to hold hearings on Amtrak/NEC; Chinese railcar manufacturing – and on PSR (from a shippers point of view; the scripts were written years ago but will be dusted off along with the fake tears).  In H2/19 we may see hearings on PTC, depending on the rate of progress.  In any event, a new front, if less dangerous, might be opening on the re-regulatory battlefield.

Q:   What are your thoughts about CSX and their start to the new year?
A:
  CSX – naturally – beat expectations for Q4/18, growing by 58% YOY, 3 points above the Street.  The OR improved by 480bps to 60.3% for the quarter; confusing (for me) that was also the FY OR.  CSX sees that FY60.3% as more realistically being ~61% given the lumpiness of RE & Line sales, etc.  therefore, CSX guided towards a sub-60% OR next year (thereby achieving the 2020 goal a year early).  That appears to suggest the end of the wild, multi-hundred OR point reduction period (2017-18), but the new long term OR goal isn’t clear, in order to balance with growth (and that’s a good thing, despite some plaintive analyst bleats on the call).  Free cash flow jumped 88% FY18 and/but cash distribution jumped even higher (102%; the hard numbers were $3.2B and $5.4B); CSX announced another $5B buyback program to replace the just-completed one.  CEO Jim Foote stated several times that their 2019 Guidance of low single-digit revenues came from reading the same headlines we all do and that repeated talks with customers suggested underlying economic strength and ’19 will see much lower fuel surcharges in the revenue mix). 

Q:  Overall, how did rail do in 2018?
A:  
Operationally it was obviously a solid year. Notably expenses shrunk by 2% despite the unit growth, safety improved (FRA reportables by 36%, for instance) and velocity gained 17%, dwell shed 13%.  However, on-time originations improved, but by a point to 78% - and O-T arrivals declined sequentially to a still-not-great 58% (YOY better by 2 points, to be fair). All this with a 6% reduction in headcount (which is likely to stay around that rate of natural attrition in the next few years).

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Alison Babcock
Ask The Experts: January 15, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:   Is Jim Vena, ex-COO at CN and newly appointed to the same critical role at UNP in their operating transition to PSR, worth $8B?
A:
  Jim Vena joined the UP and the market loved it.  In fact, the day after his announcement, UNP raised their Q4/18 OR target to improvement from slight increase – not on the property for a day and already they have to raise expectations (literally in this case). 

  • He is a proven PSR railroader, and thus eliminates any nagging doubts about the UP’s commitment to the process change.  But it does also raise some questions?  At RailTrends only 6 weeks ago, UP CEO Lance Fritz made an excellent case for the UP’s commitment and progress (accelerating the 2nd region to undergo the change, etc).  Does this move indicate stalled progress?  Or had negotiations and possibly legal efforts simply taken time?  And what is the endgame for Messrs. Vena (60 years old) and Fritz (a dynamic 55)?  Is one man (and one man not named “Hunter”) worth all of the new “Buy” recommendations?  I can honestly say that since RT18 I liked the story before, and this move only clarifies it and adds momentum. 

  • The earnings call on January 24 will be too soon for Vena to know much, though that didn’t stop EHH on his first calls on new property, at CP or CSX; in any event, we will be able to discern more about the new working relationship between the two Alpha-male leaders in Omaha.  In addition, the announcement added to the overt pressure on Norfolk Southern, the other rail undergoing an operating change (“informed by tenets of PSR”) – and BNSF, the only railroad not bringing in PSR (see Matt Rose, below, as well as more, of course, of course, on PSR).

Q:   What are your thoughts regarding commissioner changes at the Surface Transporation Board?
A:
  At the turn of the year, Deb Miller left the Surface Transportation Board but Patrick Fuchs and Martin Olberman were confirmed, joining with Chairman Ann Begeman to form a three-person Surface Transportation Board.  Of course, the full complement is 5….but the Board may feel it has enough heft to begin to tackle some of the issues before it as well as to, er, “monitor” the PSR efforts at the UP and the NS.   Recalling the Chairman’s speech at RailTrends18, that is something the railroads must be very careful about….see, for example, the recent WSJ article on “New Railroad Fees Attracting Scrutiny” on assessorial/demurrage fees as Ms. Begeman highlighted in letters to UP and NS and in her speech.

