photo source: Canadian Pacific
Inside This Issue
· New Kid on the Track: CPKC Now a Reality
· Q1 Fun Begins: Another Round of Earnings To Bring Lots of New Learnings
· Buffett Finds Fault: Sage of Omaha Pans NS for Derailment Response
· The FRA Has its Say: Regulator Issues Derailment Safety Advisory
· The U.S. Economy: Inflation Cooling. Are Rate Hikes Ending?
· Rail Force Winds: Intermodal Expert Larry Gross Paints a Grim Picture
· An Urge to Expand but a Shortage of Land: A Threat to America’s Factory Boom
· Lorie’s Story: Greenbrier Chief Presents Latest Trends in the Railcar Market
Track Talk
“I think they handled it terribly… they were tone deaf.”
-Berkshire Hathaway CEO Warren Buffett, on CNBC, criticizing Norfolk Southern’s response to its now-infamous derailment in East Palestine
The Latest
· It’s official. Canadian Pacific and Kansas City Southern are now one, the result of a $31b merger. The deal itself, keep in mind, was completed in December 2021, following several months of battle between Canadian Pacific and its rival Canadian National. But CP wasn’t permitted to exercise management control until receiving regulatory approval, which the Surface Transportation Board granted last month. The new railroad carries a new name CPKC—or more officially Canadian Pacific Kansas City Limited. It remains, significantly, the smallest of what are now six, not seven, Class I railroads in the U.S. and Canada. To celebrate the milestone, the two companies drove a ceremonial Final Spike in Kansas City, where both networks come together. The mission for the new railroad going forward: Fulfill its many promises to investors, shippers, regulators, unions, and other stakeholders. The new CPKC pledges, for example, to create new single-line shipping options while also creating new jobs, boosting local economies, taking more trucks off the road, supporting passenger rail, investing in new infrastructure, and relentlessly emphasizing safety. More specifically, it aims to generate more traffic between Canada and Mexico, both carload (grains, chemicals, petroleum, and forestry products, etc.) and intermodal. It will, however, take about three years to fully integrate the two railroads. CPKC will be run from Calgary and led by CP’s top executives, with Keith Creel still CEO. Creel and his team will have a lot more to say on April 26th, when CPKC holds its first quarterly earnings call as a combined company.
· This week, Union Pacific and CSX will lift the curtain on first quarter earnings season—both railroads report on Thursday (April 20th). They’ll do so in the context of deeply disappointing intermodal trends, with AAR traffic data showing North American container/trailer movements down 10% y/y so far in 2023. Carloads are up 3% but mostly thanks to Canada—U.S. carload traffic is down slightly. The biggest carload commodity remains coal, which is still up y/y but trending down in recent weeks. Chemical concerns are front and center, with U.S. volumes down a disconcerting 7% year to date. U.S. grain is down 8%. This leaves railroads deriving most of their growth momentum this year from autos, construction materials, and energy. We’ll hear a lot more on what they see coming as earnings season unfolds over the next two weeks. One giant question: Do they still expect intermodal demand to recover in the second half of the year? Another question everyone is now asking: In the wake of the East Palestine affair, are new government regulations imminent?
· The economy is another concern, albeit one with some positive trends. Consumer price inflation is down to just 5% y/y. Producer price inflation is down below 3% (and actually declined from February to March). This suggests the Fed will finally pause its rate hiking, if not at its next meeting in early May, then at the one after in mid-June. Many are now wondering if might not be long before the Fed starts cutting rates. The Bank of Canada, meanwhile, which already stopped hiking, held rates steady again at its meeting last week. Back in the U.S., big banks reported strength as they discussed their first quarter earnings. Retail sales for March (see chart below) are declining modestly but in part for a good reason—Americans are spending less money at gas stations. It’s also important to note that non-retail spending—on services like travel, leisure, health care, and education—remains strong. Delta Air Lines last week said in its Q1 earnings report that travel demand continues to be red-hot. There are of course still concerns about the overall economy’s exposure to the sluggish housing market, the contracting IT sector, rising wages, and recent signs of weakness in the manufacturing sector, including all-important auto production which remains well below pre-pandemic levels. Another big worry is the commercial real estate sector, with many offices empty as people work from home.
Railroads in the News
· Reuters ran an interesting story about the factory-building boom taking place across the U.S. Companies based both within the U.S. and abroad are eagerly establishing new U.S. facilities in response to “hefty government incentives, a
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