April 16, 2018
Greetings: (and apologies – this was due out Friday morning but my server had other ideas)
The Q1/18 RR Preview will be out tomorrow morning followed by a trip to speak/attend NEARS, N/E RR Shippers, in Newport RI (https://www.nears.org/2018_updates/NEARS%20Agenda%202018-02-22.pdf - note the strong short line presence there in the agenda, with the ASLRRA’s CEO, LBD, and Watco and Pan Am, among others). The is appropriate, because between Class One rail service issues and line sale “fever”, 2018 might well be the Year of the Short-Line Railway (or short line holding company – SLHC) – though, to be fair, intermodal’s return to growth form would compete for the theme of the year, so far….But this is a time to celebrate the small-rail, entrepreneurial side of the business (some 600 railways in North America that make up roughly a tenth of the rail volume, focused of course on the merchandise side) – and to note that the ASLRRA Person of the Year (the Tom Schlosser Award) went to GWR’s funder, Mort Fuller. My few slides are attached.
The Short –Line (ASLRRA Connections) conference played to a packed house in Nashville last week, at the minimum-security prison otherwise known as the Gaylord Opryland, with line sales and relations with C-1s among the hottest of topics, along with a specific experiment led by GWR (and its SLHC peers, notably Watco, Anacostia & Pacific, and Pan Am, all of whom served on my panel) and NSC and paper manufacturer WestRock Paper.
Line Sales potential inaugurating a “new era” of network re-evaluations in railroading? Clearly, there was a palpable sense in Nashville (and mentioned specifically on my SLHC CMO panel) that the CSX initiatives – the two line segments (IL & FL) openly discussed, two SLs currently leased by Omnitrax sold to them, and perhaps more to come, being as they are “sitting on 1000s of miles of parallel routes” – as well as the PTC-led determination of what are “core” routes within the network would lead to an industry-wide re-thinking of their network’s strengths & weaknesses, and what might be better served by nimbler partners; NSC has actually preceded CSX with segment sales and with the return of a McClellan to run NS Strategy might well do more deals (though BNSF has actually bucked the trend by buying-in some previously sold or leased lines. The focus on merchandise traffic, on volume growth and on service – not to mentioned the big, big pools of available, interested PE & infrastructure money all made this seem like a return to the 1990s – “Back to the Future”….
Service, however, remains an issue – of course - and there wasn’t any clear consensus on exactly why or how this happened again (beyond the specifics of CSX/PSR and CN & growth), and thereby not much beyond faith, recent trends suggesting a bottoming, and big capex budgets (notably CN) that this would be corrected in the second half of the year….Though to be clear, that was indeed the expectation among the railroaders there in Music City.
o The CSX transition was in many ways more shocking then we even fully understood, in terms of ops personnel reduction and its impact. One big CSX interchange partner, Pan AM, however, noted that now they have a better connection to CSX operating officers, and said that the inclusion of IM into merchandise trains in some routes provided a real growth opportunity for them….
o It was noted that the C-1 focus on the Operating Ratio removed any slack capacity, helping to cause this issue (I would still note that demand planning remains a key weakness, matched up against investment that has a 10-50 year life). One result – a huge shortage of locomotive parts to service the older power units recalled to service….
o The real worry is the possible biggest missed opportunity for rails in modern times, given the truckload capacity issues! The flip side also isn’t good – shippers unable to get trucks – or depend on rail – are calling for changes in truck size & weight (TSW) – and getting a hearing.
Pilot set to take off? Information-sharing experiment (between shipper, C-1 and SLs) holds real promise - Technology was a stated theme of the event, but there was a real example of “walking the walk” in the WestRock Paper experiment that’s about to begin. Some factoids first: only 20 years ago rails had ~70% of the paper market, now its ~50%. A third of rail orders were converted at WestRock due to the lack of visibility on incoming empty cars (!) – and because of that ongoing irritant W/R has 5 TL companies with personnel stationed at HQ (quite intimidating to RR visitors!). So, the new triumvirate of W/R itself, NSC and its SL connectors are running a pilot program, using the GE SL platform, to offer ETA, trip plan, “dynamic” trip plan, and that visibility on empties using a disinterested third party (the AAR’s “Steel/Roads” – my very own “B2F” moment as I worked on such a plan in its infancy back in….2000). This should work, and can be easily replicated (the barriers are purely cultural)….
BNSF’s Chairman Matt Rose provides a dramatic call-to-action for the railway industry – Given BNSF’s relationship with short lines - buying in rather than selling out, and with unit trains (very much for), not to mention the meeting’s southern-eastern locale, Matt was an interesting choice – but proved to be a great one, using a Q&A platform with ASLRRA CEO Linda Dauer Barr to preach: Coming threats from the highway must be met by service and technology! PTC is indeed moving from costly burden to technological opportunity (BNSF rightly calls itself a leader, both in PTC technology and project completion; meanwhile short lines – some 90 of them involved in PTC - and passenger lines will be stressed to meet the 2018/20 deadlines, if they even can at this point).
Matt noted four areas of competitive concern, but not before reminding the audience that his company, and all rails, have their value determined by the interplay between three stakeholders - Investors (and their need for returns – yes, even at B&H’s BNSF), Customers, and Employees. While this seems obvious, it is challenged by each leg of the stool (overly reduced capex/increased buybacks or its polar opposite, not focusing on the need for ROI). For employees, its competitive (but realistic) compensation reflecting the competitive – and technological – factors in the marketplace.
The driving wheel is service: But critical to the virtuous circle that balance between the three spokes can support is providing good (and consistent – and improving) rail service. That clearly isn’t happening today (even if we are far from any current “crisis”); some of it indeed is an OR, or short term result focus. Matt talked about an “unwritten agreement with (the regulatory body) the STB”, which is pretty close to what I have been calling the also unwritten “Grand Bargain” (see slide, attached). Intermodal, the highest service segment (and BNSF’s forte) is growing again – even that will be again tested. Matt noted that the “Amazon effect” is mixed for rails – initially they can, and are, playing in what used to be called the “B2C” or e-commerce arena (note those growing 28’ trailers), but AMZN’s demands for reduced variability, for 2 (not 3) day services, and for direct contact (rather than through the current model’s use of IMCs and TL partners) will be a challenge (not insurmountable, but looking difficult from the present location).
Meanwhile, the highway – overcrowded and plagued by driver shortages – is not going away – of course. The four threats all have counter-strategies from a well-financed rail industry with an excellent network advantage, if addressed:
Modal fairness – capex versus subsidy (today) – though as I often say, those modes that lived by the subsidy in a more politically generous era suffer by it in today’s infrastructure deficit, politically challenged times (see the ramped up infrastructure spending of 2018 – or not, as the case may be….).
TSW – the downside of the missed (so far?) opportunity – the drumbeats are getting louder, the big boys, such as FDX (length) and AMZN (weight – the real problem) are taking the TSW issue to the halls of Congress and the needed user-pay system is being forgotten in the game of politics. The AAR’s position will become clearer soon (don’t bet against them in the ring, also).
Platooning and Electric-battery (EV) trucking (reducing the current 4:1 rail fuel cost – and emission – advantage); interestingly when asked about LNG powered locos (a la FEC), Matt said he didn’t see the economic justification, particularly as the future for locos will be….batteries.
AV and driverless – coming via the Trojan Horse of safety (and you can’t fight that or technology), and another side of government modal inconsistency (investment support for driverless; none for engineer-only much less….).
All of this will make for a very interesting Q1 earnings call period….
Anthony B. Hatch