Inside This Issue
· A Date to Remember: The 16th of November
· Yes or No: Will Workers Ratify?
· Last Chance to Make a Stance: CP-KCS Hearings Conclude
· Boone Shine: CSX’s Sales Chief Sheds Light on New Demand Trends
· No Ending to the Spending: A Capex Update from UP
· Labor Rattling: Railroad Employment Trends Since 2000
Track Talk
“Ultimately, the decision to ratify or reject this agreement is yours.”
-SMART-TD union president Jeremy Ferguson, in a video address to members
Latest News
· November 16th. That’s the tentative deadline for railroad workers (members of the BLET and SMART-TD unions) to have their say on the new industry contract negotiated last month. If they vote yes, large wage increases will follow. Still, at least some will elect to reject, unsatisfied with provisions covering matters like sick leave and attendance policies. Railroads don’t appear apprehensive about the outcome, anticipating a yes vote and knowing Congress could still impose a settlement in the event of a no vote. Beyond mere acceptance, railroads hope the new deal ushers in a period of more amicable management-labor relations.
· In Washington, hearings on the CP-KCS merger resumed, headlined by a day-plus, last-chance rebuttal by the two merging railroads themselves (see below).
· A few other developments of interest across the industry: BNSF completed the double-tracking of its line linking Kansas City and Wellington, Texas, part of the Emporia subdivision. The corridor is part of BNSF’s strategic southern transcon route that connects Los Angeles with Chicago. It’s the last of the company’s 11 transcon subdivisions to have received adjacent double tracking. CSX, meanwhile, said its Quality Carriers truck unit shipped its first new-and-improved ISO tanks for moving chemicals. The railroad also announced a new Georgia-Pacific paper facility along its lines running between Memphis and Nashville. In the trucking space, consolidation continues as Werner Enterprises purchased Baylor Trucking. Union Pacific will team with ZTR to build hybrid-electric locomotives in Arkansas. Bloomberg News published an article about the impact of drought on Mississippi River shipping—“companies are paying a premium to move steel, aluminum, and other goods by rail and truck, despite costs that are up to five times more than what they’d normally pay by barge.” The industrial logistics company Savage plans to build a new multi-commodity transload facility in Utah, which Union Pacific will serve. And to the north, Canadian National published its winter operating plan, covering matters like investment, staffing, and technological deployment. As you might imagine, running a railroad in Canada’s northern climate isn’t easy.
State of the Unions
· In a video address to members, Dennis Pierce of the BLET union, and Jeremy Ferguson of the SMART-TD union, spoke about the new contracts that workers are being asked to ratify. The two leaders stressed that they’re not trying to encourage workers to vote one way or the other; they merely hope to dispel rumors and falsehoods about the five-year deal spreading on social media. However, they did close by celebrating key achievements of the deal, including the defeat of efforts to reduce train crew sizes, and additional time-off and attendance policy benefits above and beyond what the Presidential Emergency Board (PEB) had recommended. The union leaders also warned that if that contract were rejected, Congress could still impose the PEB’s recommendations via legislation.
· If ratified, workers would get an immediate 14% wage increase, followed by another 4% next year, and another 4.5% in 2024. “This represents the largest package of wage increases in nearly 50 years,” said Pierce. The agreement also includes annual lump sum bonus payments of $5,000. Workers wouldn’t have to pay more for their health care. And importantly, they’d get one additional day off per year for personal reasons, be it vacation or celebrating a birthday. They’d also get three routine and preventive medical care visits per year, without being penalized for their absence.
· Voting is tentatively scheduled to begin on Monday, Oct. 17th. Polls will close on Wednesday, Nov. 16th. So by Thanksgiving (Nov. 24th), the results should be known.
