PSR/PHR/M&A/and Other RR Acronyms on RT18 Week

November 28, 2018

Greetings!

Welcome to the 2018 version of RailTrends Week, which grows longer every year, it seems, much like pro sports seasons (the 7th game of the World Series this year would have ended in November!).  This year, RT18 will be, as it has to be, all about Precision Scheduled Railroading (PSR)….how could it not be?  We’ll miss CN’s CEO (and RA “Railroader of the Year” JJ Ruest, on the injured list with a flu; but look forward to CFO Ghislain Houle as his replacement. Get well soon JJ!

Calling out around the world, are you ready for a brand new beat?  Not only is PSR sweeping the industry, it’s causing concerns in DC and shipper board room – and dividing rail observers into a full-blown civil war -  even as it still promotes joy on Wall Street.  We’ll have it covered from all angles, past (CN), present (CSX) and future (NSC, UP – and the STB).  The only challenge to the over-riding theme might have  come from another favored rail acronym, CBR, but the recent collapse of oil prices has taken that commodity off of high boil.  But before I get to the pre-conference heart of the matter, first I need to produce another “Mea Culpa” – last week it was UP’s Q3/18 OR – this week was misspelling “Buckner” last report (thanks Ted); but then if I am recounting a famous error why shouldn’t I also drop the ball?  Another error, of course, is the “sold out” status of RT18 itself, for which I apologize again.  Attached is the RT18 agenda and the listing of a conference call I will do with Stifel to, along with my “Takeaways”, recount the event….

Two quick hit topics to start:

  1. Short lines may be getting their Xmas present early in the form of permanent, if slightly altered, Investment Tax Credit.  The GOP majority of the House is pushing legislation to make the 45-G ITC permanent; as you know the short lines have lived on last minute stays of “execution” for years.  The fact that it wasn’t bi-partisan is seen as a minus by some insiders, who place the odds of it passing at slightly better (30-40%?) of the other three options – nothing, one year and two year extensions.  Still, it is moving the ball forward for an idea with massive popular legislative support….The “DC Panel” will discuss tomorrow (though there still isn’t a new head of the Short Line group, the ASLRRA, yet)….

  2. M&A back?  I don’t think so….Sightings of a CSX plane in Calgary revived the dormant but never dead rumors of a CP-CSX merger….http://trn.trains.com/news/news-wire/2018/11/21-wall-street-analyst-csx-and-cp-are-the-most-likely-merger-partners .  Apparently following planes is a “thing”, but since rail merger meetings are watched like hawks by rail unions, and non-agreement personnel, it seems  to me that if any talks are real, they would be held in….Chicago.  Readers likely know my extreme aversion to future rail consolidation (until shippers actively would support it); and they know that if I am wrong on rail consolidation rumors, I wouldn’t be a little wrong.  I think rail mergers would allow a stripping of access rights that would overcome any perceived synergies….as for this, and reasons given by some on the Street:

    1. The GOP congress/POTUS supports idea (get going’ while the goin’s hot) ignores the fact that a rail merger is not a Dem/Republican issue, but a contest between Big Businesses – think the chemical industry versus rails, not the consumer against a big company.  More a regional issue than partisan….

    2. The fact that there are some perceived activist investor interest in the companies has more to do with CSX’s turnaround; in fact TCI wasn’t promoting a merger for CSX in 2007….

    3. Most stakeholders (other rails, shippers, labor, politicians/regulators, communities) would be in varying degrees of active opposition; that’s not an unknown fact

    4. In the Hunter Harrison bio, “Railroader”, it comes out loud and clear from both the major investor and actor, that the potential in a CP-eastern road merger was all about the so-called “Hunterizing” of CSX or NSC (which in effect happened when EHH, as a free agent, needed only the (vast) approval of the remaining stakeholder group, the investors, to “Hunterize” CSX) – but not in anticipated CP-Eastern railway synergies….

    5. If there was to be a merger, IMHO, CP, as fine a carrier as it is, would be the tail in the dog-fight between the US Big Four….

