Inside This Issue
· Snail Rail: Are RRs Too Slow to Change?
· Ho, Ho, Ho, You’re Too Slow: Even the Jolly Green Giant Thinks So
· Boone Shot: CSX Exec Fights Uphill Battle to Grow
· Tariff Tantrum: U.S. Extends Key Deadline but Amps Up Threats
· Trackage Right Fight: BNSF Says UP Obstructing Its Plans
· Reciprocal Ditching: Court Says No to Reciprocal Switching
· This Week: J.B. Hunt To Discuss Latest IM Trends
Track Talk
“The railroads’ pace of change is too slow.”
- Aaron Girard, Senior Vice President of Logistics, Seneca Foods
“As an industry, we haven’t been the quickest to evolve. We haven’t been the quickest to think differently.”
- CSX commercial chief Kevin Boone
The Latest
· It was another week of disorienting tariff announcements. First of all, that 90-day pause on reciprocal tariffs scheduled to end last week—it was extended through the end of this month; the new deadline is August 1st. At the same time, President Trump spoke of new tariffs—ranging from 20% to 50%—on countries that don’t agree to a new trade deal by August 1st. Trump sent threatening letters to key Asian trading partners (and military allies), notably Japan and South Korea, whose economies depend heavily on U.S. trade. He made similar threats to the European Union and Mexico, which he said would face 30% tariffs next month, absent a deal. He raised nominal rates on Canada again, though USMCA-compliant goods remain exempt, so the impact should be minimal. Brazil was punished with a prohibitive 50% tariff, potentially upending the business strategy of American Airlines, for one, a big importer of Brazilian-made Embraer jets. India is another country still hoping to negotiate its way out of a double-digit tariff hike. Separately, Trump announced new tariffs on copper, one of the most heavily-traded commodities worldwide (it’s essential to computing, construction, electrical wiring, etc.). He said vaguely that pharmaceuticals would face a giant 200% tariff.
· What does this mean for North America’s railroads? We’ll hear their thoughts as they report their Q2 earnings, starting with Canadian National, CSX, and Union Pacific next week. This week, we’ll hear from J.B. Hunt, whose intermodal business—though focused on domestic containers—would suffer if tariffs depress consumer spending. We’ll also get earnings commentary—and surely lots of tariff commentary— from America’s largest financial institutions, including JPMorgan Chase, Bank of America, and Wells Fargo (the latter selling its railcar leasing unit). These banking giants, which serve a wide swath of companies and households, have a good window on the latest trends.
· Other earnings calls to watch this week: Fastenal, Alcoa, and GE Aerospace (for insight on manufacturing trends), Prologis (e-commerce and warehouse real estate), and PepsiCo (consumer spending). Last week, by the way, Delta Air Lines reported its Q2 results, which were generally good thanks to strong demand for premium and international travel among higher-income Americans. But trends for economy-class travel were significantly weaker. Delta by the way, is a big buyer of European Airbus planes but insists, “We’re not planning on paying any tariffs for aircraft deliveries.” Will Airbus pay? If it refuses, will Delta cancel orders? (And no, it couldn’t just turn to Boeing, which has a years-long wait-list for new planes).
· Will railroads and other companies sound just as relaxed about the tariff threat as they’ve been (generally speaking) over the past two months? After all, stock markets have rallied sharply. Energy prices and inflation more broadly have trended down. Railroads for one are enthused by investment incentives in the Big Beautiful Bill. The U.S. job market and consumer spending have mostly held firm. Or—alternatively—will firms sound more fearful, as they did when tariffs were first announced this spring? Are they worried about what might happen after the new August 1st tariff deadline? Are they spooked by the recent weakness in the job market outside healthcare and education? Are they spooked by last month’s drop in retail sales, or by the ongoing slump in housing and manufacturing? As for interest rates, the Fed’s next policy move will come on July 30th. But as chairman Jay Powell has already said, he’s disinclined to lower rates until he better understands the full impact of the tariffs, whatever they wind up being. One final thing to keep in mind: Companies that report earnings tend to be large. Smaller American businesses, many dependent on imports, could be hurt worse by the tariffs.
