August 12, 2025 • 53 mins
Union Pacific’s $88 billion bid for Norfolk Southern could usher in a new era for the North American railroad industry if the companies can show the Surface Transportation Board that the deal will enhance competition and is in the public interest. In this Talking Transports podcast, Tony Hatch, founder and president of ABH Consulting, joins Lee Klaskow, Bloomberg Intelligence senior transportation and logistics analyst, to share his insights about the merits and challenges of a possible merger between the two large railroads. UP and NS will need to make their case to all stakeholders, which include shippers, workers, Norfolk shareholders and regulators, who could be the most difficult to persuade. The downstream effect of a deal or perceived likelihood of regulatory approval could lead to further consolidation among Class I carriers.
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Episode Transcript
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Speaker 1 (00:07):
How everyone.
Speaker 2 (00:08):
This is Lee Clasgow and we're Talking Transports. Welcome to
Bloomberg Intelligence Talking Transports podcast. I'm your host, Lee Klaskaw,
senior free transportational logistics analysts at Bloomberg Intelligence, Bloomberg's in
house research arm of almost five hundred analysts and stritters
this around the globe before diving in a little public
service announcement. Your support is instrumental to keep bringing great
(00:28):
guests and conversations to you, our listeners, and we need
your support. So please, if you enjoy this podcast, share it,
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any ideas for future episodes, or just want to talk transports,
please hit me up on the Bloomberg terminal, on LinkedIn
or on Twitter at Logistics Lee. Now on to our episode.
We're delighted to have back with us. Tony Hatch an analyst, consultant,
(00:48):
and fixture within the North American railroad industry. Tony has
been a senior transportation analyst on Wall Street for over
twenty years before starting his independent analysis and consultancy firm
and nineteen ninety nine. Tony's coverage has been focused on
the free transportation segment, particularly surface transportation and railroads. He
has a research partnership with KEYLG Consulting and an equity
(01:12):
marketing partnership with CV Securities. Along with Progressive Railroading magazine,
he co founded co presents and leads Rail Trends, the
most comprehensive railway conference every fall in New York City.
Welcome back to the podcast, Tony.
Speaker 1 (01:27):
Great to be on, interesting times, lots to think about.
Speaker 2 (01:31):
Yeah, and you know you are a repeat guest and
you're on a couple of months ago. I tend try
to like keep the distance between episodes of a little further,
but you know we are and, like you said, very
interesting time. And I really wanted to have your perspective
about what you're thinking about. You know, all this rail
consolidation noise that's in the marketplace. Obviously it's a little
(01:51):
more than noise, since you know there's a deal on
hand between UP and Norfolk Southern. Just if you would,
could you talk about, you know, a what your thoughts
are on consolidation, where you think this is going to
lead us and you know, more broadly, we can talk
about it if we think a deal can get done.
Speaker 1 (02:10):
So, Yeah, the last time we talked and it was great,
was on the biggest topic you know of the time,
which was howard rails who are in my opinion, fifty
percent trade weighted deal in an era of tariffs and
trade wars. And now we've forgotten that already because this
story has come up. You know, this was perceived to
be a short window where they could change a long
(02:32):
held policy against you know, transcendental mergers. And that was
believed because I guess by by Jim Venn of the
Union Civic, but by folks who sort of followed this
because you don't have leaders in the industry who've come
up through their own company ranks, with the exception of
BNSF and in the Eastern railroads, the targets here they
(02:52):
didn't even come up from the railroads. So there'll be
the expectations that might be more transactional. You haven't had
a lot of growth we discussed this last time, and
certainly not growth and bonuses at market cap. And finally,
you have an administration that is pursuit which I'd like
to talk about later, that might be perceived as being
looking favorably on this in ways to ease some of
(03:13):
the complexities of the merger and so you began to
talk about it more, to hear about it more, and frankly,
when Union Pacific started really leading the charge at some conferences,
whatnot I thought Jim Venna was using the opportunity to
smoke out this Service Transportation Board, the sole regulator and
decider on mergers, to define some undefined clauses like the
(03:36):
next round of mergers. The new rules have to enhance competition,
enhance and be in the public interests. But those who
have never been defined, and that's been sort of a deterrence,
much discussed in the last merger, the CP case, which
was allowed under the old rules where you must maintain,
not enhance. And part of the thinking then was we
(03:57):
don't want to make the SCB define that as a
non defined phrase. It's scary. If you define it, your
DC lawyers, your strategists, and your network planners can begin
to attack it. What can I do to overcome this?
It's still not defined. And yet, because of I guess
the feeling about those other things, maybe Jim Venna's own
(04:18):
tenure time and time service at time left in service,
they've decided to make a go of it now, at
least so far. It's long been thought that rail mergers
could be very beneficial if if, and I'll get to
the if in a second, the benefits being the removal
of interline operations, which has been a problem in my
(04:40):
thirty five years now of doing this. We're two railroads
meet and it's not a disastrous issue. But if you're
ninety percent on time, you're a pretty good railroad. And
you hit another ninety percent on time railroad in Chicago,
it may take a day scheduled day to get between
the two of you, but ninety times point nine times
point nine means now you're eighty one percent time. And
(05:01):
you know the simple map and so and the other issues.
You push everything to Chicago. It's sort of neutral ground.
Saint Louis is three hundred miles further west. That's three
hundred miles of dollars into a Western into Union Pacific's
revenue base. So you you would route things out of
route to keep on your system as long as possible.
You can eliminate those that's kind of thinking. You can
(05:24):
eliminate a lot of the assets that you've built up,
you know, hump yards on either side, and really make
this like a pit stop. You change the cruise, you're
fueling up and you're going at one point five seconds.
That's an exaggeration. You also have, of course the SG
and a production you don't need to CFOs or heads
of of the ag department. And finally, there is an
(05:44):
undefined I mean I don't know the number, but some
number of businesses that are going to be short haul
at the meeting points. Short haul on either side of
the Mississippi River. Three hundred miles west of the Mississippi
River is a plant that wants to move goods into
the into the east. But for a union specific for example,
or being a SEF in their very complicated extensive work rules,
(06:07):
that's that's really a kind of a short line Business's
very difficult for them to do that unless you give
them unit trades, right or massive volume, and so they
basically have it. And so the assumption is there, and
it goes three hundred miles on the other side of
the border, so you have two short hauls. But if
you now run one single railroad and it's six hundred miles,
it becomes a little more compelling for you to try
(06:30):
to figure out how to design that service. So those
are the three buckets and everybody's always told me, going
back to the two thousand bn CN merger that did
not happen, that it would be great to solve those problems.
And some people said it would be really tragic that
it requires a merger, you know, to solve those problems,
(06:50):
that you can't partner use technology your way to get there.
But these problems would lead to you know, a boost
of capacity, a boost of you know, speed, rely ability,
which is probably the most critical word of all of those,
and new business and lower costs because of the last
two factors. But after the rules were changed following BNCN
(07:11):
and the rules that were applied to the Canadian National
attempt to rest away Kent City Southern from CP, the
feeling was the price was too high. The benefits were good,
but they weren't worth paying this enormous price in concessions,
in remediations, in deals, in access, in labor deals, et cetera.
(07:34):
So that was you know, the thinking really from the
mid oughts until about you know, two months ago, And
in fact, the Union Pacific was the leader of that thinking.
They had really used their political muscle to put the
kaibash on the Burlington Northern Canadian National merger because they
were so reeling from the pain self inflicted paid of
(07:55):
their Southern Pacific merger, and because as a railroad there
was the largest If you step in and interview to
make things to maintain competition and to change routes and
offer tractedge rights, the relroad that fifty five share loses
five points, the road at forty five percent share gains
five up saying we've got the best franchise, Why do
(08:15):
I want to give anything away? That was their thinking
until Jim Venna came and I'm not sure what has
spurred him to change their long you know, their two
decade corporate bedrock philosophy.
Speaker 2 (08:27):
Yeah, so if you just if we rewind a little
bit and go back in time, you know, back in
you know, the new rules that are in place today
we're implemented, I believe in two thousand and one. And
the reason was because of those large acquisitions. You know
what was there like thirty thirty five class ones in
nineteen eighty. Yes, now there's just a handful you know there.
(08:52):
You know now now there's just I guess six and
so you know that's been dou contolidation and a lot
of those consolidations, you know, as those mergers ended up
with really really bad service and the shipper suffered and
then so you know, that's kind of why those rules
were put in the place. And and as you mentioned,
you know, Kansas City Southern was exempt from some of
(09:12):
those higher, higher hurdles that you know, the rest of
the class ones were uh you know now faced, and
that's really just because they were so small, you know,
in CP but KC it's still the smallest class one rail.
So so when we're looking at you know, mergers today,
you know, from my vantage point, like, I don't think
(09:32):
there's really any argument that a transcontinental network is probably
you know, could improve efficiencies and lower costs and all
that stuff, But but how does it enhance competition? I
think unless unless all of a sudden, you know, the
next step here is Burlington Northern makes a play for CSX,
which what are your what are your thoughts on you know,
(09:53):
what the next steps were. I don't want to get
ahead of ourselves, but you know, do you is that
the deal or do you think it's a it's a
c P CSX or a CN CSS.
Speaker 1 (10:02):
So I'm working on the assumption. There's so many things
we don't know. We have to make assumptions. And if
you follow the if trail, if that, then this and
then that. But if the original if is wrong. But
the assumption I'm making that I think is sort of
widely held as the Canadians are out of this round,
partially because of the or maybe majority reasoning behind the
(10:27):
split between US and Canada. Politically, the fifty first state
rule and whatnot. CN as you know, has a rule
that their headquarters has to be in Montreal. Now, the
thinking in the past was they could keep an office there,
you know, and their workarounds. I'm not sure the new
Prime Minister Carnie would allow that, you know, he would
(10:48):
want to make sure they're headquarters of the Canadian National
Railway to be fully staffed up in Montreal with French
speaking people. So the thinking is that also CP with
its Mexico merger, has limited itself. It was long thought
to fit well with the Union Pacific, but with Kansas
City Southern and the Mexico operations, that's probably problematic from
(11:11):
an anti trust perspective in Mexico. So I think I'm
going to assumption that Canada may get rolled if we
were to see two you know, I didn't agree to
see any and I always said if I was going
to be wrong, I wouldn't be a little wrong, I'd
be a lot wrong. And so I think it may
be in phases. But if this one is allowed, this
is the thunderclap, right, this is the dam breaking. The
(11:33):
other things that would follow would be you know, flood damage.
If you will, you know, we could talk about like
what BN's options are, whether we think this would pass there,
and you know, with what the Canadians are going to do.
I mean, I think CP is hopping mad because I
think they believed, I believe that they had the last
merger and that under the new rules nothing else could
(11:55):
get a enhanced competition. One thing I'll count counter that,
possibly just to add to the conversation, is a whole
new class of investor I'm sorry if shipper may get
involved here that are really politically powerful but have never
particularly thought about railroads in the regulatory DC sense. They've
(12:15):
used their capital, their political capital for issues of intellectual
property rights or labor abroad. And I'm thinking about Nike, Walmart, Target, Amazon,
all these guys that are international retail players who could
see benefit from faster more reliable service. I think they
(12:36):
benefit now. I mean, I don't think it's you know,
sea change, but they could potentially have never been involved
in an STV hearing come in and they could potentially,
although they'll have their hands out, we'll talk about that,
they could possibly. That's where you might see it. But
intermodal is not under the seb's regulatory purview. That is
enhancing global supply chains, which is not how this merge
(13:00):
will be presented to Washington. If you saw the original presentation,
practically had fireworks in apple pie, you know, audit. It
was so American, even though the speaking man was a Canadian.
