Inside This Issue
· Crisis Averted: Railroads and Unions Strike a Deal to Stop a Strike
· Still Some Stress Until Workers Vote Yes: New Contract Must Be Ratified
· From Jim to Joe: CSX Changes CEO
· Full of Crop: Big Grain Harvest Means Crunch Time for CN, CP
· Green Goals: CN Discusses Its ESG Strategy
· Boxing Champ: A Look at Norfolk Southern’s Outsized Intermodal Biz
Track Talk
“This is a deal with hard-fought wins for the workers, and one that the railroads were able—after moving quite a bit—to agree to.”
-U.S. Secretary of Transportation Pete Buttigieg, speaking on CNBC’s Squawk Box
The Labor Deal
· Normally, railroads operate in the background, not at the center of national attention. Last week, however, they briefly grabbed headlines from even the late Queen. It was not for a good reason. The U.S. economy looked on with great apprehension as railroads and their unions struggled to reach a new collective bargaining contract as a Friday deadline neared. Railroads began preparing for the worst, halting some shipments. Amtrak canceled passenger trains in anticipation. The Biden Administration pressed hard for a settlement, hosting marathon negotiating sessions as the witching hour approached. Lo and behold, the two sides struck an 11th-hour deal.
· It is, to be clear, a tentative deal. Members of the unions involved now need to vote on whether to accept it. If a majority votes no, a strike could still occur later this fall or beyond. Unions will send out ballots this week, with voting typically open for about 30 days.
· The key sticking point wasn’t money. On that matter, the two sides agreed to follow the August 16th recommendations of the Presidential Emergency Board, specifically a 24% wage increase over the course of the five-year period from 2020 through 2024. Workers would get an immediate 14.1% pay hike, plus an extra $1,000 per year. Nor was crew size a sticking point—the new agreement doesn’t have anything to say about moving from two- to one-person train crews. More contentious was the matter of attendance and work schedule policies, including rules that make it difficult for workers to take days off for personal or family medical care. The tentative agreement addresses that by, among other things, allowing unpaid days for health care without any attendance penalties. It also includes one new paid day off.
· The two largest unions involved said in a statement: “Most importantly, for the first time ever, the agreement provides our members with the ability to take time away from work to attend to routine and preventive medical care, as well as exemptions from attendance policies for hospitalizations and surgical procedures.”
· It’s not necessarily representative of what might happen with the ratification votes to come. But for the record, one of the smaller unions that reached a tentative contract agreement earlier in the week, wound up seeing it voted down by the rank and file. This was the IAM union, representing about 5,000 locomotive machinists, track equipment mechanics, and facility maintenance personnel. The separate deal that was reached close to deadline on Thursday involved three unions representing about 60,000 workers. These were:
o The Brotherhood of Locomotive Engineers and Trainmen Division (BLET) of the International Brotherhood of Teamsters
o The International Association of Sheet Metal, Air, Rail and Transportation Workers– Transportation Division (SMART-TD)
o The Brotherhood of Railroad Signalmen (BRS)
· Combined, the BLET and SMART-TD say they represent approximately 125,000 active and retired rail employees, with about half of members employed at Class I railroads that are party to the new agreement.
· Railroad customers, it seemed, were obviously concerned about the prospect of a strike. But many seemed to think things would never get too bad. LyondellBasell for one, which moves lots of chemicals by rail, said at an investor event just before the labor settlement: “The rail strike that’s coming up, we expect that it’s going to be fairly short. We’re already seeing some embargoes on hazardous shipments of things like ethylene oxide and styrene. We think that it’s going to have really an immaterial impact on our business relative to what we’ve already seen in logistics constraints.” In the end, even those mild concerns were unnecessary.
Other Latest News
· As the railroad industry announced its new labor agreement early Thursday morning, CSX that same day named a new chief executive officer. He’s Joseph R. Hinrichs, who will take command on Sept. 26th. Current CEO Jim Foote, thrust into the role upon the illness and subsequent death of Hunter Harrison in 2017, will retire but continue to advise the company through next March. Hinrichs comes from outside the rail industry. He’s a longtime Ford executive who most recently ran the company’s $160b automotive operation, a job that included shipping vehicles and parts by rail. But as always when companies turn to an industry outsider, critics will question his experience, while supporters will tout his potential to deliver fresh new ideas and perspectives.
· FedEx, based in Memphis, jolted markets with an exceedingly bearish financial update. It said macroeconomic trends “significantly worsened” in August, more so in Asia and Europe but in the U.S. as well. It will surely say more when it reports earnings this Thursday. That’s the same day the Federal Reserve will announce its latest move on interest rates, following another high consumer inflation reading published last week. Also published last week: August retail sales data from the Commerce Department. It showed overall spending up slightly from the previous month, boosted by stronger auto sales and people spending more money dining at restaurants. They spent less at gas stations and also less on home furnishings like furniture and appliances. Looking y/y, spending was up 9.1% in August, ahead of the 8.3% y/y increase in consumer prices. One other key development in the economy: 30-year mortgage rates now exceed 6%, more than double what they were this time last year.
