Rails - Service/Perception & Inflation

Rail Bridge

Greetings;

 

“PSR is naked and all alone in the eyes of the Surface Transportation Board”

/Independent Railway/Intermodal Analyst Anthony B. Hatch, as quoted in Trains….

 

Well I hate to say I told you so (and I don’t always refer to myself in the 3rd person, above, a la Rickey) but….rather I should say we do, so see Adriene Bailey’s extremely popular presentation at RailTrends 2020 last November, looking at rail service from the proactive side (both attached)….What follows is a bit disjointed but Tony hopes his points come across.

 

But before, hot off the pressesThe House T&I (Transportation and Infrastructure, big always/bigger these days) Chairman DeFazio submitted a letter today (7/26) in opposition to the CN’s proposed Voting Trust – never mind that the deadline was a month ago.  (Writing this as a Dem) Maybe if one’s TV only has one channel and that is CSPAN one thinks rules do not apply….And, unlike some of my peers, I am not taking sides here (or at all), I just wonder what happened to those Congressional calendars?  Speaking of my peers etc in the analyst community, it is remarkable to see how their belief in a positive (in this case for CNI) STB ruling VT has dropped over the last month; fair enough, but to put any numbers behind it other than 50/50 is nuts (one analyst was quoted as saying the odds of a VT were between 10%-20%; oh, really?) and implies there is more science to this than emotions and positions taken by five (5) STB Commissioners….

Back to the Service….Issue

From the TWEETS (sign up!)

  1. STB concern on international supply chain issues brings a phrase (“Stay in your Lane”) to mind but following the E.O. – see slide at very bottom - also brings one (“I hate to say I told you so”) to RRs, whose service issues during rising concern over inflation & supply chains is….poor, to say the least
  2. RR service/STB#2 – RRs are not the cause of supply chain woes, PSR is NOT the issue per se (or by itself) - rather it’s LABOR (national issue exacerbated by where RRs are) & BOTTLENECKS (GLOBAL issue), neither STB’s lane – see Supply-Chain Backlogs Turn Chicago Into New Chokepoint - WSJ.
  3. RR svc/STB#3 Activist STB seeking to solve problems that don’t exist entirely w/ rail - Very idea of lifting the intermodal (de facto truck competitive!) exemption is lunacy That said, STB activism well  telegraphed, the RRs must step up & deliver more network resilience

 

Inflation?  US CPI was up 5.4% in June – a number that shocked the Street - and the White House.  The fact that Q2/21 GDP may come close to doubling that may not matter too much (the GDP is temporary – is inflation?).  This is not (only) a rail (or any mode or supply chain) story – the WSJ report “Companies Test Price Increases” used examples in consumer products, snacks, food, oil & oil services (see NatGas and coal prices), white goods, packaging and cardboard, plywood and industrial parts and supplies (lumber strangely went the other way).  And – didn’t mention “railroads” once, even if elsewhere the same publication (the very one that suggested the Executive Order was “aimed” at rails) said “understaffed freight railroads” were a bottleneck cause.  We know what’s happening in auto production (but we don’t know when – it will be resolved).  Some thoughts:

  • Demand!  Retail sales surprised on the upside in June (+0.6%); inventory sales ratios, usually around 33% this century, are ~30%, a situation that may take the next 2-3 quarters to resolve – given no further “events”
  • Supply – some of this is congestion in the supply chain, some may be specific equipment shortages (53’ boxes?); some is weather, no longer “unusual”; some is companies reluctant to increase supply given the still cloudy crystal balls; some is specific (chips); some (much) is labor.  Issues there include government subsidies, of course but also job opportunities elsewhere (construction, the historic bane of trucking recruiters) – the Times writes that “low wage employees are seeking – and getting – better options”.  And then there’s the lumpy pattern from the unequal pandemic recovery (globally)….and Covid hasn’t exactly followed the script for its exit scene yet.
  • Policy!  BlackRock noted that Washington has shifted since 2016 (over both administrations, so far) from an emphasis on trade to (re) developing US manufacturing, which is….more expensive; Mexican government actions might be said to slow down near-shoring and FDI, and the Canadian border doesn’t open up for US folks for another couple of weeks….