You know, I got a little tear in my eyes.
I thought about small towns and dogs and fishing holes.
And then they used the word enhanced about eight times.
(13:21):
So you know, they know where their issues are, right.
But I'm not. I agree with you, and I think
your call that we talked about offline is brave and correct.
I think that's very hard to prove unless you have
the world's biggest companies come in and prove it that
this is enhancing our global competitiveness, which is a positive
thing for this country, but not a positive thing for
(13:42):
Peter Navarro right, and the White House trade figures they
don't want to see better supply chains to Asia, and
that's or Europe, and that's really an area where you
could say a big benefit of this merger could be.
Speaker 2 (13:57):
So I guess there's so much talk about so as
the rule stands, now, you know, what do you think
the probability of this getting STB approval?
Speaker 1 (14:09):
So you know, I had put it at two percent
a year ago after my rail Trend's conference that we
alluded to where this coming November, we were giving Jim
Venna our Innovator of the Year award. All prior to
these announcements, there was a big, a popular you know,
there's a big speech by Oliver Wyman that said railroads
(14:31):
have really got to grow. We've run into the end
of the pure cost cutting you know era where that
really benefits investors, you know, and returns. You need to
take this more lean machine and do what Keith Crile said,
pivot to growth. And all the CEOs said that everybody
believes that we just haven't seen it. We had a pandemic,
we've got a trade war, we had each Palestine, et cetera.
Speaker 2 (14:54):
So just so just with us. Do you think the
rails like as they stand out, can ever grow more
significantly more than GDP?
Speaker 1 (15:02):
So I do know that puts me on a very
lonely island. I believe that they've never really been tested
in the new all all of the last investor days,
which are becoming increasingly important to understand the railroads because
while they used to be annual, they're now every two, three, four,
five years. If you go back to the Norfolk Southern's
(15:22):
in the end of twenty two, operating ratio is used
in one single slide deck. Once, you know, they all
talked about growth. So and people say, is Marty Oberman
the last or two chairmen ago, the chairman of the
STB said, I've heard the song before. Every time I
come to the rail trends, they talk about growth, and
here we are doing it again. But if you don't
talk about it, you'll never do it. The talk about
(15:44):
it is to try to get their stakeholders that own
their stock right, the shareholders to view them differently than
an operating ratio machine. And so you know they've talked
about resiliency or Jim Vendolex called a buffer. You know
they're trying to move away from matching their costs to
the expected volume, which is, you know, a mugs game.
(16:06):
They have never been you know, they've been good at
ratcheting costs down in recession or a pandemic, but they're
always in behind when business comes back up, and they
have several years of service issues. So they're trying to
change the thinking of the people who put who put
pressure on them to focus entirely at costs. So an
(16:26):
important first step is to talk about growth before you
do it. And I would argue they haven't had a
good chance to test it because we're in a freight
recession since the end of twenty twenty two, as I'm
sure you've talked about in other of these podcasts, you know,
the excess trucking capacity exacerbated by a confused economic policy.
(16:47):
So I do think they can. I think the leader
that there are three areas where they can do this
without under a so called normal economy, should we ever
be lucky enough to see it again. That is industrial developments,
slow building process, that is, tighter relations with short lines,
which up actually has been the recent leader in terms
of turning over in Eugene, Oregon and Kansas City Missouri
(17:10):
there first and last mile of the short lines to
do that so much better. And then the third area
is intermodal, where I wrote a report for Ayana that's
available on the website called the Intermotive to the Crossroads.
I truly believe that a sustained domestic and international into
domestic transloaded business can grow, can push the other two.
(17:31):
Maybe you know, short lines grow faster than GDP, so
if you can tag onto that wagon, industrial development is
tying into new trends and you know, aluminium, depending upon
where the economic policy falls out. But I believe that
as intermodal grows, continues to grow as a percentage of
the railroad pie, it should be growing, you know, at
a overall maybe one to five to two ex GDP
(17:55):
between international, which may be a more stable business, I
mean the lasting from stable in recent years, but you
know we've already globalized. Now maybe a un globalizer will change.
They'll be shifts, but it may not grow like it
did ten years ago. But domestic share is a great opportunity.
They can't do that now. The argument is will this
make them do that? I don't know, and I don't
(18:18):
think they can prove it, but I do believe they
can grow. I think partnerships are really hard. I think
the CACS merger with CP really stimulated a lot of thought,
got the marketing people together with the strategy people and
the operating people and designing Falcon you know, and new
services MMX now SMX, you know all these. I think
there's really was sort of an unleashing of the entrepreneurial
(18:40):
spirit in railroad headquarters. And I think one of the
unfortunate things is mergers kill that for a while. You know,
the short lines are distraught because they're all cutting new
deals and now the short line people are going to
be called off to deal with.
Speaker 2 (18:53):
This, right, And so you said before this it was
a two percent probability of happening. So fast forward to today,
what do you think of the probability of this getting
regulatory approval?
Speaker 1 (19:05):
Yeah, I got off track there. I went from two
to twenty to forty to and as we talked pre
show here, sixty. But I'm talking to you makes me
think maybe that's too high, and that goes under the assumption.
I have full respect for the really high intelligence levels
of the CEO of Union Pacific, so I kind of
(19:25):
thought he must know something he must know what he's doing.
I alluded to the fact that I've been wrong with
making that assumption in other events in the world before.
You know, I think that I don't know how he's
going to prove it. In talking with Keith Criele at
the CN they are convinced that there's no way. For
example that they said in their statement, we have only
(19:48):
twenty customers that have two to one issues. That's not
even an issue under enhanced competition. That's a maintain competition.
You know. That was the big deal in the UPSP.
So a plant or a city factory, you know, a
destination of a freight destination served by two railroads and
you're merging them. So that giving trackage rights or whatnot
(20:11):
got ben s into the chemical business. They're a junior
partner to UP, but they weren't in it at all.
But they had to solve when UP and SP who
were the two big ones, merged the very powerful chemical industry,
which is already sent out a letter condemning this merger.
You know, so two to one is solving a two
two to one problem. Was what strategists and lawyers and
(20:33):
whatnot did to solve old rule mergers in the rail
business new rule, so and Jim Venna and the NS
and up teams alluded to having only twenty customers, not
twenty sites, by the way, customers who who have a
two to one issue, And as Keith Greyle pointed out
his call, that is an irrelevant statement because you're not
(20:55):
there to solve two to one and make it like
it was before or as sued like it was the
day before the mercher. You're there to enhance it, and
I think you lead point out that, I think it's
very difficult to enhance it unless you've got a wave
of these new shippers, you know, these global shippers, and
global is a bad word. But the Amazons, the Nikes, targets, Walmarts,
(21:18):
who have never been involved in rail regulation coming in saying, oh,
it's helping us a big deal, it's enhancing competition with
the highway with our own fleet. You know, will turn over.
I'm not sure they will. They've never been involved before
in a railroad issue on a major way, testifying it
at as TV hearing. But this is, you know, going
to hit their radar. And the problem with this again
(21:40):
is that you know that makes supply chains to Asia
that much better. Is that what we want? I mean,
I want it, but is that what they want in
sixteen hundred that's a big avenue.
Speaker 2 (21:48):
Right, And so just what you were alluding to before.
So we've published on the Bloomberg terminal. You know, we
put a probability around twenty five to thirty percent on
a deal getting relatory approval and getting finalized. We would
admit that it's going to be a moving target and
as time goes on that number is going to increase
or decrease. But that was kind of the starting point
when when the when the deal was was first rumored
(22:10):
to happen. But you know, we'll see what what you
know U P and N S, you know, how they
make their case, and we'll also, to your point, see
how all of the stakeholders react. We know some of
the the unions who was at the the b L E.
T came out against it already and so you know,
(22:31):
it'll be interesting to see what the other unions say.
Because Jim Venna on on there on the on the
merger call, you know, it did say that you know,
the trades trades people would be okay, they're not looking
to cut those kind of jobs. It seems to be
like you pointed out more of the S G and
A folks that might be at risk at losing their jobs.
Speaker 1 (22:51):
But it's important. You just raised a really good point.
First of all, I think it's really excellent that you
put those numbers, and following our conversation, I don't have
a published number on a billboard, but I think I
will reduce mind based on what we've been talking about.
I mean, you know, it's a rather naive to just
say he knows what he's doing. I think that is
very smart. I know that he's not had conversations from
(23:12):
with the SCB that have given him any sense of
anything at all. I don't think the White House has
that bigger role, you know, and we could talk about that.
And one of the things that's interesting is the Teamster Union,
of which b l T is a big part. You know,
if they're an opposition that they're you know, they're an
ally of the White House. You could argue that this
(23:33):
is gonna be pro labor, you know, bad for white collar,
good for blue collar. We're going to grow. We need
more T and E people, more training and enginemen. But
that doesn't mean it gets to the other thing. A
merger opens the books on railroads, So everybody, every stakeholder
is going to come and demand and ask for something.
A lot of these negotiations will be behind closed doors.
(23:53):
You want me to sign a letter supporting your merger.
I need relief in Houston rate cuts and Scranton. And
we may not know that. We'll just see that this
company X or Industry Y has signed a letter. It's
board of the deal. We don't know what they gave
away for that. I mean, that's the key. Here is
the benefits unknowable right now without inside information. But presume
(24:14):
to be large, like a blind man with an elephant.
Don't know what this is, but big you know, and
then you've got the cost. The costs are going to
be money. The costs are going to be time and
attention and loss of momentum, which was a good question
asked of then in his quarter. And then there can
be all these other costs that you give away to everybody.
Our union is going to try to demand codification of
two man crews are communities, but this is the death
(24:37):
by a thousand cuts. The communities that are going to
see more traffic as you disperse out of just Chicago.
Are they they're going to want trees planted. That sounds silly,
but that's a mitigation for sound. They're going to want underpasses,
grade crossings. How many communities are there between California and
you know, Maine, you know New York a lot? So
you know, if that's the thousand cuts going, you know,
(25:00):
we've seen that with CN and this their Jay acquisition.
You know, they're so you know, I worry about these.
You know, how do we tally up whether this merger
makes sense? The consensus among smart people in the industry
was the cost side of the ledger was going to
be way too close to the benefit to take the chance.
And one person has changed his mind about that.
Speaker 2 (25:21):
I mean, listen, like I said, you know, from on paper,
it sounds like it's it's a good idea, but you know,
to your point, like what kind of concessions are they
going to have to do not only for the stakeholders,
but the STV, Like, like do you think they'll have
to do like force reciprocal switching on their network?
Speaker 1 (25:37):
Sort the STB supposedly is representing the stakeholders, you know,
so that's why I say, you know, uh, and those
they represent labor to some degree. You know, labor also
has the safety angle and whatnot. But they certainly represent
the shippers in the communities, right, they have environmental overlook
and other things like that. Now, Patrick Fuchs, a Republican,
(25:58):
wants the rail industry and all of its stakeholders to succeed.
He's very smart and he feels very passionately about that.
