Greetings
The Dog days of summer, where always we are hearing discouraging words, has given me some pause….maybe the resumption of work travel (IANA’s Intermodal Expo in newly fluid Long Beach! Plus NEARS and SWARS) after Labor day will revive my spirits, or the return of Clayton Kershaw or of cooler weather or….maybe improved rail metrics and better rail public discussion?
RailTrends is coming into focus – and another good one is in the offing (November 15-16 NYC www.railtrends.com ) – of course a full preview will come mid-fall but we got the DC guys, the short line panel (my favorite), the analyst session, rail cars (Kloster), the Chairman (Marty) and the Big Cs – Robinson (debut!), Foote, Ottensmeyer, Elkins & Jalali, with one TBD (watch this space) – and of course our 2022 Railroad Innovator of the Year, Rick Webb of Watco!
So, the PEB happened….see attached. We await the final, final ac ts of the drama, which is – all journalistic efforts to the contrary – becoming less and less dramatic. Total comp bump with retroactive was 24%, not 22%, so even a little more toward the labor side of the ledger than I initially wrote in a rush. Average increase is 4.4%, 90bps above the recent contracts on average (in different labor circumstances). Still, given the circumstances (politics/economy/inflation/rail reputation & service/labor shortages etc) it coulda been worse….and shouldn’t lead to any further – or certainly any significant – truing up of accruals for back pay.
Rail/Labor Coverage has been all over the place – Bloomberg just this week stated that rails couldn’t swallow the rate increase, and that they were already running one man trains (I tried to respond: “This is just misinformation – the 24% (22%) wage increase wont be hard to swallow for the rails, they have accrued for it and support the PEB (publicly) recommendations – see NCCC STATEMENT ON PRESIDENTIAL EMERGENCY BOARD REPORT – NRLC (raillaborfacts.org). If anyone objects will be the unions….” But you know how that goes. When did fake news become a freight thing? Even labor has noticed the spread of bad or mis-information: The old rail prophet Frank Wilner noted that in RA – as the NRLC (National Railway Labor Conference) observes:
- During the first six months of 2022, each railroad’s voluntary “quit rate” was between 2% and 3.7%, just a fraction of the 13.1% quit rate reported by the Bureau of Labor Statistics for the transportation, warehousing and utility sector.
- Railroads have been outperforming the broader labor market in attracting new hires. For 2021, railroads reported more than 42 applicants for each open position, which is well above the 25 applicants per open position benchmark cited by workforce planning experts.
- Railroads have been reporting an even greater number of applicants per available job during the first six months of 2022. A caveat, volunteered by railroads, is that in some locations—especially those in remote areas—there are fewer applicants, but railroads have responded by offering relocation bonuses and other inducements
- And the unions put some interesting, pro-PEB “myth-busting” slides such as: PEB_250_Page_12- scaled.jpg (2560×1440) (smart-union.org) and PEB_250_Page_11-scaled.jpg (2560×1440) (smart-union.org) on who “won” the recommendations battle….
Some other rail/labor thoughts:
- While rail can offer signing bases, they cannot adjust pay and quality of life issues (a la Walmart) nor give retention bonuses (a la UPS) without the contract
- The PEB paragraph about capital versus labor and risk continues to cause discussion
- Labor, meaning both capital and lower case “l” workers and unions, have been very, very vocal about morale issues – where there’s smoke, is it signals during a PEB process or a fire out on the network? I wonder….
- Rail has been losing the PR game, given the above and having publications beyond Bloomberg such as Barrons (“Rails have no ‘Top Gun’” – i.e.; they aren’t “sexy” jobs) and where we see misinformed phrases passed off as truths:
o Rails need to be “rescued” by the PEB – belying the fact that those are the old rules of the ancient game
o Rails are “unsafe” as well as un-sexy – and that’s just not true (even if you have, hopefully noted that I have called out a stalling in safety improvement….The FRA, nominally the safety regulator, in its war on technology isn’t helping
That’s not all that’s happening in DC even in the sweltering hear, of course: The WSJ wrote on the growing presence of the STB and the rails’ unfortunate role in aiding & abetting that: Railroad Regulator Turns Up Heat on Industry to Fix Shipping Delays – WSJ. Meanwhile, the 1% tax on share buybacks is not expected to have a material impact on corporate plans – the rails have always had a fairly balanced plan, even in the PSR implementation periods (spending on network hasn’t changed much from its high levels excepting the 2015 aberration (think: BNSF and North Dakota). Also:
- Shippers and trade associations (such as the rails historic nemesis the ACC) continue to pile on, like hitting a piñata without a blindfold
- Stated Cemex in their quarterly “we encountered significant rail disruption in the quarter causing a shift from rail to more expensive truck”….which brings to mind Hunter – savior/killer of the rail hopes – and his comments on his day in DC before the STB (see the book “Railroader” for details – this is a family report).