Other Developments
· The STB ruled that CPKC can still use Union Pacific’s tracks to haul grain between Beaumont, Texas, and two Texas Gulf Coast ports, namely Houston and Galveston. These were rights originally granted nearly 40 years ago (in 1988), when UP merged with the Missouri-Kansas-Texas Railroad (the MKT). The STB’s predecessor, the Interstate Commerce Commission, granted these rights to Kansas City Southern, as a means to alleviate anti-competitive effects of the merger. Fast forward to 2023, and KCS’s new owner, CPKC, asked the STB to reaffirm those rights for the newly-enlarged railroad. It wants to ensure it can ship grain all the way from North Dakota, for example, to Houston and Galveston via Beaumont. Yes, it can, the STB said. “By enforcing this merger condition and affirming the continued use of these haulage rights, the Board preserves routing options for agricultural shippers, helping support a strong supply chain and market access for American exports.” One of the four current STB members, Robert Primus, dissented: “Expanding the condition to protect affiliate-to-affiliate handoffs… would alter the competitive balance among railroads (burdening UP and benefitting KCSR) in a way that was unnecessary to ameliorate any merger-related harm under the ICC’s merger policy.”
· In a new case, BNSF asked the STB to immediately stop Union Pacific from blocking access to UP tracks between northern California and Nevada. BNSF wants to use that UP trackage (with UP crews) to move double-stack intermodal trains to Salt Lake City, where it intends to interchange with the Salt Lake Garfield & Western Railway. The SLGW, a unit of Patriot Rail, just opened a new Salt Lake City intermodal terminal. BNSF claims the trackage rights based on a 1996 ruling tied to UP’s merger with Southern Pacific. It says UP is refusing its request, accusing it of “flagrant violations of UP’s obligations under the UP/SP merger conditions.” UP says no, it’s not trying to block anything. BNSF simply hasn’t “provided adequate time to hire and train the crews necessary for the new trackage rights movements, nor has it… provided enough time and information to work through the operating details of the new required interchange with SLGW.” The STB will discuss the matter with both railroads on Tuesday.
· And one more STB update: It ruled that Norfolk Southern’s planned takeover of the Norfolk & Portsmouth Belt Line Railroad (NPBL) will be treated as a “significant transaction.” That implies a more rigorous approval process than if it were classified as a “minor” transaction.
· For CSX, 2025 got off to a bad start, with project-related operational woes, leading to lower-than-expected profit margins. Eager to gets its margins back on track, the Florida-based railroad axed 125 management positions. It will likely provide more details during its earnings presentation next week.
· Regarding the railroad industry’s inability to grow, Richard Kloster of Integrity Rail Partners expressed some concerns in an article published by Progressive Railroading. He worries that the longterm stagnation in rail freight demand, if it persists, could spell trouble for companies in the railcar supply chain. “If you don’t need the car, or as many as you did before, you also don’t need as many railcar parts, or railcar shops, or railcar builders, or railcar leasing companies, and so on.”
The Economy
· What’s the true purpose of President Trump’s tariff offensive? To stimulate domestic manufacturing? To alter the value of the dollar? To browbeat trade concessions from other nations? One impact already evident is their boost to government revenue. The U.S. Treasury collected $27b in customs duties last month, up from a monthly verge of about $7b in 2024. At that pace, annual revenues would be roughly $324b. For context, the Treasury owes nearly 40 trillion in debt. Tariff revenue year-to-date accounts for about 3% of total Treasury receipts, with the largest single source being income taxes. The four biggest categories of federal outlays are for healthcare, social security, interest payments, and defense.
· Apollo’s chief economist Torsten Sløk cautions that inflation could yet, well, inflate. He points to not just tariffs but also the weaker dollar, which also makes foreign goods more expensive for Americans. He also warns about the impact of immigrant removals. “If 3,000 unauthorized immigrants are deported every day, the labor force will decline by roughly 1m people in 2025.” He adds, “Lowering the labor force by 1m will reduce the [labor force] participation rate by 0.4 percentage points, which will lower the unemployment rate, lower job growth, and increase wage inflation, particularly in the sectors where unauthorized immigrants work—namely construction, agriculture, and leisure, and hospitality. In short, deportations are a stagflationary impulse to the economy, resulting in lower employment growth and higher wage inflation.” You can see Sløk’s latest analysis here. Also below is a slide from Conagra’s latest investor presentation:
NARS Event Highlights, Lake Geneva
CSX
· Kevin Boone, CSX’s chief commercial officer, joined the company in 2017 thinking he’d “change the world.” And he still might—the railroad has every intention of growing, for the benefit of shippers, taxpayers, workers, the environment, and the economy. But he admits: Progress has been “slower than I’d like it to be.”
