Back on Track
Railroad Weekly Mar. 28, 2022
Inside This Issue
· Back on Track: CP Running Again as Labor Clash Ends
· The Floridian and the Meridian: CSX Has a Beef with NS
· Operation Modernization: NS Upgrading its Locomotives
“While arbitration is not the preferred method, we were able to negotiate terms and conditions that were in the best interest of our members. Our members will return to work at 12:00 (noon) local time today.”
-Statement (March 22) from the Teamsters Canada Rail Conference (TCRC)
· The dispute was mercifully short. Canadian Pacific’s shutdown lasted just two days, ending when management and the Teamsters Canada union agreed to binding arbitration. That means a neutral party will decide the terms of a new work contract, after hearing arguments from both sides. The two big issues still in dispute are wages and pensions, following last-minute compromises on other key matters including work rules and benefits. Surely Canada’s government, at the behest of worried shippers, put heavy pressure on the union to accept binding arbitration, something it initially resisted. Federal mediators were indeed involved in the negotiations. In any case, the settlement relieves the North American economy of at least one additional supply-chain headache, at a time when supply-chain headaches are seemingly everywhere.
· Speaking of which, some supply chain headaches are in fact easing—the auto sector’s shortage of semiconductors, for example, is getting slowly better with time. But new disruptions are constantly arising, including several related to Russia’s attack on Ukraine. North America’s farmers, for one, are concerned about the cost and availability of fertilizer. Off the U.S. east coast near Baltimore, another giant ship has run aground. And on the rails, congestion remains an issue. Norfolk Southern, for one, temporarily imposed restrictions on trucks with containers and trailers entering or leaving the railroad’s facilities in Jacksonville, Florida. The facilities are experiencing “crane challenges” that are “undermining terminal fluidity.”
The Floridian and the Meridian
· Florida-based CSX is more or less fine with Canadian Pacific buying Kansas City Southern. But it’s not happy about something Norfolk Southern is requesting. The latter wants the STB to only approve the KCS deal if NS is granted “limited contingent trackage rights” to move freight over the line—owned by KCS—between Shreveport, LA and Wylie, TX. Wylie is in the booming Dallas-Fort Worth metroplex, home to an intermodal terminal that NS has the option to purchase. Put simply, NS wants to establish unfair market dominance—or so CSX alleges—in the fast-growing corridor between the southeast and southwest between Meridian, MS, and the Dallas area via Shreveport. In the name of fair competition, we should be guaranteed the right, CSX asserts, to interchange with the newly-formed CP-KCS at Meridian. NS and KCS currently operate as a joint venture between Meridian and Shreveport, a corridor known as the “Meridian Speedway.”
· North America’s Class I railroads get most of the spotlight. But across the continent are some 600 short line and regional railroads often providing first- and last-mile service for shippers and their customers. One company, Genesee & Wyoming, based in Connecticut, itself owns 103 U.S. freight railroads. And it talked last week about some of the industrial development happening along its lines. It highlighted 69 projects, in fact, involving $1.5b of investment and more than 1,000 new jobs. An example? A new steel facility in Delta, Ohio (near Toledo), built by a customer of G&W’s Indiana & Ohio Railway (IORY). It happens to be the fourth steel company since 2015 to have expanded along the IORY network, testament to the emerging “steel corridor” that’s creating jobs in the region.
· Bainbridge, Georgia, north of Florida’s capital Tallahassee, will be home to a new biodegradable plastics facility along G&W’s Georgia Southwestern Railroad. A facility producing renewable carbon pellets will open along the California Northern Railroad. Back in the Midwest, meanwhile, the Peoria & Western Railway and Illinois & Midland Railroad have new transload sites to help move wind-turbine equipment.
