Reflections on RailTrends Plus

20161212 Tonyhatch (Cropped)

Greetings;


I am now out of my third quarantine of the pandemic (we’re fine – the old AOC/”abundance of
caution”)….RailTrends was, in my own, humble (?) opinion, another smashing success. Below are my
reflections looking back at RT2020. Thanks to my partners at Progressive Railroading/TradePress, the
sponsors, the speakers (!), the Innovator of the Year Jim Foote, and, of course, the attendees (OK,
“listeners”). The First Day had a mix of the tried & true (panels, rail cars) and the new & challenging (Rail
Pulse, O&W), below. The Second Day brought out the bigger guns (three CEOs, a CMO, and a ViceChairman). But as usual, the world only seemed like it stopped turning…..


First from the tweets (with punctuation etc re-applied!) i.e. the recent big news coming from the railway
industry:

  • Two-Ocean Railway – CP and CEO Keith Creel are as good as their word – as promised at
    RailTrends (etc) CP signed up a major steamship line (Hapag Lloyd) to the port of St John NB,
    matching CN with Canadian Maritimes port access and creating a “hedge on China”; CP
    regained access to the port 18 months ago through the CMQ deal….CP already had access to
    Montreal, of course, though that port has size restrictions. In fact, it was a strike at the POM
    that allowed for CP to have a trial run if you will….
  • The big news - So it's true: CSX has reached a deal to buy the Pan Am. Details weren’t released
    (yet? Pending STB filing). No word (yet) from NS, which made a pre-emptive appeal to the STB
    re: their Pan Am Southern JV. It’s a big deal, but also a small deal ("less than 1% of market
    cap/revenues"); it’s also likely not cheap, and reasons (CSX’ need to own a market they already
    have some measure of access and control over) were initially unclear...But further
    conversations with locals and observers suggest there are opportunities on “both sides of the
    ball” (economies and synergies) as well as port access of a fashion (St John, again). And that
    Maine paper business is suddenly hot, hot, hot.

    • As we get to know this better it will be interesting to see if this is a “big railroad deal” (a
      la CP/CMQ) or can CSX retain the local business that Pan AM has worked so hard
      (propane, Poland Spring water, etc) to develop….
    • This deal, like the contraction then growth of CSX’ Intermodal business, follows a
      pattern we saw at CN – in this case, the addition of contiguous regional/short lines to the
      mothership. It isn’t clear how many deals are like the Pan Am, a unique asset, but if
      there are more opportunities, we have seen the playbook….And CSX is clearly done for
      the time being with selling short line segments….
    • We expect STB approval but not immediately – after al, the CP-CMQ took nine
      months….
    • Two big questions emerge, however:

      • Wither NS? What are the conditions set in the 2009 creation of the Pan
        Am Southern JV? How will CSX accommodate them? The PAS runs 4
        full trains/day (2 in each direction); will, as some speculate, a “New
        Conrail” deal be set up? Will they be bought out?
      • Where was GWR in this, seemingly made-for deal given their rich
        owners? Wasn’t what Brookfield bought GWR for? I certainly think that
        NSC thought so….

  • The STB is finally staffed: Primus & Schultz were officially confirmed to STB tonight - so my
    latest report (earlier tonight) is incorrect & there is now (or soon) a full complement of five STB
    Commissioners – which will likely lead to a...
  • abh Podcast - Jeff Berman of Logistics Management and I held a post-RailTrends fireside chat - :
    https://www.logisticsmgmt.com/podcast/the_state_of_the_freight_railroad_and_intermodal_s
    ectors_with_tony_hatch.
  • Mexican teachers back to school and off the tracks - The blockades against Mexican railways
    appear to be over - great news for KSU whose Mexican IM is running down ~15%. The 2-month
    blockade was by teachers - not rail-related (see CN in the winter) - but big collateral damage.
  • Have 2 RRs invested in AV trucking? According to "Tech Crunch”: the investment in AV tech co
    Tu Simple stands out because of its size($350mm) AND the array of companies involved.
    Goodyear, UNP, CNI, trucker USXpress & retailer Kroger all participated in the round….This is
    really interesting and coming after the announcement of Rail Pulse (below) and the various
    other internal tech commitments and initiatives and big new hires (CN and UP –
    coincidentally?), is solid evidence that the rails are using their financial power to compete in the
    tech race….It also follows the pattern established by rails of making small outside investments
    starting with the so-called first internet boom at the start of the century; in this case it’s
    fascinating that rails have invested in what is perhaps the leading player in the “existential
    threat”. Is it like a sail-maker investing in Fulton’s steamboats? Or is it a page out of Sun Tzu
    (keeping friends close….)