And I think that the other members that I know,
Karen Hedlin and Michelle Schultz, and I think the one
I don't, Robert Primis, all do they want the relatisy
to succeed. But sometimes that means choosing one side over
(26:19):
the other. But the real we've got to remember it's
not a partisan issue. The Wall Street General wrote an
outbed piece saying that a pro business Republican as the
fifth member is something that the president should do. Uh
And because he has the right, the Republicans have three
members and get that board up to you know, not
a two to two split, but a three to two
Republican majority would be pro business. And that is that's
(26:43):
so simplistic because the board, the stakeholders the board represents
are mostly very big businesses, probably Republican ones, right, And
so the idea that being allowing a real merger is
pro business. It could be that's the whole idea of
enhancing competition. But the Chemistry councils already come out against it,
the North, the National Industrial Transportational League, the Mid League
(27:06):
has come out against it, the you know, Alliance of
rail Shippers have come out against it, representing you know,
across but so they that may be just bargaining positions,
but the opening statement, you know, I hate this. What
are you going to get me? But the fact is
it's not clear the way it's been assumed by so
many that the President is going to like this because
(27:27):
it's just great for you know, for business. I mean,
it enhances international supply chains, and it may piss off
you know, industries that are also important to this country
and too, you know, restoring and rebuilding a manufacturing base.
So I'm not saying it is one way or the other.
But the simplistic idea that Republicans you know don't like
rail regulation and Democrats do makes the basic assumption that
(27:49):
there is a woke position on a chemical company fighting
for raiding, you know, pricing power with a railroad. There
just isn't there's a regional you know, should not have
not you know, not a Democratic Republican one.
Speaker 2 (28:03):
Let me ask you a question, kind of getting off
the subjects. That's a little bit. I'm just curious to
your perspective. So, you know, we mentioned that growth is
really important because all the cost cutting has really mostly
been done. I mean, they can, they can, you know,
everyone can be a little better. But like we're not
talking like huge step downs in their operating ratios anytime soon.
(28:24):
You know, is it a bad things that investors view
railroads just as utilities that just generate great cash flow,
And so that's.
Speaker 1 (28:32):
A really interesting point. You know, they could definitely be
more efficient and from here if you believe in the
positive signs of PSR, not the quote bastardization of it
end quote that we saw when we became focused. When
investor led managers to focus on quarterly annual operating ratio
or margin improvements, then you started thinking about only what
(28:54):
cost can I take out if you run your business
on time, if you run to a schedule that meets
other schedules, and you are able to crew to staff
crewing correctly and to not have over time. Keith Griole,
who is a great phrase maker for this industry. The
CEO of the CPKCS has said, and all the really
(29:16):
echoed that the operating ratio of the margin is the
outcome of a process and the rare occasions Keeth goes
to Calgary, back in where his headquarters are, he says process.
But nonetheless, the fact is, if you do these things correctly,
you should get more efficient. But if you manage the
efficiency not the growth, you know, that doesn't work and
(29:38):
it's very short term oriented. Adrian Bailey, the head of
the rail practice at Oliver Wyman, in a close ally
and friend, spoken real trends and she said, lads might
have to pivot to growth, have to use keith phrase
if they don't, and they can't because there is a
lot of skepticism. You know, I happen to believe they can,
but I understand what you know. Everybody else have two choices.
(30:01):
The choice. One choice is to shrink to your regulated commodities,
build up your cash flow and do what you just said,
become like a utility. They could, you know, have much
higher dividend payout rates. You know they don't need in
order to do the chemical, grain and cold businesses and
a few other manufacturing manufacturings correctly, they don't need massive
new IT overhauls. They could become utilities. We won't have
(30:24):
as much fun with them, you and I. But she
said the other alternative is potentially to merge, and that's
really one of the first times that was That was
November of last year. That started the ball rolling a
bit in terms of conversation. But the Oliver Lineman study
said that if the railroads merge unscathed, unhit by regulatory
give backs, they'll gate two hundred and fifty basis points.
(30:46):
And this is a lot of risk for two hundred
and fifty basis points in margin. So you know, I
think your numbers on passage are braver and frankly more
realistic than mine. But I had raised my because I
really I was wrong in a series of steps. I
really thought Venna was using the discussions to force Patrick
(31:09):
fuchs hand to state things, not to actually go forward
with a merger agreement. I thought that the not having
a voting trust would be a much bigger obstacle. Frankly,
I think it is. You know, they said they didn't
even want to go to attempt it. I think it's
because they knew they never would get it, and that's
why they have that two and a half billion dollar
breakup feet He's probably gone too far down the road
(31:32):
to turn back now, even if his own people begin
to add up all those costs and see that if
your basis of on a scale of benefits is one hundred,
what does an acceptable deal with money, time, all those
little things? Maybe even open access? Is it ninety? Do
you pay? You know that doesn't seem more, it's it eighty,
(31:53):
you know, on a scale level. That's what I'm trying
to say. Also, many of these numbers are very hard,
if not fully imposts will for us estimate nobody on
the rail analysis or observer or outside sensus any idea
what removal of innerlining really will mean to the bottom
line forgetting estimating new business you get by I'm talking
(32:14):
about what does it do tomorrow if you could do it.
I don't have those numbers, nor do we know how
big the watershed business is, And we don't know what
giving one million dollars every community to plant trees to
mitigate noise will meet because they won't tell us all
that we.
Speaker 2 (32:28):
Were talking early about service because like you know, these
rules that were passing two thousand and one where really
came about because the service was really negatively impacted by
you know, two networks merging together. You know what, I
would say, it's at CPE CPKC merger kind of proves
that you can have a merger and keep service levels
(32:50):
at a decent level and not you know, really hurt
the shippers. And I think the rail industry today has
really learned the lessons of you know, impacting ship or service,
which like with CSX when they started doing PSR. Gosh,
how long ago that was? That was it eight years ago?
I think, yeah, something like that. So I really think that,
(33:11):
you know, I'm not from my vantage point, you know,
I don't think it's necessarily service is going to get
hurt when they if they do merge. But obviously there's
a lot of execution risks that can come into play.
Speaker 1 (33:23):
So the mergers, the three mergers that really clocked service
were the big ones that created the big four that
we have today in the US, UPSP that was the
worst of them, BNSF, BN Placenta FE, Great BNSF, and
the split of Conrail. Each of them had various kinds
of moments. The UPSP congestion crisis that lasted a year plus.
(33:47):
Was when people say we're in a service crisis, I'm like, god,
you know that almost took the economy down. I mean
Houston didn't have a car moving, a real car moving.
All those chemical business plans were shutting down. It was crazy.
We have much less information accessible too. But they were
parallel mergers, and they were also signs of hubris up.
(34:07):
Basically came and fired a lot of local sp guys,
but a lot of railroading before the information age was
I know this territory. I know, we got to get
it through there before three because that's when the commuter trained,
you know, and so they lost all that institutional knowledge.
So I don't think that would be replicated. The CN
mergers over its history were all and ed. BC Rail
(34:31):
Illinois Central was constant cential Grain Lakes transportation. They had
some one interchange point, CPKC had one interchange point. So
they essentially just tied them together. When they did put
together the computer systems, which are still doing now. They
didn't run it down. Not a disaster. But you know,
even the great Keith Crele is not undefeated. So I
(34:54):
truly believe that if this margery allowed. They should discuss
the risks of this because it's national right. But these
are much simpler ones. However, there are multiple interchange points.
That is also a benefit because you know, if elimiting
the interline is an advantage, Crile only did it at
one very little interline spot. These guys could do it
at Memphis, New Orleans, Kansas City, Chicago, Saint Louis. But
(35:18):
that also created some complexity issues. So that is an issue.
And there are people who were young who are in
the logistics departments at Dow or Ford or whatever, who
are now in a position of running logistic departments who
will remember UPSP and it was thirty years ago. Roughly.
(35:39):
That's a whole lifetime for many people who might listen
to this, but they're still you know, people in leadership
positions will remember. That's an issue. I think it's a
solvable issue, but the SB will look hard at it.
I think the bigger issues are the ones we talked
about before. But UP was reeling from there, the fallout
and the pushback in two thousand from their ninety five
or six merger, and the problems that just lasted. They
(36:02):
didn't hit their creative numbers for five years and they
said it was going to be year one, so they
lost credibility. I mean that's why they wanted to put
the kibosh. You know, we got to stop this. We
got moratorium. And they at the time had such political power.
I don't think they have it today like they did
that The industry may you know, the AAR may, but
(36:23):
UP used to be you know, the AR was the industry.
I mean it was up and UP was you know.
Now I think their office is half the size. It
was unfortunate because they're coming into the which could be
the biggest battle of their lives. And mean going back
to the you know, the last the Golden spike, right.
Speaker 2 (36:40):
So so like like I mentioned earlier, like my probability
is going to change with time. It's it's going to
be a fluid number. What do you need to see
to get more positive or negative? And the deal is
it just is it just the press releases from shippers
that are going to come out and in the months
to come.
Speaker 1 (36:58):
So yeah, and you know, one of the things I
travel around a lot to go to a lot of
shipper conferences and whatnot, and most of them are at Spring. Unfortunately,
there are some of the fall ones. I mean, I
needed to talk to people who are going to have
political sway in this. The STB, as we've talked before,
it's kind of shut down on this, as they should be.
They weren't very shut down in the CP case. I
(37:20):
mean they let their feelings be known a lot more.
But I think talking to people press releases, you know,
we may you know, we maybe in a period of
sort of like the phony war in World War two
before the US got involved with you know, when nothing
was happening but they were at war. I mean, I
don't know what the next event is that'll make me
change my mind. Maybe understanding more, hearing all the big
(37:44):
players speak, and that is not just the Association heads
with the railheads, you know, listening to Jim Venna speak
with Mark George and I hate, I'm not trying to
give the pressure. I'm just easily swayed by the last
person I talked to. If so, I'd be president. But
the I thought they gave a pretty good presentation. And
(38:04):
then I heard Keith Greele the next day just shred
it and I was like, you're right, you're right. You know,
they have a you know, the two for one, for example,
is jimple Look, that's all we have to solve. Well,
that's not even on them, that's not relevant at all,
you know, so I'm not saying that that. Well, first
of all, that's really in true because the personalities involved
(38:25):
are a big part of this. And you know, the
CND ASPRAA, all the guys, the great lieutenants, the great
war chiefs under the Emperor Hunter have dispersed across the
industry and they're back and they have a long history
of let's call it nicely, a tense competition with each other.
Speaker 2 (38:44):
Yeah, and you know Jim Venna, he is an operating
background and so you know he's going to be folks
on the operation and the integration, you know, which, Oh gosh,
I mean, if this deal gets approved in two years,
how long do you think as integration could take. I
know that it's like.
Speaker 1 (39:04):
We're into two years with CP right and they only
had one. I mean, that's the other thing that was
thought about is that this would be a lasting mark,
you know, the legacy of the Jim to leave, but
he can't be around to see the new co thrive,
you know. I mean, how that's four years? I mean
who knows that the sum is committed to hitting a
status or of deadlines. So when an application is filed
(39:27):
will have a sense of what the decision will be made.
But then the implementation starts if it's proved, and that'll
take a long time. And one of the issues the
railroad industry has is succession. You know, they've lost a
bunch of people. It's not clear who if independent mergers,
(39:47):
who the successor to Jim Venna would be.
Speaker 2 (39:50):
Right, he's sixty six right now.
Speaker 1 (39:52):
Yes, it's not clear who the successor to Mark George
Norfolk Southern would be. Same as true at say Sex
is not in the It seems like maybe it was better.
I are there always was. You knew who the guy
they were bringing the guy or or woman and putting
them in different departments, and you know, having speak at
conferences and getting you know, all the stakeholder groups that
(40:13):
you know, Labor Finance US, you know comfortable, I don't
know who that person is, so you know, you're right.