· The numbers, frankly, aren’t good. “Many of the markets we touch have not seen growth over the past five years.” Since 2019, Boone explained, U.S. industrial production has remained largely flat. There’s been no growth in housing starts and no growth in auto sales—these are two critical markets for CSX because they affect demand for so much else that railroads carry (steel, plastics, lumber, aggregates, etc.). CSX’s auto, coal, and petroleum volumes are down by double-digits since 2019. Industrial output among U.S. pulp and paper mills? Down 16%.
· Even some of the categories that have increased since before Covid haven’t increased much. CSX’s chemical, intermodal, and stone/sand/gravel volumes are up by just single digits, still not terribly impressive for a half-decade.
· The point is, railroads have been largely unexposed to the strongest growing sectors of the U.S. economy, like IT, tourism, health care, etc. Put another way, they’ve had a terrible economic backdrop this decade. Essentially, they’ve been operating in a recession-like environment, given the trends for coal mining, housing construction, auto production, non-auto manufacturing, etc. Boone called it “the decay of the industrial base in the U.S.,” which in fact has been happening for decades. Making matters worse these past five years, supply chains for moving physical goods have suffered extreme disruption. “The wind has not been at our back.”
· Not stopping there, Boone named another challenge: In the age of Amazon, consumers want immediate deliveries, and shippers have to respond with just-in-time logistics. That favors trucking, which is often faster, more reliable, more flexible, and less complex than rail shipping. In addition, railroads must invest billions in their own infrastructure, making project and asset acquisition decisions with 30-to-50-year time horizons. Railroads also face tougher regulatory oversight—for adopting new technology, for example. And railroads are only as good as their interchange partners—half of CSX’s freight touches another railroad, and there’s nothing it can do “if the other railroad is falling down.” The challenges, he admits, are much more numerous than the advantages.
· If all of this sounds like a company in despair—a company giving up hope—well, that’s absolutely not the case. After his gloomy assessment of the past five years, Boone then pivoted to a much more positive outlook for the future. Railroads, he asserted, enter the next half decade with a powerful arsenal of advantages versus trucking—they’re safer, their cheaper, they’re cleaner, they’re more scalable for large freight volumes, and they require less taxpayer support. Don’t forget that trucking has experienced a recession of its own these past few years, resulting in low pricing and overcapacity—that’s been a big competitive headwind for railroads. However, with truck driver pay per mile up 50% since 2019, “We should expect supply rationalization at some point.” A recovering truck market, for sure, would boost CSX.
· At the same time, that decay of America’s industrial base seems to be reversing. CSX can see it in the many new projects, plants, and factories opening and under construction along its network. The southeastern U.S., in particular, after decades of seeing textile jobs flee overseas, is now becoming a magnet for new manufacturing. The past five years may have seen weak manufacturing output. But it’s seen enormous manufacturing investment.
· The new tax law passed by Congress (the “Big Beautiful Bill”) features an accounting provision for depreciation of structures that should further incentivize domestic U.S. manufacturing investment. Boone calls the potential benefits “huge.” If interest rates eventually come down, that would help too. Tariffs, though currently a source of market uncertainty and project pauses, could also lead to additional domestic investment. And one thing that’s changed from the past is automation, which negates the importance of labor cost differentials between U.S. and overseas workers. CSX, to be sure, has lots of shovel-ready sites for prospective factories. When a new one arises on the CSX network, that’s potentially 50 years’ worth of new business.
· More specifically regarding tariffs, they’re most likely to boost domestic production of autos and steel, Boone remarked. That would be helpful because CSX doesn’t benefit much from imported vehicles, which are typically trucked from ports to dealerships. In fact, he said 85% of imported vehicles at the port of New York are trucked, versus 15% moving by rail. For autos produced at domestic plants, the reverse is true: about 85% move by rail. The situation is similar for steel. However, Boone recognizes that reciprocal tariffs by foreign nations could hurt CSX’s export business (of coal and chemicals, for example).
