Inside This Issue
· New Year Cheer: Latest Inflation Data Boosts Case for Resilient Economy
· A Busy Agenda: MARS Event This Week, Q4 Financial Reports Next Week
· Supply Still Burdened, Demand Uncertain: Auto Sector at a Crossroads
· No Sobs if Lots of Jobs: Canadian Bank Chief Upbeat on Home Economy
· Unimpressed: Some Express Doubt About Railroad Growth Plans
· Can Wayne Run a Train Without Jane? Railroads, Unions Debate 1-Person Crews
· Looking Back: A History of How Supply Chains Evolved
Track Talk
From last month’s FRA hearing on crew size:
“We see no need and no justification for this crew size and crew location rule that would solve a nonexistent problem.”
-American Short Line and Regional Railroad Association president Chuck Baker
“Class I railroads are now running trains up to five miles long. It is absurd to argue that such a massive piece of equipment can be safely operated by one individual given the many tasks for which at least two people are needed.”
-AFL-CIO Transportation Trades Department president Greg Regan
The Latest
· We’re now a week away from fourth quarter earnings season, when North America’s Class I railroads will provide their latest outlook on demand, fluidity, pricing, and other aspects of their business. Before doing so, however, many will present this week at a Midwest Association of Shippers (MARS) event in Chicago (Publisher’s note: I’ll be there; please say hello! -Jay Shabat). The chief executives of Canadian National (Tracy Robinson), BNSF (Katie Farmer), and Norfolk Southern (Alan Shaw) are all scheduled to speak. So is STB chair Marty Oberman, along with Greenbrier’s CEO Lorie Tekorius, AAR chief Ian Jeffries, and of course representatives from an assortment of rail shippers. Also next week, Canada’s CIBC Bank will hold an investor conference featuring Canadian Pacific’s chief marketing officer John Brooks.
· Things are starting to feel somewhat better on the economic front. A closely-watched inflation report showed consumer prices actually fell from November to December and are now up less than 7% y/y—still high but coming down steadily. The drop in oil prices and easing supply chain bottlenecks are helping. So is a cooling housing market. This could make the Fed more dovish when it announces its next interest rate move on Feb. 1st. Monetary officials are still, however, concerned about rising wage pressures supported by a still-hot jobs market. (A separate and more serious issue is the potential to implode the entire global financial system if Congress doesn’t permit the Treasury to service its debt later this year). The largest U.S. banks, meanwhile, said in their Q4 earnings calls last week that spending throughout the economy remains strong, albeit more so on services than goods. Services, incidentally, tend to be more labor intensive, contributing to the ongoing job market strength. Unfortunately for railroads, goods are more relevant than services, though capital investments are important too, and both private and government spending on construction is still pretty robust outside the single-family housing sector.
· Toronto-Dominion Bank’s Bharat Masrani sounded relatively optimistic about the Canadian economy, citing the strong job market. “I’m not suggesting there’s a 100% chance there’s no recession,” he told investors at an RBC Capital investor conference last week. “When rates go up so much, is there a slowdown to be expected? Yes. But on the other hand, the job market has been remarkably strong and continues to be strong… am I saying for sure that this is going to be just a benign environment? No, absolutely not... But the part to watch is employment… that’s the indicator as to what’s going to go on.” Masrani did however add that “even if we don’t get into a recession, much slower growth is going to feel like a recession. I’m sure there are a lot of sectors right now, I talk to a lot of clients, they are feeling they’re already in a recession.” In his description, it would “be more of an interest-rate-caused recession.” But “are we seeing a depression here with some of the questions you are asking me? You say, oh my God, the world is coming to an end. We don’t see that.”
· FTR Transportation Intelligence presented its latest “State of Freight” update in a webcast last week. The prevailing mood is one of uncertainty, it suggested, following a freight slowdown in 2022, which preceded an unprecedented freight boom in 2021. Imports to North America are now slowing “rather dramatically,” while railroad carload traffic too ended last year with weakness. Overall rail volume is expected to have a sluggish 2023, impacted by a slowing economy. FTR’s Todd Tranausky highlighted the many coal-fired power plants coming offline for environmental reasons, the big drop in chemicals traffic late last year, and the intermodal-unfriendly shift away from west coast ports. FTR is still bullish on chemical traffic over the long term though. Tranausky said train speeds in North America improved in Q4, but staffing isn’t back to where it was pre-pandemic and certainly not pre-PSR (Canadian carriers, he noted, were quicker to hire back workers during the pandemic). Railroads will be wary of cutting rates given their own cost inflation. But they might not have a choice in competitive intermodal markets. Labor tensions remain high, even as railroads implement “kinder and gentler” attendance policies. One sector that’s critical to watch is auto production. On the one hand, there’s still lots of pent-up demand for new vehicles, and inventory is now more plentiful. But with higher borrowing rates, sales have been flat recently, which could lead to production cuts.
· As an aside regarding the auto sector, Ford’s Ted Cannis, who runs the company’s commercial sales, said at an industry event last week that he’s seeing “a huge amount of demand.” However, “on the supply side, the situation remains tenuous… We expect the chip situation to get a litter better this year, but it’s still an ongoing issue.” He mentioned a tight labor market as well, not just for Ford but also for its suppliers. “It’s a constant challenge to provide vehicles to our customers, in some cases [meaning] a very long waitlist.”
· In other news, Canadian Pacific secured a tentative contract deal with about 1,200 of its mechanical employees represented by the Unifor union. There’s more and more talk of developing hydrogen hubs to promote clean energy—one example is a project envisioned at the booming port of Corpus Christi, Texas. Sure enough, some of the hydrogen produced would likely move to markets by rail—Corpus Christi’s port is served by three Class I railroads (BNSF, UP, and KCS). In the meantime, ports all along the Gulf of Mexico are enjoying an import boom. According to PIERS, a sister product of S&P Global’s Journal of Commerce, imports from Asia through the ports of Houston and Mobile increased 34% and 16%, respectively, in the first 10 months of 2022. Overall, container imports to North America, after surging during the pandemic, are now roughly back to pre-pandemic levels.
· Class I railroads say they’re keen to grow. But not everyone’s convinced. John Schmitter of Rail State, in a blog post, questioned the true nature of this “growth” railroads claim to be chasing. Norfolk Southern, for one, said at its recent investor day event that it would prioritize growth even if it meant a somewhat higher operating ratio. But as Schmitter notes, current strategies often involve no new train starts, no new service, and no new capacity. Instead, it often merely targets “taking business in selected lanes where they perceive they have capacity.” This, he says, “isn’t really a growth strategy.” Railroads are hiring more staff to handle more of the volume their current customers want to ship. But “most other businesses would not call that a growth strategy… For railroads to increase market share and really grow volume will require new services and a very different mentality on service performance. Schmitter, by the way, is scheduled to speak at this week’s MARS event in Chicago. So will other advocates of railroad growth and service improvement, including Oliver Wyman consultant Adriene Bailey, who spoke with Railroad Weekly last January:
Railroad Crew Hearing
· Last month, the Federal Railroad Administration (FRA) held a public hearing on the controversial topic of train crew sizes. It’s controversial, of course, because railroads seek FRA authority for one-person crews, something labor unions strongly oppose. Representatives from both sides presented and argued their viewpoints at the hearing, which was led by Caroline Hayward-Williams, the FRA’s Director of its Office of Railroad Systems and Technology.
· Last July, the FRA published a Notice of Proposed (NPR) that would establish safe minimum requirements for the size of train crews, depending on the type of
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