Rails - 2020 Top 10


This was originally meant for New Year’s week, then got delayed, given all of that celebrating in
place. Then the goal became the 12th Day of Christmas (Drummers Drumming, remember) where
some of the frippery was, or might have been still timely – see a friend’s re-worked carol below,
followed by the 2020 Top (?) Ten. But the 12th Day was Wednesday, January 6th, now to be remembered
for sadder reasons. To paraphrase Monty Python’s best episode - The Piranha Brothers (archive.org):
even the National Association of Manufacturing had to sit up, and take notice. I have to ask, in Pete
Townshend’s words: “So, you think ’21 is going to be a good year?” I was sure, then less so….but today
I am still hopeful….So, back to rail business. I have attached some things that might have missed over
the holidays, including the much-discussed Oliver Wyman presentation from RT20; recent traffic, NSC at
NRC, etc – and the T-10. Stay safe!

A few things:

  • Recent Tweet: Happy New Year!* To paraphrase the Bard on the subject of much-maligned
    (admittedly and with apologies, by me) DOT Secretary Elaine Chao "Nothing in her career
    became her like the leaving it" (*if possible)
  • I can’t wait to see new NYC’s brand new Moynihan Train Hall - Moynihan Train Hall: It’s
    Stunning. And, a First Step. - The New York Times (nytimes.com) – but remember that while I am
    a CONSUMER of passenger rail, I am an ANALYST of Freight Rail – and I have to admit that when
    asked in general conversation about my opinions on Amtrak or commuter rail, it brings to mind
    Dirty Harry’s line to his boss who came from H/R….
  • Traffic: December and FY20 RTI! Thanks to Dan Keen and the AAR. As we know, like the
    Secretary of Transportation, for rail freight volumes, nothing also became 2020 like the ending
    of it. The headline: North American Freight Rail volume was, in total, up 3.4% for the month
    (that’s carloads down 2.7% although 10/20 showed increases) and intermodal up fully 9.7%. For
    the full year, the numbers were lousy – only 4/20 up in carload which was down 11% (!) and IM
    down 2.4; the total was down 6.6%. But both of those were impacted by US coal, down 14.5%
    for the month and 24.6% for the year, as well as Mexico, which had a tough year….
    • How tough? FY20202 total -10% (carloads down 7% on 6/20; IM -13%)
      – and unlike the pattern in the other two NAFTA nations, it was worse in
      Q4 and December (carloads were up 1.3% but IM was down 21% (!) and
      thus the total showed a 9% decline.
    • On the day of hockey’s return, Canada wins the NAFTA Gold, but not in
      spectacular fashion: FY -4% (CL-7% on 6/20; IM -1%); they finish 2nd for
      the 12th month: total up 3.3% (CL -0.5% on 11/20; IM up 8.1%.
    • The USA gets the silver: FY carloads -13% with only 3/20 showing
      increases; IM down “only” 2% bring the total traffic number to -7% YOY;
      for December carloads were down 3.7% (note that ex-coal they were up
      1% (10/20) and intermodal up 12.2% bring the total to +4.4%.

So that’s why there was no lump of coal in your stocking, it wasn’t because you were good….

Speaking of the recent holiday:

The Twelve Days of Railroading Christmas, 2020
“Twelve OmniTRAX CEO’s in a decade”
“Eleven different NS PSR strategies”
“Ten Mexican blockades”
“Nine Times G&W multiple dreams”
“Eight Oliver Wyman Naysayers”
“Seven Kloster GE Box Cars”
“Six RailTrends shortline panelists”
“Four Class 1’s haunted by EHH”
“Three Harvard Crimson”
“Two SoCal dudes AND”
“One great SP railroader stolen by the Atchison Topeka & The Santa Fe!”
/sent from a railroader friend….

The T-10: So, looking back (OK, why?!?) and forward, here’s what happened and what may happen, and
perhaps why it mattered. All of the rails spent the fall and early winter saying wait for January, for the
Q4/20 earnings webcasts, for a more detailed preview, guidance and outlook.