· Perhaps most importantly, “service is really, really good right now.” As CSX has discussed, the tunnel expansion it’s undertaking in Baltimore has stressed the operation. So too has its need to rebuild its Blue Ridge subdivision after hurricane damage. But key operating metrics are now improving. Importantly, both of those projects are ahead of schedule and should finish in Q4. That will lead to further fluidity, while increasing network capacity. The Baltimore tunnel project, more specifically, will allow for double-stacking intermodal container trains. Expect CSX to announce new service offerings once the project is complete. As for the Blue Ridge rebuild, Boone admits to much higher costs than originally expected (more than $400m). The work won’t directly result in $400m in new business. Yet CSX opted to spend the money anyway, to gain added operational resiliency.
· As all of this is going on, CSX expects new business from its Pan Am shortline in New England, which was “not in good shape” when acquired. Hauling more waste is one promising market for Pan Am. Also promising is the railroad’s work with inland ports eager to have more rail shipping options. CSX’s transloading unit (Transflo) is growing. Quality Trucking, a specialist in shipping chemicals, will benefit as the trucking market right-sizes.
· This year, domestic coal is up (though international coal markets have been weak). Public infrastructure investment, meanwhile, (i.e., roadbuilding) continues to benefit the railroad’s aggregates business. Export plastic business has grown. And so on. It’s hardly all doom and gloom.
· Boone admits that railroads have a history of being unable to handle sudden spikes in demand, like during the crude oil-by-rail boom a decade ago. A key to addressing this is adequate staffing, and a key to ensuring adequate staffing is lower employee turnover. Happily, Boone said worker attrition rates at CSX have fallen sharply, to just 4.5% for the prior 12 months. That figure was previously 9%. A softer national job market is surely one reason for fewer workers leaving. But another is management’s efforts to change the company’s culture. Attrition, by the way, is expensive. “The average cost to train a conductor… is about $60k to $70k.” Lower attrition helps with service too, thanks to a more experienced workforce.
· A big priority now is identifying ways to accelerate and optimize interchanges with other railroads. CSX is working on ways to provide clearer and better information for shippers, though this typically requires a joint effort with other railroads, which can be challenging. “It’s not about CSX alone getting better, it’s about all of us coming together.” He added, “I still think it’s crazy that we have customers call in to tell us we missed a switch. It just blows my mind that still, today, we’re not proactively sending out those notifications.” It’s something “we’re working on really hard.” But again, it requires coordination with other railroads, which in turn requires data sharing, transparency, and deploying new technology. Another thing he said that “blows my mind”: “How do we lose railcars on the railroad?” The good news is that Boone says he is finding his peers at other railroads increasingly receptive to cooperation.
· Adopting new technology will be instrumental in many other ways. One potential example is using AI-based predictive analytics to pre-position inventory based on what retailers expect consumers to purchase. No need to wait for someone to order a new toothbrush; get it there in advance, based on predictive buying behavior. “We’re trying to become part of that conversation.” The conventional wisdom, Boone says, is that this Amazon effect is bad for railroads because it requires speed and consistency. He invited shippers at the Lake Geneva MARS meeting to be part of the conversation.
· Boone fielded a question about the appeal of railroads becoming full-service logistics companies, offering shippers more than just rail transport. To a small extent, CSX has moved in that direction, buying Quality Carriers, a trucking company. But a true “vertical integration” model has been tried unsuccessfully in the past, Boone said. One impediment is that Class I railroads are currently so profitable that anything else they buy will inevitably be less profitable, thus dragging down margins. This alone makes vertical integration a non-starter for Wall Street, which wields heavy influence. Wall Street is simply a metaphor for the railroad shareholders and bondholders who provide the industry’s capital.
· Another question concerned the next-generation of locomotive technology. CSX, remember, is working with CPKC to develop hydrogen locomotives. But it’s way too early, he said, to make a definitive decision about what the next-generation of power will be. Importantly, this will have to be an industry-wide decision, since railroads regularly use each other’s locomotives. It’s also a decision that will cost the industry hundreds of billions of dollars, so “you better get it right.”