RailTrends 2020 Highlights – and there were a lot even if we missed the informal aspects of our
annual event (please reach out to me for more detail on any of the specific presentations):

  • RT20- The DC/Ottawa/Mexico Trade Association Panel take away - lots of rail issues, of course, in
    the coming administration and legislation year, but we all need to be patient. The (any)
    incoming administration, like the STB, likely means a get-up-to-speed period and staffing in
    transport isn’t as high a priority, history tells us, as perhaps it should be. As the AAR’s Ian
    Jefferies noted, with the time needed to find, hire and approve positions, expect lots of
    discussion little action until midyear earliest, at the White House, in Congress, and at the DOT
    (FRA & STB). Crew size mandates will be a long and laborious process, through Congress, the
    FRA and the courts. More on this issue and on Ian’s overall view below. The ASLRRA (short
    lines) in the person of Chuck Baker talked 45-G ITCs, of course, extended through 2022 (with the
    Sisyphusian a task of rebuilding the coalition in the new Congress to attempt to make that tax
    credit permanent) – but also the importance of so-called “CRISI-grants”, which totaled $150mm
    to the short lines (and ~$8mm to Rail Pulse!) in 2020. There are two upcoming legislative issues
    – the reauthorized FAST Act (which was extended for a year, naturally) – which is where in 2019-
    20 the infamous/ridiculous 2-man crew mandate was placed and therefore remains a
    threat....again, see below….

    • The NRC’s Ashley Weiland noted (among other things of course) the impact of Covid-19
      on transit, with its impacts on rail contractors and suppliers; meanwhile the RSI’s Nicole
      Brewin noted the huge effect of China (CRRC) on car-building, and how that unfair
      competition must be addressed.
    • Both Canada (the RAC’s Marc Brazeau) and Mexico (SCT’s Alejandro Alvarez Reyes) had
      great slides and discussed share – in the former’s case, how intermodal has gone from ¼
      of the volume to 1/3 in only five short years; in the latter how rails hold a 255 share and
      the goal is for fully 40%.

  • ESG is here to stay a recurring theme here, there (RR Q3 webcast), and everywhere is ESG. EVP
    Beth Whited of UNP spoke today on ESG. Others noted it was important - but ONLY after
    transport value (price/service). But it’s a growing and thriving investment form – see, for
    instance, the big fund (remember them?) TCI's demands of CNI and CP (they submitted
    shareholder proposals on climate action pans) and it is investors that will drive this revolution;
    note that all of the rails devoted a slide, out of ~10, in their Q3 webcasts to ESG. The AAR’s Ian
    Jeffries (see below) told RT20 that we should expect to hear more from rails on climate change
    in the future. Also, a major cost-focus in 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 – Pan Am saw it as the railroad, others as total
    supply chain (and GWR invested in Cargomatics, adding to the trend of rails putting their money
    where they see the future in technology). Although there were friendly disagreements in style
    and strategy, overall serious optimism abounded:

    • Watco called their Dow (internal switching) deal – “PSR within the plant” - the biggest in
      their long history – and a real game-changer for the NA 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….
    • RJ Corman noted how their small, below the public radar (and auction) deals – including
      a new one in central PA - were a testament to their value-add….they agreed with the
      majority that supply chain management was a real opportunity even for the small
      carriers, and looked to join RP (IMHO) soon….

  • The new "Rail Pulse" GPS-based visibility/tech alliance made its long-awaited debut with a panel
    of 3/5 of its founding members (the first 3 of the JV - NSC/TRN/GATX/Watco/GWR. R/P as of
    now has “control” ~20% of the North American railcar fleet and will start up by YE2022 – 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; see below….With US rails at 91.6% interoperable (from the
    FRA’s PTC report), change is coming….

    • GATX brings in shippers galore – they have 8~800 customers. Trinity noted its’ “open
      architecture” plan – this is truly aimed as a network solution, not a small subset’s value
      add.

  • The annual Analyst Panel shows 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 and my slides are
    attached (actually, a longer version built for the annual Northwestern University Transportation
    Center’s Sandhouse Rail Group’s annual Holiday Luncheon, tomorrow). Larry Gross called the
    recent intermodal jump and the share gain out of LA/LB (both international and transloaded) a
    “perfect storm with all of the hurricane a tailwind” which just might not be sustainable (and
    wonders whether Canada provides real PSR 2.0 lessons for the US) – more on Larry’s views
    tomorrow. Loop’s Rick Patterson (oi!) noted that CSX had really jumped the fore in the US, and
    that as the US carriers switched to growth planning from (purely) efficiency) – a pattern that I
    see does reflect the earlier Canadian experience.
  • Kansas City Southern’s Mike Walczak, VP Network Planning (& Treasurer) talked about their
    unique blend of PSR and growth planning. KCS will remain at the upper end of the Capex-as-a-
    %-of-revenues lists, despite the fact that PSR has, as with its peers, unlocked a lot of capacity.
    The settling down of trade controversy clearly helps KCS – though they closely monitor 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 their
    goal of full autonomy in 5 (to seven, as CIO Brian Hancock pointed out via the Q&A) years!
  • Oliver Wyman retains its role as "paradigm-challenger" at RT20- this year by Adrienne Bailey
    showings OW’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 – it
    is attached. 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 cited was
    autos being sailed from Mexico to the USA. It makes for necessary understanding – as I tweeted
    at the time – “RRs cannot ignore!”
  • For Dick Kloster’s annual rail car review, see next report.


