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The underlying theme at RailTrends® 2022 (held Nov. 15-16 in New York City) was the need for culture change in terms of customer and labor relations, which should lead to improvements in Washington relations, as well.
The rails continued to talk about growth — which, as was pointedly noted, the theme of RailTrends last year, as well. So, starting with the skeptical side:
1. STB Chairman Marty Oberman not surprisingly took the U.S. Big 4 Class Is to task, but in perhaps the most persuasive way yet. He claimed rails are monopolies (again, see highways, publicly supported) that do not serve the public interest — and that through their labor reductions that, in effect, already have caused the industry and its customers to suffer the effect of “a partial lockout.” Furthermore, by using the AAR’s estimate of a (now moot point) $2 billion per day impact from a rail work stoppage, the economic impact was in range of $100 billion! While I don’t really agree with that, and I don’t fault the rails (or any industry) for layoffs in March-May 2020, it was hard to argue that the rail industry was and is less resilient. Meanwhile:
• At least three of Oberman’s fellow commissioners were in the audience.
• His best line: “Rails said at RT21 that they were pivoting to growth and all I got was this lousy T-shirt!” Look for merchandise tables at RT23.
• Oberman hinted that STB would look at embargoes as a way of managing rail congestion, and so he/they did (see upcoming Union Pacific hearing). Therefore, I would take seriously his hinting that common carrier obligation would be a means to an end in 2023.
• It was hard to argue with the complaints, as stated — and given that Oberman did not propose any government-intervention solutions, so far, so good.
• AAR’s Ian Jefferies and ASLRRA’s Chuck Baker, whose excellent fireside chat/panel preceded the chairman’s address, would agree. For all the sturm und drang, Messrs. Jefferies and Baker see a clearer path to success than they saw during the legislative threat era (circa 2009).
2. Oliver Wyman’s Adriene Bailey once again called for broad changes in the railways in order to address the significant decade-long loss of market share. She offered the following suggestions:
• Acknowledge the need for change. (I would say — given recent conversations with the new CSX President and CEO Joe Hinrichs, including at a RailTrends dinner, for example — that this is happening.)
• Use the downturn as a runway to change, and not in the traditional way of cost-cutting to maintain near term earnings — which we shall see, and which also relates to:
• Convince investors of the value of growth — again, rails have been talking that talk, so I believe that, despite the usual dumb OR cult remnants, is also happening (or beginning to).
• Foster supportive regulatory regimes. The jury is out here, with the focus on the near term.
3. The Analyst Panel was supportive of Bailey’s call — particularly Loop Capital Markets’ Rick Paterson, who continued his clarion call that the pursuit of shareholder value has removed rail from the public interest obligations — which are supportive of long-term growth, citing my “Cult of the OR” as an example. It’s hard to argue with that — in the past (although, of course, everyone in the supply chain is pursuing shareholder value to some extent). I would argue that is past behavior, and that the growth pivot is the only option … but the facts on the ground support Rick, for now. Meanwhile, Larry Gross gave a rather pessimistic outlook for intermodal (IM), although not because of rail strategy (sure, service isn’t helping — “cycle times nor on-time measurements are not at all truck like” — but Larry sees the entire IM supply chain) but because of weakening domestic IM trends since spring (“really a market demand issue”), a “non-existent” fall peak and accelerated West-to-East port migration, some of which might revert.
And now from the more optimistic side:
4. Short Lines! Of course, from the entrepreneurial side, there’s always optimism. First, Rick Webb of Watco deservedly won our annual Railroad Innovator Award. Watco recently made the Forbes list of best mid-sized companies, the only rail to do so. After receiving his award, Rick delivered an address that emphasized culture, service and logistical solutions, which Watco has perhaps best exemplified in the entire freight rail industry — from switching to ports to traditional short-line creation. And he offered a lesson for the big guys: Grow volume, not just price (a big short-line theme), balance stakeholder interests and embrace technology.
• The short-line chief commercial officer panel is always my highlight. Again, culture was stressed (Railroad Development Corp.’s Henry Posner III); cooperation with the big rails, as well (despite the coming general “war for talent” and the impact of the Class I labor inflation on SAL compensation). The short lines pushed back on the new trend of Class Is to push back on certain growth (or “curate” — see #7 below) because of their inability to handle it (Anacostia Rail Holdings’ Eric Jakubowski); there’s hope that with crew hiring, that might change. There have been successes of note — R. J. Corman (represented by Justin Broyles) added a line in North Carolina; Genesee & Wyoming (repped by Michael Miller) added a Hyundai plant (!!) in Georgia. … CPKC was seen as either a great direct benefit (Watco) or an indirect one (Anacostia, noting the deal might allow more focus on north-south opportunities); RDC noted that Davenport, Iowa, floods a lot. … The panel was worried about deal valuations (no surprise — they are at least partially in the deal business), with some wondering if some of the big funds might sell out and what that might mean. Broyles saw a cooling off period after a hot half-decade (but there were a lot of private equity/infra folks in the audience lapping that up!). …The short lines are extremely confident in themselves and their individual ability to grow and to serve — but they have, shall we say, a healthy skepticism about rails’ growth pivot (I almost placed them in the top group, the skepticism category). But their work as a buffer, switcher, promoter, entrepreneur makes me place them overall on the optimistic side.
5. Technology! RailTrends has always tried to focus on tech & rail, and we were blessed by two tech presentations (and many tech attendees), in addition to Rick Webb’s clarion call.
