Photography by Frederick Manfred Simon © www.steelwheels.photography
Inside This Issue
· O.R. Lower or Carload Grower? Will the Real Jim Vena Please Stand Up
· C&C for CSX: In Jacksonville, Coal and Chemicals Reign Supreme
· Norfolk Western: NS Provides More Options for Moving Boxes West
· Last Mile Smile: NS Wants to Improve Service, Door to Door
· More Discord at Ford: UAW Strikes Largest U.S. Auto Plant
· Oberman Hot and Cold: STB Chair Both Praises and Scolds
· Kan’t Do That: Kansas Outlaws One-Person Train Crews
Track Talk
“Kansans’ safety and security must always come first, and that includes the safety of our railroad crew members. This requirement will protect workers from the effects of fatigue, prevent train derailments, and reduce risks in the many Kansas communities along our railroad tracks.”
-Kansas Governor Laura Kelly, announcing new rule requiring railroads operating in the state to have at least two railroad crew members in the lead locomotive
Read American Places, a book with deep insights into the most important trends and developments throughout the U.S. economy -Jay Shabat, Publisher, Railroad Weekly
The Latest
· It’s time for Q3 railroad earnings season, with Union Pacific and CSX reporting on Thursday. It will be UP’s first quarterly report under new CEO Jim Vena, who will likely share more of his vision for the company. Will he emphasize growth and service over operating ratio, as other Class Is have done? Surely, he’ll say UP can achieve success on all three fronts. But will he, for example, pronounce an aversion to front-line furloughs, even while freight demand is subdued? For the record, he’s already furloughed about 150 maintenance workers, though not any engineers or conductors. Sure enough, that provoked a reaction from union leaders, regulators, and even the Wall Street Journal. So, clear your schedule for Thursday. And grab some popcorn.
· As for CSX, it’s winning praise for improved service and improved employee morale. We’ll find out on Thursday if that’s driving stronger profitability. Among other things, investors will be closely watching for updates on chemical and coal markets. These are CSX’s two leading revenue contributors.
· Norfolk Southern and Canada’s two Class Is won’t report until next week. Berkshire Hathaway usually publishes Q3 figures for BNSF during the first week of November. The NS, CN, and CPKC earnings calls, in particular, promise to shed light on the leading questions of the moment: Is intermodal recovering? Is the UAW strike eating into auto shipments? How’s the autumn grain harvest progressing? Any signs of life in housing-related shipments? Are all the new cross-border rail offerings into Mexico driving traffic growth? And so on. Note also that J.B. Hunt reports earnings on Tuesday, offering a window on the latest intermodal trends.
· Last week, Norfolk Southern announced what it called a “customer-centric, operations-driven solution.” Though it might not be the highest margin business, the railroad expanded options for eastern companies wishing to move containers to west coast ports. Rather than restrict availability to selected days, NS will now ship westbound on all days when its gates are open, specifically from its facilities in Louisville, Cincinnati, Columbus, Cleveland, and Detroit. Depending on the exact lane, either Union Pacific or BNSF will take freight onward from Chicago.
Details of Norfolk Southern’s new container policy:
· The state of Kansas is now requiring two-person train crews, becoming the tenth state to implement a crew-size law. The others are Ohio, California, Wisconsin, Arizona, West Virginia, Minnesota, Washington, Nevada, and Colorado. Separately, the federal Energy Department announced $7b in funding for seven new hubs to develop hydrogen energy, which might one day power locomotives, among other things. Railroads are working closely with governments and companies to establish a role in the transport of hydrogen as it’s produced and delivered.
· The port of Corpus Christi in Texas, which claims to be America’s largest port by total revenue tonnage, moved 52m tons of freight through its ship channel during the third quarter, up 8% y/y. The port, served by UP, BNSF, and CPKC, continues to benefit from booming crude oil exports. In an update from the Georgia Ports Authority, executives spoke about Savannah’s Mason Mega Rail terminal, which boasts “the greatest on-dock rail capacity of any port in the Western Hemisphere.” Both CSX (with its Carolina Connector) and Norfolk Southern (with its forthcoming Blue Ridge Connector) are expanding their inland offerings from Savannah. Toronto’s Globe and Mail ran an article discussing Prince Rupert’s discussion with Dubai’s DP World about perhaps building a second container terminal.
The Economy
· The latest U.S. consumer price index showed annual inflation at 3.7%, following a 0.4% increase from August to September. That’s somewhat higher than the Fed would have liked, though perhaps not enough to justify another interest rate hike on Nov. 1st. Energy prices jumped during September, though they’re still down y/y. Housing and transportation services (specifically the cost of repairing and insuring vehicles) are two key areas where costs are up sharply from this time last year. Economists, however, see housing costs easing in the coming months.
