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By Tony Hatch, abh consulting
A good crowd of hardy souls involved across the spectrum of rail
operations and finance gathered in New York City Sept. 30-Oct. 1 for RailTrends 2008
and heard some rather scary things from bankers and government (no
surprise). But they also heard encouraging words from participants
representing a variety of rail and infrastructure development positions
— from large rails to small, from ports to power plants, from rail
equipment owners to users. All in all, RT08 provided more confirmation
that, even in tough times, the rail secular story stands out.
Finance "Apocalypse Now"? RT08 kicked off with officials from Platinum Sponsor and abh consulting partner
Miller Tabak + Co. L.L.C., who analyzed the explosion of derivative
investment in the rail group, above and beyond the swaps that gained
notoriety in the CSX-TCI case. They (Miller Tabak Co-CEO Jeffrey Tabak
and Strategic Stock Surveillance EVP Erin O'Reilly) also noted that
mutual funds represented three quarters of rail equity ownership in
2003, with hedge funds at about 10 percent — now, hedge fund ownership
is at 28 percent and traditional funds down to 59 percent!
The annual analyst presentation brought more diversity of opinion than
usual, with UBS' Rick Paterson doubting the longevity of the pricing
story that both Tom Wadewitz of J.P Morgan Chase and I espoused ... and
(yet) Rick believes the Union Pacific "turnaround" story has more
"legs" than Tom does. The "Impact of the Credit Crisis on the Rail
Industry" panel was scary — essentially, the credit markets are frozen,
even for investment grade companies, although rail credits have
outperformed the market and other industrials as much as their equity
The Rail Equipment Finance panel was a bit more reassuring — after all,
the asset values of rolling stock and locomotives provide excellent
collateral. It is worth noting that fully a quarter of the rail
private-car fleet is or was just recently for sale, (however, as I've
started in the past, it's been more often than not due to the parent
companies' financial conditions brought on by non-rail lending). In
addition, current lease rates are out of historic kilter with asset
values, and rail velocity improvements will begin to have real impact
on fleet sizes, which is actually good news.
Also, we heard from a few speakers on rail cars — notably the Railway
Supply Institute's Tom Simpson, leasing company execs and RT standby
Toby Kolstad — that next year looks bleak for the rail car OEMs. For
'09, Toby projects 42,000 deliveries (compared with about 50,000 this
year and down from the recent peak in '06 of 75,000), and it's already
looking 10 percent to 20 percent too optimistic.
Trading Places — Funding (debt, infrastructure improvements, etc.) was the recurring theme.
Would the private sector recover? Would the government(s) have any
money to spend? We heard two excellent presentations on public-private
partnerships (PPPs) as a funding source, from the successful to date
(Norfolk Southern's Heartland and Crescent corridors, with NS EVP Jim
Hixon offering details) to the not-yet (CREATE, an update for which was
provided by CSX Transportation AVP Mark Hinsdale). But will the
government come up with funding even for PPPs that are incredibly
Government — "Who's in charge here?" We also heard from two
members of Congress, both from Florida — U.S. Rep. John Mica (the
minority leader on the House T&I Committee) and U.S. Rep. Corinne
Brown (the head of the T&I Rail Subcommittee). The Floridians split
their votes along party lines on the first "bailout" plan and disagreed
on similar lines about Amtrak, but they both agree quite passionately
that freight rail is a present and future solution to infrastructure
needs. Mica extolled the need for an Eisenhower-type plan, with
high-speed rail and potentially a $1.5 trillion transportation budget,
perhaps $500 billion to come from the reauthorization of SAFTEA-LU next
year. As Mica predicted, Congress on Oct. 1 passed the Safety Bill,
which would add to hours-of-service (and thus some costs), though in a
much less Draconian way than the original House version, and mandate
positive train control (PTC) by 2015 (funded by a mere $250 million, or
far less than 10 percent of the cost). The PTC provision, on the heels
of the California tragedy, includes passenger and most freight
mainline, but the details will be key (interoperability and cost
allocation being the major ones).
Associations plan for calm after the wind. Both Cliff Mackey of
the Railway Association of Canada (RAC) and Ed Hamberger of the
Association of American Railroads (AAR) gave solid and forceful
presentations on the continued need for vigilance on "re-reg,"
especially as "deregulation" becomes a bad word in D.C. The RAC (backed
by CN) is trying to actually bring deregulation to the last holdout in
Canada, the export grain transportation business (which as presented
ought to be a great cautionary tales for Rep. Oberstar about getting
what you wish for). The AAR is looking for the Surface Transportation
Board to announce on Oct. 25 whether it'll open a proceeding on
replacement costs, looking at toxic inhalation (TIH) risk-capping, and
also getting all the unions back as allies in the 2009 "re-reg,"
investment tax credit and SAFETEA-LU battles.
