Ask The Experts: August 7, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: How will modern technology be integrated into the rail industry in the future? Will we ever see real time traffic reports, live data tracking like we can see in google maps/waze for automobile traffic?
Rails fully get that they are at a growing technological disadvantage, having for years (ever) thought of themselves as rather cutting edge (and at times that was so – think of all of the public data they produce weekly). They also know that winter is (or may be) coming in the form of driver-less trucks, platooning, etc – that may be further off than originally projected but there are lots of smart folks in Silicon Valley and elsewhere working on ways to chip away to the first two rail advantages versus trucks – manpower and fuel efficiencies (the third is their network infrastructure, the final and likely unstormable castle). And with the coming completion of PTC, the rails have inadvertently but now recognizably built the backbone of the coming digital rail, not just safety but visibility! They are working on tech all over – and their shareholders are demanding that they do so. I think CN and BNSF may be the leaders but all of them are now at least talking the talk….

Q: What are your thoughts on Union Pacific (UP) performance?
“UNP’s earnings lift railroad stocks/eases railroad fears/help put rail stocks back on track/etc” – so ran the many headlines (and the analyst congratulations) after UP reported essentially the same trend as CSX – weaker volume outlook, reaffirmed OR targets - but in a more palatable manner (evidently)….Union Pacific reported a 12% increase in (YOY) EPS – consensus was +9% - despite a 4% decrease in volumes and the OR declined 340bps to a record low 59.6%. revenues “only: dropped 2% because pricing was up almost 3%. The new-ish four commodity categories read thusly, in terms of volume and revenues YOY” Ag (flat, +4%); Energy (-9%/-13% - yikes; not only was coal down 7% but sand was down fully 50% - I wonder if the rails contributed to killing this once golden goose?); Industrial (again, the primary target for PSR - +2%/+4%, with plastics traffic up 6%); and Premium, or IM & auto, -5%/-2%. The largest subcategory here, Domestic Intermodal, showed a worrying 11% decline, and that’s supposedly without de-marketing – CMO Kenny Rocker said lane closures have had a “very minimal impact”. Looking slightly ahead, UP sees 6 of 12 categories as positive, 4 negative and 2 (grain and trade-related) as “?”. UNP expects sequential but not YOY volume gains in H2/19

Operating efficiency clearly saved the day for UP – expenses declined 7% on the 4% volume drop. Headcount (and comp&benefits) dropped 8%. 4 of the 6 listed KPIs improved. Productivity gains were $195mm gross, $170mm net (after weather-related “operational challenges headwind”), but UNP reiterated targets for FY productivity ($500mm) and OR (below 61% this year and sub-60 for next. Safety was interesting – it was listed at the top of the Unified Plan 2020 continued focus list, and as an inflator of “Other Expenses” due to higher casualty costs – but safety stats, a normal operating metric (P/I, accident rate) were nowhere to be found. In fact, we need a deeper dive into the related U/P2020 KPIs since those listed in Omaha last year (pre-management shakeup, pre-PSR) are obviously useless….

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Alison Babcock