Sound & Fury: Tomorrow and Tomorrow….

May 28, 2019

Greetings;
Sound & Fury: Tomorrow and Tomorrow….Tomorrow I will be at the Rail Day at the Wolfe Conference; in two weeks at CN’s Investor Conference in Toronto. But last week I was at the North American Rail Shippers Annual Meeting. NARS was a full house affair deep in the heart of Texas, with excellent coverage of the companies (BNSF) and issues (regulation, energy, trade) that I had anticipated (see last week’s “Traffic Mystery & an Unexpected Honor” – and below). And yes, I do appreciate being called NARS’s “2019 Person of the Year”; I cannot in all good faith state that this will be my last brag on that topic (see attached, if you wish). To receive it at the same time as my two good friends, Ed Hamberger of the AAR and Allan Roach of Watco, received the Lifetime Achievement Awards (now permanently named the “Ed Hamberger Award”!), made it super special. Meanwhile, the rail world didn’t stop spinning just because I was grinning in San Antonio – there were two major hiring announcements from Class Ones, both of whom started their rail careers at the ATSF (thanks to the only SP-foamer in the industry for pointing that out), the SF of the BNSF, and both of which produce interesting mysteries as well as deep implications and interesting ramifications:

  1. I didn’t see that coming! 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….

  2. 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; we’ll learn more tomorrow from CSX CMO Mark Wallace….

Signifying….a lot! NARS was great – missing only a larger Class One (I am looking at you, Union Pacific) presence, and perhaps the Railway Association of Canada to balance the presentations by the AAR and the Mexican Railway Association (which was terrific to have included). Takeaways include:

  • (Speaking of) the BNSF was out in force, which was great to see. 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….

  • Meanwhile, BNSF’s Group Vice President/Industrial Products John Miller discussed the massive effort to dig out from the Midwestern flooding (they are “fully operational” by now, but still only “close” to having every route back in service); John showed the CBR opportunities whose window may be short; he also held out some hope for “a little brighter future” for sand (PLG’s Graham Brisben, on the other hand, expects “further Northern White – i.e.; rail-moved – Sand diminishment”).

  • Regulation and government influence was a recurring topic. Listening to new STB Commissioner Patrick Fuchs allowed me to firsthand see what all the fuss was about – he is a dynamo, and with him the STB will be more, uh….dynamic. Of course, that might not be a….good thing. First, the hearings on Assessorial Charges (etc) begin tomorrow (5/22) and take in two full days and 40+ witnesses. Expect some black eyes in Jacksonville, Norfolk and Omaha. Second, on the other big issues (following up the released STB “study” on rail pricing, Fuchs allowed that by midsummer they would begin figuring out “public participation”….So, again, we are glad to have the likes of Ian Jeffries, the new AAR CEO (who gave his first NARS speech to acclaim) and Chuck Baker (the new ASLRRA – shortline – CEO; ditto) as well as Iker (“all Day”) de Luisa from Mexico’s AMF – and Marc Brazzeau of the RAC – “walking that wall” is reassuring. One discordant note is that it increasingly looks like the short line (“45-G”) tax credit will be lost in the DC/pre-election maelstrom….

  • One way to forestall government intervention is to provide good rail service – and itis 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, on the analyst section with me, 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 (see CN, 2017) 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….we’ll hear more, I hope, in Toronto.

  • Trade – the US Chamber of Commerce’s trade expert, SVP John Murphy, highlighted the self-inflicted wounds (in this case my phrase, not his) our trade war is doing to the economy (for example, over $40B in lost sales from the China tariff increases alone). He noted that US manufacturing was far from hollowed out – but that job levels peaked in 1979 (why? Automation, not NAFTA!). he also correctly predicted that the Mexico/Canadian metals tariffs were close to being revoked (below0. Speaking of Mexico, PLG’s Brisben stated that the US is providing 2/3 of refined products consumed in Mexico (due to gasoline theft, Pemex failures, etc) – and that although MALO has an unstated “Mexican Energy Resurgence” agenda, given the state of Pemex’ finances and capability, it “is hard to see Mexico achieving energy independence”. That’s good news for the trade section’s sponsor, KSU….

  • It was good to hear from Beth Whited of the UP (ok, so they weren’t totally absent – but they are the biggest railroad in Texas!), formerly the CMO now head of HR, an increasingly important topic in these days of Millennials and post-millennials, tech-saviness – and PSR demands. Interestingly she gave NSC the credit for being the leader in re-thinking the militaristic, hard knocks/hard life aspect of rail operations and the impact on families, etc. Two other things – she noted that UP’s (newish) COO, Jim Vena (to date the biggest rack of antlers in the rail industry’s Canadian Big Game Hunting contest) has been running a series of 2-day training classes (a la “Hunter Camps”); in addition the all-important sector of labor relations falls under Beth’s purview – Section Six notices to start the process go out this fall.

  • Creeping in this petty pace from day to day: Clarence Gooden, the retired President of CSX, gave his usual funny and insightful – and generous – speech. The only issue I have is that Clarence mixes up 2006 (when CSX began highlighting the “railroad renaissance”) and 1997 when I initiated the phrase in an interview with the Wall Street Journal….

News:

  • The White House removed the tariffs on metals from Canada and Mexico (and neither of those countries had to agree to quotas), serving to both remove a (the) major obstacle to USMCA approval from those two countries and to move the focus to China (although notably the tariffs were not removed from the EU or Japan, setting up potential trade battles in half a year’s time). China is of course still ongoing – you know it is getting serious when China pulled that series finale of Game of Thrones from local TV markets. In any event, this is good news for trade (and thus, rail) on the North American continent.

  • Here is news on a major Intermodal Association of North America (IANA) panel at “Intermodal Expo” in September in Long Beach, with key Intermodal execs from NSCX, UNP and CNI, that I am leading: https://contentsharing.net/actions/email_web_version.cfm?ep=FoaZovdeF-z2w0tLzjDf5ZT9JTmrYMxpxhkcmEeT-iXJmN1Cfh6n8IQs9vEkzwbilPRxLEd2x4e-Q3l4BEGg5IVg8Tre4QNQDsJw6iBwZQ1HSaBIRSIwRO4gtEyWE9HL

  • We are already hard at work on RailTrends 2019 (www.railtrends.com November 21-22 NYC) and are pleased to announce that our first signed speaker will be Rafael Santana, who will be by then the CEO of the combined Wabtec/GE Transportation – given the importance of technology to the rails’ future, it couldn’t be more timely or exciting to have Rafael on board….

Anthony B. Hatch
NARS 2019 Person of the Year

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