The CP-KCS Hearings
· The STB’s hearings on the CP-KCS merger extended into week two. The board heard more arguments from more stakeholders, some for, some against. There was a Minnesota official worried about the merger’s impact on local traffic, commuter delays, and pollution. A propane company in Maine recounted difficulties in negotiating with CP after it purchased the CMQ line. Chlorine producers alleged that CP currently tries to avoid carrying their hazardous cargo by setting unreasonably high tariffs with onerous stipulations—that’s against its common carrier obligations, they insist. A speaker representing multiple trade associations (the American Chemistry Council, The Fertilizer Institute, and The National Industrial Transportation League) expressed concerns about CP foreclosing competition on “bottleneck segments.” These associations want the STB to impose remedies that regulate rates on certain transactions between CP-KCS and its customers. The example given was KCS’s shipments to Canada, currently facilitated through interchanges with Canadian Pacific and Canadian National (at different locations). With the merger, the associations argue, “the existing neutrality of KCS would be destroyed.” The merger had its supporters too, among them Progressive Rail, a shortline partner of CP, and Hapag-Lloyd, a customer of both CP and KCS. The maritime shipping giant hopes to launch new Lazaro Cardenas service with CP-KCS, connecting Asia with U.S. consumer markets via Mexico’s Pacific coast.
· Thursday, spilling into Friday, was reserved for CP and KCS to make their final rebuttals to antagonists, some of whom don’t oppose the merger but want various conditions attached. The two merging railroads, represented by their CEOs and flanked by legal counsel, opened by reiterating the benefits of the deal—benefits to the U.S. economy, to shippers, to employment, to the environment, and so on. CP cited its recent eviction by Union Pacific from the EMP container pool—presumably in retaliation for merging—as evidence that competition remains intense. The two railroads refuted “false aspersions” by others about its plans for capital spending and other matters. They said contrasted their merger—between two healthy railroads with strong operating records—to the far more complicated integrations involving 1) Union Pacific and Southern Pacific and 2) Norfolk Southern and CSX assuming control of Conrail. Canadian National’s call for a more robust service recovery plan is unjustified, they said, citing the 1,000-plus workers assigned to work on the integration. CP chief Keith Creel emphasized his experience managing CN’s multiple takeovers.
· CP and KCS gave detailed, and in some cases updated, plans to mitigate concerns in Chicago and Houston, specifically. At one point, the presenters showed a video of a train moving from east to west Houston, using a camera in the locomotive to give the perspective of the engineer as the train moves forward. CP claims UP is under-investing in the Houston area, foregoing clear capital allocations that would significantly benefit fluidity in the area. KCS chief Pat Ottensmeyer insisted that Laredo is a highly competitive border crossing market, with trucks still holding a roughly 90% share of the container market. Union Pacific and BNSF, remember, expressed concern about their access to the Laredo gateway post-merger. Another line of argument made by CP: Mexican pricing regulations wouldn’t even allow what UP and BNSF are alleging, specifically that CP/KCS would jack up rates to Laredo.
· Another topic of discussion was the Springfield line, which Canadian National wants to buy, with an order by the STB to force CP to sell it. Creel says he’s offered CN the possibility of creating a joint venture on the line, if it meant taking trucks off the road. A forced “fire sale” divestiture, CP’s lawyer said, “would be vastly overreaching.” Separately, on the Meridian Speedway issues that Norfolk Southern raised, Creel said NS’s real motivation is converting their haulage rights with KCS to trackage rights, simply because trackage rights are cheaper and entail use of one’s own crews. CSX’s demands were essentially laughed off by all, including STB chair Marty Oberman.
Highlights from last week’s SWARS event
CSX
· Kevin Boone, CSX’s sales and marketing chief, said he’s “feeling a lot better” about the operational situation. Hiring is up, and service metrics are improving, especially over the last few weeks. Achieving the “magic 7,000 number,” referring to total train and engine employees, looks within reach by year end, despite a high attrition rate among new trainees. Importantly, the network has been “speeding up” in recent weeks, with about 97,000 railcars currently on its network. That number was more like 125,000 a few months ago. Fewer railcars in transit imply cars are getting to customers faster, Boone emphasized. It does not mean less revenue for the company. It means customers, importantly, don’t need as many railcars to fulfill their shipment needs, thus saving them money. But Boone also admitted, “We still have a long way to go.” Under brand new CEO Joseph Hinrichs, CSX wants to create more network resiliency, so that it’s prepared to handle future demand opportunities. That’s not always been the case in the past: “Every time growth has surprised to the upside, we fail to meet that as an industry.” Boone adds that artificial intelligence software can help, allowing management to more accurately anticipate how many people won’t show up to work on a given day, for example.