 

Rails – their role in inflation?  (As opposed to Inflation – It’s Impact on Railroads).  So, the big news (as we all await the very BIG news from DC) is:

  • For rails (and ships/trucks/ports/shippers) there is a labor issue, which while seemingly everywhere is a local issue and there is a demand & bottleneck issue, which while having local (choke-point) aspects, is a global issue
  • UP shutting WC-Chicago lane to clear the backlog in Global IV, by bringing back formerly closed (2019) GIII – did they get rid of too much capacity?  Well, they were able to bring it back….
  • BNSF responds by “metering” (their phrase) trains eastbound, and e-routes IM traffic from LALB, parks some, etc
  • Supply-Chain Backlogs Turn Chicago Into New Chokepoint - WSJ
  • The esteemed Executive Director of the Port of LA urges no singular cause, not rail specific
  • It has been pointed out by Rick Patterson (oi!) that, for rails, “weather issues” meant floods, or hurricanes, or maybe sometimes drought in terms of grain.  But now – wildfires have impeded eastbound intermodal from ports in BC (CN & CP) and Cali (UNP)….
  • JBHunt reported a big positive surprise in earnings with IM revenues up 21%, an OR of 89.6% (that’s good, folks) though IM volumes were up only 6%, leaving chips on the table for sure due in part to shortages of boxes exacerbated (of course) by slower turn times/equipment “detention”  (a pattern all of IM showed back in 2018, recall)

 

The bottom line, is volumes are moving; rail metrics have been spotty at best in Q2/21 so far but appear to be improving.  UP is lifting its moratorium.  Intermodal Volumes remain strong in June, but domestic comparisons shrink.  IANA data shows IIM volumes up 12% in June, but that is a tale of two supply chains, as domestic up under 1% (TOFC actually down 3%) while international – site of all of those supply chain issues - was up over 25%.  YTD (6 months) showed domestic up 11% (COFC =10% and, holy turnabout, Batman! TOFC up 19%); international up 20% for the total

 

Two sets of related Q&As

From IANA (Intermodal Association of North America) “Intermodal Insights”:

Topic: How are Precision Scheduled Railroading, Positive Train Control, and other technologies improving the processing of trains at intermodal terminals?  See “RRs & Tech 2021 Update” slide deck, attached; much of this is, um, not my lane, but I tried….

Questions:

  • What positive effects have PSR and PTC brought to the planning and deployment of intermodal rail operations? PSR may have become a dirty word (above), or phrase, certainly in DC, but it is foundational to the railroads to gain efficiency – some of which the shareholders do indeed “keep” in the form of lower Operating Ratios, but some of which flow to shippers in the forms of consistency and new market opportunities (meaning a more efficient, lower-cost railway can think about new business once deemed “marginal” by their old, more bloated selves).  PTC is still on the come, as it were, but it will be the “IT backbone of the coming digital railway”.
  • What other current technologies, such as automation, are being deployed in the current working environment, to improve the processing of trains at intermodal facilities?  Automation (and perhaps AV drayage) is coming, and in some cases already here (new gate check-ins, hand-helds, AV cranes, etc).  This must be a continued area of focus….
  • What are the challenges in implementing new train processing enhancement technology at terminals?  Often, but not always, existing union work rules (which must be negotiated) 
  • How will better technology for train processing have a positive effect on drivers’ wait time, as well as improve safety, at terminals?  I cannot speak with expertise to the latter, but the former is as big as it is obvious – every minute counts!  And even more so in the future – IM service standards are like greyhound racing – when you get close to the rabbit it accelerates!

 

From the Upcoming Logistics & Management Rail/Intermodal Round Table:

 