Hey Hunter – you’re so fine you blow my mind!  Now some in the “old guard” of rail observers (writers/bloggers/consultants/retirees/etc) have accused me of being a cheerleader for PSR, because I have noted the rapid improvement of CSX, etc.  Two thoughts in my defense:  that is certainly not what the late, lamented architect of PSR, Hunter Harrison, always thought.  We had strongly different opinions on the impact of the PSR revolution on shippers (and other railroads, labor, politicians/regulators, etc).  To that point its easy to forget that 5/6 of the railroad stakeholders view PSR (implementation, anyway) with trepidation – as evidence see the shipper reaction to CSX’ reorg of its IM O&D pairs, and the STB’s letter to Union Pacific’s newish CMO Kenny Rocker, asking for “fairness” in tariffs (really, in this case, assessorial charges & demurrage), asking that if UP charges for shipper tardiness, will they pay out for UP tardiness?  The author of the letter, which takes the STB into new realms of proactivity, will be at RT18, too – the STB Chairman Ann Begeman – as will Rocker’s boss, UP’s Chairman Lance Fritz.  The other point is that what I truly celebrate is the railway that emerges from the revolution as a butterfly from its controversial cocoon – the Post Hunter Railroad (PHR, or PHHR).  To that end we’ll here from CN, CP and, learnin’ to fly, CSX.  Some thoughts:

  • That there’s a need for change, despite the continuous excellent financial results can be seen in the still-poor railroad industry service/operating metrics, as well as the intriguing story in classic railway “merchandise” (non-coal/non-IM) business, as reported by “Trains”.  Since 2000 (to 2017), railway merchandise volumes grew 4.5%, well below that of any economic measurement.  But even within that, you saw clear winners  who were PSR-oriented (CN+36%, CP+13%) and losers who were not (yet): CSX -23%; NSC -15%; UP +1%.  Always intriguing BNSF was up 14%; and of course this is way to simplistic, not counting the energy revolution, the NAFTA and overall globalization trends etc.  But, nonetheless, it isinteresting….

  • There’s always a willingness to fight the last war, manifesting itself in this case by investor focus on hump yard closure/switch.  To that end, after NSC tried to move Chattanooga to a flat-switch, it found that it had to “bring back the hump”, and in effect, created (as reported by RA) a “hybrid yard”.  Meanwhile, work goes on apace at UP’s $550mm NEW Brazos Yard (tom open in 2020).  See “point-to-point” vs. hub & spoke, below.

  • Has the success of PSR itself, at least financially, caused a short-termist problem, being a potential driver of “The Cult of the OR”?  In other words, causing reduced capex, and a too strict matching of capacity and anticipated (but never accurately!) demand….Note, for you strict constructionists out there, Hunter himself wasn’t obsessed with the OR as a be-all, end-all….

  • What is the impact of PSR on short lines?  GWR has publicly stated that it will have to adjust since so many of its interline partners are converts; the first mile is where “pre-blocking” (and associated costs) begins.  But it also has led to a culture of SL creation at CSX, which could (should?) well be replicated….

  • Old friend Brian Bowers (ex-KSU), writing in “FreightWaves”, covers PSR and articulates some key points well:  PSR is point-to-point plan (versus the hub-and-spoke plan of most major rails heretofore); its about asset productivity which leads to improved service; it develops employees (those that buy into it); it has been led by a change agent rather than, as now proposed, by those that “shared a more traditional planning process”.  Other interesting questions raised by BB:

    • Is PSR a form of retreat to one’s own network (achievable in Canada but harder in the more interconnected US)?  The fact that CN led the league in “routing protocols” and alliances suggests to me that isn’t the case, but that’s interesting nonetheless….

    • Is the antidote to that, despite what I said above, mergers (after all, the new culture spread might just make that easier)

    • As mentioned above:  Does PSR success in OR reduction actually encourage short-termism?  Will it lead to even more of a split in the perceived goals of shippers (and their DC reps) and railway investors?

    • Is the desire to shed redundant assets, particularly railcars, going to lead to spot or longer shortages?  I would suggest that there is always capital from the leasing industry, but we should watch for changes in TTX plans….

Also of note for future discussion:

  • Trade isn’t looking any friendlier these days, at least looking east, but on 11/30 we should see the signing of NAFTA 2.0 – the other two parties (you know, our allies Canada & Mexico) are hoping for removal of the disruptive steel & aluminum tariffs, but as of now that looks unlikely.

  • AMLO will be sworn in as President of Mexico on Saturday – facing a border crisis not of his making, and a credibility crisis that is (WSJ:  “the short unlikely honeymoon between investors and AMLO is over”) after canceling the new Mexico airport project contracts (etc).  Its never easy, is it? 

  • Class 8 truck sales were up 40% in October – who’s filling those seats?

  • GM’s announcement will have a minimal effect on CN (around $25mm, Loonies) but perhaps a tad larger on NSC (CMO Allan Shaw will address RT18) but a sign that at an ever-faster pace, the times they indeed are a-changin’….

  • Climate change?  What climate change?

  • Meanwhile, NYS’s lawsuit against Exxon for not being clear about climate risk form an investment perspective suggests that maybe no one IS aware of climate change; if ever there was a great case to be made for caveat emptor, then investing in Big Oil in the 21st C given the large, constant, international, public discussion of the risks (and opportunities) is it….

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

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