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By Tony Hatch
The North American Rail Shippers’ (NARS) annual convention in San Francisco (May 18-20) was another in a string of interesting industry events. If it was slightly less crowded than last year’s event, it might’ve been because shippers serving the housing, auto and (to an extent) consumer segments were absent. But the key takeaways were more of the same on rail pricing trends (despite creeping “re-reg” efforts) and, sadly, on near-term volume trends.
As chair of the AAR, CSX Corp. CEO Mike Ward offered up a forceful, if brief, defense of the need for returns to maintain capex and thus capacity; notably, he supported the AAR’s efforts for investment tax credits and replacement costs. Following Ward, representatives from the (at that time) three candidates for U.S. president provided campaign updates. Short on substance? Yes. But it’s the first time I’ve heard discussion on infrastructure in any campaign.
Among the rail customers in attendance, the National Coal Transportation Association (NCTA) admitted to rail service improvements, if a bit grudgingly, but said issues with rate “reasonableness” and the appeal process remain. And while the group supports ECP brake technology, NCTA isn’t sure its members should pony up the $4,000 to $5,000 per car to implement it. The American Chemistry Council (ACC) was reasonably neutral, providing some mutually good news: ACC believes the U.S. DOT procedures on haz-mat movements would federalize local NIMBY efforts. On the other hand, the American Forest and Paper Association brought a pleasant demeanor to a fairly broad attack on four fronts: car supply, competition (“30 percent of our members are ‘captive’”), service (questioning rails’ commitment to manifest business, and wondering if all of future capex and ITC benefits would go to intermodal), and (of course) price. The AFPA supported the proposed anti-trust legislation and is “encouraging their members to participate in the Christensen Associates study on rail competition.”
On the heels of Union Pacific Railroad’s loss of the Kansas City Power & Light rate case, the Surface Transportation Board keynote was most interesting. Rachel Danish Campbell, Chairman Nottingham’s chief of staff, was thorough and direct, offering hints that shippers could take the cause of underinvestment by companies owned by new-investor types to the board. (Really? Why would they if the returns hold up?) The UP case, by the way, looks like a one-off, with UP apparently deciding against arguing on stand-alone costs for reasons of reasonableness and economy. But we could be seeing signs of a more active STB.
(Note: The anticipated shipper win in the E.I. du Pont de Nemours and Co./CSXT rate cases was registered after this column was written.)
Meanwhile, all seven major rails’ chief marketing officers (CMO) spoke on a panel, demonstrating their commitment (to shippers, and directly, to carload business. Substance was absent due to antitrust considerations, but the CMOs did deliver a few key points — notably, that the diversity of the overall rail franchise (and the intermodal story) was really a benefit to all shippers, as I have long argued. UP allowed that it spent $570 million of last year’s $3.1 billion in capex on the chemical corridor, and several billion in the last few years. Norfolk Southern Railway focused on its new Patriot Corridor, a co-investment à la Meridian with the former Guilford that gets NS solidly and singly into New England — and which has gotten somewhat short shrift from the investment community.
Day 2 involved analysts (myself included) and intermodal — a great panel on the eastern/all-water opportunity. The Virginia Port Authority (VPA) saw the service differences between West Coast mini-landbridge (MLB) and Norfolk narrowing, especially as ships get faster (while noting that they’re slowing down in the face of the fuel cost spike) — with reduced service variation.
Unfortunately, there wasn’t a western carrier there to rebut that, but NS did declare themselves to be coastally agnostic. Yet the Class I noted that even though all four of its new corridors (Meridian, Crescent, Heartland and Patriot) supported movement in both directions, they had gone from 58 percent MLB in 2004 to 48 percent today (on the way to 40 percent?). Where’s the break-even? Chicago (for VPA)? Columbus (western rails)?
Finally, we heard from the big Kahuna: Wal-Mart Inc. spends $400 million on intermodal a year and that should grow as fuel costs and shipment size changes push that product. Wal-Mart looks to its diversification strategy for reliability (by arriving closer to its hubs, which favors its own truck fleet) and risk (after, say, the 2002 West Coast dockworkers’ strike that still haunts them), which also supports all-water. The biggest nugget? The ever-shrinking package size, which will have a huge impact on future logistics.
Tony Hatch is an independent transportation industry analyst/consultant.