If you're holding the stock of the new code, you
need to think about who's the implement or in the
long run, if you're a long term holder, that's a question.
Speaker 2 (40:28):
So pretty much we've got to be on the lookout
for presles. And you know we're talking about stakeholders, and
you know, it's important to note that, you know, CP
the other railroads could be against this merger. Well, that
the trucking industry will probably be against the merger because
of their own economic interests in the American Truck Association.
I know they haven't come out with anything yet, but
(40:49):
you know, one would guess that they're not going to
be fans of it unless you think otherwise. You're making
a face.
Speaker 1 (40:55):
So I'm trying to remember whether they were last time.
I'm not making a face yet. Sorry, both we can
see each other, you can't. No, that was my thinking face,
So I guess I got to change that. What did
they say in the CPKS of course that you know,
that was a different kind of merger than this. This
is a big East West merger. You know. I think
the imcs have complications ahead of them, the interment of
(41:16):
marketing companies because you have some that were you know
up ns that are UPCSX. They're going to have to switch.
There's all the UMAX box program and a lot of
them used, which is a upcsxing. Their complications not otherwise.
The trucking industry, I'm not sure that they've ever been consulted.
And the idea of all of these was supposedly get
(41:38):
trucks off the highway, you know, so an organized trucking
industry is not favor of that, right. But I will
tell you that one of the things when you look
at the CP example, they have hit their financial targets,
they have hit their operating economies targets, they have marched ahead.
They are way behind in their volume targets and in
their trucks off the highway. At the last SEB report
(41:59):
committed the applicationation, they're fifteen percent of that number one five.
So now there's a freight recession, there's been a trade war.
Mexico has been particularly targeted. You know, there are reasons,
but they are not hitting their volume numbers, even if
MMX is at big success as they say, So, you know,
(42:19):
I don't know if the trade industry is as much
to worry about. I would hope they would. I don't
know if they get a seat at the table. Because
the STV one of the problems with the STB historically,
and I had said this to a former chairman Marty Oberman,
you know who with THEE I've disagreed about a lot
of solutions. He would propose. I said, I wish you
had more power, and he laughed. He said, how could
you possibly wish that, knowing what you know? What you think?
(42:39):
And I said, because you think competition, and this is important,
is only rail competition. You know, you don't regulate the highway,
so you pretend it doesn't exist. You don't regulate geography,
so you pretend that the idea you can source lumber
in British, Columbia or Georgia, you know, doesn't exist. One
of the issues here that you're some of your listeners
(43:00):
they care about is there are a class of investors
and analysts of the situation or not railroad people who
think that the enhanced competition clause will be solved by
offering better inter motor routes. And the STB views itself
sort of like a Supreme court in that it uses
precedent in old cases and cites them, you know, in
(43:21):
making these cases. And in no time before has competition
included the highway when it was two to one or
maintaining competition, it was maintaining rail competition. When they have
made those arguments, we have to maintain two to one
to make it still two to two. I argued, there's
I ninety five is right next door. It has come
to in fact, this plant is giving more and more
(43:41):
business to the highway than the rail. You know, that
argument was not listened to, So that's just interesting. I
have gotten in friendly arguments with people who called me
and said they're gonna be able to enhance competition because
it's going to be a more competitive truck product. And
I'd say it has to enhance rail competition unless they
break with you know, a tradition that dates back in
the Interstate Commerce Commission in the nineteenth century of not
(44:03):
using president gotcha.
Speaker 2 (44:05):
So I was a little surprised, you know, when we
talked about the cansile, like what the next step is.
So you don't think, like, you know, BN is going
to make an announcement anytime soon about you know, whether
to make a bid for NS or a separate bid
for X. If it does happen, will probably happen when
I'm on vacation, because there is a precedent anytime that
(44:26):
I'm on vacation, something big happens.
Speaker 1 (44:29):
And usually do you remember the last rounds. When the CP,
Casey and CM fight, they always announce things on Saturdays.
Speaker 2 (44:36):
Yes, so it's very thoughtful. But anyway, it's not about me.
It's it's about the industry. So it's absolutely so you
don't in your mind from you know, you don't think
something is just right around the corner.
Speaker 1 (44:51):
Well, we haven't talked about the other big shoot that
could drop. I think the Canadians are going to fight this.
I know CP is going to fight this. And you
know what happens down the road if it's approved, is
you know, under different political circumstances, a digeratory. I don't
think they can get involved. However, if you are a
gambling person, I've been wrong on every step of the
(45:12):
last three months, so you might want to bet on that.
I don't know. At the top of my head. With
the market capoes of C you know CN, I mean
cnn N s are comparable sized, I is how I'm
thinking off the top of my head, you know. So
for them to buy to get into a bidding war
for one of these things, because right now, the other
(45:33):
shoe that we did talk about is what does being
a SEF do. Everybody assumes that you know, First of all,
being a SEF makes more sense. I think geographically and
mix of freight with the d S and c SX
makes more sense with Uni Perivic the huge carload business,
the chemical business versus the bn JB hunt running on
containers from you know, alle Long Beach onto uh Pennsylvania
(45:58):
on the n AS to get be it clothing and whatnot. However,
that's not what worked out. Why didn't it happen the
way it did happened? Maybe there was some fear that
the chemical industry would be I think there was too
much power. They've already come out against it. Maybe it's
the personalities. I mean, these are forever mergers. To another
creole paraphrase, but you know you're gonna have to walk
hand in hand with your compatriot for the next two
(46:22):
years at least two chippers Senate and so I'm not
so sure that the Benas teams have CSX and up
of very sopataco so and you know, I think it's
also in my mind that Mark George didn't really like
his job. I think he's a great guy, He's been
a great leader, came in at a horrible time and
stepped up. But one of the things he kept saying is, man,
(46:44):
this job is hard, not being a CEO, being a
CEO in the era of activism and whatnot. He's got
three and core board people. I think that played a role.
When Claude Mansra left the board of Norfolk Southern, he
was thought to be He's never publicly anti merger, and
so he leaves Richard Anderson, formerly of Delta, which where
(47:06):
he made his bones putting together the Northwest merger and
knows everybody in DC because of that, also ran Amtrak.
He's now the chairman three Ancora. You know activist board
members who are transactional. I think that's what attracted that pairing,
even if it didn't make map sense logically, so does
be in THEEF try to outbid them. From everything I've
(47:29):
tried to learn, the differences in the pairings of those
four are not so great you'd pay a premium to
bust up the other one, right, and then you have
to think another fact. You cannot offer Berkshire stock historically,
so btsf's actually lost some mid level people of real
talent because they couldn't pay them in stock, couldn't give
(47:50):
them stock options because Berkshire doesn't do that, So you know,
that's what the fuck do they spin this off? Do they?
And they got four hundred and I think thirty billion dollars.
They just reported their cash number and I don't want
to be quoted on it. It's big, so they could
pay cash, but it's still a pretty big jung of
cash to go to support one of their businesses when
(48:12):
they have a lot of them. So the question is, well,
you know, what are the leadership of berkshare WANT. What
is the leadership of being a SEF want. Here's what
I would do, And I've talked to a bunch of
people and they think it's logical, but we don't know.
I don't know what Katie Farmer is thinking. I would
watch what goes on if a formal application is filed.
I would do what Keith is. I'd fight it like crazy.
(48:35):
You won't if this gets approved anyway, you don't lose
any moral standing. You're not a hypocrite. You say I
fought it, but you approved it, and now I have
to go forward with my own And who's going to
buy CSX. I mean, I'm not saying they're terrible. I'm saying,
if you assume the Canadians are out of it. There
are only other parent that's logical is being a SEF
(48:55):
and so they're forced to just wait. Now. They put
out in an interview on Alan Bloomberg. Uh, he basically said, Hey,
I'm cute. Look at me. You know, I'm over here.
I can dance. Uh. And you know, I like Joe
Joe Hendricks a lot. I like my Corey. They they
have done a really good job you and you said
(49:15):
it before about you know, the change in management. It's
sort of more pro growth things. They went through massive
construction project and you saw no ship or complaint. So
I went to the seer all the meetings that were
regional shippers in their territory. I'm talking about the Howard
Street tunnel at CSX, which they took out. They have
you know, they have on purpose really destroyed their fluidity
(49:39):
in order to make it better. And it's all you know,
by taking this tunnel out in the center of their
system in order to double stack, to make it wider
and bigger and opening up in the fourth quarter. They
have done all this stuff and then got their their
detour routes flooded. But you know, unfortunately and and so
their numbers, their dwell numbers went up various various things,
(50:01):
you know, and so investors were angry, shippers were not.
They get shoppers don't look at twelve numbers. They're like,
do what you promised me, And they're doing what they
promised them, and so CE sector is actually doing pretty well. Now.
The worry is if you're a C section North Southern,
now that you've you're really restoring your system you took,
It's like you took your own car and overhauled the engine.
Are you really about to go out and run the car?
(50:23):
What are you going to do? I mean, what's the
white collar workers, the marketing folks at the eastern railroads
if this goes forward, what are they going to do?
I mean, what's the morale going to be?
Speaker 2 (50:32):
Like?
Speaker 1 (50:32):
There? Right? Uh? That's really why I've sort of opposed this.
But but if I were being a set to get
answer to the question I asked myself, I would do nothing.
I would I would have my lawyers. I'd fight like
crazy to get every concession, and then if you lose
the fight or if it gets proved, then I'd go
in and you know, I'd call up Joe henrix Er
maybe his successor and by then and say hey, let's talk.
(50:56):
You know, I mean, I'd be talking to them anyway.
But I don't see any reason for them to rush in.
And unlike when a lot of the arms think, I
don't see any reason I have a bidding war with
my luck. That means that when I go on vacation,
a bidding war will start and the Canadians will jump in.
And everything you just said I said, he's wrong. But
I'm trying to think as logically as I can. I
think this is a two person story, but if it's approved,
(51:18):
it is the damn breaking and everybody else will be.
Speaker 2 (51:21):
At all And this this is very fluid, and you know,
in a couple of months, I'd like to check in
with you again. We're going to have, you know, see
if my twenty to thirty percent changes or if your
percentage changes.
Speaker 1 (51:34):
Yeah, so I'm officially at sixty and I will tell
you that an analysts that we know and I never
I don't think you do either. When they're on the
earning skulls. I just like to read the transcript and
I don't ask public questions. I will in any meeting.
But one of the analysts got up and Venna castigated
him in there, meaning he's like, you're only at seventy
five percent approval. We got to talk. Yeah, so I
(51:56):
was waiting, Yeah, that's exactly who was I just figured
he has his own PR department. I don't even be it,
but but but you know, I was wondering how many
times he's called you. I will tell you that that
you know, he pays attention to what everybody says. He's
aware of your number. I care to you. He and
Joe Henrix have too much censor people about that.
Speaker 2 (52:16):
It's interesting, all right, Tony. We definitely have gone over
our time a lotment, but this is a great conversation.
And like I said, let's check in a couple of
months and see where where where we are on rail consolidation.
Speaker 1 (52:30):
I'll do you know, any if any event happens. I mean,
I'm happy to talk to you. It's always a pleasure
to talk to you. So I'll do it anytime, whether
it's a couple of months, see where we are, or
because one of the things I just said wouldn't happen
happens on a Saturday, and you know, and we have
to talk about it.
