Jacksonville Thrill

Railroad Weekly October 21, 2024

Inside This Issue

·   Jacksonville Thrill: CSX Delivers Q3 Growth… And a Better O.R.

·   Jacksonville Chill? New Challenges Weighing on Q4  

·   Yes You Can: STB Approves New CSX-CPKC Interchange  

·   Kansas City Giddy: UP Investing to Grow K.C. Intermodal

·   Gains for Grains: An Update on Canada’s Grain Harvest

·   Hunt for Higher: J.B Hunt IM Biz Still Hurt by Low Truck Rates

·   Amazon Crime: Cargo Theft a Growing Problem  

·   Evidence of Irrelevance: Analyst Cites Two Decades of Lost RR Biz

Track Talk

“Our aim was to grow volume, revenue, and operating margin compared to last year, and that is exactly what we delivered.”

      - CSX CEO Joe Hinrichs   

The Latest: A New Interchange Approved

·   It took longer than expected. But the STB’s decision is in: Yes, CSX and CPKC can establish a new interchange point in Alabama. They’ll do so by each acquiring portions of rail lines operated by the Meridian & Bigbee Railroad, or MNBR, a Genesee & Wyoming property. CSX, for its part, will buy the MNBR’s eastern network between Burkeville and Myrtlewood. And CPKC will buy its western portion between Myrtlewood and Meridian (in Mississippi). The two Class Is announced their plans last May. MNBR will continue to provide local service to customers between Meridian and Myrtlewood.

·   The idea is to eliminate the need for MNBR to serve as an intermediary carrier in moving traffic between CPKC in Meridian and CSX in Montgomery. It’s a busy part of the country for rail traffic, and one that’s growing rapidly as industrial and economic growth expands beyond both ends. Areas affected include Texas, the Gulf Coast region, and Mexico to the west and southeastern markets like Atlanta and Florida in the east.

·   The new Myrtlewood interchange should benefit shippers on certain lanes that currently, for example, have to interchange in congested New Orleans (the STB cited shipments currently moving between Montgomery and Shreveport via New Orleans, and also Cincinnati-Shreveport shipments that currently move through East St. Louis; Myrtlewood could be more efficient for both). Some east-west shipments, furthermore, might now require fewer handling events. CSX and CPKC, meanwhile, pledge to make significant investments in their newly acquired lines, “which would improve safety, reliability, and speeds between Montgomery and Meridian.”

·   The STB also cited the many new auto factories sprouting up across the southeast as potential beneficiaries of the new Myrtlewood gateway. Canadian National, Norfolk Southern, and Union Pacific on the other hand, could potentially lose some traffic that they currently interchange with CPKC or CSX. The STB decision referenced traffic moving between CPKC and NS at Meridian, and Mexican traffic moving between CPKC and CSX currently via Laredo and New Orleans with UP as an intermediate carrier. NS and CN, along with Amtrak, expressed some objections to the Myrtlewood plan. But the STB largely dismissed them. The Board did say CSX must maintain its Selma, Alabama, gateway “open on commercially reasonable terms.” And controversially, it said the two railroads are “required to adhere to any and all of the representations it made on the record.”

·   The STB approves such transactions when it determines that they don’t substantially lessen competition, create a monopoly, restrain trade in freight surface transportation, or create anticompetitive effects that “outweigh the public interest in meeting significant transportation needs.” All four sitting Board members (there’s one vacant seat) voted to approve. But members Schultz and Fuchs expressed misgivings about how long it took to issue a decision, and about that representations condition, which they consider too vague. “If it were up to me,” wrote Shultz, “the Board would approve this transaction without the unnecessary ‘representations’ condition.”

Other Developments   

·   Union Pacific is building a new intermodal terminal in Kansas City, one of North America’s busiest rail hubs. The facility, which should open in the middle of next year, will serve both domestic and international containerized shipments of grains, consumer goods, refrigerated products, and pet foods. UP has announced several intermodal expansion initiatives in the past few years, including new investments in Phoenix, Houston, and California’s Inland Empire. It’s also been active in developing new options for cross-border intermodal shippers into and out of Mexico.

·   Quorum Corporation published its September report on the Canadian grain market. It said total western Canadian rail shipments to all destinations in the first two months of the 2024-25 crop year totaled slightly more than 9.3m metric tons (MMT). This was up 11% from the same period a year earlier. About 80% of the grain was shipped to western ports (Vancouver and Prince Rupert). Another 13% was shipped to the U.S. or Mexico. The rest was moved to markets within Canada (Thunder Bay is another Canadian port used for grain exports). The two largest grain products shipped were wheat and canola.

