June 3, 2025 • 45 mins
The more protectionist policies out of Washington are creating a more uncertain backdrop for North American railroads and the broader freight markets. Yet the industry should be agile and resilient enough to navigate the volume volatility that has come with the ever-changing US tariff policies. 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 insights about the state of the industry and what might be ahead for railroads. Hatch also discusses regulations, growth opportunities, service levels, consolidations, labor relations, nearshoring among other topics.
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Speaker 1 (00:07):
Hi everyone, this is Lee Klasgow when We're Talking Transports.
Welcome to Bloomberg Intelligence Talking Transports podcast. I'm your host,
Lee Clasgow, senior freight transportation logistics analyst at Bloomberg Intelligence,
Bloomberg's en house research arm of almost five hundred analysts
and strategists around the globe. Before diving in a little
public service announcement, your support is instrumental to keep bringing
great guests and conversations to you, our listeners, So we
(00:30):
need your support. So please, if you enjoy this podcast,
share it, like it and leave a comment. Also, if
you have any ideas for a 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 onto our episode. We're delighted to have Tony Hatch,
an analyst consultant at ABH Consulting and a fixture within
(00:51):
the North American railroad industry. Tony has been a senior
transportation analyst on Wall Street for over twenty years, starting
at Sell Brothers, proceeding to Argus Painweber, and most recently
notat West Markets. Prior to starting his independent consultancy in
nineteen ninety nine.
Speaker 2 (01:10):
Tony is known for.
Speaker 1 (01:11):
His knowledge of the intermodal area where the various modes
of free transportation converge, on which he has held several
dozen specialized conferences. Recently, Tony has been providing not only
traditional institutional transportation research, but also providing due diligence in
other services to new forms of transport investments, such as
(01:32):
private equity infrastructure hedge funds in such areas as intermodal
rail maintenance and construction rail cars and three pls. He
has a research partnership with PLG Consulting and an equity
marketing partnership with CV Securities. Along with Progressive Railroading magazine,
(01:55):
he co founded, CO presents and leads Rail Trends, the
most apprehensive rail conference every fall in New York City.
Welcome to the podcast, Tony Lee.
Speaker 3 (02:06):
I'm sorry about the length of that autobiography that that
bio there. It's I'm really happy to be here. I
appreciate what you do and I appreciate your having me
my pleasure.
Speaker 1 (02:17):
I've always enjoyed talking to you throughout the years at
various you know, investor conferences, and you know, I really
appreciate your insights because you're probably this I don't say
this is as an insult. You're probably the oldest person
doing this right now, right because you've been doing it
for so long.
Speaker 3 (02:36):
I think that's right. You know, the other people that
are senior people that we could think about there were
actually the assistance of the people that were my peers
that have lasted you know, out there and it is
you know, it's one of the things you just point
out to made me think, was we used to running
each other at these investor conferences, and given all the
craziness of the last five to seven years, they've been
(02:57):
fewer and fewer, so this is great to catch up.
They used to be annual events that a railroad would
hold and investigature maybe every other year. And at CSX
last year the last time I saw you that was
the first one and I think five So that's unfortunate.
Speaker 1 (03:11):
Absolutely, So you know, why don't you tell us what
the state of the North America railroad railroading industry is
right now?
Speaker 3 (03:20):
Quiet anxiety? You know, I don't know where we are.
You know, when you all hear this, what will be
whether the world will be on the tariff you know,
trade war story, changes all the time. But one of
the problems railroads have is that they're in a derived
demand business, meaning that as we see the world changing,
they need to wait to see what their customer is
(03:41):
going to do. There's very little they can do but
to emphasize words like agility and resilience, as they did
in their last earnings calls, and they have approved their
service significantly off the bottoms of the pandemic recovery. That's
one thing they can control. But right now in terms
of and they maintain their guidance for earnings, but are
VeryE whereas a lot of other industries pulled it. But
(04:03):
they are, you know, wondering what the immediate future will
be and the long term they're going to be fine.
But I think one of the biggest problems the roads
have faced is the beginning in about January twenty twenty,
and that's an important date to remember. The railroads were
going to do with Keith Kreele of the CP case
is called pivot to growth. They'd spent the years of
the second half of the prior decade going through PSR
(04:26):
transformation and efficiency moves, and we're really willing and wanting
to test the growth potential out of this. They've come
pretty close to the end of the pure cost cutting
story as far as generating cash flow and whatnot, and
they really needed to grow the revenue side, and they
did that, you know, in the month and a half
before the pandemic started, followed by labor shortages, labor review,
(04:50):
East Palestine, trade War one. You know, now we have
Trade War two, a freight recession that has gone on
really since the end of twenty So you're seeing relevance
trying to grow at a time when they given that
they can't do it themselves, they need their customers to grow,
at a time when their customers are showing you know,
green shoots, but no full trees worth, no forest of growth.
(05:14):
And that's unfortunate. And we've now, you know, led by
government policy, may have another year, maybe longer, in which
we say, well, you know, they would have, but because
of the trade war and all the other the fact
that we may we're looking a little better today. But
maybe the trade war's lowers demand. It certainly looks like
it's extending the trucking recession. That's not good for the rails.
