Ask The Experts: April 24, 2019
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.
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?
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….
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.
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%).
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