Speaker 2 (52:44):
All right. Thanks, So much, and I also want to
thank you for tuning in. If you liked the episode,
please subscribe and leave review. We've lined up a number
of great guests for the podcast, so please check back
to hear conversations with c SWEET executives, shippers, regulators, and
decision makers within the frame markets. Also to learn more
about the free transportation markets, check out our work on
the Bloomberg Terminal at Bigo and on social media. This
(53:06):
is Lee Klasgas signing off and thanks for talking transports.
How everyone.
Speaker 2 (00:08):
This is Lee Clasgow and we're Talking Transports. Welcome to
Bloomberg Intelligence Talking Transports podcast. I'm your host, Lee Klaskaw,
senior free transportational logistics analysts at Bloomberg Intelligence, Bloomberg's in
house research arm of almost five hundred analysts and stritters
this around the globe before diving in a little public
service announcement. Your support is instrumental to keep bringing great
(00:28):
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any ideas for future episodes, or just want to talk transports,
please hit me up on the Bloomberg terminal, on LinkedIn
or on Twitter at Logistics Lee. Now on to our episode.
We're delighted to have back with us. Tony Hatch an analyst, consultant,
(00:48):
and fixture within the North American railroad industry. Tony has
been a senior transportation analyst on Wall Street for over
twenty years before starting his independent analysis and consultancy firm
and nineteen ninety nine. Tony's coverage has been focused on
the free transportation segment, particularly surface transportation and railroads. He
has a research partnership with KEYLG Consulting and an equity
(01:12):
marketing partnership with CV Securities. Along with Progressive Railroading magazine,
he co founded co presents and leads Rail Trends, the
most comprehensive railway conference every fall in New York City.
Welcome back to the podcast, Tony.
Speaker 1 (01:27):
Great to be on, interesting times, lots to think about.
Speaker 2 (01:31):
Yeah, and you know you are a repeat guest and
you're on a couple of months ago. I tend try
to like keep the distance between episodes of a little further,
but you know we are and, like you said, very
interesting time. And I really wanted to have your perspective
about what you're thinking about. You know, all this rail
consolidation noise that's in the marketplace. Obviously it's a little
(01:51):
more than noise, since you know there's a deal on
hand between UP and Norfolk Southern. Just if you would,
could you talk about, you know, a what your thoughts
are on consolidation, where you think this is going to
lead us and you know, more broadly, we can talk
about it if we think a deal can get done.
Speaker 1 (02:10):
So, Yeah, the last time we talked and it was great,
was on the biggest topic you know of the time,
which was howard rails who are in my opinion, fifty
percent trade weighted deal in an era of tariffs and
trade wars. And now we've forgotten that already because this
story has come up. You know, this was perceived to
be a short window where they could change a long
(02:32):
held policy against you know, transcendental mergers. And that was
believed because I guess by by Jim Venn of the
Union Civic, but by folks who sort of followed this
because you don't have leaders in the industry who've come
up through their own company ranks, with the exception of
BNSF and in the Eastern railroads, the targets here they
(02:52):
didn't even come up from the railroads. So there'll be
the expectations that might be more transactional. You haven't had
a lot of growth we discussed this last time, and
certainly not growth and bonuses at market cap. And finally,
you have an administration that is pursuit which I'd like
to talk about later, that might be perceived as being
looking favorably on this in ways to ease some of
(03:13):
the complexities of the merger and so you began to
talk about it more, to hear about it more, and frankly,
when Union Pacific started really leading the charge at some conferences,
whatnot I thought Jim Venna was using the opportunity to
smoke out this Service Transportation Board, the sole regulator and
decider on mergers, to define some undefined clauses like the
(03:36):
next round of mergers. The new rules have to enhance competition,
enhance and be in the public interests. But those who
have never been defined, and that's been sort of a deterrence,
much discussed in the last merger, the CP case, which
was allowed under the old rules where you must maintain,
not enhance. And part of the thinking then was we
(03:57):
don't want to make the SCB define that as a
non defined phrase. It's scary. If you define it, your
DC lawyers, your strategists, and your network planners can begin
to attack it. What can I do to overcome this?
It's still not defined. And yet, because of I guess
the feeling about those other things, maybe Jim Venna's own
(04:18):
tenure time and time service at time left in service,
they've decided to make a go of it now, at
least so far. It's long been thought that rail mergers
could be very beneficial if if, and I'll get to
the if in a second, the benefits being the removal
of interline operations, which has been a problem in my
(04:40):
thirty five years now of doing this. We're two railroads
meet and it's not a disastrous issue. But if you're
ninety percent on time, you're a pretty good railroad. And
you hit another ninety percent on time railroad in Chicago,
it may take a day scheduled day to get between
the two of you, but ninety times point nine times
point nine means now you're eighty one percent time. And
(05:01):
you know the simple map and so and the other issues.
You push everything to Chicago. It's sort of neutral ground.
Saint Louis is three hundred miles further west. That's three
hundred miles of dollars into a Western into Union Pacific's
revenue base. So you you would route things out of
route to keep on your system as long as possible.
You can eliminate those that's kind of thinking. You can
(05:24):
eliminate a lot of the assets that you've built up,
you know, hump yards on either side, and really make
this like a pit stop. You change the cruise, you're
fueling up and you're going at one point five seconds.
That's an exaggeration. You also have, of course the SG
and a production you don't need to CFOs or heads
of of the ag department. And finally, there is an
(05:44):
undefined I mean I don't know the number, but some
number of businesses that are going to be short haul
at the meeting points. Short haul on either side of
the Mississippi River. Three hundred miles west of the Mississippi
River is a plant that wants to move goods into
the into the east. But for a union specific for example,
or being a SEF in their very complicated extensive work rules,
(06:07):
that's that's really a kind of a short line Business's
very difficult for them to do that unless you give
them unit trades, right or massive volume, and so they
basically have it. And so the assumption is there, and
it goes three hundred miles on the other side of
the border, so you have two short hauls. But if
you now run one single railroad and it's six hundred miles,
it becomes a little more compelling for you to try
(06:30):
to figure out how to design that service. So those
are the three buckets and everybody's always told me, going
back to the two thousand bn CN merger that did
not happen, that it would be great to solve those problems.
And some people said it would be really tragic that
it requires a merger, you know, to solve those problems,
(06:50):
that you can't partner use technology your way to get there.
But these problems would lead to you know, a boost
of capacity, a boost of you know, speed, rely ability,
which is probably the most critical word of all of those,
and new business and lower costs because of the last
two factors. But after the rules were changed following BNCN
(07:11):
and the rules that were applied to the Canadian National
attempt to rest away Kent City Southern from CP, the
feeling was the price was too high. The benefits were good,
but they weren't worth paying this enormous price in concessions,
in remediations, in deals, in access, in labor deals, et cetera.
(07:34):
So that was you know, the thinking really from the
mid oughts until about you know, two months ago, And
in fact, the Union Pacific was the leader of that thinking.
They had really used their political muscle to put the
kaibash on the Burlington Northern Canadian National merger because they
were so reeling from the pain self inflicted paid of
(07:55):
their Southern Pacific merger, and because as a railroad there
was the largest If you step in and interview to
make things to maintain competition and to change routes and
offer tractedge rights, the relroad that fifty five share loses
five points, the road at forty five percent share gains
five up saying we've got the best franchise, Why do
(08:15):
I want to give anything away? That was their thinking
until Jim Venna came and I'm not sure what has
spurred him to change their long you know, their two
decade corporate bedrock philosophy.
Speaker 2 (08:27):
Yeah, so if you just if we rewind a little
bit and go back in time, you know, back in
you know, the new rules that are in place today
we're implemented, I believe in two thousand and one. And
the reason was because of those large acquisitions. You know
what was there like thirty thirty five class ones in
nineteen eighty. Yes, now there's just a handful you know there.
(08:52):
You know now now there's just I guess six and
so you know that's been dou contolidation and a lot
of those consolidations, you know, as those mergers ended up
with really really bad service and the shipper suffered and
then so you know, that's kind of why those rules
were put in the place. And and as you mentioned,
you know, Kansas City Southern was exempt from some of
(09:12):
those higher, higher hurdles that you know, the rest of
the class ones were uh you know now faced, and
that's really just because they were so small, you know,
in CP but KC it's still the smallest class one rail.
So so when we're looking at you know, mergers today,
you know, from my vantage point, like, I don't think
(09:32):
there's really any argument that a transcontinental network is probably
you know, could improve efficiencies and lower costs and all
that stuff, But but how does it enhance competition? I
think unless unless all of a sudden, you know, the
next step here is Burlington Northern makes a play for CSX,
which what are your what are your thoughts on you know,
(09:53):
what the next steps were. I don't want to get
ahead of ourselves, but you know, do you is that
the deal or do you think it's a it's a
c P CSX or a CN CSS.
Speaker 1 (10:02):
So I'm working on the assumption. There's so many things
we don't know. We have to make assumptions. And if
you follow the if trail, if that, then this and
then that. But if the original if is wrong. But
the assumption I'm making that I think is sort of
widely held as the Canadians are out of this round,
partially because of the or maybe majority reasoning behind the
(10:27):
split between US and Canada. Politically, the fifty first state
rule and whatnot. CN as you know, has a rule
that their headquarters has to be in Montreal. Now, the
thinking in the past was they could keep an office there,
you know, and their workarounds. I'm not sure the new
Prime Minister Carnie would allow that, you know, he would
(10:48):
want to make sure they're headquarters of the Canadian National
Railway to be fully staffed up in Montreal with French
speaking people. So the thinking is that also CP with
its Mexico merger, has limited itself. It was long thought
to fit well with the Union Pacific, but with Kansas
City Southern and the Mexico operations, that's probably problematic from
(11:11):
an anti trust perspective in Mexico. So I think I'm
going to assumption that Canada may get rolled if we
were to see two you know, I didn't agree to
see any and I always said if I was going
to be wrong, I wouldn't be a little wrong, I'd
be a lot wrong. And so I think it may
be in phases. But if this one is allowed, this
is the thunderclap, right, this is the dam breaking. The
(11:33):
other things that would follow would be you know, flood damage.
If you will, you know, we could talk about like
what BN's options are, whether we think this would pass there,
and you know, with what the Canadians are going to do.
I mean, I think CP is hopping mad because I
think they believed, I believe that they had the last
merger and that under the new rules nothing else could
(11:55):
get a enhanced competition. One thing I'll count counter that,
possibly just to add to the conversation, is a whole
new class of investor I'm sorry if shipper may get
involved here that are really politically powerful but have never
particularly thought about railroads in the regulatory DC sense. They've
(12:15):
used their capital, their political capital for issues of intellectual
property rights or labor abroad. And I'm thinking about Nike, Walmart, Target, Amazon,
all these guys that are international retail players who could
see benefit from faster more reliable service. I think they
(12:36):
benefit now. I mean, I don't think it's you know,
sea change, but they could potentially have never been involved
in an STV hearing come in and they could potentially,
although they'll have their hands out, we'll talk about that,
they could possibly. That's where you might see it. But
intermodal is not under the seb's regulatory purview. That is
enhancing global supply chains, which is not how this merge
(13:00):
will be presented to Washington. If you saw the original presentation,
practically had fireworks in apple pie, you know, audit. It
was so American, even though the speaking man was a Canadian.
You know, I got a little tear in my eyes.
I thought about small towns and dogs and fishing holes.
And then they used the word enhanced about eight times.
(13:21):
So you know, they know where their issues are, right.
But I'm not. I agree with you, and I think
your call that we talked about offline is brave and correct.
