September 20, 2018
So (too?) many acronyms! This week I had hoped to calmly discuss the important conferences this week, the Intermodal Expo (IANA) and AREMA – but other matters got in the way (so now I will discuss the big Intermodal “Expo” etc early next week) - notably the announcement of the implementation of Precision Scheduled Railroading at the Union Pacific, as well as the announcement of Ian Jefferies to succeed Ed Hamberger (2018 RR IotY!) at the Association of American Railroads (AAR). On the latter, well done, all – assured continuity in a successful program in these, er, “dynamic” times, is a must. Congrats to Ian! ON the other hand, a “vaya con Dios” to CSX’ erstwhile head of Industrial Products – when CSX announced its personal changes (new heads of Intermodal….and IP) I failed to notice which musical chair was empty. Michael took a lot of heat for CSX under their rocky (at least initially) PSR rollout (see below) and did it with grace. Speaking of PSR rollouts, my first thoughts were….while everyone in this (all?) industry adopts perceived “best practices” (ie; steals good ideas) to some extent, I couldn’t believe that UNP CEO Lance Fritz actually used the very phrase “PSR” (that’s a first for me – usually a railroad would go to great lengths to show that they came up with the idea); my second was that somewhere, Hunter Harrison was having a belly laugh!
Conference call, it seems, notably
UP & PSR, considered: Following the detail-light webcast on Wednesday (Yom Kippur, not that that particular holiday impacts the financial industry), a few more rational thoughts have come to mind:
The Street, piling on with ratings upgrades after the Tuesday initial announcement, was disappointed by the tenor of the conference call, specifically in the lack of numbers, the unchanged Guidance (60% OR by 2020) and what seemed to some to be a slow rollout (starting with the so-called “Mid-American Corridor, roughly half of the manifest business at UP, on October 1 and then by 4 other regions till full implementation is completed by YE18. There was a fair amount of consternation concerning UP’s statement that they weren’t closing or converting any hump yards (to “flat-switching”). Recall, however, that pre-CSX, closing/converting yards was a by-product of PSR, not an initial maneuver. One question in an otherwise lackluster analyst performance was notable: “So what exactly is transformational about this plan?”
On the other hand I was disappointed by the unchanged capex number (15% - or less – of revenues), though I note that PSR usually leads to initial capex reduction (see CP, now CSX) followed by growth capital and a changed game-plan (see CP and, especially, CNI).
The Street seems to be clamoring for a PSR-imbued hero to ride up and change UP – be it CP’s Creel (no), CNI’s Cory (busy, thanks) or retired Jim Vena, ex-CN COO (and long seen as the “white knight on the horizon”). The Street didn’t think this through (and there is/was only one Hunter Harrison). Of that list, the latter is the only one (due to his age as much as anything) that fits the scenario on the ground, but I place low or no odds. One thing must be retained here – this was a decision by the UP CEO, Lance Fritz, not by the Board or by an activist slate to replace the CEO….Lance will be able to explain more at RailTrendsthis fall….UNP does have former CSX COO (including time under Hunter) Cindy Sanborn, on property (running their Western division) but if they were going to highlight that, the webcast was the opportunity….There are some 250 changes to schedule etc per region, so getting “results’ will require some patience for the impatient shareholder set….
Implementing PSR is not a simple – or even a complex in practice but simple in concept - playbook change to a new offense as in football (going from the T-formation to the Veer, say). As I have covered in the past, notably recently in my writing on the new EHH Bio (“Railroader”, as well as “Switch Point” and Hunter’s own books), PSR is about asset velocity (which reduces “safety stock” assets and increases reliability), reduced variability wherever possible, and while PSR does have some specific tools (mixed trains, for example, or a focus on the car and not the train), it is really about attitude, sense of urgency, commitment (sometimes single-minded commitment) and cultural change, rather than a set rulebook so inscrutable that only time spent in Montreal can decipher….
UNP claims that the “Blend & Balance” initiative in the PNW, described to the financial community at the (every 4-year) Investor Conference in May, was a pilot program, and that this move isn’t some last-gasp change effort brought on by outside influence. Still, giving only hints, unperceived, in a Big Meeting in Omaha in early summer and then changing around many of the key personnel (COO, CMO) is an IR issue….UP didn’t say what, specifically caused them to make such outwardly dramatic changes after the Investor Conference (which usually is slated to have a lifespan of years not months), nor if this was Board-imposed (unlikely).
One funny thought – CSX in undergoing PSR-related changes in intermodal, was in the midst of a tiff regarding schedule (O/D pair) reductions with….UP. This may have been behind Fritz’s comments that with all of the changes upcoming to the schedule, some, notably the (IM) Premium business, would be left untouched….
The Street’s attention turned to the anticipated reactions by rival western rail, BNSF (doing just fine, thanks) and CSX’s eastern rival, Norfolk Southern. Given that, rightly or wrongly, the Street not only asks questions but, through its share ownership or sales can sometimes provide answers, NSC, lacking the protection of Warren Buffett, will certainly have to deal with this from a perception point of view if nothing else….Some thought that “the regulators” wouldn’t allow two major rails to implement PSR simultaneously….which it seems to me is a rather fanciful concept of the powers of those “regulators”….
That said, UP’s rather more stately plan to roll out PSR is due to the “collateral damage” seen to stakeholders (notably shippers but also other rails etc etc) in the previous rollouts (culminating in “the regulators”, in this case the STB, holding the “shame hearing” on CSX service last fall; UP’s more deliberate approach may seem unsatisfactory to some shareholders – in the short term – but if it can indeed be done without alienating shippers (and other rails and labor and politicians and, yes - even those “regulators”) then that would be a good thing!
Anthony B. Hatch