  • Covid, in a first punch knockout over its contenders the Election (which beat Trade Wars to get
    the chance to be overwhelmed by the Pandemic); now – second wave? Third wave? New wave
    dance craze? It’s all taken a toll on me. And while vaccines offer hope, I don’t mind stating that
    the scariest three words of the minute are “new coronavirus strain”….
  • Uncertainty – the general and railway puling of guidance, citing cloudy or even non-existent
    crystal balls, limited shipper visibility, pandemic, and political response ambiguity, etc. There are
    some signs of hope here – not just the rail company’s statements to look to January, as
    mentioned, but others: For example, the comeback of the dividend, that is anticipated. In the
    darkest days, 42 of SP500 cut payouts; in recent days, 6-10 have restored them. And in an 8-K,
    Union Pacific pre-announced an eye-popping OR (55.6%, down 4.1 points and making their
    “55+0” plan all of a sudden not so crazy), so maybe we’ll see some visibility return. This is the
    biggest thing the Street will look to when rails start reporting Q4/20, starting with the Union
    Pacific on the morning of the 21st (discussing their prospects and the $278mm non-cash charge
    for the “re-purposing” of the Brazos Yard)

    • We also expect in ’21 some major railway Investor Conferences, hopefully
      live, which are due/past due for the group
    • There are also unresolved succession issues – Yes, BNSF was happily decided
      but there still isn’t clarity at CSX, CN, UP, KCS….and maybe CP if
    • Free agents? Keith Creel? (note and take this to the bank – there will be no
      rail consolidation in 2021 or 202-anything); also, it’s said, Jim Vena,
      operator extraordinaire. However, as the industry moves from PSR 1.0 to
      2.0 (PHR)

  • The Shark’s Tooth – I have emphasized that in the shutdown, first of production then of
    demand, that rails have a proven ability to reduce expenses (and increase their variable/semivariable percentages of operating expense) in a known slowdown – and if C19 might not have
    been seen coming by everyone, it was obvious enough to the freight community by the time of
    the Q1/20 webcasts in April (and before as the volumes began to plummet in March). So in an unpredictable time, there was one predictable result – the rails beat earnings expectations, first
    in Q1/20 and then in the carnage of the second quarter. And then came….like a tsunami, the restocking/recovery. Now, this was unprecedented and unexpected. Mid-year business and trade
    press accounts were full of tales of supply chain disaster (in fact, never before had supply chains
    been so widely discussed in the serious press, in politics, etc). While fighting covid, rails –
    labeled “essential” and with a lot of C19 resistant activity - had to restore labor numbers and
    operations and fast. They did so – certainly not without hiccups – but they did. It is certainly
    fortunate that PSR (1.0) in the US was already entering maturity when the pandemic struck. No
    commodity, with the possible exception of automotive (to which it is tightly coordinated)
    exemplifies the V-shaped recovery that because of its severity I labeled the “shark’s tooth”
  • Intermodal!
1.26.21 (2)

This chart is just here for illustrative purposes, through Q3/20 and created by Jason Miller, Ph.D.
of Michigan State (Go Sparty!); see the recent YE&Preview issues of the Journal of Commerce
for more from Jason (as well as from OW’s Adrienne Bailey on her RT20 Presentation, a nice
accompaniment to the attached report). We’ll be hearing more from Jason/MSU in 2021….
Anyway, the drop in the spring (first supply-driven, already distorted by the Trade Wars, then
demand-driven) then the recovery as inventories needed to be replenished (and, it’s commonly
said, folks spent more on things than events like ballgames and movies and dinners
out). Intermodal burst into FY positive territory and has remained there – though remember the
comparisons to 2019 only looked difficult in a pandemic. And in six weeks, we’ll be comparing to the pandemic. But still….the rails also showed they could play in the growing eCommerce
sandbox (see below). Some IM thoughts:

  • Will the west coast hold on to some of its regained share? Put another way,
    will there be a bifurcation of IM between faster service (west coast ports)
    and cheaper, slower service (all water)?
  • Is the international segment’s recovery sustainable? HIS sees global
    container trade growing at 4%+ to 2030; hopefully the removal of the
    Navarro gang will be helpful
  • Does the reduced truckload length of haul (LOH) mean good or bad things
    for IM?
  • 27% of TL companies cite “infrastructure” as their top challenge (drivers
    being listed by everyone, of course) – “Inbound Logistics” was the
    source. This is, of course, a positive for rails, whose infrastructure as well as
    their financial strength are the two impregnable barriers (even as
    labor/fuel/emission advantages are under varying degrees of attack).
  • Will the rails hold on to their domestic share gains as they competed for PSR
    1.0, and rallied to the recovery? I think they can. Analysts must watch their
    technological progress (below) and their spend on capacity….