· Container counts at the port of Los Angeles plummeted 16% y/y. But before ringing any alarm bells, note that the neighboring port of Long Beach saw volumes largely unchanged. East coast ports, meanwhile, continue to show strong y/y growth—the port of Savannah for one saw a y/y gain last month of almost 19%. L.A.’s port did say rail cargo was still waiting an average of 7.6 days to get on a train, which is four times the dwell time recorded in February. L.A. has 17,000 boxes waiting nine days or longer to get on trains. The main reason is that containers are piling up at midcontinent terminals like Chicago, Dallas, and Kansas City. Said L.A. port chief Gene Seroka: “Cargo owners need to pick up their boxes faster in the interior.” On a separate note regarding the domestic intermodal sector, the EMP pool of railroad-owned containers and chassis—managed by Union Pacific and Norfolk Southern—is evicting Canadian Pacific as an agent railroad. Canadian National will replace it. UP clearly sees the combined CP-Kansas City Southern entity as a potential intermodal rival, particularly for shipments into Mexico.
· Railroad stocks got a hammering last week, at first because of strike fears, but also as part of a broader decline in North American share prices. Congratulations, however, if you bought railroad stock five years ago. See below:
Highlights from Morgan Stanley’s 10th annual Laguna Conference in California
Canadian National
· CEO Tracy Robinson, speaking on Wednesday (Sep 14th), expressed concern and dismay about the “labor situation” in the U.S. “Nobody wants a labor shutdown.” CN of course, in addition to its tracks running roughly horizontal across Canada, owns track running roughly vertical down the spine of the U.S., from Duluth, Minn., through Chicago and down to the ports of New Orleans and Mobile. It wanted to buy Kansas City Southern’s largely vertical network running down into Mexico. But that attempt failed amid concerns about market power—Canadian Pacific struck a deal to buy KCS instead.
· Robinson’s key theme was that CN is ready—ready with enough labor, ready with enough locomotive power, and ready with enough railcars. Ready for what? Most importantly right now, handling Canada’s grain crop, which was abnormally small last year but looks to be larger than normal this year. “It’s going to be a rush, but we’re ready for it.”
· Some farmers and ag traders have expressed concern about the ability of CN and CP to handle the big crop this year. For CN, critical will be its export facilities including Vancouver and Prince Rupert along the Pacific, and Thunder Bay and Montreal to the east. “We’re going to have to use all of those port options if we’re going to kind of move this crop to the market.” Robinson separately mentioned that the U.S. grain harvest, which CN already started to move, appears “pretty decent.”
· The grain crop aside, CN is still seeing strong demand to move coal, petroleum, chemicals, and especially autos. Total carload volumes so far this quarter are up 6% y/y, boosted by the railroad’s fastest average velocity—212 miles per day this quarter—since 2016. That’s in stark contrast to U.S. railroads which are struggling with velocity. Robinson suggested that the reason CN is doing better stems from the “foresight” not to make any mass reductions in train and engine (T&E) workers. It did enact major job cuts last year but mostly across the management ranks. Recall that in the second quarter, this management headcount reduction helped CN achieve a 59% operating ratio, best among all Class I railroads. That’s after posting the worst Q2 operating ratio a year earlier.
· To maintain its positive momentum, CN will seek growth in various sectors, including energy. It has a new fuel terminal opening at its Toronto yard next year, for example. It has some new plastics facilities debuting or expanding on its U.S. network. It hopes to move critical minerals from northern Quebec such as lithium, a key input for batteries. Automotive volumes in eastern Canada are surging as production revives. And more auto business will emerge as manufacturers build electric vehicle plants along CN’s rail lines. Robinson emphasizes the surplus handling capacity CN has in the eastern and southern parts of its network.
· That’s true for CN’s intermodal network as well, which hopes to capitalize on new trade flow patterns including a shift of ocean liners sailing from Asia into North America’s east coast ports (to avoid congestion and potential labor strife in the west). CN has high hopes for Halifax, where new owners are investing in the port’s two terminals. “We’ve got a straight shot out of there to Montreal, Toronto, Detroit, Chicago, and some of the fastest transit times.” The railroad is eager to see more intermodal business at the Gulf port of Mobile as well. And out west, the company has plans to squeeze more growth out of Vancouver, while Prince Rupert to the north is a “natural growth point for CN.” And not just for intermodal—Prince Rupert’s export potential extends to Canada’s many natural resources.
· How is the intermodal business doing right now? The operational distress that characterized the pandemic era seems to be finally easing. Congestion in lanes between Toronto and Montreal, importantly, has improved. Robinson boasted of industry-best handling capabilities in Chicago, a legacy of its 2009 takeover of the Elgin, Joliet, and Eastern Railway.
· The big question for intermodal, however, is “where does that go from here, given how much inventory was moved early through that system.” She adds: “My guess would be, from what we’re hearing, we’re going to see a softer kind of peak this fall than we normally would.”
· Want to hear more about CN’s plans? Investors will have the chance next May, when CN plans an investor day event.
Canadian Pacific
· The grain harvest is obviously a focus for CP as well; for no other railroad is grain more important in terms of contribution to overall revenues. CEO Keith Creel,
Keep reading with a 7-day free trial
Subscribe to Railroad Weekly to keep reading this post and get 7 days of free access to the full post archives.