· Things got really interesting when Boone started talking about the current demand situation. CSX is indeed seeing “some cracks in the economy,” most clearly in the housing sector. But the overall outlook is one of great uncertainty. The future path of commodity prices, including coal and metals, will have a “huge impact on our business.” Fuel prices too, are an area to watch. On the intermodal front, Boone seems to have little doubt that an international slowdown is coming. CSX achieved impressive success in the international intermodal business this year, thanks to the shift in demand to east coast ports like Savannah and Charleston. And volumes into these ports remain elevated. But all the stuff coming in will inevitably lead to excess inventories for companies. Boone mentioned containers currently sitting at its yards filled with merchandise for Valentine’s Day, reflective of a desire to ship super-early to ensure things arrive before they’re needed. If all this extra and early shipping foreshadows the inventory glut CSX is expecting, there’s a silver lining: Chassis and other equipment would free up for use in the domestic intermodal business, which does have ongoing growth potential. Equipment shortages were a major impediment to growing domestic intermodal revenues this year.
· The auto sector is one area where demand continues to grow strongly. Manufacturers have some 36,000 finished vehicles sitting at their plants that need to move by rail. Auto dealer inventories, meanwhile, remain low. Recall that auto supply was severely constrained by a worldwide semiconductor shortage throughout the pandemic—a shortage that continues to be an issue today.
· In general, even if demand slows, CSX hopes to not see any volume declines, because after all, it’s been turning away demand because of its staffing woes. Boone separately said that Hurricane Ian, despite CSX’s large presence in Florida, didn’t have a material impact on demand. There was however some modest demand impact from the strike threat prior to unions agreeing to new contracts last month.
· Boone arrived in Phoenix having just participated in a CSX board meeting, the first of CEO Hinrichs’ tenure. The meeting’s purpose was to discuss the company’s five-year strategy, which will focus on growth through innovation and service (the term “service” added at Henrichs’ insistence). The plan also calls for transformation through technology and a more engaged workforce. In Boone’s telling, CSX achieved a lot by sharply cutting costs in recent years. But additional cost-cutting opportunities have diminished, at least those with the potential to move the needle on operating ratio. The much bigger opportunity now is winning new business. And as it happens, there’s a lot more business available to win, some of which wouldn’t have been economically worthwhile prior to the company’s cost cutting. Put another way, the cost cutting put CSX in a better position to grow revenues. But that will require what Hinrich calls “customer advocacy,” whereby CSX shippers are happy with the railroad’s service and recommend and encourage others to use it. Said Boone: “There’s plenty of opportunity if we can get our act together.”
· He did acknowledge the risk of “over-hiring into a recession,” assuming the U.S. is currently in one, or will be before long (that seems to be conventional wisdom as the Fed repeatedly raises interest rates to quell inflation). The new labor agreements, of course, assuming they’re ratified, are highly inflationary (a 24% pay increase over five years).
· He mentioned some key headwinds burdening railroads in the past decade or two:
o Coal’s secular decline as an energy source (primarily for producing electric power and steel)
o Offshoring manufacturing production to Asia
o Just-in-time inventory principles, which favors the faster movements trucks can provide
o The unwillingness of many new North American factories to prioritize rail access
o Poor railroad reliability, something that CSX won’t be able to solve alone—about half of the freight it carries touches another railroad on its journey
· But there are opportunities for railroads too:
o Growing environmental concerns among shippers, who can cut their emissions by switching from truck deliveries to rail
o The new trend of onshoring, which Boone—never mind the skeptics—is convinced is happening. CSX, he says, has added 15 new site projects during the past 12 months, promising some $400m in annual revenue
o The move from just-in-time to just-in-case. The supply chain meltdown of the past two years has convinced many shippers that it’s sometimes better to be resilient than efficient. All the while, e-commerce has companies eager to position lots of inventory at warehouses close to customers, enabling rapid home delivery. Shipping things from centralized warehouses overnight by truck often won’t cut it anymore
o The new infrastructure bill passed by Congress, which will inevitably mean heavy highway construction for years, implying traffic and congestion on the nation’s roads
o CSX specifically has strong potential to grow intermodal traffic at key east coast ports like Savannah, which unlike most west coast ports has plenty of land to add warehouse capacity
Union Pacific
· SWARS (the Southwest Association of Rail Shippers) held one its semiannual gatherings in Phoenix last week, featuring speakers from across the industry. One was
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