Accelerated Trends – Was 2020 and the Pandemic, as awful as it was (still is) really “a hinge in
history” as Larry Summers (former President of Harvard and some other jobs) stated? Most,
outside of the public health arena, think that it simply accelerated trends already in place – and
boy, did that happen. Most notably, Ecommerce increased by a third, as noted; it has also,
combined with the trade uncertainty (to say the least) over the last 4 years, has led, to
discussions of changing supply chain patterns - if not demonstrably to near/on-shoring (beyond
PPE, etc). The biggest concentration, and by mid-crisis (May) seemingly the only focus, was on
supply chain viability and visibility, diversity, and optionality (AKA “resilience”) – see
“Globalization”, below. But it was enlightening to back over the trade press/business
press/academic and government concerns over the course of the year, from the darkest days to
the fall recovery and the beginnings of vaccine success.

  • Boy did the experts have it wrong – for example, the JoC, the bible for the
    container trade, headlined in April “Coronavirus to diminish (steamship)
    transport demand and destroy earnings”. Oops! But to be fair, who knew?
  • Full recovery? After (and it is important to remember) the bad year for rail
    that was 2019 (truck capacity, the last effects of the disruptions of PSRE 1.0,
    trade wars) we had hopes of 2020 being a base year (boy did I have that
    wrong). So, when? Moody’s says 2023. McKinsey says 3-5 years, with rails
    at 4 years due to their exposure to oil & gas (faster in non-metallic minerals,
    clay, ceramics, cement, Ag, food products (which are areas of rai interest,
    BTW). Let's see what the rails say next week, although I have modest

Zooms & RailTrends – more contact, less contact. Typically I attend (and most often speak at)
some 25-35 rail and related conferences, getting a pulse check on just about all of the
stakeholder groups. This year I made it to….two, plus two company visits before the
shutdown. Zooms made it, er, possible to continue – and in fact not having to have the
disruptions of travel meant that in some ways conference content was improved, sometimes by a lot. It certainly upped the game for the so-called “analyst conferences”, usually such a CFO family reunion (“let us look back to our most recent quarterly earnings call”). This year, led (as in so many things) led by the Canadians in the summer CEOs and others joined in via the internet, and….things were actually said! Whether or not that compensated for the informal
time for channel checks, succession outlooks, industry gossip, etc is debatable (I think not). But
it helped….and didn’t require long pants. Some new streams, for me, were added (a great
Chicago-based rail veterans bi-monthly Zoom, for example). RailTrends 2020 was terrific,
absolutely as good as it could be under the circumstances (thanks, all) but, still. My
“Reflections” are once again attached. We hope we’re live by November. As of now, I have no
live event on the schedule until H2/21 (I will update the calendar in my next piece) – the
excellent NRC event, the usual kickoff of the year, was virtual (see below), as will be MARS
(Midwest Association of Railroad Shippers), of course….MARS in fact is next week, on the very
busy day that is January 20th….the agenda is, of course, good: you have your Creel, your Farmer,
your Titterton, your Hatch (take him or leave him, it precedes cocktails, virtually) here’s the
agenda link: TENTATIVE TOPICS & SPEAKERS (mwrailshippers.com). While the timing could have
been better, one advantage to a virtual MARS is not having to be in a shopping mall, anchored
by a Sears, in Lombard, IL (though I will miss the fun at Harry Caray’s, named after the old Cards

Technology! portals, (Rail) Pulse and….Tu Simple investment. As The Economist noted, “the
pandemic has quickened the pace of technological adoption”; eCommerce business will end the
year up a third, the world is changing at an ever-faster pace. Perhaps I am being too optimistic
(I have been accused of that before) but I think that while the rails have work to do in the tech
space (converting PTC to the digital backbone, etc), as well as in the tech-related space
(regulatory, legislative, labor), it’s now clear that they “get it” and are beginning to both focus
on the subject and to spend money. Critically, as with ESG (below), their shareholders are
asking about it, which helps concentrate their collective minds….2021 had better be a good year
for rails & tech….