I think that's very hard to prove unless you have
the world's biggest companies come in and prove it that
this is enhancing our global competitiveness, which is a positive
thing for this country, but not a positive thing for
(13:42):
Peter Navarro right, and the White House trade figures they
don't want to see better supply chains to Asia, and
that's or Europe, and that's really an area where you
could say a big benefit of this merger could be.
Speaker 2 (13:57):
So I guess there's so much talk about so as
the rule stands, now, you know, what do you think
the probability of this getting STB approval?
Speaker 1 (14:09):
So you know, I had put it at two percent
a year ago after my rail Trend's conference that we
alluded to where this coming November, we were giving Jim
Venna our Innovator of the Year award. All prior to
these announcements, there was a big, a popular you know,
there's a big speech by Oliver Wyman that said railroads
(14:31):
have really got to grow. We've run into the end
of the pure cost cutting you know era where that
really benefits investors, you know, and returns. You need to
take this more lean machine and do what Keith Crile said,
pivot to growth. And all the CEOs said that everybody
believes that we just haven't seen it. We had a pandemic,
we've got a trade war, we had each Palestine, et cetera.
Speaker 2 (14:54):
So just so just with us. Do you think the
rails like as they stand out, can ever grow more
significantly more than GDP?
Speaker 1 (15:02):
So I do know that puts me on a very
lonely island. I believe that they've never really been tested
in the new all all of the last investor days,
which are becoming increasingly important to understand the railroads because
while they used to be annual, they're now every two, three, four,
five years. If you go back to the Norfolk Southern's
(15:22):
in the end of twenty two, operating ratio is used
in one single slide deck. Once, you know, they all
talked about growth. So and people say, is Marty Oberman
the last or two chairmen ago, the chairman of the
STB said, I've heard the song before. Every time I
come to the rail trends, they talk about growth, and
here we are doing it again. But if you don't
talk about it, you'll never do it. The talk about
(15:44):
it is to try to get their stakeholders that own
their stock right, the shareholders to view them differently than
an operating ratio machine. And so you know they've talked
about resiliency or Jim Vendolex called a buffer. You know
they're trying to move away from matching their costs to
the expected volume, which is, you know, a mugs game.
(16:06):
They have never been you know, they've been good at
ratcheting costs down in recession or a pandemic, but they're
always in behind when business comes back up, and they
have several years of service issues. So they're trying to
change the thinking of the people who put who put
pressure on them to focus entirely at costs. So an
(16:26):
important first step is to talk about growth before you
do it. And I would argue they haven't had a
good chance to test it because we're in a freight
recession since the end of twenty twenty two, as I'm
sure you've talked about in other of these podcasts, you know,
the excess trucking capacity exacerbated by a confused economic policy.
(16:47):
So I do think they can. I think the leader
that there are three areas where they can do this
without under a so called normal economy, should we ever
be lucky enough to see it again. That is industrial developments,
slow building process, that is, tighter relations with short lines,
which up actually has been the recent leader in terms
of turning over in Eugene, Oregon and Kansas City Missouri
(17:10):
there first and last mile of the short lines to
do that so much better. And then the third area
is intermodal, where I wrote a report for Ayana that's
available on the website called the Intermotive to the Crossroads.
I truly believe that a sustained domestic and international into
domestic transloaded business can grow, can push the other two.
(17:31):
Maybe you know, short lines grow faster than GDP, so
if you can tag onto that wagon, industrial development is
tying into new trends and you know, aluminium, depending upon
where the economic policy falls out. But I believe that
as intermodal grows, continues to grow as a percentage of
the railroad pie, it should be growing, you know, at
a overall maybe one to five to two ex GDP
(17:55):
between international, which may be a more stable business, I
mean the lasting from stable in recent years, but you
know we've already globalized. Now maybe a un globalizer will change.
They'll be shifts, but it may not grow like it
did ten years ago. But domestic share is a great opportunity.
They can't do that now. The argument is will this
make them do that? I don't know, and I don't
(18:18):
think they can prove it, but I do believe they
can grow. I think partnerships are really hard. I think
the CACS merger with CP really stimulated a lot of thought,
got the marketing people together with the strategy people and
the operating people and designing Falcon you know, and new
services MMX now SMX, you know all these. I think
there's really was sort of an unleashing of the entrepreneurial
(18:40):
spirit in railroad headquarters. And I think one of the
unfortunate things is mergers kill that for a while. You know,
the short lines are distraught because they're all cutting new
deals and now the short line people are going to
be called off to deal with.
Speaker 2 (18:53):
This, right, And so you said before this it was
a two percent probability of happening. So fast forward to today,
what do you think of the probability of this getting
regulatory approval?
Speaker 1 (19:05):
Yeah, I got off track there. I went from two
to twenty to forty to and as we talked pre
show here, sixty. But I'm talking to you makes me
think maybe that's too high, and that goes under the assumption.
I have full respect for the really high intelligence levels
of the CEO of Union Pacific, so I kind of
(19:25):
thought he must know something he must know what he's doing.
I alluded to the fact that I've been wrong with
making that assumption in other events in the world before.
You know, I think that I don't know how he's
going to prove it. In talking with Keith Criele at
the CN they are convinced that there's no way. For
example that they said in their statement, we have only
(19:48):
twenty customers that have two to one issues. That's not
even an issue under enhanced competition. That's a maintain competition.
You know. That was the big deal in the UPSP.
So a plant or a city factory, you know, a
destination of a freight destination served by two railroads and
you're merging them. So that giving trackage rights or whatnot
(20:11):
got ben s into the chemical business. They're a junior
partner to UP, but they weren't in it at all.
But they had to solve when UP and SP who
were the two big ones, merged the very powerful chemical industry,
which is already sent out a letter condemning this merger.
You know, so two to one is solving a two
two to one problem. Was what strategists and lawyers and
(20:33):
whatnot did to solve old rule mergers in the rail
business new rule, so and Jim Venna and the NS
and up teams alluded to having only twenty customers, not
twenty sites, by the way, customers who who have a
two to one issue, And as Keith Greyle pointed out
his call, that is an irrelevant statement because you're not
(20:55):
there to solve two to one and make it like
it was before or as sued like it was the
day before the mercher. You're there to enhance it, and
I think you lead point out that, I think it's
very difficult to enhance it unless you've got a wave
of these new shippers, you know, these global shippers, and
global is a bad word. But the Amazons, the Nikes, targets, Walmarts,
(21:18):
who have never been involved in rail regulation coming in saying, oh,
it's helping us a big deal, it's enhancing competition with
the highway with our own fleet. You know, will turn over.
I'm not sure they will. They've never been involved before
in a railroad issue on a major way, testifying it
at as TV hearing. But this is, you know, going
to hit their radar. And the problem with this again
(21:40):
is that you know that makes supply chains to Asia
that much better. Is that what we want? I mean,
I want it, but is that what they want in
sixteen hundred that's a big avenue.
Speaker 2 (21:48):
Right, And so just what you were alluding to before.
So we've published on the Bloomberg terminal. You know, we
put a probability around twenty five to thirty percent on
a deal getting relatory approval and getting finalized. We would
admit that it's going to be a moving target and
as time goes on that number is going to increase
or decrease. But that was kind of the starting point
when when the when the deal was was first rumored
(22:10):
to happen. But you know, we'll see what what you
know U P and N S, you know, how they
make their case, and we'll also, to your point, see
how all of the stakeholders react. We know some of
the the unions who was at the the b L E.
T came out against it already and so you know,
(22:31):
it'll be interesting to see what the other unions say.
Because Jim Venna on on there on the on the
merger call, you know, it did say that you know,
the trades trades people would be okay, they're not looking
to cut those kind of jobs. It seems to be
like you pointed out more of the S G and
A folks that might be at risk at losing their jobs.
Speaker 1 (22:51):
But it's important. You just raised a really good point.
First of all, I think it's really excellent that you
put those numbers, and following our conversation, I don't have
a published number on a billboard, but I think I
will reduce mind based on what we've been talking about.
I mean, you know, it's a rather naive to just
say he knows what he's doing. I think that is
very smart. I know that he's not had conversations from
(23:12):
with the SCB that have given him any sense of
anything at all. I don't think the White House has
that bigger role, you know, and we could talk about that.
And one of the things that's interesting is the Teamster Union,
of which b l T is a big part. You know,
if they're an opposition that they're you know, they're an
ally of the White House. You could argue that this
(23:33):
is gonna be pro labor, you know, bad for white collar,
good for blue collar. We're going to grow. We need
more T and E people, more training and enginemen. But
that doesn't mean it gets to the other thing. A
merger opens the books on railroads, So everybody, every stakeholder
is going to come and demand and ask for something.
A lot of these negotiations will be behind closed doors.
(23:53):
You want me to sign a letter supporting your merger.
I need relief in Houston rate cuts and Scranton. And
we may not know that. We'll just see that this
company X or Industry Y has signed a letter. It's
board of the deal. We don't know what they gave
away for that. I mean, that's the key. Here is
the benefits unknowable right now without inside information. But presume
(24:14):
to be large, like a blind man with an elephant.
Don't know what this is, but big you know, and
then you've got the cost. The costs are going to
be money. The costs are going to be time and
attention and loss of momentum, which was a good question
asked of then in his quarter. And then there can
be all these other costs that you give away to everybody.
Our union is going to try to demand codification of
two man crews are communities, but this is the death
(24:37):
by a thousand cuts. The communities that are going to
see more traffic as you disperse out of just Chicago.
Are they they're going to want trees planted. That sounds silly,
but that's a mitigation for sound. They're going to want underpasses,
grade crossings. How many communities are there between California and
you know, Maine, you know New York a lot? So
you know, if that's the thousand cuts going, you know,
(25:00):
we've seen that with CN and this their Jay acquisition.
You know, they're so you know, I worry about these.
You know, how do we tally up whether this merger
makes sense? The consensus among smart people in the industry
was the cost side of the ledger was going to
be way too close to the benefit to take the chance.
And one person has changed his mind about that.
Speaker 2 (25:21):
I mean, listen, like I said, you know, from on paper,
it sounds like it's it's a good idea, but you know,
to your point, like what kind of concessions are they
going to have to do not only for the stakeholders,
but the STV, Like, like do you think they'll have
to do like force reciprocal switching on their network?
Speaker 1 (25:37):
Sort the STB supposedly is representing the stakeholders, you know,
so that's why I say, you know, uh, and those
they represent labor to some degree. You know, labor also
has the safety angle and whatnot. But they certainly represent
the shippers in the communities, right, they have environmental overlook
and other things like that. Now, Patrick Fuchs, a Republican,
(25:58):
wants the rail industry and all of its stakeholders to succeed.
He's very smart and he feels very passionately about that.
And I think that the other members that I know,
Karen Hedlin and Michelle Schultz, and I think the one
I don't, Robert Primis, all do they want the relatisy
to succeed. But sometimes that means choosing one side over
(26:19):
the other. But the real we've got to remember it's
not a partisan issue. The Wall Street General wrote an
outbed piece saying that a pro business Republican as the
fifth member is something that the president should do. Uh
And because he has the right, the Republicans have three
members and get that board up to you know, not
a two to two split, but a three to two
Republican majority would be pro business. And that is that's
(26:43):
so simplistic because the board, the stakeholders the board represents
are mostly very big businesses, probably Republican ones, right, And
so the idea that being allowing a real merger is
pro business. It could be that's the whole idea of
enhancing competition. But the Chemistry councils already come out against it,
the North, the National Industrial Transportational League, the Mid League
(27:06):
has come out against it, the you know, Alliance of
rail Shippers have come out against it, representing you know,
across but so they that may be just bargaining positions,
but the opening statement, you know, I hate this. What
are you going to get me? But the fact is
it's not clear the way it's been assumed by so
many that the President is going to like this because
(27:27):
it's just great for you know, for business. I mean,
it enhances international supply chains, and it may piss off
you know, industries that are also important to this country
and too, you know, restoring and rebuilding a manufacturing base.