Q:   The Surface Transportation Board recently released its ROIC (Return on Investment Capital) numbers for 2017. What are your thoughts?
A:
  The STB – finally – released “revenue adequacy” (ROIC vs. WACC) statistics for the rails – but for 2017.  That’s unusually late even by government standards, and cannot be blamed on the lack of Commissioners (can it?)….the rails’ performance in this regard – and this is US-only so eliminates the excellent results from Up North – was “barely adequate”, or, technically, actually inadequate: Return on Invested Capital of 9.9% coming in below the Weighted Average Cost of (that) Capital of 10.04%, with four carriers above the line (UP 14.1%, CP’s Soo Line at 10.7%, BNSF and NS at 10.1%) and three below – mid-revolution CSX at 8.8%, CN’s Grand Trunk at 7.7% and KCS (US) at 7.1%.  Remember, this is already quite old news….And I am not sure it will mean reduced STB presence (the theory being that the rails are “inadequate” so not over-charging) given the dated info and the PSR efforts.

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Alison Babcock
Ask The Experts: January 8, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  How are the railroads handling the implementation of technology?
A:
  The mindset has totally changed in just a few short years.  These include the visibility projects going on at the short lines, CN’s boxcar based track inspection (thus used in revenue service rather than capacity-sucking special cars – 8 on order for 2019), and automated train inspection portals (at speed – up to 60mph - and without the manpower and time of an optical inspection).

Q:  What do you think the future holds for Short Lines?
A:  
Short Lines may be entering a New Golden Age, in terms of organic growth fueled by technology, better Class I cooperation and merchandise focus – and through the creation of new shortlines (a la CSX).

Q:  What is your opinion on AAR's current rail traffic results?
A: 
 The results suggest a slowing economy (although, as mentioned above, the comparisons are more difficult). Overall, US+Canada, Intermodal + Carload, was up 2% in November, the slowest rate of growth in 2018. Only 9/20 US and 12/20 commodities in Canada showed increases. The US carloads were flattish (actually down 0.2%; ex-coal & grain up 0.4%); intermodal up as reported by 2.5%. Canada showed us a different story – carloads up 7.5%, IM +1.7%. Leading the charge was Chemicals + (especially) Petroleum, up 8% in the US (petroleum up fully 29%). Weakness came from US Ag, motor vehicles, coal, sand….Crude by rail impact was profound – up 29% US and fully 39% up North.

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Alison Babcock
Ask The Experts: January 3, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  How it's been going since Almo was inaugurated on Dec 1, 2018?
A: 
Almo was inaugurated in Mexico City on December 1st, and it’s been a rough start for those who saw “moderate” in him and for those who saw better cooperation with the US (the FT reported that POTUS calls him “Juan Trump”).  In his inaugural address, the new President vowed to “end free-market policies” and decried liberalism. The FT has been particularly focused on him, as the headline “Investors in no mood for the Mexican leftist president” attests. Currently, Amlo is in a battle with the bondholders of the canceled MC airport project.

Q:  What is the most current information regarding the US Grain market?
A: 
The unintended consequences of distortions in the soybean supply chain are a historical fact (the ‘90s trade war vs Japan helped jump-start the Brazilian soybean industry). Now, the US exports to China are down 44% through 9 months. Worse, the “normal” rail move of beans, a mostly for-export crop, from the upper Midwest to the PNW – perhaps the most lucrative rail market there is, or was - is a much lower return move to the Gulf to backfill Argentina (which sends their beans to China). Meanwhile climate change’s frontlines, if not in coral reefs, are in Ag, pushing corn northward, for example (Canadian corn crops?) In addition, the still stoutly GOP farm belt (helped by the US Government bribes, er… ”assistance”) is now all of a sudden finding storage prices going through the roof, in part because the tariff-inflated price of steel! Farm equipment growth will be down some 4/5 this year. And, the US trade surplus in Ag will be the lowest in a dozen or so years….

Q:  Has rail traffic been increasing in North America?
A: 
  North American Rail traffic is hanging in there – in fact, in week 50 (12/15) it was up 4% (carloads a bit less than +2%, intermodal up over 6%).

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Alison Babcock