Ask The Experts: January 15, 2019
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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