2019 - Year of the Short Line? More (NEARS & ASLRRA) Rail Conference Takeaways (Before "Earnings Period")

April 15, 2019

Greetings;

Back off the road for a little bit, just in time for the rails’ Q1/19 earnings reporting period (see Preview tomorrow and our efforts to decipher all of the quarter’s moving parts!).  Meanwhile, I attended two major conferences, the North East Association of Rail Shippers in Baltimore straight into the Short Line (ASLRRA) Convention, both of which yielded a few choice nuggets, and more, for understanding the modern freight rail industry….and the changing & growing role of short lines within the industry.

North East Rail Shippers’ (NEARS) spring meeting in Baltimore was all about the impact of PSR – with a short line/regional twist.  The key-note speaker was Gil Lamphere of IC/CN creation fame (and also a former CSX Board member), now of Mid-Rail, a virtual, well-financed (“well over $1B to invest) short line/rail acquisition company (apparently still waiting on deal one).  Gil highlighted his career working with Hunter Harrison and  PSR, and how it can be applied in the short line/regional segment – to mitigate what he called the “arrogance of the long lines “ (nice phrase) and the “Cult of the OR” (my phrase).   Freightwaves (Joanna Marsh) covered Gil’s and my speeches on OR, etc: https://www.freightwaves.com/news/railroad/should-rail-look-beyond-operating-ratio .

PSR impacts Short Lines in a multitude of ways – and vice versa.  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 SLs 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 (see below).  The biggest opportunity should come from the renewed focus on the car-load business at the major rails – see the large number of Class One internal short line meetings - the short line sweet spot….

Some other NEARS nuggets:

  • A rail equipment panel (GATX, National Steel Car, CAI) was perhaps a tad too optimistic on what they thought would be a rather minimal impact of PSR on the rail car leasing business (“cycle times increase initially then decrease” – I am not sure at all about that)

  • CAI, a global leader in international containers, is looking to expand in the domestic business, it seems….

  • 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 PSR, unlocking a new market opportunity in a low current share  environment

  • CP’s CBR head said they were pretty committed to enforcing (through market means) a ban on all tank cars but the new 117Js….

  • “Jason’s Survey” confirmed a general sense of reduced/reducing shipper economic expectations, though nothing too drastic….

  • During the NEARS “PSR-palooza” the WSJ published their take on the process, “clean sheeting” and all: https://www.wsj.com/articles/a-revolution-sweeping-railroads-upends-how-america-moves-its-stuff-11554302583?mod=searchresults&page=1&pos=3 , discussed last week, but nicely timed for the full day immersion in Baltimore.

The Short Line Convention (“Connections”) in Orlando was crowded (1700+) and happy affair, given the climate of renewed importance for their sector – and the smell of money as valuations and interest seem to rise exponentially.  In fact the increase in deal interest seems to be pushing aside some, but not all, of the strategic interests – it was widely taken for granted, for instance, that the Bloomberg-reported rumors that GWR was going private were in fact true (no comment., of course, from the company, which wasn’t very present at the event – in fact the absence of short line holding company leadership at the event is a rare long time issue for me, one that I am sure will be addressed by new ASLRRA CEO Chuck Baker).  Their was deal talk all over the mouse-town, with one group said to be in talks on as many as five opportunities after the latest deal accomplished, the Regional rail purchase by UK-based 3i (www.3i.com ) reverberated through the halls.  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 ling term business development).  NSC and BNSF have ruled out sales, for now, but UNP might provide an opportunity as they accelerate through their 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 and it was well evidenced in Florida….

Anacostia & Pacific had a good conference – not only did co-founder/co-CEO Peter Gilbertson get the big service-to-the-industry award, but one of their key lines, the New York & Atlantic, got a rave “review” from the NY Times!  See: https://www.nytimes.com/2019/04/07/nyregion/rail-freight-nyc.html .

Discordant Notes?

  • Technology is never easy – kudos to the ASLRRA for a big tech focus at “Connections” (ugh).  I attended a terrific session on “The Amazoning of RRs”, where speakers (WAB/GE) talked not only of threats developing but of an offensive push against the highway share.  On that note, however, the efforts that I learned about to use IT links in a combined short line/Class One service & visibility (particularly to empties) are progressing very slowly, and efforts to convince Class Ones that this type of information isn’t proprietary continue to run into roadblocks….

  • Not every short-line/class one relationship moves forward at the same pace – the short liners were, well, upset that one major car-load focused PSR railroad is forgoing their short line meeting in 2019, after years of being a progressive on that front….

  • Regulatory issues – Fall is Coming:  At both NEARS and ASLRRA there was discussion of coming 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….

Other issues heard/discussed in Orlando:

  • Rumors swirled of major Class One layoffs, including one seemingly going on at a major western PSR railway during the event; the short lines (and shippers) lament that a good deal of the headcount reduction seems focused on the marketing folks “at the other end of the phone line”….

  • The AAR, via their Chief Economist’s presentation, expects a reduction in finished vehicle traffic in 2019 – seemingly reinforced by the 2% drop in sales YTD, as well as headwinds in housing and construction

“Security is more important to me than trade”/POTUS

Finally – trade.  Of course.  A deal with China looks closer (“any day now” it has been reported for….days), completing USMCA/NAFTA 2.0 seems farther away (Canada objecting to continued metals tariffs/quotas; although Mexico passed a required labor law); the self-induced exclusion from TPP is already having an negative export impact according to today’s WSJ Heard on the Street.  Border closure on/off/being done illegally?  AMLO’s “magical thinking” in terms of investing in Pemex and refining capacity is a directed effort at reducing or even eliminating US refined products export seven in the face of periodic but sever shortages, which is  a key growth market for KSU.   and accepted (it is way more important in terms of volumes than the usual “42% of units” as reported by the AAR – old data, US figures only, no related effects (fertilizers, etc) and doesn’t take into account the growth of the trade volumes as opposed to the “base”.

Look for the Q1/19 Preview tomorrow and CSX earnings as a lead-off at the end of the day….

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com