KCS (Spacing)


Only 10 Days till the KSU special Shareholders Meeting….and CN+KSU scores the highly sought-after recommendation from Proxy company ISS – will that move CP to some form of action? 


Traffic seems to slow and now that Berkshire Hathaway (BNSF) closed the books on North American Class One Railroad Q2/21 earnings we can Review what has an interesting period, to say the least bit also one with almost totally meaningless comparisons….But first, ISS comes out for CN’s proposal, traffic for July is “dropped” by the AAR….and renewed travel complexity….


First, the Covid Comeback muddies the calendar - RILA cancels with 2-weeks’ notice!  Jazzfest in NOLA gone….Bad signs….but NARS, NEARS & EXPO are still ON for next month (see excellent NARS agenda, and not just because….attached; note also that as NARS 2019 Person of the Year, and there being no 2020 NARS live….)


Now – the KSU news – first from the Tweets (sign up!)

  • “The waiting is the hardest part” (see report- attached) Probable STB decision on CNI (+KSU) Voting Trust by EOB tomorrow (8/6) (note – NOPE!) before Congressional Recess? Surely by Friday/13th before the KSU special shareholders meeting 8/19 – Critical beyond any actual verdict will be the wording of the decision (from a very “wordy” Board!) – Will it inspire CN – or CP?  Deter everyone?
  • The Waiting Pt2 & Mea Culpa Yesterday I wrote CP scored big with the STB in getting access to KSU data; I have been corrected by greater legal minds. Of course, it IS a win that CP is still alive pending the VT decision, true, but KSU feels it actually won Battle of the Data @STB rejected CP's efforts to use KSU confidential info
  • CN+KSU gets the coveted nod from proxy advisory firm ISS (which is important, and even critical for passive funds), which surprised me as the announcement – on Saturday! – was still timed before the coming (?) STB Voting Trust decision - if not the arbs.  In its recommendation, ISS cited that there was “no (CP) actionable alternative”.  

- SO will CP now step-up/out and provide an increased “actionable alternative”?  PERHAPS, after forever saying NO to any "bidding war", at least narrowing their face-price gap to CNs?  I don't know, but I do know we're coming down to brass tacks - if not the end, or the beginning of the end, then surely the end of the beginning (I lust love quoting that man).  And, remember, the power is still in the hands of the STB when all is said & done…..

  • While I was surprised in the middle of the weekend (what is it with this deal and weekends?!?) it seems that Arbs were not – one smart one had this to say:  “If the vote is unsuccessful, the deal ends there. By voting in favor (one can) “keep hope alive” - even if the STB were to say NO voting trust (say) tomorrow, it could still be in shareholders’ best interest to vote for the merger because it then allows KSU to receive a $1b break fee if they can’t win via appeal, etc.  Without the vote in favor, that $1b break fee disappears” Note – opinions on the vote not mine….(no “mea culpa” wanted this time!)


BNSF reported strong Q2/21 numbers – more in the “Review”.  Revenues were up 26% on a slight (albeit perplexing as you shall see) mix hit and volumes up almost 25%.  OpEx matched the volume so the OR “only” improved by 70bps to 60.4% (over 500bps higher than that of UP, BTW).  But IM was stellar, in a period of extreme stress, they produced revenue growth of 32.6% on a volume surge of 27.4% (so something was moving in Q2!).   Ag’s split was +19%/+13%, Industrial Products +17%/+18%, and coal, well, don’t think we have a trend here but coal revenues were up forty-two (42%) percent.


Rail traffic slowed down in July (though ending the month on a stronger note).  North American volumes, according to the AAR’s Rail Time Indicators, were up only 3% (11/20 categories up), with carloads up 5% and in-the-spotlight Intermodal only up by 0.5%.  Grain and autos are dragging down the carload numbers while coal (coal) propped them up (+14%!).  This was a month of pattern reversals – Mexico was the leader (13/20, totals volumes up 13%), the US in the middle while Canada was the caboose (10/20, volumes -3%; IM -6% and carloads down 1%).  While the US tied Canada in scoreboard sluggishness (10/20), their overall volumes were up 4% (carloads up 7% thanks to the black stuff, otherwise up 4%; IM was up 2%).  But the totals were 13% below July 2019, and even IM was down 2% from that time period - which you recall was not a great month for IM due to truck capacity and the trade wars….On a more positive note, the week of July 31 volumes was up 11% and IM back to +14%...

  • Speaking of trade wars, a coalition of the top business advocacy groups (including the US Chamber, the Business Roundtable, the NRF, American Farm Bureau, etc) urged the Biden administration to re-engage with China and remove the Trump-era tariffs.  I must admit I had thought that this would be a rather quick benefit coming from the Biden White House….
  • China is well behind its so-called “Phase One” US import quotas, which is likely impacting the slowdown in US grain exports
  • Nonetheless, the US trade deficit widened (remember your college economics course: so what?)


Rail shippers continue to see service issues – and see advantages to be taken (Churchill on crises redux).  In addition to the American Chemistry Council (the “other ACC”) letter to the STB and the shipper-motivated activities of the Chairman of the House Transportation now come

  • The (a?) Rail Customer Coalition (Common Sense Railroad Freight Transportation Reform ( sent a letter to the STB arguing for reciprocal switching, and cited a report from old friends Escalation Consultants (the Washington Generals of the rail regulation game,  remarkably if cheerfully consistent in their answer to any question from rail regulation to “Will the chicken cross the road?” is “More government interference in railroads!”
  • The Agriculture Transportation Working Group has also joined the pile, urging enactment of the EO provisions (but we all agree on the latter’s “fairness” provision)
  • The AAR fired back, via CEO Ian Jefferies’ Op-Ed in the venerable Chicago Tribune (attached)
  • Still, the need for a return to rail fluidity is urgent (see IM volumes, political pressure, share opportunity, etc)


Speaking of POTUS Executive Orders, Biden issued one on Electric Vehicles, as well as plans for renewed auto emission regulations perhaps in response to the gutting of (-90%) he monies so related from the White House initiative to the compromise (Senate) version of the Infrastructure Bill.  For rails, they must watch the “heavy thumb” on the modal scale – yet another reason not to have to spend their political capital on defense….


“Review” to come….


Anthony B. Hatch 
abh consulting
Twitter @ABHatch18