In my own, humble (?) opinion, the virtual RailTrends® 2020 was a smashing success — thanks to my partners at Progressive Railroading/Trade Press, the sponsors, the speakers (!), Railroad Innovator Award winner Jim Foote, and, of course, the attendees (OK, "listeners").
Day One (Nov. 19) featured a mix of the tried and true (panels, rail cars) and the new and challenging (Rail Pulse, Oliver Wyman). Day Two (Nov. 20) featured the bigger guns (three Class I CEOs, a CMO, and a vice-chairman). And as usual, the world only seemed like it stopped turning.
As for the highlights — there were a lot of them, even if we missed the informal aspects of our annual live event (please reach out to me for more detail on any of the specific presentations).
• DC/Ottawa/Mexico trade association panel takeaways. There are lots of rail issues on the docket in 2021, but we all need to be patient. With a new Administration, there will be a get-up-to-speed period, and history tells us staffing in transport isn’t that high a priority. With the time needed to find, hire and approve positions, expect lots of discussion but little action until midyear (at the earliest) at the White House, in Congress, and at the DOT/FRA, as Association of American Railroads' President and CEO Ian Jefferies noted. Crew size mandates will be a long and laborious process that winds through Congress, the FRA, and the courts (more on this issue and on Ian’s overall view below). The American Short Line and Regional Railroad Association — in the person of ASLRRA President Chuck Baker — talked 45G investment tax credits, of course, which have been extended through 2022. Now, the Sisyphean task is to rebuild the coalition in the new Congress to attempt to make that tax credit permanent. Baker also discussed the importance of so-called “CRISI-grants,” which totaled $150 million to the short lines (and around $8 million to Rail Pulse!) in 2020.
Meanwhile, National Railroad Construction and Maintenance Association President Ashley Weiland noted (among other things) the impact of COVID-19 on transit, and the corresponding impacts on rail contractors and suppliers. And Railway Supply Institute Vice President of Government and Public Affairs Nicole Brewin discussed the huge effect of China (in the form of the China Railway Rolling Stock Corp. on car-building, and how that unfair competition must be addressed. And both Railway Association of Canada President and CEO Marc Brazeau, and Agency of the Secretariat of Communications and Transportation of Mexico (SCT) Alejandro Alvarez Reyes) offered terrific slides and discussed share — Brazeau, who talked about how intermodal has gone from one-quarter of the volume to one-third in only five years; and Reyes (head of SCT rail transportation regulatory), who discussed how rails currently hold a 25% share with a goal of 40%.
• ESG is here to stay. A recurring theme here, there (railroads' Q3 webcasts), and everywhere is "Environmental, Social and Governance" — aka ESG. Union Pacific Railroad EVP and Chief Human Resources Officer Beth Whited detailed the ESG efforts underway at North America's largest railroad. Other speakers noted ESG is important — ONLY after transport value (price/service). But it’s a growing and thriving investment form — see, for instance, the demands from big fund (remember them?) TCI of CN and Canadian Pacific (TCI submitted shareholder proposals on climate action plans). And it is investors who will drive this revolution; in their Q3 earnings webcasts, all the railroads devoted a slide to ESG. At RailTrends 2020. AAR’s Ian Jefferies said we should expect to hear more from railroads on climate change. Meanwhile, a major cost-focus at the end of PSR 1.0 is fuel efficiency.
• Short lines are the beating heart of rail service — and deal-making. No wonder they are in such demand! Our spirited panel talked deals on and off the rail line, on both sides of the plant's gate. There was disagreement on what was core — PanAm Railways EVP and Chief Commercial Officer Michael Bostwick saw it as the railroad, others as the total supply chain. And Genesee & Wyoming (G&W) has invested in Cargomatics, adding to the trend of rails putting their money where they see the future in technology. Although there were friendly disagreements among the panel participants in style and strategy, overall serious optimism abounded.
Watco EVP and Chief Commercial Officer Stefan Loeb called the company's Dow (internal switching) deal “PSR within the plant” — the biggest in the company's long history — and a real game-changer for the North American short-line platform. But they can't win them all, or all of the time — their vaunted "potato cars" saw business shift back to truck for reasons beyond their direct control. But that is the essence of short-lining: nothing ventured, nothing gained.
R. J. Corman VP of Commercial Strategy and Yield Management Alin Campian noted how the company's small, below the public radar (and auction) deals — including a new one in central Pennsylvania — were a testament to their value-add. He agreed with the majority that supply chain management was a real opportunity even for the small carriers.
• The new "Rail Pulse" GPS-based visibility/tech alliance made its long-awaited debut with a panel of three-fifths of its founding members: Norfolk Southern, TrinityRail, and GATX (Watco and G&W also are JV partners). Rail Pulse currently “controls” about 20% of the North American rail-car fleet and will start up by year-end 2022 — the architecture is set up for “phased adoption,” which could (but shouldn’t) take up to 12 years. After the initial grant monies, monetization of the data will fund the project. I truly believe it can — and will — be a game-changer. With U.S. rails at 91.6% interoperable (according to the FRA’s PTC report), change is coming. GATX brings in shippers galore — they have 8~800 customers. TrinityRail noted its “open architecture” plan — this is truly aimed as a network solution, not a small subset’s value add.
• Our annual analyst panel reflected healthy disagreement on the sustainability of the current intermodal boom, and the rate at which PSR operating improvements turn into shipper-understood service improvements. I remain cautiously optimistic on both. Gross Transportation Consulting's Larry Gross called the recent intermodal jump, and the share gain out of Los Angeles/Long Beach (both international and transloaded) a “perfect storm with all of the hurricane a tailwind” that just might not be sustainable. Gross also wonders whether Canada provides real PSR 2.0 lessons for the U.S. rails. Loop Capital Markets’ Rick Paterson noted that CSX had really jumped the fore in the United States, and that the U.S. carriers switched to growth planning from (purely) efficiency — a pattern that I see does reflect the earlier Canadian experience.