• RailPulse gave an update – it’s getting closer! It was a great coming-out party for the new general manager, employee #1 David Shannon; as well as UP for the first time, for me, anyway (Josh Perkes of LOUP Logistics); as well as the Moses of the RailPulse tribe, Norfolk Southern’s Mike McClellan; and the always quotable Eric Monger of KBX Rail (“Covid killed JIT”; just one nugget). RailPulse is in the second of three pilot stages with various equipment types and still is sticking to a second half of 2023 rollout.
• Rahul Jalali, SVP/CIO of UP and ex-WalMart-er, gave the last but potentially the most critical presentation. He is one of three CIOs to enter Class I railroading form outside the industry and is charged with taking UP’s big-tech legacy, with historic successes and historic baggage (and size) and bringing a real sense of speed to market (for example the SAP/Cloud conversion in Omaha). He emphasized that the UP board showed its backing by outlining a multiyear rather than annual budget and tempted us with discussion of automation (mobile yard switching, train pacing, the latter a key to onboarding the big new IMC customers UP has won).
• Maybe we’ll get another temptation of rail autonomy as CSX has just applied to the FRA (not a sympathetic audience) for the right to use Wabtec’s Trip Optimizer to stop/start trains. But this “zero-to-zero” program is being pitched not at labor but fuel — and emissions savings. Wicked smaht …
6. The big new deal — CPKC! We heard from both sides, country (Keith Creel of the CP) and western (Pat Ottensmeyer — not his farewell, he insisted — from the KCS).
• Pat and the KCS have gone on a memorable journey — not just from inception/concession (TFM, Mike Haverty, etc.), but in the nearer term, starting with the election of 2016 when Jim Cramer listed KSU as the No. 1 short after the Trump victory. And the battle from NAFTA to USMCA was stressful and ultimately victorious, in part after Pat got seriously politically involved (I would argue it was a heroic victory in restoring the status quo ante bellum). When you’re dealing with the opportunities in Mexico and linking USMCA, the war is never over — after the AMLO fight over refined product imports (it’s quieter but hardly over), now the talk is banning US-GMO corn by ’24. As with energy, it is a battle between political rhetoric and economic reality. Meanwhile, KCS plugs away —witness the second Laredo bridge, and it’s just one example. Most of the CPKC transition team was in the audience at RailTrends.
• CP is excited, boy howdy! (Yeah, I know I assigned Pat the western role in this Blues Brothers bit). Keith emphasized that “the mandate is growth” — for some reason, no one is skeptical when he says it. In response to my question about the relatively low estimate for “trucks off the highway” (~160-170K) versus rail competitive wins, he hinted strongly that the estimate was low, noting the Laredo opportunity as an example (I reiterate that my belief that the CPKC emphasis on rail-rail competition, while real, is also political). Aside from the growth mandate, Keith stressed a few politically correct themes: stakeholder growth, scalable infrastructure (and not “over-subscribing”) and hydrogen locomotive development (after he left NYC, he sent us a short video of CP’s new power unit on its first revenue run, and we showed it to the RT audience at the summit’s end).
7. CN — Tracy Robinson’s first RailTrends, after a hurricane forced us to reschedule our 2012 event and she, then with CP and on that year’s speaking agenda, couldn’t make the new date. Now, we now know more than we did then … so when I look back at her comments, which were very well received, about “team building from within and without,” I wonder … but at the time, what I took away was that the so-called “curation” of the book of business was mostly done by now, and that after a few good quarters (getting their mojo back) that there was “meaningful growth to be had.”
8. Norfolk Southern CMO Ed Elkins is a great communicator, even if he was hamstrung to a certain extent by being a few weeks shy of NS’ own Investor Day (12/6). So, while he was unfortunately revelation-free, he was confident. Ed noted as a marketer he was (finally?) benefitting from “boots coming on the ground” and improving sequential numbers, starting with crews and moving to metrics. He sees highway conversion still as the greatest opportunity, as well as market reach extension through short lines, transloading, etc.
9. CSX and Jim Foote’s farewell. OK, this will also be sort of revelation-free. But I can sum it up as: You had to be there. Jim off the leash. It was peak Foote. Unfortunately, though we had (and are thankful for) 4/5 of the STB in attendance, we did not have Commissioner Primus, or we might have been able to stage the “Reprise at the Marquise.” Jim noted many events of his long career (so, cleaning grain cars is not actually glamorous), that PSR worked at CSX, that the North American freight-rail industry, while hardly at its peak, remains the envy of the world, that rails must improve in two major areas — labor relations, and first and last mile — and that he was off into the sunset. Dinner with his successor gives me confidence that major changes and successes at CSX are not riding off with Jim but will continue.
10. The rest of the conference and the attendees — OK, look, I needed 10! So, time and events preclude me from going into details about the associations panel (consider attending NRC in January and Railway Interchange in October), Dick Kloster’s annual rolling stock review, or a great presentation by Andrew Harding, CEO of the largest railroad in Australia (Aurizon) — a truly fascinating Rubik’s cube of opportunity and challenge worth the time to look into (contact me). Also note again the power of the audience: The majority of the STB, as noted, and of the KCS portion of the transition team, as well as retired PSR officer Sameh Fahmy; COs from two Class Is; major leasing company CEOs and supplier leadership; among others. All of that may not have made it into my Top 10 but they will inform me as we head into 2023.