· G&W’s railroads are also attracting customers, i.e., shippers, without facilities directly touching their networks. That’s thanks to transloading, the transfer of shipments between truck and rail (like intermodal but without the containers). Train-truck journeys have become popular among shippers without direct rail access, G&W says. So its railroads are building new transload facilities, including one in Visalia, along the San Joaquin Valley Railroad. Visalia is in California’s Central Valley, which contains some of the world’s most productive farmland (see the June 7, 2021, issue of our sister publication Econ Weekly: https://www.econweekly.biz/2021/06/07/issue-22-june-7-2021/). In this case, though, the new facility was built to handle biodiesel and renewable diesel fuel.
· G&W separately emphasized the increasing urgency among customers to achieve their ESG targets, specifically relating to environmental sustainability. “We are prepared to assist them,” the company said, “in finding sites and services that help reach those goals.”
More from Short Line Land
· The Rio Grande Pacific Corporation is another major owner of short line railroads. One of them, the Nebraska Central Railroad, stands to benefit from a new $375m soybean-crushing plan now under construction near Norfolk, Nebraska. It’s expected to open in 2024, producing—annually—847,000 tons of soybean meal (for livestock feed), 77,000 tons of pelleted soybean hulls (also for livestock feed) and 450m pounds of crude soybean oil (used to make, among other things, renewable diesel fuel). The Nebraska Central will serve the new facility together with Union Pacific.
· Norfolk Southern said it would modernize 330 of its Wabtec locomotives, resulting in trains that burn less fuel and emit less carbon. By 2025, the railroad expects to have 950 locomotives upgraded to modern efficiency standards. The latest upgrades, according to NS and Wabtec, will also extend the useful life of the locomotives by 20 years, improve fuel efficiency by as much as 25%, increase reliability 40%, increase haulage ability by up to 55% and reduce maintenance and overhaul costs by 20%.
· Freightcar America, based in Chicago, is a major manufacturer and lessor of railcars, competing with the likes of Trinity Industries, Greenbrier and National Steel Car. In its earnings call last week, executives said railroads continued to show improving business fundamentals despite supply chain headwinds and higher costs. That includes higher costs for the steel used to make railcars.
· Railcars in storage, Freightcar America said, have fallen by more than 200,000 units since the peak of 520,000 cars in July 2020, not long after the pandemic began. “Today, there are just over 300,000 cars in storage.”
· Since 2020, it adds, railroads, shippers and other owners have scrapped more railcars than they’ve received, which bodes well for future orders. It’s increasingly common to retire older and less efficient railcars, explaining why scrap rates remain historically high. Freightcar “expects this trend to continue into 2022.”
· Orders, sure enough, are increasing. The company booked 1,032 in Q4, compared to just 90 in the same quarter of 2020. Looking ahead, “demand in Q1 continues to be solid across our diverse railcar portfolio.” One attraction of buying new cars is that they’re lighter, implying less fuel burn. They often provide more capacity than earlier generation models as well. Freightcar boasts of leading the industry in in lightweight car designs, first for coal and later mill gondolas, coil cars and grain cars.
· Who exactly is ordering? Demand is more or less evenly distributed among railroads, shippers and lessors, management said. With respect to lessors, lease rates are improving and railcar utilization rates are increasing. Demand for boxcars is notably high, the company added. Same for mill gondolas (millgons) and flat cars. Cars that transport autos should soon experience a demand pop too, once supply logjams are cleared and production returns to normal.
· Just a few facts about Freightcar America: It now produces railcars exclusively in Mexico, having closed plants in Alabama and Virginia. Financial institutions and mainline lessors, account for two-thirds of its customers, with railroads another 22% and shippers 6%. TTX, specifically, is its single largest customer, or was last year anyway. The year before its largest customer was Amtrak. Other top customers include Union Pacific, the aerospace giant Boeing and CIT Rail (now owned by First Citizens Bank).
Did Someone Say First Citizens Bank?