  • On the “existential threat” trucking side (EV & AV), the hype continues but
    the reality was starting to set in. The head of Waymo said that AV presented “a
    bigger challenge than launching a rocket”. In 2018 thought that by 2030 30% of
    the auto market would be AV – now it says ~5%; Nikola lost it's (Republic)
    garbage truck contract when it was discovered that not all garbage rolls
  • The rails are moving forward – Wabtec and BNSF are testing their hybrid
    battery-powered loco (BEL) while sources tell me that they are beginning to
    think of an all-out push for hydrogen
  • The FRA is reportedly looking at high-speed freight cars to tap into the parcel
    market – this will fit well with AR (autonomous rail) ability (it's been said) to run
    short, fast trains as well as slow(er) long ones

ESG - ESG (Environmental, Social and Governance) investing refers to a class of investing that
is also known as “sustainable investing.”. This is an umbrella term for investments that seek
positive returns and long-term impact on society, the environment, and the performance of the
business. For those of you fully familiar skip ahead to number 9 – but after the rails all
dedicated a full earnings call slide (out of about 10 on average) in October (and UNP spent their
RT20 presentation on the topic) it is here and here to stay, yet in my zoom presentations in the last two months the first questions that I received were from those unfamiliar with the term and
topic). This will have advantages for rails as long as they retain their (fuel-based) emissions
advantages; this will also be something of an issue for all companies including rails as bigger and
bigger funds hold managements accountable for ESG performance. I will have more on this next
week – on the rise (?) of “stakeholder capitalism” and how that applies, etc.

Ag-- I have written a lot starting with the traffic decline that it was amazing to see grain
transportation as the stabilizing factor for rails! US and Canadian grain volumes were up just
under 28% for the last month of the year and just under 11% for the year 2020 as a whole
(Mexican grain was down 5.6% FY20). Not only that, but at the start of the year bullishness – in
some cases looking out 18-24 months, which for grain is eons - was rampant, and increased
demand and falling supply (in this case good for rails) meant that, as noted in business journals
everywhere, prices were booming. Yes, China was behind on its “Phase One” promises (by a lot)
but their ongoing demand expectation was very bullish (they had brought their pork herds (are
pigs in a “herd”?) back up 80% of their level before the swine’s own pandemic. Ethanol remains
problematic (although there was hope for positive news from the incoming administration – in
fact, the farm belt sees good things in general from Biden (trade wars, etc) so you might wonder
about their voting – but that’s another story for another time. World events seem to be a
tailwind for North American grain. La Nina and other events were hindering competitors
(notably the ongoing and bitter trade war between China and Australia). And here’s a headline
– “political unrest helps move grain prices higher” (American Farm Journal) – but that “political
unrest” is in….wait for it….Argentina!

Globalization/De-globalization/Regionalization? The whole nature of supply chains was one of
the most debated issues in this world – in May, for example, The Economist cover story stated
“Goodbye, Globalization” (after absorbing three “body blows” – the 2008 crash, the trade wars, and then C19). The whole perceived importance of supply chains was elevated in the spring (“Don’t it always seem to go, you don't know what you've got ‘til it's gone!”). The new rule wasn’t JIT it was (to be, we’ll see) JIC (just in case), and the greatly over-used word “resilience” rose to the fore. But it’s not just in the dark days – the ATA’s “Transport Topics” wrote this week
that “Manufacturers re-think supply chains; Eye re-shoring after the Events (sic) of 2020”.

  • DHL (not an uninterested actor) says that its Globalization Index (the year
    2000=100)peaked in 2017 at 127, dropped to 122 for 2018-2019 (trade
    wars) – and could end up at 111.
  • De-coupling with China? BofA estimated that would cost some $1T (not a
    typo – “T”) over 5 years; in fact, China’s recovery, whatever one thinks of
    their C19 response has been extraordinary, and their share of global
    exports increased from ~13% to 20% by midyear ’20 (IHS). In fact, China will
    show positive GDP numbers for 2020, and not just by PRC stats.
  • Near-shoring? Refer back to my mid-year report (“Manana”) – I just don’t
    see it. Looking beyond PPE issues, the Center for Automotive Research
    notes that Mexico’s poor handling (ahem) of the Covid crisis has hindered
    their efforts in that regard.
  • EY stated in April that 83% of the global manufacturers they polled were
    looking to de-couple from China and re- or near-shore; in October that
    number was down to 37%.