·   Mexico’s Congress moved ahead with legislation, subject to ratification by state governments, that would give the federal government more control over the nation’s rail network. The goal is to foster more passenger service, which freight railroads could operate. It’s something that CPKC, for one, is following closely given its large Mexican freight rail operation.  

·   The website “Area Development” featured an interview with Norfolk Southern’s GVP of Industrial Development, Craig Hudson. He trumpeted the advantages of shipping by rail (cost, sustainability, etc.). And he encourages more companies to consider it. “One of the biggest challenges is not considering rail early enough in the site planning process. Unlike trucks, which can operate with some flexibility, rail infrastructure needs to be integrated from the outset to ensure the site can accommodate it efficiently.” He adds, “In our current pipeline of about 450 projects, we see strong growth in metals, construction, chemicals, and renewable fuels, as well as in the agricultural, forest, and consumer goods sectors. These are all sectors where rail has traditionally been strong, and we expect that to continue.” Separately last week, NS executives Ed Elkins and Alex Luc spoke at the Virginia Maritime Association International Trade Symposium, underscoring the importance of Norfolk and the Hampton Roads region to international supply chains.

·   The logistics firm Expeditors International, speaking with investors last week, discussed the rising rate of cargo theft as the value of goods shipped increases. “The thieves are becoming way more organized, way more structured… It’s a lot more organized than it was in the past, and we have to protect against that.” The majority of such crime, it said, “happens when assets are at rest.” Earlier this month, a video of train thieves in Chicago went viral.  

The Economy

·   The early Q3 earnings commentary from Corporate America paints a generally healthy picture of the U.S. economy, which is getting an extra boost this fall from subdued oil prices. Overall inflation is down and rising real estate and stock prices have created a large wealth boom for households. The job market remains healthy. There’s a lot of corporate and government investment in projects ranging from data centers and semiconductor fabs to military technology and transportation infrastructure. The Wall Street Journal recently wrote about “America’s New Millionaire Class: Plumbers and HVAC Entrepreneurs.” Airlines speak of surging demand everywhere Taylor Swift performs. Last week, the Census published its latest retail sales report, showing further month-over-month and year-over-year gains in September (see below). Exclude gas stations, and retail spending was up almost 3% y/y. Exclude auto dealerships as well, and the increase was closer to 4%. Companies are however noting some spending hesitancy around the presidential election next month—airlines for example see softness in ticket sales for early November. Firms also report some spending weakness among lower-income households.

·   Citigroup, one of America’s largest banks, speaks of “global economic performance [that] continues to be surprisingly resilient.” Regarding the U.S.: “Whatever you want to call the U.S. landing, the sentiment around it is more optimistic, supported by the recent positive payrolls report, and we see a healthy yet more discerning U.S. consumer, and the U.S. corporate sector on its front foot.”

·   Blackstone, a giant investment firm, listed some major economic trends in its earnings call last week, including “the revolution underway in artificial intelligence; the build-out of digital energy infrastructure needed to support AI; the renewable energy transition; the rise of private credit…; the extraordinary advances in drug development in the life sciences area; the emergence of India as one of the most important major economies; and the cyclical recovery in commercial real estate.”

CSX Q3 Earnings

·   William H. Vanderbilt, running the New York Central in the 1800s, said famously: “Railroads are not built for the benefit of the dear public. That is all nonsense.” Joe Hinrichs disagrees. As chief of the CSX, he’s today loudly preaching a message of good corporate citizenship—that railroads serve a “higher order purpose,” not merely their shareholders. In fact, he argues, these two missions are not in conflict. On the contrary, they’re compatible, and CSX is starting to prove it. During the July-to-September quarter, it delivered a 62.6% operating ratio, which was more than a point better than its figure in the year-ago period. It achieved this improvement, importantly, while growing freight volume 2.6% y/y. It grew revenues too, by more than 1%.

·   One quarter alone doesn’t prove a point. But last quarter anyway, CSX substantiated its claims that prioritizing customer service, employee engagement, and traffic growth is good for shareholders. That’s after a long period in which the dominant ethos on Wall Street was that shareholders benefit most when railroads shrink their workforce and shrink their asset base.