· First Citizens held an investor call last week to discuss its takeover of CIT, which includes CIT Rail, a major railcar lessor. The Raleigh, North Carolina-based bank now considers the rail sector one of its three core business segments, alongside commercial banking (for corporations) and general banking (for households and small businesses). During the call, executives said First Citizens will hold $7.4b in rail-related assets, making it one of the leading railcar lessors of North America. According to a presentation last year from GATX, another industry lessor, Trinity is the largest player in the market with 24% of the roughly 919,000 lessor-owned railcars as of January 2021. Wells Fargo was next with 16%. Union Tank Car held 14%. GATX itself and CIT held 13% each. SMBC, based in Japan, was another sizeable player with a 6% share.
· In its call, by the way, Frist Citizens said railroad utilization rates of railcars have improved since September 2020, from 88% to 93% as of the start of 2022.
The CSX Network
· As CSX explains in its annual report, its railroad covers 19,500 miles, with roots dating back to the country’s very first commercial railroad: The Baltimore and Ohio, charted in 1827 (the 200th anniversary is just five years away!). The modern CSX, incorporated in 1978, is the product of a 1980 merger between Chessie System and Seaboard Coast Line Industries. Its core business was linking northern population centers and Appalachian coal fields to growing southeastern markets. Another major milestone came with the company’s partial acquisition of Conrail in 1997, providing coverage of New England and the giant New York metropolitan area, which it connected to Chicago and the Midwest, along with the Southeast.
· Today, the CSX network features four major corridors:
1) One is the route along Interstate 90 running between Chicago and Boston. This is the “water level” route, almost all of it double tracked, with few grades or hills to slow velocity. When New Yorkers, New Englanders and other northeasterners buy imported goods from Asia, there’s a good chance the products will arrive at a western port like L.A., then travel by rail to Chicago, and then by rail eastward via CSX on the I-90 corridor. The corridor also handles import traffic from ports in New York, New Jersey and Pennsylvania, headed inland for the Midwest. Merchandise, intermodal and coal traffic are all plentiful along the I-90.
2) The I-95 corridor links Southeastern metros like Charleston, Miami and CSX’s hometown of Jacksonville to population centers in the mid-Atlantic and northeast, i.e., Baltimore, Philadelphia and New York. The line is heavy with food, consumer products, metals and chemicals. It also happens to be a vital line for major east coast ports.
3) The CSX’s Southeastern Corridor reaches the western gateways of Chicago, St. Louis and Memphis from markets in the southeast, via cities like Nashville, Birmingham, and Atlanta. It’s typically full of intermodal, automotive and general merchandise traffic. It’s a big coal route, too, providing mines in southern Illinois a means to reach power plants in the Southeast.
4) CSX operates a network dedicated primarily to coal, providing transportation for mines in the Appalachian Mountain region and Illinois Basin. It allows them to reach industrial areas in the Southeast, Northeast and Mid-Atlantic, as well as many river, lake and deep water port facilities. Some of the coal is exported abroad via these ports. CSX, meanwhile, says roughly a quarter of its export coal freight—and the majority of its domestic coal freight—is used for generating electricity or industrial purposes.
· The Canadian Pacific lockout is over. But labor tensions in the railroad industry will never disappear entirely. In fiery Congressional testimony earlier this month, BLET chief Dennis Pierce criticized railroad labor practices, exhibiting no love lost for Precision Scheduled Railroading—it’s “neither precise, it’s not scheduled and it’s not railroading.” BLET, whose initials stand for the “Brotherhood of Locomotive Engineers and Trainmen,” represents nearly 57,000 U.S. railroad workers. Pierce blamed railroad management for understaffing that’s disrupting supply chains, degrading customer service and compromising safety. The BLET, which started negotiating a new contract with U.S. railroads in late 2019, still doesn’t have one—according to the Railway Labor Act, old contracts don’t expire but rather stay as is past their end date, changing only after both parties agree.
· There’s at least one issue upon which railroad management and unions agree. As Pierce told Congress, the BLET opposes new STB rules mandating reciprocal switching.