Inside This Issue
· Q1 Earnings Underway: What did Railroads Have to Say?
· CS-Xcellent: Upward Margin Moves as Railroad’s Service Improves
· Union Pacific Caught in a Storm: Weather Woes Sink Q1 Margins
· Triple Trouble on the Rails: Chemicals, Forestry, Intermodal All Weak
· But Three Areas of Relief: Autos, Construction Materials, Energy All Strong
· Coal Comfort: Fortunes Fading, but Coal Trends Still Largely Positive
· Mode Red: Will Intermodal Finally See Some Growth Again in Second Half?
· Schneider Man: Keith Creel Webs First Big Customer Win for CPKC
Track Talk
“Consumer-facing markets are in rough shape right now. Importantly, though, there remain opportunities to capture additional demand in a number of markets. The entire team is executing a plan to capture those additional carloads supported by an improved service product.”
-Union Pacific CEO Lance Fritz
“Our network is running well, and we intend to do even better and show that CSX can sustain reliable service over time, which is essential for us to profitably grow our railroad.”
-CSX CEO Joseph Hinrichs
The Latest
· Q1 earnings season (sound the trumpets) is underway. Union Pacific got things started on somewhat of a sour note, reporting a y/y drop in profit margins due to demand stress across multiple freight categories, most importantly intermodal, coal, grain, forestry products, and chemicals. Stormy wintry weather didn’t help. UP remains optimistic about the rest of 2023 however, thanks to sustained strength in auto-related shipments, energy-related shipments, and construction-related shipments. One way or another, CEO Lance Fritz is winding down his tenure at the helm. The question is, will Fritz hand-pick his successor with the input of his Board? Or will UP’s next CEO be Jim Vena, the choice of dissident shareholder Soroban Capital?
· CSX, meanwhile, reported Q1 earnings as well, delivering a somewhat more uplifting message. For one, its profit margins increased y/y, helped by an extreme turnaround in its operating fluidity. The industry’s understaffing problems are now largely in the rearview mirror and for CSX, that statement is especially true. Just as an example, its carload trip plan performance last quarter improved a massive 34 percentage points y/y (impressive!). It’s no doubt feeling the same intermodal pain cited by Union Pacific—and for that matter the intermodal truckers J.B. Hunt and Knight-Swift. Nor is CSX a stranger to softer chemical markets, its most important line of business. On the other hand, Q1 weather disruptions were fewer in the east, and coal markets held strong. New CEO Jim Hinrichs is off to a good start, even making progress on labor relations. (See below for a more detailed review of the results UP and CSX reported last week).
· CPKC, newly formed from the merger of Canadian Pacific and Kansas City Southern, announced its first major business win since becoming a single entity earlier this month. Starting in mid-May, the Calgary-based railroad will start moving freight for Schneider, one of the continent’s intermodal giants. The arrangement is somewhat narrow, focusing on container movements between Chicago and major markets in Mexico—nothing from Canada or elsewhere in the U.S. to Mexico, at least for now. Still, it’s something worth celebrating, and perhaps a sign of more new business wins to come. In announcing the Schneider deal, CPKC highlighted its bridge—soon to be two bridges—crossing the Rio Grande River at Laredo, Texas. Its crossing provides “a reliable alternative to congested highway ports of entry.”
· CPKC’s quest to win more freight traffic to and from Mexico comes as the country’s economic growth prospects are getting much attention. Last week, the company GAP, which operates several Mexican airports, published some slides that help highlight some of the positive forces that CPKC and others are seeing. Here are two slides on the cities of Guadalajara and Tijuana, plus another identifying the hot markets for nearshoring:
· Class I railroads continue to sign new sick leave deals with unions. BNSF now has one, for example, with the International Brotherhood of Railway Carmen (BRC). In other labor news, some 70 maintenance-of-way workers at the Genoese & Wyoming shortline empire voted to join the BMWED union. That same union is picketing BNSF events—including a town hall hosted by CEO Katie Farmer in Kansas City last week—hoping to secure a sick pay deal of its own (the Berkshire Hathaway-owned railroad has deals with eight of 12 unions currently). BMWED is separately one of 14 unions behind a new lobbying campaign demanding that “U.S. freight rail corporations halt all stock buybacks until safety improves across the industry.” Here, by the way, are some photos of that BNSF town hall event, posted on BMWED’s website:
· Progress in west coast port labor talks? Promisingly, the ILWU says it’s reached a tentative agreement with the Pacific Maritime Association on key issues. Two of the most contentious issues have been pay and use of automation, though the union didn’t specify what was settled. Not so fast, said the PMA on Friday. “While significant progress has been achieved in coastwise contract negotiations, several key issues remain unresolved.” It added that “work actions led by ILWU Local 13 at the Ports of Los Angeles and Long Beach continued to disrupt some operations at key marine terminals today. The Union is deliberately conducting inspections that are not routine, unscheduled, and done in a way that disrupt terminal operations.” We’ll soon see if the ILWU’s optimistic statement has any merit.