· In sum, Boone’s message was that CSX understands the slow pace of change. It recognizes the many challenges that have inhibited its growth. But it’s working hard to change and working hard to grow, with signs of emerging success. “We are making good progress.”
A Shipper’s Frank Perspective
· Aaron Girard, the logistics chief for Seneca Foods, represented smaller shippers with no love lost for Class I railroads. Seneca isn’t a small company—it owns nationally-known brands like Green Giant (ho, ho ho). But as Girard explains, it has facilities spread across the northern U.S., each shipping modest freight volumes. Most have just two or three scheduled switches a week.
· Girard would very much like to ship more by rail. Seneca currently arranges about 70k truckload shipments annually. In addition, “Boxcar shipping of canned vegetables,” he said, is incredibly important to us… I want to ship more by rail.” But the railroads aren’t making it easy.
· He proceeded to launch a litany of gripes, including “irrational” rate increases, failure to fulfill railcar orders, refusal to take ownership of problems, a confrontational attitude, disinterest in advocating for customers, and a penchant for blaming customers every time something goes wrong. Seneca’s own customers, including large supermarkets like Walmart, are extremely demanding. They’ll deduct compensation if a truck arrives just one minute late. Only two of Seneca’s customers still have their produce shipped via boxcars—and one of those two just last week decided to stop. Girard said the value of rail has diminished over time, and that the “railroad pace of change is too slow… We need the railroads to improve.” He has the feeling that Class Is ignore smaller shippers when times are good. “When the market softens, our freight becomes important.”
· Girard isn’t all negative. He complemented Norfolk Southern and BNSF specifically, along with shortlines like the TCWR in Minnesota and Watco’s Wisconsin and Southern Railroad. The shortlines “think like entrepreneurs.” He did add a caveat, though—as shortlines grow and consolidate, he sees some behaving more like the Class Is, and not in a good way.
· He concludes with some advice. For railroads to capture more business, they must 1) decide if they really want small manifest business, 2) if there’s an issue, own it, 3) recognize and respect customer investments, 4) offer consistent pricing (“When the market tightens we should have the same importance”), 5) create an environment where your employees can advocate for a customer; don’t talk of partnership. Demonstrate it.
· Note that some shippers are reluctant to so openly criticize railroads. Girard even alluded to the MARS event in Chicago this winter, when former STB chair Robert Primus decried the alleged practice of railroads retaliating against shippers who air their complaints.
Other MARS Event Highlights
· Norfolk Southern’s operating chief John Orr, in a lunchtime conversation with his colleague Stefan Loeb, focused on continuous efforts to improve operations and safety. Orr was a pioneering practitioner of Precision Scheduled Railroading while working for Hunter Harrison at Canadian National. He later ran Kansas City Southern’s operations and served briefly as CPKC’s chief transformation officer. Last year, while fending off a management coup by the investment group Ancora, NS essentially purchased Orr from CPKC. But the PSR he’s implementing at NS is not the same PSR of yesteryear. He calls the new version PSR 2.0, which puts a greater emphasis on safety and service. The customer has a much bigger role.
· Orr discussed some of his priorities, including the adoption of technology “not for technology’s sake” but to solve real problems. He cited track inspection work, which hasn’t changed much since the 1970s. Technology now exists to turn problem finders into problem fixers. Technology can also help with shipment and railcar visibility. But visibility is not enough, he said. Customers also demand accountability. They need to know someone’s accountable when something goes wrong. They also need, as Loeb remarked, “one source of truth.”
· One challenge is that shortline partners sometimes don’t have the capital to invest in the latest technologies. Well, Orr hinted that NS could play a role in helping them finance such investments.
· Separately, STB member Karen Hedlund said the board was spared the mass DOGE firings seen at other federal agencies. The STB remains prepared to handle what comes, even a transcontinental merger proposal. “Bring it on,” she said. Shortly before speaking, a federal court struck down the STB’s recent reciprocal switching rule, concluding the board lacked the proper authority. You can read the court’s ruling here. Back to Hedlund’s comments, she took some time to admonish CPKC, who’s technology cutover caused significant operational issues. “Railroads really have to up their game in terms of IT.”