Rails - Summer Daze

July 5, 2018

Greetings and Happy 4th/Vacations, etc.

CSX continues its “re-think” and service recovery slows in the heat – but, really, there hasn’t been a lot going on in the direct rail space (though see below on service and on CSX) – but there’s been plenty in the world that impacts the freight rails, starting in….Mexico.  Next week we’ll put out the Q2/18 Preview and have the full quarterly (and June) traffic analysis (which will be positive despite the political threats (below) – US volumes were up 4.2% (carloads +2% & IM+6%); 14/20 commodity categories reported by the AAR showed YOY increases….

“I don’t think his views are all that negative to our business”

/KSU CFO Michael Upchurch, as quoted in the FT on new President-Elect of Mexico, Lopez Obrador (AKA “Amlo”)

“From his lips to God’s ears”

/old Yiddish saying being repeated by all rail stakeholders (among others)

So, it wasn’t even close.  Amlo swept to victory and reassured the markets somewhat in his acceptance speech (though his reiterated promise to look into the contracts let as part of energy reform is - or could be - chilling).  There appears to be a few scenarios that could unfold, given the chameleon-like qualities of the experienced Pol/radical new leader that won so big.  Of concern:  regulatory rollback; the end of Pemex reform (a huge rail opportunity); a fight against the Yankee insults that breaks down NAFTA.   But we hear conciliatory things (and we like what KCS’s CFO has to say); we don’t know, really, who Amlo is – or which Amlo will show up in 5 months-time.  He could be the:

  • Tropical Messiah with a “shaky grasp of economics”  (The Economist, etc)

  • The Mexican Chavez (per the typical nightmare in Monterrey)

  • The Mexican Sanders (he captivated the youth and “change” votes)

  • The Mexican Trump (the NYT, others who seem as a pedagogic nationalist) – do opposites or likes attract more?  With Amlo and Trump, are they opposites or like-minded?  Rather oddly given the nationalist feelings of both leaders, so far, with NAFTA still undone, the early signs from DC and MC are actually somewhat reassuring….

Tomorrow is T-Day – Tariff Day – between the US & China (Canada took retaliatory efforts on C-Day, July 1) - the chance to see if the global trade cold war heats up; already the threat has galvanized industry to speak up against the current policies (unusual enough in itself in a GOP-dominated government) and has led to warnings of an economic slowdown (FT: “Tariffs Threaten US Manufacturing Renaissance”; Fed Chairman Powell: “Vital business investment decisions have been delayed due to the uncertainties on trade”).  The Chinese retaliatory tariffs cut deeper than those mostly symbolic ones such as on bourbon to get back at Senator McConnell; the impact on soybeans is already apparent – lowest prices in a decade and a 10% discount to Brazil) . HIS says Chinese/US tariffs would impact, in a container sense, 6-8% of the TEUs.    However, there are some  interesting facts which need to be discussed:

  1. Auto sales have accelerated, in 2018 and especially recently, to the surprise of industry analysts and reversing the sales trends of the last 18 months.  June sales were up 5% YOY (+2% YTD) – is this pre-buying ahead of tariff-based price increases?  Or that tax-reform er, “trumps” auto tariffs?

  2. Q1 Asian imports into the US (teus) up 9%, roughly 2X the recent trend – though recent trends suggest trade in this market and globally is slowing

  3. The US dollar is up ~5% YTD, hurting exports (soybeans included) – it will be an interesting fight between US consumer purchasing power and Chinese tariff.

Driver shortages – sure, but….Also on the front burner is the ongoing trucking capacity shortage and its impact on price (and shipper inflation) and on rail share potential.  The current consensus thinking is that the T/L price boom will continue (even as the reported YOY increases must of course moderate).  But – the ATA reported driver turnover at 94% in Q1….Now that’s bad, to be sure, and compares to ~75% in Q1/17.  But it was over 100% in H2/15!  And it reached 127% in Q1/07 (and was at 116% for the full year)!  So what’s the deal?

CSX continues to fine tune (“re-think”) long term plans  - CSX’s decision to plow ahead with the eastern (North) Carolina Connector intermodal terminal, albeit not as a HUB in the old CSX’s hub&spoke plans.  Nonetheless, I think this is significant in that it shows that CSX is clearly operating with the benefits of the PSR overhaul but also in a clear, “Post-Hunter” world-view.  This is setting themselves up nicely, especially given that….

Rail service has the summertime blues….CSX’ service recovery looks extraordinary in a relative sea of dullness.  UNP issues a nicely-worded letter to shippers last week explaining their recent backsliding (post Investor conference) was due to an act of God (a tunnel collapse) and of men, or lack of men – crews….Their system velocity as of the last week in June declined 6%, and although they were running close to the BNSF velocity 23.9mph vs. 24.3), their intermodal speeds had a rather large-ish gap of 3mph to BNSF’s 31.8mph.  Norfolk Southern, meanwhile, issued no such letter (that I am aware of) but also declined form the May average (fully 13%) and was running a 3.4mph gap to CSX’s 29.1.  CSX, meanwhile, was the only railroad showing improved velocity and terminal dwell to this period in 2015….Note that of course the Canadian results are US –only and thus less than fully useful, though I am confident that CNI will report improvements in its quarterly call in a few short weeks.

