Mixed Freight - Rails Since RT18

December 14, 2018

Greetings!

After today, only 10 shopping days left….if that phrase has any meaning anymore.  After the difficult task of analyzing and summarizing RailTrends (“That’s a Wrap”), and a quick visit to Chicago for the annual Sandhouse Christmas Luncheon speech, I felt the need to go back and look at rail and global events that I missed.  One, for example, was the public announcement of the Norfolk Southern HQ move to Atlanta, heretofore the worst-kept secret in the rail industry (one must wonder:  is this the perfect time for a move as a means of culture change – brand new location/brand new attitude – or a distraction in times of changing operating plans and philosophy?  All, or more, will be revealed at the February 11 Investor Conference in….Atlanta). 

The WSJ released their “Management Top 250”: two hundred and fifty managements and nary a railway there.  I must say, post RT18, that I think that’s unfair, although perhaps the poll was US-centric.  The top transportation company was UPS at #20 (FDX was #91; I wonder how that song played in Memphis); Berkshire Hathaway was #107.  Heck even the autos cracked the top 50 (GM#37 and Ford #42).  No rail leaders made the BusinessWeek 50, either, though three folks with big influence on rail did (Chrystia Freeland, Canada’s trade minister, the CEO of Waymo, and Amlo.

Speaking of trade….well NAFTA 2 was signed and sealed  - but remains a long way from being delivered.  GM’s plant closure announcement will factor in here, of course.  The US and China walked back from the brink, but then an arrest in Canada….Poor Canada.  Our government is concerned about Mexico and jobs, and in the end it is Canada that gets the ire of Washington in the NAFTA talks.  Our is concerned about China, and it’s Canada facing Chinese retaliation.  Meanwhile the illogical focus on trade deficits has so far yielded an almost 2% increase in the so-called “trade gap” (October); transports await the next move from the “Tariff Man”

Speaking of Amlo, inaugurated in Mexico City on December 1st, it’s been a rough start for those who saw “moderate” in him and for those who saw better cooperation with the US (the FT reported that POTUS calls him “Juan Trump”).    In his inaugural address, the new President vowed to “end free market policies” and decried liberalism.  The FT has been particularly focused on him, as the headline “Investors in no mood for the Mexican leftist president” attests.  Currently, Amlo is in a battle with the bondholders of the cancelled MC airport project.

Big news on intermodal pricing -JB Hunt released information about the ongoing arbitration award process with their western rail partner, BNSF:  the are taking a $134mm charge in FQ4related to payments owed to BNSF for revenues owed 2014-18.  BNSF had previously said they would receive “in excess of $100mm”.  The amount awarded for this year (~$45mm) suggests the string direction of intermodal pricing and will of course greatly influence the NS-JBHT negotiations (only BNSF’s contract is in perpetuity with arbitrator rulings).  Also impacting those talks will be the still ongoing CSX intermodal transformation, both serving, it would seem, to strengthen NS’ hand.

Speaking of intermodal, to listen to the “Logistics Management” webcast “Intermodal Roundtable, featuring myself and the estimable Larry Gross, click here: https://event.on24.com/eventRegistration/EventLobbyServlet?target=reg20.jsp&partnerref=em3&eventid=1878008&sessionid=1&key=D2A8A2DB04A18BB3B418265628C1F74D&regTag=&sourcepage=register.    IANA reports that November intermodal growth slowed significantly, albeit against tough “comps”.  Overall IM grew 3.6% by their tally (the AAR pegs rail/IM at +2.4%, US + Canada).  Both trailers (up less than 2% versus a YTD level of +12.4%) and domestic containers (+2.4% versus +5.2%) were the culprits (missed opportunity?); international 40’ boxes also slowed slightly after a pre-tariff rush, to +4.8% (vs. +5.4%).  Some IM news of note:

  • October truck tonnage grew almost 10%; November wont look as snazzy…

  • It appears more and more likely that the new UPS-Teamsters contract will shift more UPS business to the road from the rail; obviously not great for IM….

  • But November Class 8 truck orders “finally fell” (ATA) 15% YOY

  • Truckload pricing obviously past peak – November spot trucking rates were down 2% YOY, and a recent sell-side survey said expectations for 2019 have been reduced from +5-10% to +1-5%

  • Given rail network velocity trends over the past 18 months, this headline (from the publication “Inbound Logistics”) has to be chilling (and yet another warning):  “Get it Fast - Supply Chain Velocity is Critical” – listing 12 steps to achieve success - #1 being move closer to the customer and #4 invest in visibility

  • On the other hand, Amazon’s new patent application, per Bill Stephens of “Trains” is interesting: using stack trains as “rolling fulfillment centers” with the upper container holding drones for last mile delivery.  Is it practical?  Betting against AMZN hasn’t been a good strategy….also, Stephens points out, AMZN’s role as a network for small retailers serves as an aggregator of volume for rails, giving them access to shippers they wouldn’t have had otherwise….

Speaking of traffic results, the AAR’s RTI December issue (for November) is out and, as we have seen from weekly volumes, the results suggest a slowing economy (although, as mentioned above, the comparisons are more difficult).  Overall, US+Canada, Intermodal + Carload, was up 2% in November, the slowest rate of growth in 2018.  Only 9/20 US and 12/20 commodities in Canada showed increases.  The US carloads were flattish (actually down 0.2%; ex-coal & grain up 0.4%); intermodal up as reported by 2.5%.  Canada showed us a different story – carloads up 7.5%, IM +1.7%.  Leading the charge was Chemicals + (especially) Petroleum, up 8% in the US (petroleum up fully 29%).  Weakness came from US Ag, motor vehicles, coal, sand….CBR impact was profound – up 29% US and fully 39% up North.

Fred writes, Hunter laughs:  Always interesting, Fred Frailey’s column in the latest (January) “Trains” was even more so than usual – “Hunter’s Triumph from  the Grave” echoes some of my thoughts about the late Mr. Harrison’s impact on the rest of the Class One rail world after his untimely death.  He also wonders whether true PSR can be achieved without EHH himself or a close disciple (“not easily” he says; let’s see, I say, after Union Pacific’s CEO Lance Fritz spoke so convincingly at RT18).  Fred also remains skeptical about whether, when all is said and done, a PSR world is even a good thing (given continuing rail service improvement issues).  As you know, I am convinced that the PHR, the development phase after PSR, is the way to the future.  Finally, Fred offers anecdotally from sources that the emerging powers that be at Berkshire Hathaway (in this case Vice Chairman Greg Abel, in charge of non-financial assets) are “fascinated by the profits enabled by PSR” and that new, more intrusive belief was part of Executive Chairman Matt Rose’ s decision to leave BNSF early next year.  It will be most instructive to compare BNSF to the evolving UNP, always is, but particularly year end ROIC.  Remember, BNSF was one of the best performing rail shares in the first phase of the “railroad renaissance” (the first decade of the century) – they trailed the industry in OR progress but led in ROIC improvement.  That proved the test case for the viability of intermodal, an OR drag but potentially an ROI enhancer!  Is Matt, who has, to be fair, been rumored to be moving to greener pastures like forever, a casualty of both the changed Berkshire and, really, the cult of the OR?  (Stay tuned to our fireside chat at MARS in January!)

Other news of note:

  • Ferrovial, the Spanish infrastructure investor, is selling its non-transport assets to focus entirely on transportation

  • The $A2.4B takeover bid for GrainCorp in Australia by LTAP includes on the team old friend Lance Hockridge, former CEO of Aurizon….

  • Maersk pledges to be “carbon free” by 2030

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