· Several big banks reported Q3 earnings last week, sharing insights on the economy. New York’s Citi said, “Recent [U.S.] data implies a soft landing, but history would suggest otherwise, and we are seeing some cracks in the lower FICO consumers.” (Lower FICO just means people with weaker credit ratings, i.e., those riskier to lend money to). Pittsburgh’s PNC said it’s “expecting a mild recession starting in the first half of 2024, with a contraction in real GDP of less than 1%.” According to Wells Fargo of San Francisco, “Average commercial and consumer loans were both down from the second quarter as higher rates and a slowing economy have weakened loan demand, and we’ve continued to take some credit tightening actions. Looking ahead, the U.S. economy has continued to be resilient with key support from the labor market and strength in consumer spending… Our base case remains a continued slowing of the economy, but we remain prepared for a wide range of scenarios given there is still significant uncertainty ahead.”
· Fastenal also reported last week. The Minnesota company, which literally sells many of the nuts and bolts used in construction, said its “managers across our business are fairly cautious on where the market is today… I think aerospace is doing fairly well… I’m getting the feedback that everything else remains fairly tepid.”
· In Mexico late last month, the country’s central bank left overnight interest rates unchanged at 11.25%. Inflation is running at a little over 4%. Policymakers spoke of tailwinds from nearshoring and auto exports but expressed concern that a U.S. slowdown would hurt the Mexican economy. Another thing they’re watching closely is the peso-dollar exchange rate, which has strengthened most of the year before deprecating some since the summer. A strong peso helps Mexico by allowing it to pay less for its imports. But it hurts the country by making its exports more expensive. According to the Observatory of Economic Complexity (OEC), Mexico’s top exports are autos, computers, and crude oil. Its top imports are refined petroleum, autos, and office machine parts. You can see how critical autos are to its economy. For more on Mexico’s manufacturing sector and how railroads might benefit, check out this short video from geopolitical strategist Peter Zeihan.
· Back in the U.S., the striking UAW hit the nuclear button on Ford, targeting its largest and most profitable plant. The giant Kentucky Truck plant near Louisville builds F-Series Super Duties, Expeditions, and Navigators. Ford calls it “one of the most important manufacturing plants of any kind in America.” The factory is served by CSX’s adjacent O’Bannon yard.
Highlights from the North East Association of Rail Shippers (NEARS) Event
· In Portland earlier this month (Maine, not Oregon), northeastern rail shippers had a chance to hear directly from CSX’s chief executive, plus senior executives from Norfolk Southern and Canadian National. Also speaking was the U.S. railroad industry’s top economic regulator, namely STB Chair Marty Oberman. The event was hosted by the North East Association of Rail Shippers (NEARS), which holds spring and fall conferences each year—the spring 2024 event will be in Saratoga Springs, New York.
CSX
· Joe Hinrichs of CSX, garnering lots of good reviews from stakeholders across the industry, remembered how surprised he was upon arriving to the industry, at the “angst and animosity” directed toward railroads. Unions, regulators, shippers, even Amtrak… “everybody hated us except investors.” This was clearly a situation that needed to change, setting Hinrichs on a path toward improving life for workers and improving customer service. His philosophy: “We exist to solve problems for customers.”
· CSX has since won praise—even from STB chair Marty Oberman—for delivering more reliable service. But not yet reliable enough, according to Hinrichs, who points to the roughly 10k railcars a day that still aren’t getting to where they’re supposed to. And that’s more than just a service problem. It’s a cost problem. “The number one driver of costs in railroading is how fluid the network is.”
· Back on the employee front, he clarified that CSX’s no-furlough policy specifically pertains to train and engine (T&E) employees, which require a half-year of training before starting their jobs. About half of CSX’s employees are in the T&E category. That said, there’s no current need to furlough non-T&E staff, with the company actually growing its carload volumes this year (in other words, volumes excluding intermodal). Yes, the freight market has been weak throughout 2023. But CSX is winning market share, Hinrichs says, thanks to its improved service (NS’s East Palestine problems surely contributed to some share shift as well).
· Intermodal—and especially international intermodal—has been unequivocally weak, albeit with some signs of pickup recently. Chemicals and forest products are two other areas of softness. But things are hardly all bad. The market has been more of a “mixed bag,” with autos, coal, aggregates, minerals, and steel all performing well. The fall grain harvest Hinrichs says, is looking good. As for the UAW auto strike, Hinrichs himself led several rounds of contract negotiations with the UAW while an executive at Ford. Back in the early 2000s, he even delivered a presentation to Norfolk Southern on how it could improve service to the auto sector. Today, he’s unmistakably bullish on the railroad industry’s potential to grow, holding, after all, a “Royal Flush”: Railroads can help the economy, help the environment, help the taxpayer, and help customers save money (vs. trucks). “I wake up every day excited by that opportunity.”
· Interestingly, he blames railroads for holding back the U.S. economic recovery after the Global Financial Crisis of 2008-09, and again after Covid, by not being able to handle the rebound in freight demand. The reason: Ill-advised worker furloughs. But where more specifically can CSX find more business going forward? Hinrichs gave the example of a factory he visited, producing 50k tires a day. It has its own rail spur, but it’s completely walled off and unused. CSX wants to change that.