Day Two brought out the Big Guns, in chronological order, all RT veterans:

  • Keith Creel of Canadian Pacific, prior winner of the Innovator of the Year 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 promised (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 more efficient unit trains thanks to regulatory relief unlocking
    CAPEX)….This was “Mr. Operations”, Hunter’s famous protégé, talking growth, growth,
    growth….In fact, he stated that his Investor Day 2019 projections of a big growth pipeline were
    way, way too conservative (by 2/3!) – he now expects to add fully One Billion Dollars to the top
    line in the next 24-36 months!
  • CSX’ Jim Foote, our 2021 Innovator of the Year: Jim as p
  • Alan Shaw, Norfolk Southern’s EVP of Marketing (CMO): Alan’s thoughtful, well-regarded
    presentation talked about emerging and accelerated shipper trends following the pandemic
    experience, where shippers are becoming more risk-averse and falling into rail-centric patterns:
    retailors holding more inventory (and keeping it closer to consumers), near-shoring and onshoring (I remain a Missourian here), tighter service requirements (always – and here R/P will help a lot), increased focus on transportation costs (again, always) – and ESG. NSC also gets its PSR-Capacity Dividend – and has more SL partners than the other Class Ones. More on Alan’s presentation below…. er, his norm noted that he was “bringing...
  • rails back to 75 years ago” – even if rails were so much better than 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 (RT19) stated as the realistic goal – carload a point or two better than GDP, intermodal
    at 2x! C19 was, of course, a real challenge (and remains so, in the “second – or whatever
    number – wave”) but also proved out their rail’s PSR and IT journeys. CSX will continue to bring
    in outside talent and embrace new ideas. More on Jim’s discussion both above and below; he is
    a most-deserved IoY winner.
  • Patrick Fuchs, Vice Chairman of the Surface Transportation Board: He has three years left of his
    5 and is looking forward therefore to spending the majority of his time with a full board (this will
    allow for more intra-Board discussion, etc). He noted that 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 that he is
    an STB Commissioner who “gets it”.
  • Canadian National’s CEO JJ Ruest (future IoY, 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 IPO is ~6000%. JJ had two major points:

 

    1. PHR - one was what he called the “existential question” for rails (which I have included
      in my discussions on the “Cult of the OR”) – is a railroad about (only) efficiency or is it
      about growth? Would you want to be a $15B company at a 55% OR, or a twenty-five
      billion-dollar company at a (say) 59% OR?
    2. The Introduction of the DSR – the Digitalized Scheduled Railway (PSR 2.0+) via their by now 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 their new CTO who came in with such an impressive resume (Bombardier/Wabtec) – my initial impressions have been very positive. I also hope – along with their own supply chain technology efforts - to see CN participate in R/P!


This year, as mentioned, the (Democratic) house attempted to legislate two-man crews – that is over-reach
(it has been a negotiation since, literally, time immemorial, and it is counter to the drive to technology
(by year-end with PTC the rails are – from an IT perspective – almost ready for full autonomy on railways
and this race vs. AV trucking is….everything). It makes no sense (except for politics). DC will also see a
full complement (5) of STB Commissioners….the AAR and the ASLRRA (and IANA, NRC, RSI, RSSI, REMSA,
RTA etc.) will have lots to do in 2020!


Some write-ups of RT20 by key industry columnists (two from Berman/Logistics Management, one form
Bill Stephens of “Trains”):

  • https://www.logisticsmgmt.com/article/ns_executive_highlights_the_need_for_freight_rails_to
    _take_a_more_customer.
  • https://www.logisticsmgmt.com/article/aar_president_and_ceo_jefferies_addresses_myriad_fr
    eight_rail_issues_at_rai.
  • Class I railroad executives tout growth prospects, customer focus | Trains Magazine.


Finally, if 2020 hasn’t done enough: 2 Women Charged With Train Terror Near Canadian Border - Ellen
Brennan Reiche, 23, and Samantha Frances Brooks, 27, were accused of tampering with (BNSF) train
tracks to disrupt signals and possibly cause derailments, according to a criminal complaint.
https://www.nytimes.com/2020/12/02/us/train-shunt-washington.html?smid=em-share.


Tomorrow – what else I missed while being quarantined and reflecting on RailTrends….

 

 

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

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