So I'm not saying it is one way or the other.
But the simplistic idea that Republicans you know don't like
rail regulation and Democrats do makes the basic assumption that
(27:49):
there is a woke position on a chemical company fighting
for raiding, you know, pricing power with a railroad. There
just isn't there's a regional you know, should not have
not you know, not a Democratic Republican one.
Speaker 2 (28:03):
Let me ask you a question, kind of getting off
the subjects. That's a little bit. I'm just curious to
your perspective. So, you know, we mentioned that growth is
really important because all the cost cutting has really mostly
been done. I mean, they can, they can, you know,
everyone can be a little better. But like we're not
talking like huge step downs in their operating ratios anytime soon.
(28:24):
You know, is it a bad things that investors view
railroads just as utilities that just generate great cash flow,
And so that's.
Speaker 1 (28:32):
A really interesting point. You know, they could definitely be
more efficient and from here if you believe in the
positive signs of PSR, not the quote bastardization of it
end quote that we saw when we became focused. When
investor led managers to focus on quarterly annual operating ratio
or margin improvements, then you started thinking about only what
(28:54):
cost can I take out if you run your business
on time, if you run to a schedule that meets
other schedules, and you are able to crew to staff
crewing correctly and to not have over time. Keith Griole,
who is a great phrase maker for this industry. The
CEO of the CPKCS has said, and all the really
(29:16):
echoed that the operating ratio of the margin is the
outcome of a process and the rare occasions Keeth goes
to Calgary, back in where his headquarters are, he says process.
But nonetheless, the fact is, if you do these things correctly,
you should get more efficient. But if you manage the
efficiency not the growth, you know, that doesn't work and
(29:38):
it's very short term oriented. Adrian Bailey, the head of
the rail practice at Oliver Wyman, in a close ally
and friend, spoken real trends and she said, lads might
have to pivot to growth, have to use keith phrase
if they don't, and they can't because there is a
lot of skepticism. You know, I happen to believe they can,
but I understand what you know. Everybody else have two choices.
(30:01):
The choice. One choice is to shrink to your regulated commodities,
build up your cash flow and do what you just said,
become like a utility. They could, you know, have much
higher dividend payout rates. You know they don't need in
order to do the chemical, grain and cold businesses and
a few other manufacturing manufacturings correctly, they don't need massive
new IT overhauls. They could become utilities. We won't have
(30:24):
as much fun with them, you and I. But she
said the other alternative is potentially to merge, and that's
really one of the first times that was That was
November of last year. That started the ball rolling a
bit in terms of conversation. But the Oliver Lineman study
said that if the railroads merge unscathed, unhit by regulatory
give backs, they'll gate two hundred and fifty basis points.
(30:46):
And this is a lot of risk for two hundred
and fifty basis points in margin. So you know, I
think your numbers on passage are braver and frankly more
realistic than mine. But I had raised my because I
really I was wrong in a series of steps. I
really thought Venna was using the discussions to force Patrick
(31:09):
fuchs hand to state things, not to actually go forward
with a merger agreement. I thought that the not having
a voting trust would be a much bigger obstacle. Frankly,
I think it is. You know, they said they didn't
even want to go to attempt it. I think it's
because they knew they never would get it, and that's
why they have that two and a half billion dollar
breakup feet He's probably gone too far down the road
(31:32):
to turn back now, even if his own people begin
to add up all those costs and see that if
your basis of on a scale of benefits is one hundred,
what does an acceptable deal with money, time, all those
little things? Maybe even open access? Is it ninety? Do
you pay? You know that doesn't seem more, it's it eighty,
(31:53):
you know, on a scale level. That's what I'm trying
to say. Also, many of these numbers are very hard,
if not fully imposts will for us estimate nobody on
the rail analysis or observer or outside sensus any idea
what removal of innerlining really will mean to the bottom
line forgetting estimating new business you get by I'm talking
(32:14):
about what does it do tomorrow if you could do it.
I don't have those numbers, nor do we know how
big the watershed business is, And we don't know what
giving one million dollars every community to plant trees to
mitigate noise will meet because they won't tell us all
that we.
Speaker 2 (32:28):
Were talking early about service because like you know, these
rules that were passing two thousand and one where really
came about because the service was really negatively impacted by
you know, two networks merging together. You know what, I
would say, it's at CPE CPKC merger kind of proves
that you can have a merger and keep service levels
(32:50):
at a decent level and not you know, really hurt
the shippers. And I think the rail industry today has
really learned the lessons of you know, impacting ship or service,
which like with CSX when they started doing PSR. Gosh,
how long ago that was? That was it eight years ago?
I think, yeah, something like that. So I really think that,
(33:11):
you know, I'm not from my vantage point, you know,
I don't think it's necessarily service is going to get
hurt when they if they do merge. But obviously there's
a lot of execution risks that can come into play.
Speaker 1 (33:23):
So the mergers, the three mergers that really clocked service
were the big ones that created the big four that
we have today in the US, UPSP that was the
worst of them, BNSF, BN Placenta FE, Great BNSF, and
the split of Conrail. Each of them had various kinds
of moments. The UPSP congestion crisis that lasted a year plus.
(33:47):
Was when people say we're in a service crisis, I'm like, god,
you know that almost took the economy down. I mean
Houston didn't have a car moving, a real car moving.
All those chemical business plans were shutting down. It was crazy.
We have much less information accessible too. But they were
parallel mergers, and they were also signs of hubris up.
(34:07):
Basically came and fired a lot of local sp guys,
but a lot of railroading before the information age was
I know this territory. I know, we got to get
it through there before three because that's when the commuter trained,
you know, and so they lost all that institutional knowledge.
So I don't think that would be replicated. The CN
mergers over its history were all and ed. BC Rail
(34:31):
Illinois Central was constant cential Grain Lakes transportation. They had
some one interchange point, CPKC had one interchange point. So
they essentially just tied them together. When they did put
together the computer systems, which are still doing now. They
didn't run it down. Not a disaster. But you know,
even the great Keith Crele is not undefeated. So I
(34:54):
truly believe that if this margery allowed. They should discuss
the risks of this because it's national right. But these
are much simpler ones. However, there are multiple interchange points.
That is also a benefit because you know, if elimiting
the interline is an advantage, Crile only did it at
one very little interline spot. These guys could do it
at Memphis, New Orleans, Kansas City, Chicago, Saint Louis. But
(35:18):
that also created some complexity issues. So that is an issue.
And there are people who were young who are in
the logistics departments at Dow or Ford or whatever, who
are now in a position of running logistic departments who
will remember UPSP and it was thirty years ago. Roughly.
(35:39):
That's a whole lifetime for many people who might listen
to this, but they're still you know, people in leadership
positions will remember. That's an issue. I think it's a
solvable issue, but the SB will look hard at it.
I think the bigger issues are the ones we talked
about before. But UP was reeling from there, the fallout
and the pushback in two thousand from their ninety five
or six merger, and the problems that just lasted. They
(36:02):
didn't hit their creative numbers for five years and they
said it was going to be year one, so they
lost credibility. I mean that's why they wanted to put
the kibosh. You know, we got to stop this. We
got moratorium. And they at the time had such political power.
I don't think they have it today like they did
that The industry may you know, the AAR may, but
(36:23):
UP used to be you know, the AR was the industry.
I mean it was up and UP was you know.
Now I think their office is half the size. It
was unfortunate because they're coming into the which could be
the biggest battle of their lives. And mean going back
to the you know, the last the Golden spike, right.
Speaker 2 (36:40):
So so like like I mentioned earlier, like my probability
is going to change with time. It's it's going to
be a fluid number. What do you need to see
to get more positive or negative? And the deal is
it just is it just the press releases from shippers
that are going to come out and in the months
to come.
Speaker 1 (36:58):
So yeah, and you know, one of the things I
travel around a lot to go to a lot of
shipper conferences and whatnot, and most of them are at Spring. Unfortunately,
there are some of the fall ones. I mean, I
needed to talk to people who are going to have
political sway in this. The STB, as we've talked before,
it's kind of shut down on this, as they should be.
They weren't very shut down in the CP case. I
(37:20):
mean they let their feelings be known a lot more.
But I think talking to people press releases, you know,
we may you know, we maybe in a period of
sort of like the phony war in World War two
before the US got involved with you know, when nothing
was happening but they were at war. I mean, I
don't know what the next event is that'll make me
change my mind. Maybe understanding more, hearing all the big
(37:44):
players speak, and that is not just the Association heads
with the railheads, you know, listening to Jim Venna speak
with Mark George and I hate, I'm not trying to
give the pressure. I'm just easily swayed by the last
person I talked to. If so, I'd be president. But
the I thought they gave a pretty good presentation. And
(38:04):
then I heard Keith Greele the next day just shred
it and I was like, you're right, you're right. You know,
they have a you know, the two for one, for example,
is jimple Look, that's all we have to solve. Well,
that's not even on them, that's not relevant at all,
you know, so I'm not saying that that. Well, first
of all, that's really in true because the personalities involved
(38:25):
are a big part of this. And you know, the
CND ASPRAA, all the guys, the great lieutenants, the great
war chiefs under the Emperor Hunter have dispersed across the
industry and they're back and they have a long history
of let's call it nicely, a tense competition with each other.
Speaker 2 (38:44):
Yeah, and you know Jim Venna, he is an operating
background and so you know he's going to be folks
on the operation and the integration, you know, which, Oh gosh,
I mean, if this deal gets approved in two years,
how long do you think as integration could take. I
know that it's like.
Speaker 1 (39:04):
We're into two years with CP right and they only
had one. I mean, that's the other thing that was
thought about is that this would be a lasting mark,
you know, the legacy of the Jim to leave, but
he can't be around to see the new co thrive,
you know. I mean, how that's four years? I mean
who knows that the sum is committed to hitting a
status or of deadlines. So when an application is filed
(39:27):
will have a sense of what the decision will be made.
But then the implementation starts if it's proved, and that'll
take a long time. And one of the issues the
railroad industry has is succession. You know, they've lost a
bunch of people. It's not clear who if independent mergers,
(39:47):
who the successor to Jim Venna would be.
Speaker 2 (39:50):
Right, he's sixty six right now.
Speaker 1 (39:52):
Yes, it's not clear who the successor to Mark George
Norfolk Southern would be. Same as true at say Sex
is not in the It seems like maybe it was better.
I are there always was. You knew who the guy
they were bringing the guy or or woman and putting
them in different departments, and you know, having speak at
conferences and getting you know, all the stakeholder groups that
(40:13):
you know, Labor Finance US, you know comfortable, I don't
know who that person is, so you know, you're right.
If you're holding the stock of the new code, you
need to think about who's the implement or in the
long run, if you're a long term holder, that's a question.
Speaker 2 (40:28):
So pretty much we've got to be on the lookout
for presles. And you know we're talking about stakeholders, and
you know, it's important to note that, you know, CP
the other railroads could be against this merger. Well, that
the trucking industry will probably be against the merger because
of their own economic interests in the American Truck Association.