• Kansas City Southern VP Network Planning & Treasurer Mike Walczak talked about the railway's unique blend of PSR and growth planning. KCS will remain at the upper end of the capex-as-a-%-of-revenues lists, even though PSR has, as with its peers, unlocked a lot of capacity. The settling down of trade controversy clearly helps KCS —though the railway closely monitors AMLO on issues of labor, tax, and (of course) support for Pemex. Net/net, they expect a revival of strong cross-border activity (and Mike spoke before the end of the blockades). KCS reiterated its goal of full autonomy in five (to seven, as Chief Innovation Officer Brian Hancock pointed out via the Q&A) years!
• Oliver Wyman retains its role as "paradigm-challenger" at RailTrends — this year, by Oliver Wyman Partner Adriene Bailey, who shared the company's deep dive into many shipper/industries, many of whom "prefer the truck experience." This presentation may have won the informal presentation-of-the-event award: The basic theme was that shippers were increasingly relying on the reliability of trucks in this age of ever-increasing service requirements — and that the very measure cited by the rails (the so-called operating/service “metrics”) were, in fact, not the way shippers see things. Increasingly, normal rail markets were turning to the road. One slightly scary example Bailey cited was autos being sailed from Mexico to the United States. It makes for necessary understanding — as I tweeted at the time — “RRs cannot ignore!”
• Dick Kloster's annual rail-car review. When will rail-car deliveries bounce back to something that approaches "normal" levels? That is the question — one of several, questions, actually, Kloster told us, adding that 2021's totals will be flat, at best: They'll dip below 30,000 and begin to rise from there.
On Day Two of RailTrends 2020, we brought out the Big Guns, in chronological order, all RailTrends veterans:
• Keith Creel, president and CEO of Canadian Pacific, the 2014 recipient of our Railroad Innovator Award. Keith gave a clear sense of what PSR 2.0 means, CP style: A manager initially known for his operating chops has presided over a transition (a “pivot”) to growth, highlighted by a promise (kept) on St. John, huge development of their capacity (the “PSR capacity dividend”) in Vancouver (including a Maersk transload facility and an auto distribution center), and in ag (monthly records consistently in volume, new and more efficient unit trains, thanks to regulatory relief unlocking capex). This is Creel, known as “Mr. Operations,” Hunter Harrison’s famous protégé, talking growth, growth, growth. In fact, he stated that his Investor Day 2019 projections of a big growth pipeline were way too conservative (by two-thirds!) — he now expects to add fully $1 billion to the top line in the next 24-36 months!
• Alan Shaw, EVP and CMO, Norfolk Southern. In his thoughtful presentation, Alan talked about emerging and accelerated shipper trends following the pandemic experience, where shippers are becoming more risk-averse and falling into rail-centric patterns: retailers holding more inventory (and keeping it closer to consumers), near-shoring and on-shoring (I remain a Missourian here); tighter service requirements (always — and here, Rail Pulse will help a lot); increased focus on transportation costs (again, always); and ESG. NS also gets its PSR-Capacity Dividend and has more short-line partners than the other Class Is.
• CSX President and CEO Jim Foote, our 2021 Railroad Innovator Award recipient. Jim, as per his norm, noted he was just “bringing rails back to where they were 75 years ago” — even if rails were so much better than they were 35 or so years ago — and that is not a contradiction. It's applying new techniques and technologies to ideas of service developed when rails were the supply chain. He reiterated the growth plan that his CMO, Mark Wallace (RailTrends 2019 speaker), stated as the realistic goal: carload a point or two better than GDP, intermodal at 2x! Of course, COVID-19 presented (and presents) a real challenge, but also proved out CSX's PSR and IT journeys. CSX will continue to bring in outside talent and embrace new ideas. Jim is a most-deserving Railroad Innovator Award winner.
• Patrick Fuchs, vice chairman of the Surface Transportation Board. Patrick has three years left of his five and is looking forward to spending the majority of his time with a full board. This will allow for more intra-board discussion, etc. He noted there were a fair amount of open issues — revenue adequacy; the CSX Massena Lines sale to CN, which he approved (but it went 2/1 against, as is); “competition” (switching/access); rail costing (“URCS”)' demurrage, etc. — with no near-term decisions likely, but a lot to ponder. His praise for Rail Pulse shows he is an STB commissioner who “gets it."
• CN President and CEO JJ Ruest (future Railroad Innovator Award recipient, IMHO). JJ spoke two days after the 25th anniversary of the CN IPO — one of the best business success — much less merely “privatization” — stories ever. The return from the IPO is about 6,000%. JJ discussed two major points:
1. PHR (post-Hunter PSR) — JJ refers to it as the “existential question” for rails (which I have included in my discussions on the “Cult of the OR”): Is PSR about (only) efficiency or is it about growth? Would you want to be a $15 billion company at a 55% OR, or a $25 billion company at a, say, 59% OR.
2.The Introduction of the DSR — the Digitalized Scheduled Railway (PSR 2.0+) via CN's well-known tech initiatives (mostly what I would characterize as “defensive” or ops-focused, although of course that reliability and capacity created can be marketed). There will be more to come from CN's new chief technology officer Dominique Malenfant, who came in with such an impressive resume (Wabtec, GE, Bombardier) — my initial impressions have been very positive. I also hope — along with their own supply chain technology efforts — to see CN participate in Rail Pulse!