Norfolk Southern
· NS is no less determined than CSX to win more business. And to that end, it hired shortline veteran Stephan Loeb to oversee what he calls a “Swiss Army Knife” of services. They include managing NS’s relationships with shortlines (it interchanges with roughly 250 of them) and running the company’s collection of logistics businesses, including its own trucking operations. Rather than focusing only on moving freight along its mainline tracks, NS wants to be a solutions provider for shippers, down to the first and last mile.
· In a recent interview with Bill Stephens of Trains.com, Loeb gave the example of NS’s Triple Crown trucking service, which traditionally existed to support the railroad’s intermodal business. But now it’s working to make its trucks useful to bulk customers too. “This,” he told Trains, “is about attracting business that can go on rail, but for many different reasons hasn’t… Even if we take a couple basis points off of the truck market share, that’s huge.”
· At the NEARS event in Portland, Loeb provided further detail, noting that some 40% of NS’s industrial product business touches a shortline, a higher percentage than other Class I railroads. If NS is to capture more freight demand, therefore, it’s imperative that it works closely with its shortline partners, ensuring reliable and efficient interchange performance. Loeb’s team is working hard on that.
· Opportunities abound from its existing “powerhouse” customers, who’d like to ship more by rail if only convinced it’s reliable to do so. Then there are “frontier” markets like the many new electric vehicle plants coming onto its network.
· Loeb makes clear that NS doesn’t want to become another J.B. Hunt—it’s not going to do over-the-road trucking, take possession of freight, or become a warehousing company. But it does want to offer new services and new solutions to create longterm value for customers. “You can’t just look at the [core NS] network. You’ve got to look beyond it.” The Triple Crown business will therefore grow—“I think you’re going to see a lot more Triple Crown out there on the highways… Norfolk Southern is the only Class I railroad providing one-stop shopping with our Triple Crown service, leveraging our own assets.” NS is expanding its transload capabilities, for example, and investing in a company (DrayNow) that’s built an app for connecting IMCs with dray operators. NS doesn’t want to be known as just a railroad but as a door-to-door solutions provider.
Canadian National
· Kelly Levis, who runs Canadian National’s industrial business, stressed the railroad’s emphasis—ever since CEO Tracy Robinson took over in early 2022—on running a scheduled operation. The marketing team can then sell transport based on that schedule, while working with customers to evaluate their current and future needs. The goal is to build longterm sustainable business relationships.
· Keeping to a firm schedule helps improve network velocity, which in turn leads to reliable service. Currently, CN’s average velocity is up to 213 miles per day, which is admittedly helped by lower freight volumes (especially on the intermodal side). The graphic below is from one of Levis’s slides:
· Levis spoke about CN’s embrace of new technologies, from automated track inspections to the use of Google’s cloud software. It’s no less eager to invest in physical infrastructure, like new passing tracks (sidings) along its busiest corridor, specifically between Chicago and the west coast ports of Vancouver and Prince Rupert. CN has another 800 new boxcars arriving in 2024. It’s always renewing locomotives and other railcars as well.
· Levis then touted some of the new cross-border intermodal offerings now available, including Falcon Premium (customers are finding it a “very effective solution”) and Mexico Gulf Express, whereby partner Crowley ships containers over water between Mexico and Mobile, Alabama, where CN moves them onward by rail to key markets like Memphis, Chicago, Detroit, Toronto, and Montreal. Levis said she’d like to see CN establish more interchange points with other railroads, following the success of Falcon Premium with Union Pacific. In the meantime, CN is chasing new business as markets evolve—there are currently five new electric vehicle factories, for example, now coming onto its network. All five, incidentally, are in eastern Canada, where CN has more free capacity (its western network is more congested).
· Levis also talked about CN’s participation in the equipment management program, better known as EMP, which is a pool of some 40k 53-foot domestic containers (and chassis) that IMCs can access as needed. For CN, participation in the pool creates greater demand for containers that might otherwise run empty in one direction, leading to a more balanced flow of traffic. And speaking of balance, Levis underscored the diversity of CN’s business, with about 19% of its revenues coming from petroleum/chemicals, 18% from international intermodal, 17% from domestic intermodal, 16% from grains/fertilizers, 12% from forest products, etc. Its business is well-balanced geographically too (see below).
The STB
· What’s on Marty Oberman’s mind these days? The STB chief addressed the NEARS event, delivering both praise and reproach. He’s unambiguously happy about all the new services railroads are offering: CPKC’s post-merger network; the MMX, Falcon Premium and Mexico Gulf Express products; the new CPKC-CSX Alabama interchange; the new CN-NS domestic intermodal cooperation; NS’s new first-mile/last-mile team; and so on. He again praised BNSF’s Barstow gateway project as
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