OK, I will add an 11th:
The 2020 World Series – the only indisputably good news from 2020.



Other Rail news-of-note:

  • Posner-Power – Henry Posner’s Railroad Development Corporation (RDC) sold a 40% stake
    (terms undisclosed) to an infrastructure fund, iCON; this surprised me….
  • Israeli steamship line Zim filed for an IPO (they have tried three times before but their recent
    record of repositioned success as a high-service point-to-point player, a good lesson for RR/IM –
    and operator of a short-sea service to Mexico, recall, means that the 4th time is likely the
    charm….the early look values the company at $1.5B
  • Congratulations to both Don Itzkoff and to Patriot Rail as Don joined the SLHC (short line holding
    company) as Chief Policy Officer (think: government relations and such); Patriot has pulled
    together with an all star-like team in recent days by adding Don, Roquita Coleman (ex-CN) and the
    mighty, mighty Owen Zidar to their ranks and having ex-ASLRRA and multi-year RT speaker
    General Rich Timmons on their Board….
  • In other short line news, Roy Blanchard (WIR) reports that a unit of the SLHC Rio Grande Pacific
    will lease – and reopen since its 1997 closure – UP’s Tennessee Pass (strangely it’s in Colorado)
    line, 163 miles, and a sign that Class Ones can be on both sides of short line transactions. This
    one is really interesting….if successfully rehabilitated, it could be run as both passenger and
    freight (see my tweet, above); meanwhile the deal is being challenged by another short
    line Tennessee Pass Revival: It’s Complicated - Railway Age
  • December ISM numbers were a big, almost shocking surprise (note that the FT said the 4.1
    point “beat” over consensus was “at odds with other evidence”)
  • Auto sales were also surprisingly strong for Q4 (GM +5%, etc)
  • DHL beat its own earnings guidance by 10%
  • December Class 8 truck orders were the 4th highest ever, and FY20 the 2nd (behind only 2018,
    and we know how that turned out for the TL/IM markets)
  • Wind power overtook coal (25% to 18%) in….Texas
  • Whatever happened to….blockchain?
  • On the other hand, I received an unsolicited offer for an IPO of Convoy (an internet truck
    brokerage) shares at $14 valuing the company at $2B; just came over the transom….
  • Today’s WSJ reveals that Mary Steenburgen’s father, Maurice, was a conductor on the MoPac
    (Missouri Pacific, now part of the UP, and generator of a lot of rail leadership in the 19802-
    2000s, the so-called “MoPac Mafia”)
  • YRC – and, you might have missed it, the WSJ also reported YRC (formerly Yellow/Roadway)
    received $700mm – or 95% of the $736mm in outstanding federal loans
  • The last, best hope for a significant increase in PRB coal exports to Asia seemingly died when the
    Millennium Bulk Terminal project in WA, the last standing survivor of ~10 such project efforts,
    was shut down over the weekend….

Another reason to say “good riddance” to 2020 – parked cars and ended dreams: RailPictures.Net
Photo: Untitled n/a at Mill Creek, Oklahoma by David Hawkins. Note what’s missing in the photo? (and
thanks to Bobby B for sending this to me!).
Also sad: https://www.lrb.co.uk/the-paper/v43/n01/ian-jack/the-railway-hobby
It does remind me of my first ever night in Melbourne (AU) – I passed a big storefront called something
like “Railway & Railfan” – and in the window was a copy of (our) Trains magazine – in fact, one in which I
was quoted and even interviewed (their “Q&A”).
I was so excited so I entered, brought it to the counter where the clerk and the (only) other customer
were in deep conversation…. I said “hello gents – I am featured in this issue! (cue to daydreams of
setting up a lecture there for the next night, friends in town, pints all around). The response: “Good on
ya (or some such); that will be eight dollars, mate”….cue deflated balloon.

Got a feeling '21
Is going to be a good year
Especially if you and me
See it in together
So you think '21
Is gonna be a good year?

Be safe!



Anthony B. Hatch 
abh consulting
Twitter @ABHatch18