Ask The Experts: June 5, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q: Recently there were two major hiring announcements from two Class I Railroads, Canadian National (CN) and CSX. What do think will be the resulting implications/ramifications?
Canadian National announced the retirement of COO Mike Cory as of July 1 – and his replacement….by an American (Rob Reilly)….whose entire career has been at the only Class One railway (that very same BNSF) not espousing PSR!! Let that sink in for a moment – just as every US-based PSR railroad (CSX, UNP, NSC, KSU) has gone “big-game hunting” for a Canadian railroader (or at least one with CN or CP experience), the PSR Mothership, CN, goes and finds someone without direct PSR experience nor a predilection for Tim Hortons. I hear only good things so far about Reilly – we will all learn more early next month. This is clearly a sign of a culture change in the PHR world. We will all miss Mike Cory, as well, who will be around to transition Rob for a while. The Investor Conference is now particularly well-timed, and while I retain faith in CN, there has indeed been a lot of ops turnover/retirement of late …

Double Down! CSX announced that Farrukh Bezar will be their new EVP & Chief Strategy Officer. I have known Farrukh for a while, and I hope I am not prejudicing anyone by revealing that he is a New Yorker and a die-hard Mets fan. After railroading he was a consultant for some time; this announcement comes as a surprise to me in part because only March 6 CSX, as part of a restructuring of the marketing department, announced that Kevin Boone was moving from IR to VP Marketing & Strategy….This also seems similar to when NS, having the estimable Mike McClellan as Strategist, also in March announced the election of John Scheib as EVP and Chief Strategy Officer. Apparently the situation is working well at NSC …

Q: How do you think government intervention in the rail industry can be avoided?
One way to forestall government intervention is to provide good rail service – and it is inarguably getting better. Why? The reduced volumes YTD? I don’t think so (years of elevated – and necessary – capex, new operating plans) but it is a topic that has been raised. My Aussie friend Rick Patterson noted that as he sees it, over the last five years, good service quarters occurred 22% of the time; “bad service” quarters, however, registered at 35%. Some of that, he saw, was self-inflicted – crew or power shortages or capacity pinch-points (a matter of investment). To which I would add poor demand forecasting and the related, OR-driven and absolutely futile “chase of equilibrium”. Hence CN talking about the need for “surge (excess) capacity”, for market share and political reasons. Having a ~16% ROIC seems to me to justify that risk-modifying stance.

Q: BNSF CEO Carl Ice was a speaker at NARS last month. What were your takeaways?
: CEO Carl Ice was the key-noter – and really wanted to stress that although they did not fall under the PSR umbrella, efficiency is still the driving focus of rail operations (and said they are doing similar things to what they see in PSR). In response to my question about Berkshire’s Buffett’s quotes concerning UNP (and their lower OR), Carl said the implications drawn by the rail community (that BNSF would soon join the PSR party) didn’t reflect their internal views. They must be doing something right at BNSF Operations if the Mothership comes calling …

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Alison Babcock