  • How would you define the current state of the rail carload market?  As of 7/26/21:  Comparisons are “skewed”, to quote Union Pacific in their Q2/21 earnings call, but demand is pretty strong in merchandise, and even in (for a brief interlude) coal.  North American carload volumes were up 15% in June, and are up 8% for the first half.  Tougher comparisons are coming, of course, and grain, a savior in the dog days of the pandemic, will have tough comps and maybe some harvest issues.  As/when things normalize, this is an area of rail opportunity thanks to IT projects like “Rail Pulse”….
  • How would you define the state of the intermodal market from a volume and demand perspective? And, as a follow-up, how are railroads doing that?  The demand remains so strong, and railroads are moving a lot of boxes: IANA reports volumes up 12% in June (15% YTD), but the bad cocktail of driver shortages and congestion has reduced domestic growth to +1% (as opposed to +11% June YTD).  Interestingly, AAR's total intermodal data (rails only) is a bit brighter - +11% in June (+15% YTD).  The demand is there; as of now the fear that consumers would switch to buying experiences (movies, Disney-World) from “things” (that come in boxes0 has certainly not panned out….
  • How do you view the current service levels compared to this time a year ago?  Ahh, there’s the rub.  The rails probably generated a “B+” grade for their 2020 handling of the pandemic see-saw; that grade has deteriorated in H1/21.  There have been re-routings, delayed shipments, embargoes, raised demurrage charges – and lots of interest from the STB, the House T&I Committee, and – maybe – form the White House (the executive order’s mention of rails, one of 72 industries, seemed rather last minute and lackluster).  Is it the rails’ fault?  Some – too much cist cutting (pandemic, PSR) left some short of crews, in a time when all jobs are short (and when – and where – in some cases government $ goes a long way).  But the pandemic was a boulder thrown into a pond – the waves keep breaking, from new C19 outbreaks in Shenzen to congestion in the docks, poor steamship service, manpower issues at =drayage and shipper nodes, etc.
  • As a follow-up, what can shippers expect in terms of service over the course of the next year?  By the time this is read, I hope that rail efforts to de-congest (and to hire crews) have begun, incrementally to pay off (and the same goes for the rest of the supply chains).  To quote UP again, their CMO Kenny Rocker sees supply chain issues, higher costs (OT, out-of-route miles, etc, and the like) to continue into 2022.  Hopefully, after the trade war and then the Pandemic, 2022 can be a real base year for future comparisons – it would make my life a whole lot easier!
  • Is pricing where it needs to be for railroad and intermodal in light of the major capital expenditure outlays made by the carriers? Pricing is always an area of friction – all of the carriers in the global supply chain have had to raise rates (think of their own input costs, starting with compensation), and have used price to meter the volume (and asset0 flow, and to serve their contractual customers over the spot.  Inflation may not last but it is here – everywhere, so the direction of price….is up.
  • What is your take on railroad consolidation, given how the CN-KSU deal has been front and center over the last several months?  By the time of your reading, it just….might be the CP+KSU deal!  Or, no deal.  Or….Final Round (rail consolidation) means Jeopardy!  By “final round” I mean M&A involving combinations of the US Big 4 (NSC, CSX, UNP & BNSF).  By jeopardy, I mean that although those would be end-to-end, the conditions imposed on any combination (by an active and incensed STB, senate, and – maybe – even POTUS) would far, far outweigh the benefits!
  • How do you view the emerging presence of technology and automation in freight railroads, as they relate to long-term ramifications for the sector?  Critical!  First, their labor, fuel, and emissions advantages over OTR trucking are being attacked every day – with EV and AV they do indeed face an “existential (if not as imminent as we all once thought) threat”.  But they are working hard to turn PSR into that “digital backbone”, to automate themselves (the technology to create AR is well ahead of AV).  Autonomous railroading could – should – mean not just more efficiency but also a whole new rail strategy, with short fast e-commerce trains running alongside long PSR-inspired manifest trains….

 

One insider expert’s opinion:

The problem in the rail industry is not lack of competition, it is lack of being able to provide door-to-door service. The industry will have to cooperate as much or more than compete to take share from trucks. This is completely inconsistent with Mr. (Chairman) Oberman’s views which are consistent with an external view of the industry, but inconsistent with a real look at how the industry functions in reality. Forcing the industry to compete hammer and tongs will ultimately just drive increasing volumes to truck. There is no shipper that wouldn’t argue for lower prices. But in reality truck wins, even at higher rates because their service quality/reliability is vastly superior to rail - either carload or intermodal. Rail shopping is complex with many companies involved to get shipments moved from door-to-door.  Trucking is simple.

 

Also:

 

  • The Economist is offering a Webinar on Nearshoring prospects Live webinar (eiu.com)
  • You may have noticed the WSJ Weekend article on railroad design (“Logomotive”); here is the book: Logomotive: Railroad Graphics and the American Dream - Sheldrake Press
  • The US ITA released a report in 2017 (note – prior administration – but cited often) that suggested trade deals were irrelevant (adding “only” 0.5% to annual GDP) – but its methodology, like that of Colonel Kurtz, was unsound.  It didn’t, for instance, count China entering the WTO (deeming that a “political”, not “trade” deal).  It’s like the reports that say new ballparks don’t help cities – has anyone been to Denver (LoDo) lately?
  • Class 8 truck orders were up 61% in June, but that’s off a low, low base
  • Aurora, the AV developer, was valued at $11B (or 1/3 a Class One RR!) via its IPO from a SPAC – a lot of money to develop competition (others are coming)
  • Tu Simple, on the other hand, had a $1.35B IPO/raise that benefited at least two railroads (UP and CN, which invested; CN booked a gain)
  • And Uber bought Transplace for $2.25B – becoming a big player.  Transplace has roots in other players – JBHunt, and PE firm  Greenbriar (former wonders of EMD and of Nordco)
  • The Times (if you have to ask “Which?”….) noted a “nagging detail” in the infrastructure Bill negotiations – how to pay for it….detail?  But the AP Poll found 80% of Americans favor increased funding for roads &bridges (and “only 45% support federal funding for EV development, not that they need the money it seems to form the above)
  • Congrats!  Watco makes the (June) cover of Progressive Railroading – having made the cover of the (JV) publication, RA already – reminding many of when the Boss (if you have to ask….) made the covers of both “Time” and “Newsweek” (if you have to ask….)

 

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com 
abh18@mindspring.com
Twitter @ABHatch18