I know they haven't come out with anything yet, but
(40:49):
you know, one would guess that they're not going to
be fans of it unless you think otherwise. You're making
a face.
Speaker 1 (40:55):
So I'm trying to remember whether they were last time.
I'm not making a face yet. Sorry, both we can
see each other, you can't. No, that was my thinking face,
So I guess I got to change that. What did
they say in the CPKS of course that you know,
that was a different kind of merger than this. This
is a big East West merger. You know. I think
the imcs have complications ahead of them, the interment of
(41:16):
marketing companies because you have some that were you know
up ns that are UPCSX. They're going to have to switch.
There's all the UMAX box program and a lot of
them used, which is a upcsxing. Their complications not otherwise.
The trucking industry, I'm not sure that they've ever been consulted.
And the idea of all of these was supposedly get
(41:38):
trucks off the highway, you know, so an organized trucking
industry is not favor of that, right. But I will
tell you that one of the things when you look
at the CP example, they have hit their financial targets,
they have hit their operating economies targets, they have marched ahead.
They are way behind in their volume targets and in
their trucks off the highway. At the last SEB report
(41:59):
committed the applicationation, they're fifteen percent of that number one five.
So now there's a freight recession, there's been a trade war.
Mexico has been particularly targeted. You know, there are reasons,
but they are not hitting their volume numbers, even if
MMX is at big success as they say, So, you know,
(42:19):
I don't know if the trade industry is as much
to worry about. I would hope they would. I don't
know if they get a seat at the table. Because
the STV one of the problems with the STB historically,
and I had said this to a former chairman Marty Oberman,
you know who with THEE I've disagreed about a lot
of solutions. He would propose. I said, I wish you
had more power, and he laughed. He said, how could
you possibly wish that, knowing what you know? What you think?
(42:39):
And I said, because you think competition, and this is important,
is only rail competition. You know, you don't regulate the highway,
so you pretend it doesn't exist. You don't regulate geography,
so you pretend that the idea you can source lumber
in British, Columbia or Georgia, you know, doesn't exist. One
of the issues here that you're some of your listeners
(43:00):
they care about is there are a class of investors
and analysts of the situation or not railroad people who
think that the enhanced competition clause will be solved by
offering better inter motor routes. And the STB views itself
sort of like a Supreme court in that it uses
precedent in old cases and cites them, you know, in
(43:21):
making these cases. And in no time before has competition
included the highway when it was two to one or
maintaining competition, it was maintaining rail competition. When they have
made those arguments, we have to maintain two to one
to make it still two to two. I argued, there's
I ninety five is right next door. It has come
to in fact, this plant is giving more and more
(43:41):
business to the highway than the rail. You know, that
argument was not listened to, So that's just interesting. I
have gotten in friendly arguments with people who called me
and said they're gonna be able to enhance competition because
it's going to be a more competitive truck product. And
I'd say it has to enhance rail competition unless they
break with you know, a tradition that dates back in
the Interstate Commerce Commission in the nineteenth century of not
(44:03):
using president gotcha.
Speaker 2 (44:05):
So I was a little surprised, you know, when we
talked about the cansile, like what the next step is.
So you don't think, like, you know, BN is going
to make an announcement anytime soon about you know, whether
to make a bid for NS or a separate bid
for X. If it does happen, will probably happen when
I'm on vacation, because there is a precedent anytime that
(44:26):
I'm on vacation, something big happens.
Speaker 1 (44:29):
And usually do you remember the last rounds. When the CP,
Casey and CM fight, they always announce things on Saturdays.
Speaker 2 (44:36):
Yes, so it's very thoughtful. But anyway, it's not about me.
It's it's about the industry. So it's absolutely so you
don't in your mind from you know, you don't think
something is just right around the corner.
Speaker 1 (44:51):
Well, we haven't talked about the other big shoot that
could drop. I think the Canadians are going to fight this.
I know CP is going to fight this. And you
know what happens down the road if it's approved, is
you know, under different political circumstances, a digeratory. I don't
think they can get involved. However, if you are a
gambling person, I've been wrong on every step of the
(45:12):
last three months, so you might want to bet on that.
I don't know. At the top of my head. With
the market capoes of C you know CN, I mean
cnn N s are comparable sized, I is how I'm
thinking off the top of my head, you know. So
for them to buy to get into a bidding war
for one of these things, because right now, the other
(45:33):
shoe that we did talk about is what does being
a SEF do. Everybody assumes that you know, First of all,
being a SEF makes more sense. I think geographically and
mix of freight with the d S and c SX
makes more sense with Uni Perivic the huge carload business,
the chemical business versus the bn JB hunt running on
containers from you know, alle Long Beach onto uh Pennsylvania
(45:58):
on the n AS to get be it clothing and whatnot. However,
that's not what worked out. Why didn't it happen the
way it did happened? Maybe there was some fear that
the chemical industry would be I think there was too
much power. They've already come out against it. Maybe it's
the personalities. I mean, these are forever mergers. To another
creole paraphrase, but you know you're gonna have to walk
hand in hand with your compatriot for the next two
(46:22):
years at least two chippers Senate and so I'm not
so sure that the Benas teams have CSX and up
of very sopataco so and you know, I think it's
also in my mind that Mark George didn't really like
his job. I think he's a great guy, He's been
a great leader, came in at a horrible time and
stepped up. But one of the things he kept saying is, man,
(46:44):
this job is hard, not being a CEO, being a
CEO in the era of activism and whatnot. He's got
three and core board people. I think that played a role.
When Claude Mansra left the board of Norfolk Southern, he
was thought to be He's never publicly anti merger, and
so he leaves Richard Anderson, formerly of Delta, which where
(47:06):
he made his bones putting together the Northwest merger and
knows everybody in DC because of that, also ran Amtrak.
He's now the chairman three Ancora. You know activist board
members who are transactional. I think that's what attracted that pairing,
even if it didn't make map sense logically, so does
be in THEEF try to outbid them. From everything I've
(47:29):
tried to learn, the differences in the pairings of those
four are not so great you'd pay a premium to
bust up the other one, right, and then you have
to think another fact. You cannot offer Berkshire stock historically,
so btsf's actually lost some mid level people of real
talent because they couldn't pay them in stock, couldn't give
(47:50):
them stock options because Berkshire doesn't do that, So you know,
that's what the fuck do they spin this off? Do they?
And they got four hundred and I think thirty billion dollars.
They just reported their cash number and I don't want
to be quoted on it. It's big, so they could
pay cash, but it's still a pretty big jung of
cash to go to support one of their businesses when
(48:12):
they have a lot of them. So the question is, well,
you know, what are the leadership of berkshare WANT. What
is the leadership of being a SEF want. Here's what
I would do, And I've talked to a bunch of
people and they think it's logical, but we don't know.
I don't know what Katie Farmer is thinking. I would
watch what goes on if a formal application is filed.
I would do what Keith is. I'd fight it like crazy.
(48:35):
You won't if this gets approved anyway, you don't lose
any moral standing. You're not a hypocrite. You say I
fought it, but you approved it, and now I have
to go forward with my own And who's going to
buy CSX. I mean, I'm not saying they're terrible. I'm saying,
if you assume the Canadians are out of it. There
are only other parent that's logical is being a SEF
(48:55):
and so they're forced to just wait. Now. They put
out in an interview on Alan Bloomberg. Uh, he basically said, Hey,
I'm cute. Look at me. You know, I'm over here.
I can dance. Uh. And you know, I like Joe
Joe Hendricks a lot. I like my Corey. They they
have done a really good job you and you said
(49:15):
it before about you know, the change in management. It's
sort of more pro growth things. They went through massive
construction project and you saw no ship or complaint. So
I went to the seer all the meetings that were
regional shippers in their territory. I'm talking about the Howard
Street tunnel at CSX, which they took out. They have
you know, they have on purpose really destroyed their fluidity
(49:39):
in order to make it better. And it's all you know,
by taking this tunnel out in the center of their
system in order to double stack, to make it wider
and bigger and opening up in the fourth quarter. They
have done all this stuff and then got their their
detour routes flooded. But you know, unfortunately and and so
their numbers, their dwell numbers went up various various things,
(50:01):
you know, and so investors were angry, shippers were not.
They get shoppers don't look at twelve numbers. They're like,
do what you promised me, And they're doing what they
promised them, and so CE sector is actually doing pretty well. Now.
The worry is if you're a C section North Southern,
now that you've you're really restoring your system you took,
It's like you took your own car and overhauled the engine.
Are you really about to go out and run the car?
(50:23):
What are you going to do? I mean, what's the
white collar workers, the marketing folks at the eastern railroads
if this goes forward, what are they going to do?
I mean, what's the morale going to be?
Speaker 2 (50:32):
Like?
Speaker 1 (50:32):
There? Right? Uh? That's really why I've sort of opposed this.
But but if I were being a set to get
answer to the question I asked myself, I would do nothing.
I would I would have my lawyers. I'd fight like
crazy to get every concession, and then if you lose
the fight or if it gets proved, then I'd go
in and you know, I'd call up Joe henrix Er
maybe his successor and by then and say hey, let's talk.
(50:56):
You know, I mean, I'd be talking to them anyway.
But I don't see any reason for them to rush in.
And unlike when a lot of the arms think, I
don't see any reason I have a bidding war with
my luck. That means that when I go on vacation,
a bidding war will start and the Canadians will jump in.
And everything you just said I said, he's wrong. But
I'm trying to think as logically as I can. I
think this is a two person story, but if it's approved,
(51:18):
it is the damn breaking and everybody else will be.
Speaker 2 (51:21):
At all And this this is very fluid, and you know,
in a couple of months, I'd like to check in
with you again. We're going to have, you know, see
if my twenty to thirty percent changes or if your
percentage changes.
Speaker 1 (51:34):
Yeah, so I'm officially at sixty and I will tell
you that an analysts that we know and I never
I don't think you do either. When they're on the
earning skulls. I just like to read the transcript and
I don't ask public questions. I will in any meeting.
But one of the analysts got up and Venna castigated
him in there, meaning he's like, you're only at seventy
five percent approval. We got to talk. Yeah, so I
(51:56):
was waiting, Yeah, that's exactly who was I just figured
he has his own PR department. I don't even be it,
but but but you know, I was wondering how many
times he's called you. I will tell you that that
you know, he pays attention to what everybody says. He's
aware of your number. I care to you. He and
Joe Henrix have too much censor people about that.
Speaker 2 (52:16):
It's interesting, all right, Tony. We definitely have gone over
our time a lotment, but this is a great conversation.
And like I said, let's check in a couple of
months and see where where where we are on rail consolidation.
Speaker 1 (52:30):
I'll do you know, any if any event happens. I mean,
I'm happy to talk to you. It's always a pleasure
to talk to you. So I'll do it anytime, whether
it's a couple of months, see where we are, or
because one of the things I just said wouldn't happen
happens on a Saturday, and you know, and we have
to talk about it.
Speaker 2 (52:44):
All right. Thanks, So much, and I also want to
thank you for tuning in. If you liked the episode,
please subscribe and leave review. We've lined up a number
of great guests for the podcast, so please check back
to hear conversations with c SWEET executives, shippers, regulators, and
decision makers within the frame markets. Also to learn more
about the free transportation markets, check out our work on
the Bloomberg Terminal at Bigo and on social media. This
(53:06):
is Lee Klasgas signing off and thanks for talking transports.
Host
Lee Klaskow
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