Three interesting factoids:

  1. The Panama Canal widening and subsequent growth has been a big subject in the IM world (port share, rail share, rail LOH, etc) but we forget that the Canal is not just a container converyor – 38% of its crossings in 2017 were LNG ships – from zero in 2015 (pre-widening)….

  2. The average steamship line ROIC 1995-2016 was 2.6%

  3. The annual CSCMP “State of Logistics Annual Report” showed supply chain spend up 6% in 2017 – with both truck and rail spend up over 8%



  • Two new books on railroad leaders are out (or about to be – while there are a series of leaders that deserve praise for their innovative efforts in the “railroad renaissance” (Goode, Rose, Walsh, everyone at Conrail & KSU, etc), two do stand out (and yes, I checked the index first – what can I say - and I am in the 2nd book):

    • Rob Krebs of the SP then the ATSF (and the creator of the BNSF) – who in essence invented modern intermodalism.  His autobiography  is entitled “Riding the Rails – Inside the Business of America’s Railroads”, 2018 Indian U Press.  It will be my post ASG (All Star Game) reading….

    • Hunter, mais bien sur!  I was lucky to somehow get a an advanced copy of “Railroader – The Unfiltered Genius & Controversy of 4-Time CEO Hunter Harrison” by Howard Green, out soon (H&H Media).  Also a July read for me….The press release that came with the advance copy listed 7 “Business Lessons from HH”:

  1. Don’t ask people to do things you wouldn’t do yourself

  2. Just because you have an asset, doesn’t mean its free (asset utilization being a – if not the – critical component of PSR – Keith Creel: “The way you do that is to schedule things….”).

  3.  Use the phone instead of email

  4. Use stories to teach (and how!)

  5. Coach, mentor, teach (and camp)

  6. Make employees aware of consequences

  7. But also reward them….

  • Speaking of Hunter – and even since his sad death he is still the major subject of conversation - he was the subject a huge cover story in Trains – “The Legacy of Hunter Harrison”, a really insightful thought-piece by the reliable Bill Stephens, which does a good job on providing an intro to Precision Scheduled Railroading – even with its contradictions that occur in Hunter’s 4 railroads (IC, CNI, CP & CSX).  For example:

    • Humps – we all know that the reduction of (underutilized) humps was key to EHH’s vision – at CP done because 75% of their traffic upon his arrival was in unit trains (which should bypass any hub/hump – but we also know that EHH wasn’t predisposed ot loving unit trains (the time to build; the capacity suck!).

    • Longer sidings/longer trains – explained as a way to speed up the network

    • Capex – and this is interesting – “Under Harrison, CP increased capex by 44% compared to the prior 5 year period” – so much for “slash & burn”!  CP needed to catch up after deferring capex; CSX is a (slightly?) different  story….

    • Increase intermodal speeds – hmmm….

    • Line sales – big ones at CP (the DM&E and D&H, neither of which to me suggests any philosophical pattern as they were both clear dispositions; at CN he was by far a net buyer; CSX of course has ~8 segments “in process”.

    • Impact of change (the difficulties inherent from change, even if the results are positive:  in other words, hard feelings from shippers and even harder ones form labor – thus the historic need for the “Post-Hunter reconciliation” – and lingering misunderstanding of that legacy….

  • The new weekend Journal section (“Exchange”) had two interesting, relevant articles in late June – on UPS’s current (relative) backwardness in technology (and their 3-year, $20B plan to catch up); and on “super-long freight trains (by Dan Machalaba, no less!),  a great intro into the hows and whys of increasing train length (even if it rather improbably attributes the impetus for those changes on activist investing!).

  • From a great site, on restoration of UP’s “Big Boy”: https://www.atlasobscura.com/articles/where-can-i-see-big-boy-steam-locomotive?utm_source=Atlas+Obscura+Daily+Newsletter&utm_campaign=99d557ee35-EMAIL_CAMPAIGN_2018_06_13_COPY_01&utm_medium=email&utm_term=0_f36db9c480-99d557ee35-67111397&ct=t(EMAIL_CAMPAIGN_6_13_2018_COPY_01)&mc_cid=99d557ee35&mc_eid=262a4c0723

For me, these weeks are an embarrassment of riches as the Dodgers finally show signs of life and England actually won a PK match….next week is traffic and Preview then comes the deluge of earnings followed by a few interesting, sole-attended conferences….Till Monday,

Anthony B. Hatch 
abh consulting