- The Economist has taken note of a growing anti-business sentiment in the nation’s capital – from the Republicans (“The Elephant in the Boardroom” 8/20) so now everyone takes potshots at big business. But I continue to remind everyone that railway regulation is about BIG business fights (Class Ones versus Fortune 50 companies, etc – even if its often set up as if rails represent Goliath versus “the small family farm” etc.) In reality, rail regulation is without much partisan investment, and the prior board was just about as interventionist as this one, just not as good at it (nor given such opportunities to get involved!)
- Meanwhile the Inflation Reduction Act is another subsidy of trucking, in this case EV technology (one analyst friend said the new law would increase margins at EV-truck OEM (and former user of gravity to fool investors) Nikola – by fully 50%!
But these long hot days have made me re-think some of my convictions a bit, maybe because I have gotten push-back from folks in the know that I trust….Does “service – actually -beget growth”? Can rails – after all that money and all that talk – provide the service? Is it lip service while they wait for “all of this” to blow over, and a GOP Congress to save their bacon (no, and I surely hope not given above commentary). So, is their pent-up demand waiting on rail service improvements? Enough to counter any recession (which looks less likely, in any event)?
Some comments I have received:
- Writes one real insider/retired player (C-level, Board member): “Putting Hunter aside who was a bit of a genius in grasping operating timetables, PSR was not a transport revolution. It was just the manifestation of high finance leveraging railroads made possible by easy money and historically unsupportable low interest rates. Cut employees, trim inconvenient shippers, cut capital and you get low operating ratios and unlimited firepower to buy back stock, which wasn’t
even legal for much of our lives. Competitive advantage allowed railroads to survive this age of finance but railroads‘ capability has been permanently diminished. We thought we were watching a transport story but it was really just the same game being played across the economy enabled by cheap money. As Jack Welch came to conclude (something like), ‘shareholder value is about the stupidest ideas we have come up with.’ ”
- Says another: “Successful RR-ing is a community sport. There is no community. There have been mistakes made with regard to handling resources and rail infrastructure that cannot be easily fixed….Overall, I am getting the distinct vibe that the industry is anticipating a recession and that, in spite of rhetoric to the contrary, they are really not trying to add resources……they are quietly hunkering down and hoarding capital (NOTE – Capex is up, in nominal terms anyway, this year)”
- And while we’re at it, its unfortunately time for a mea culpa (as noted by Bill S): While clearly crew shortages are the key to the service failures and traffic reductions over the last 12 months, and I pointed out that prior rail service crises were caused by colossal management error/mergers (UPSP) or the lack of physical capacity to compensate for above-planned growth (BNSF 2014/CBR; CN 2016 in Western Canada), back in 2016 CN did point out in its public statements that crew shortages were also a cause. In my mitigation defense, that was more of a regional displacement issue (crews were short in Alberta) than a universal one, but still….mea culpa.
- While I am at it, some versions of my NSC earnings writeups called their new plan, rightfully TOP/SPG, and which I called “TOP/SPG?” (meaning I needed more info), “TOP/TPG”. Apologies to the Texas Pacific Group. Mea culpa.
Is it time to re-think rails? Anyway, these thoughts and others, coming from recent meetings with shippers and short lines, have given me pause. The rails are clearly behind their self-imposed deadline of service improvement in H2/22, even if recent comments by rail leaders in some equity conferences about sequential improvement are encouraging (NS now expects to get to 2019 levels around YE22). But I d, despite the awkwardness of phrasing, believe in “Service Begets Growth”….So I will for now stick with Top 10 core beliefs:
- PSR was brought into the US because service improvements were in a long stall – they were brought in for the shipper (and the shareholder)
- PSR was a success in Canada – for the shipper and the shareholder
- Wall Street, for the most part, doesn’t understand PSR and promotes only the margin portion of it (The Cult of the OR)
- The implementation of PSR at the US pioneer, CSX, colored DC’s opinions of it then and to this day
- US rails had, for the most part, successfully completed what I (and some carriers) called Phase One (restructuring) by January 1, 2020 – and were poised to try out the Growth Pivot 6. The service issues that emerged in 2021 are not, for the most part PSR but rather pandemic related (a possible exception being hump yard closures)
- Whether rightly or not, PSR has become a dirty word in the rail ecosphere and rails haven’t helped themselves either in public discussion
- Washington has become a problem – not just the STB but perhaps even more so the FRA 9. The rails re-tried to talk-the-talk on growth in January of this year…Again, they must talk – and set up investor expectations, before walking-the-walk) before “events” intervened 10. The rails have to act tactically (solve this service/political problem) while retaining strategic planning and spending (technology)
Rail traffic continues to meander -according to the AAR’s (excellent) RTI, July North American volume juuust showed a gain (+0.2%) as 10/20 carload segments increased (+0.6%) and intermodal declined 1%. By USMCA, the breakdown was:
- USA was down 1.5% overall, with intermodal down 3% (as RTI points out, the 11th decline in the LTM; more on IM below).