· BNSF is locked in a dispute with the Navajo tribal nation, whose Navajo Transitional Energy Company (NTEC) ships coal with the railroad. NTEC is asking the STB for an emergency service order that would force BNSF to “dramatically increase service frequency” for handling export coal, shipped from its mines in Big Horn County, to the Westshore Terminals facility just south of Vancouver. “BNSF,” the complaint alleged, “has breached its obligation to provide adequate common carrier service on reasonable request.”
· In economic news, the U.S. Census said new housing construction was down 17% y/y in March, a clear manifestation of the housing slump. Single-family housing starts are down an even more alarming 28%, and down a massive 54% in the western U.S. Sales of existing homes, meanwhile, plummeted 22% y/y in March (and 2% from the month prior), according to the National Association of Realtors. Median home prices though, are down just 1%, making this a very different flavor of housing slump (and a far less catastrophic one) than the crash of 2007-08. Elsewhere in the economy, freight transportation is clearly in recession, as companies like J.B. Hunt attest (see below). The Fed’s Beige Book collection of anecdotes, furthermore, makes frequent mention of credit concerns. There was much talk of manufacturing getting weaker but also pockets of manufacturing strength—in the Dallas Fed district, for one, and among aerospace suppliers. The Cleveland Fed mentioned a jump in overseas orders thanks to more favorable exchange rates (the dollar, after a long run of strengthening, has recently weakened). It’s the manufacturing firms building stuff for the housing market, alas, that seem to be suffering disproportionally. That’s true even of chemical manufacturers, as the Atlanta Fed noted: “Chemical manufacturers reported softening in the chemicals space, largely for housing sector inputs.”
· Let’s end the economic update on a positive note. S&P’s latest survey of purchasing managers revealed signs of strength in April. “Output rose at the sharpest pace for almost a year, as stronger demand conditions, improving supply and a steeper uptick in new orders supported the expansion. Solid growth in activity was seen across both the manufacturing and service sectors.” Price declines, looser labor markets, and supply chain fluidity are surely helping. Said S&P Global’s chief economist Chris Williamson: “Growth is also reassuringly broad-based, led by services thanks to a post-pandemic shift in spending away from goods, though goods producers are also reporting signs of demand picking up again.”
Class I Earnings
Union Pacific
· The Omaha-based UP surprisingly had a great year financially in 2022—it’s surprising because it had such a rough year operationally. This dichotomy largely continued into the early months of 2023, with UP earning a robust $1.5b first-quarter net profit (excluding special items) despite severe weather disruptions. The railroad battled arctic temperatures, blizzards, flooding, and tornadoes, erasing at least $50m from its bottom line. The central Sierra Nevada mountains in California, to give one example, received more than 700 inches of snow this winter, 222% above the historical average. The rough weather naturally prevented UP from handling all the demand from its customers, most importantly its coal customers in the Powder River Basin in Wyoming and Montana. There were storms brewing in the boardroom too. But more on that in a bit.
· To be clear, UP’s operating ratio did deteriorate versus last year. Its Q1 figure of 62% was about three points higher (in other words worse) than what it posted in the same quarter of 2022. And that’s not just because of bad weather. The North American railroad industry faces many challenges in 2023, led by demand weakness in multiple freight categories. Getting most attention is the intermodal slump, tied to
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