Inside This Issue
· The Know-How to Grow Now: RRs See Many Paths to Expansion
· CSX’s Oath of Growth, Oath of BOTH: We Can Expand AND Improve Profits
· Ancora’s Plea to the STB: Meet with Me and You Will See
· Mine Decline: It’s Not All Bad for Coal in 2024. But Longterm, Assume Gloom
· Chemical Reaction: RRs Grateful as Critical Chem Market Comes Alive
· Sick Day Play: UP’s Vena Says Workers Calling Out to Watch Football
· Buffett Rebuff: Berkshire Says Vote No to Union Committee Proposal
· From Delays to Praise: RRs Win Plaudits from IM Giant Schneider
Track Talk
“We want to grow. Let’s be clear about that objective.”
-Union Pacific CEO Jim Vena
The Latest
· Union Pacific, CSX, and CPKC addressed investors at a conference in New York last week (see below), sharing the latest on demand trends for the first quarter. There are only two weeks left in the quarter, and all three railroads say their freight volumes should be broadly in line with last year’s Q1. The intermodal market is finally reawakening, if not yet with great vigor. The chemical market is growing again after a rough 2023. The auto market continues to be a bright spot too. On the other hand, railroads are moving less coal and grain this year. They’re also moving less construction material.
· Coal, still the largest category of non-intermodal freight for North America’s railroads, will inevitability become a smaller market—maybe a bit slower or faster than expected (depending on natural gas prices, for example, or the pace of electricity demand). But the longterm coal decline is all but assured. The fortunes of the grain market will forever lie with Mother Nature. The trajectory of the continent’s economy is almost as unpredictable. Yet railroads—never mind these headwinds and uncertainties—are universally optimistic that growth opportunities are plentiful:
o There’s the rise of manufacturing in Mexico and the birth of new factories across regions like the U.S. southeast.
o There’s the U.S. infrastructure boom, and the petrochemical boom along the U.S. Gulf Coast
o There’s the upside of the energy transition—yes, it spells trouble for the coal market, but it’s also stimulating more rail shipments of biofuels, batteries, electric vehicles, etc.
o There’s growing talk—and some action—about Class Is cooperating more with each other.
o There’s the intense industry focus on service and reliability, hopeful that improvements will convince more companies to ship by rail rather than truck.
o There’s confidence that eventually, the housing market will revive.
o There’s confidence that the intermodal market has long-term growth prospects galore, thanks to its cost advantages, its carbon advantages, and its capacity advantages.
o There’s the strategic action of individual railroads, from CP’s merger with KCS to CN’s takeover of various shortline railroads to BNSF’s giant investment in Barstow, Calif., etc.
· Remember the math behind operating ratio: It’s total operating costs divided by total operating revenues. Now remember the adoption of Precision Scheduled Railroading, where Class Is improved their OR primarily by shrinking the numerator. In other words, they slashed costs by downsizing their assets and headcount. Today, the strategy is more about improving OR by growing the denominator. This entails boosting volumes, for sure, but also lifting prices, which railroads typically have a lot of leeway to do (at least on the carload side, if not the intermodal side; of course intermodal is where volume growth prospects are brightest). Better service helps them justify and capture higher prices too. Revenue growth is all the more imperative because the numerator continues to increase, i.e., rising wages and material prices, etc. are elevating industry costs. As UP and CSX stressed again last week, the key is improving productivity. By which they mean moving more freight—and generating more revenues—per train, per worker, per locomotive, and so on. Technology can help here too, i.e. introducing lighter-weight railcars with more handling capacity.
· It was a relatively quiet week in the war between Norfolk Southern and Ancora, the investment group looking to evict the railroad’s management team. It believes, by the way, that intermodal growth, which typically lacks pricing power, will cause costs to rise faster than revenues, resulting in higher operating ratios. That’s a big reason why it’s so adamantly critical of NS’s intermodal-heavy business model. In any case, here’s the latest in the ongoing saga: Ancora last week sent a letter to STB chair Marty Oberman, a vocal critic of its coup attempt who’s asked for a meeting. Yes, Ancora said, let’s meet. We just need more time to assemble a “100-day” business plan that we’ll have ready by mid-April. Rebuffing Oberman’s strident criticism, Ancora shouted back: “We are advocating for a strategy that has no emphasis on headcount reductions or short-sighted tactics and has already had a profound impact on improving operating models and lowering accident rates in the railroad industry. This is in comparison to Alan Shaw and Norfolk Southern’s lax operating culture and associated lack of discipline that
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