o Carloads, however, were up 0.2% – but ex-coal still down a tad (-0.5%)
o Autos helped (+8.2%
o Overall 10/20 CL segments were up
o Industrial Products were down 0.9%; chemicals declined for the third month in a row o While the death of coal, like of us all, is pre-ordained, I might have been early in calling the end of this DCB, as NatGas prices at the $10 range and the impacts if the war led to a 2.2% increase in volume for the month. That’s not enough for a third mea culpa as I will be right in the end….
- Canada shone brightly with a 6.1% total increase on an almost 3% increase in carloads (14/20) and an almost 10%b increase in IM. But of course a year ago the west was battered by fire and rain, and now its sunny days I think will never end….
- Mexico, Dios mio! Carloads -3.1% (9/20) – this despite autos up 14% and Pet/Products up 22% – and IM down 8.6% (for a total -5.5%).
- The ATA reports July truck tonnage (not units) was up 5.1%, although sequentially weaker. Tons/units not apples to apples but still that contrasts with North American rail…. • IANA reports a 3% decline in July intermodal volumes but continued green shoots in Domestic containers (+1.6%). This includes the whole IM ecosphere. TOFC continues it’s free faqll (-29%) while international, still beset rather than begetting, down 3%.
The rails quarter left more questions open than answered, of course, given the results, which can be summarized as another fine quarter financially (given the conditions -m much of which to be sure are self-imposed); most beat reduced expectations. They retained pricing power. They maintained capex (although given the inflationary impact on goods – and, soon, labor), that’s not a major victory. They are all behind on their “second half service and volume recovery” plans, of course – but they all were optimistic that the inflection was almost in sight. None – none – see any signs of a slowdown and all – all – see pent up demand ready to roll. Three good summary slides form the smart folks at Oliver Wyman are at the bottom.
Foam: In NYC recently the Grolier Club exhibited a rail-related show of phots , books and documents – if you care here are my photos: https://share.icloud.com/photos/0d0O_kNoaD9NZuTftJvQ3ibog Entitled “Travelers, Tracks and Tycoons – the Railroad in American Life”, the exhibit came from the holdings of the Barriger Collection and included lots of important documents (surveys of the west for the UP; operating manuals, timetables, tourist-enticing posters, etc….If you want the book see Travelers, Tracks, and Tycoons: The Railroad in American Legend and Life: From the Barriger Railroad Historical Collection of the St. Louis Mercantile Library Association, Fry, Hoover (uchicago.edu).
➢ Perhaps the most relevant was the collection of books and docs concerning the ill-fated Rock Island Line (in the 3rd and 4th to-last photos), which might have been a mighty-fine line at one point but by the time the ICC (the parent of the STB) got through with its deliberations on the proposed UP takeover, it was another part of the “disappearin’ railroad blues”. A good lesson
on the perils of government involvement in the rails!
Also:
- Another PE investment in rails, in this case rail cars: J.P. Morgan Acquires InStar from Sightway Capital – Railway Age
- RIP Hays Watkins, former Chairman and CEO of CSX (when I started lo, those many years ago) and a leader in getting the Staggers Act passed (what would he think of today’s scene in the capital?)
- The FRA’s two-man crew ruling could impact as many as 1/3 of the US shortlines!! • UP and Wabtec announced a $1B+ 600 loco upgrade deal – but over what time period? In any event, a positive deal and supportive of the rails’ overall effort to use ESG to its advantage…. • CN announced the retirement of Chief legal Officer Sean Finn – discuss amongst yourselves…. • It’s coming down to brass tacks to see if we can have a smart rail investor as PM of Great Britain, but old friend Rishi Sunak faces an uphill fight….
- Patriot’s win in the M&A fight for Pioneer brings them now up to 31 rail lines • Whack-a-mole – anyone notice that the entire supply chain issue is like that old carnival gam? T&E shortages in south (whack) now in the west; ships backed up in LA/LA (whack) now in Savanah and Charleston; etc
- Humor for a hot day: “We are not a coal company, we are a de-carbonization transition company” – that stated after record results by….the CEO of Glencore
- More: on Wall Street analyst upgraded a US railroad simply because the comparisons are about to get much easier by Q4; So, the key to outperformance is under-performance, apparently….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
1230 Park Avenue suite 4A NYC, NY 10128
anthonybhatch@gmail.com
212.595.0457 W/ 917.520.7101 M
twitter @ABHatch18