Railways — organizing for the future. BNSF Railway Group VP
Kevin Kaufman and CN SVP Marketing J.J. Ruest gave great presentations
on ag, which will remain a bright spot even as cyclical traffic looks
even less certain. The export grain story continues to appear solid
into the immediate and intermediate future despite the "noise"
presented by the financial crisis and the Baltic Freight Index (really
driven by coal and coke). We heard about the other major bulk from the
American Coal Council's Jason Hayes, who stated that despite the
enormous overhang of regulatory/legislative uncertainty, coal ought to
continue to grow at about a 1 percent (compound annual growth rate)
domestically supplemented by exports. John Giles, president and CEO of
Fortress' RailAmerica highlighted their progress, bringing the group
operating ratio to 80 percent by fixing, not selling. Interestingly,
Giles stated that RailAmerica would remain on the sidelines on the
acquisition front (unlike Genesee & Wyoming) — for now.
Intermodal will lead the rails out of the darkness. I have
oft-stated my belief that international exports will recover whenever
the economy does, and that true domestic will be the growth leader in
the next economic cycle. RT08 featured three presentations that support
my thesis. Rodolfo Sabonge, VP of Market Research and Analysis for the
Panama Canal, gave a great overview of the big ($5.25 billion)
expansion plan under way, which will allow for container ships of up to
12.6 thousands TEUs (triple today's 4,000) to traverse the canal by
2014. Although a positive for the intermodal industry, it only adds to
the Great Debate between the anticipated growth of West Coast and
All-Water import movements.
Will U.S. ports be ready for the bigger ships given the government
funding issues? UP VP of Intermodal John Kaiser, who delivered one of
RT08's Day One keynotes, clearly believes in the future of the West
Coast. UP expects to benefit form massive capital projects that enable
the Class I to take advantage of what it believes are route structures
either superior to (the Sunset) or equal to (L.A.-Chicago,
Seattle-Chicago) western rival BNSF's. But has BNSF created a "brand"
in those markets? Kaiser didn't comment on Pacer and the big contract
expiration, of course ... but he did highlight the growth and
opportunity of UP's new Streamline product, which is clearly a response
(or shot off the bow) to 2011. He also noted that for UP, intermodal
represents a big portion of legacy contract opportunity, and that UP
(and BNSF) also had only 30 percent of western intermodal — meaning
that they, too, could participate in the coming domestic opportunity.
Finally, Kansas City Southern SVP Intermodal & Automotive Brian
Bowers discussed the Mexican market and KCS' value proposition in
cross-border intermodal, where Laredo issues and
difficult-but-manageable operating problems (drayage, ease of doing
business, lack of commitment), coupled with terrific opportunities (low
current share, 10 percent to 25 percent potential shipper savings, big
truckload and parcel trucker partner potentials) make KCS' effort look
Shippers raise the red lantern. Rail shippers in the audience
and on stage noted that not all was well, and not just on Wall Street.
Certainly, the liquidity impact on the consumer is the biggest overall
fear. But service challenges remain. Leslie Moll of ArcelorMittall USA
(the largest steelmaker in the country) gave a most enlightening
presentation, noting that the steelmaker would love to use more rail
but complexities and their own lack of institutional knowledge made
rail share gains difficult, if not currently impossible. In fact, Moll
noted that ArcelorMittall planned an enormous plant expansion in
Indiana, but due to what they perceived as NS' intransigence on pricing
(etc.), the company did not even include a rail spur! But with 2,500
truckloads a day and the desire to save costs, this, to me, is both a
sign of rails' past and the symbol of opportunity in the future. We
also heard from and met Bruce Carlton, the new leader of the National
Industrial Transportation League, who comes off as an intelligent
observer seeking to get up to speed on rail issues.
RT08 sought to provide discussion on a diverse mix of rail-related
issues, and in the end, delivered. We didn't know how "lucky" (?) we
would be in the timing of some of our financial discussion, but we
remain convinced that this, too, shall pass. Meanwhile, bruised and
battered but very much alive, the "Railroad Renaissance" endures.
RailTrends Program Consultant Tony Hatch of abh consulting is an independent transportation industry analyst/consultant.