(05:35):
So where they are now is uncertain, and they won't
say it. They put on a very brave front. Keith
Crele probably the most, but I'd say somewhat anxious, right.
Speaker 1 (05:46):
And so you know you mentioned agile and resiliency. Do
you really think the rails are either of those things.
Speaker 3 (05:53):
I think over the intermediate to long term they're incredibly
resilient and agile and flexible. If you think about the
rail in the rough century that I've followed them, I
mean in the in the thirty years now that I
actually have they you know, they they were an industrial supplier,
industrial carrier. The automobiles here were manufactured. Now they're mostly
(06:15):
assembled with containers or trucks coming with parts. That was
a big change. The movement from you know, the Michigan,
Ohio down to the south and South US in the
you know, the Dixie States for automobile production. The move,
you know, the whole globalization move of raw materials and
finished products into containers is to showed a great deal
(06:35):
of flexibility. They're pivot to most recently crewed by rail.
You know when that was, when that boomed in twenty
thirteen fourteen. You know that within a year they were
able to handle that extra capacity. They are not very
good at doing it over over a quarter or two,
or over one piece of their system and not the rest,
because you know, labor is not as flexible as all that.
But over time, you know, actually, if you think about it,
(06:58):
you know, one of the big impediments of their growth
story for the last decade plus decade and a half
has been the reduction in coal. Railroads, you know, have
lower car loads because of that and a few other things,
but they haven't fallen apart, right. You know, coal was
what started the rail industry. They were powered by coal,
they moved coal, it remained in two thousand and eight
(07:19):
the biggest and most profitable component, and now, you know,
less than twenty years later, we barely talk about it.
In the short term, like the recovery from the pandemic,
they're they're the fact that they're tied to the ground
and that their labored or tied to the region, and
that they are big, somewhat cumbersome organizations, you know, shows
that they're not in the short term. But over time,
when things become obvious, they actually can allocate their capital
(07:42):
and their resources and pivot to you know, from you know,
industrial products, which are still important to intermodal which is
the growth opportunity, So yes and no, do answer your question.
Speaker 1 (07:54):
Right, And so you know, look looking forward, where do
you see growth coming from? Since obviously it's not really
probably going to come from con over the long term
and we've seen like a bump and call this year,
but you know there's a lot of factors into that.
But you know, longer term, where is the growth going
to come for the rail industry in your opinion?
Speaker 3 (08:16):
So you know, we're in a very uncertain phase about
where where will production in North America come from? Where
where will which ports are going to win? You know,
so you couldn't ask that question at a more sort
of difficult time. But in the fullness of time, innermodal
is going to be the leader. There are there's sort
of two or three areas of growth potential for railroads.
(08:37):
One is they have yet to recapture share they lost
with their self induced labor shortage driven service problems in
twenty one and into twenty two. So for example, in
areas like paper, I mean they have a one time comeback,
they have the services come back, the share hasn't Because
if you were a shipper that had figured out how
(08:57):
to pivot the truck, if your tradition on a rail
shipper like a paper company whose plants are built on
rail spurs and have bays that are fit box cars.
If you've been able to pivot the trucks, why would
you change now when trucks are giving the product away
as you write about it. Maybe I'm exaggerating there, but
that will happen. The second thing is I think they
(09:18):
have great opportunity recapture share in domestic intermodal. They began
to They peaked and share in twenty eighteen through problems
of their own making and global problems like the pandemic
that share dropped at port share shift. They've began to
recover in the second half of last year. They're kind
of stable now as the freight percision goes, but they
(09:39):
have great opportunity to grow that business, and their service
level suggests that when truck capacity shrinks, they will grow
that business. The third place they could grow is something
they've always done, but then now they're talking about more,
which is industrial production. I mean, sorry, industrial development. I
spent a lot of time talking about it. That's always
an opportunity, and I would combine that with sort of
(10:01):
new industries battery, you know, which may be delayed by
the current political situation. But certainly there was a lot
of talk last year for the twelve months prior about
new energy opportunities to carry rail freight as well as
the power rail freight. But so, you know, industrial development
and the problem the success in c Sex is highlighted
(10:22):
that other carriers are talking about. You know, if you
see near shoring, you know, if you see reshoring, railroads
will play a big role in that. I'm not sure
right now that we're going to see major capital decisions
or supply chain decisions by enormous industrial consumer companies until
they figure out what the world is really going to be.
But you know, Mexico fits into that. Mexico is both
(10:45):
a intermotial play and an industrial development play, and the
connection of the whole NAFTA or USMCA economy, I think
is a you know, tremendous opportunity for rail and it
may be sort of on hold now, but it's not.
Speaker 1 (11:00):
Going to go away, right, you know, absolutely, And it's
harder for rails to compete because diesel prices are pretty
low and truck rates are low, so the dollar savings
really aren't that compelling. And at the end of the day,
A chuck tends to provide better service because they can
go door to door.
Speaker 2 (11:17):
For a rail, the freight needs to be touched a
couple of times.
Speaker 3 (11:20):
What I hear is you know, yeah, railroad X, I
see that you're running. You know, back to trip plane
compliance levels of ninety percent. You know, you're back to
where you are. Maybe you're better, But why would I
you know, at this point, at these prices, when they
pick it up right where I want and take it
directly where I want, why would I take a chance?
Keep me informed? You know you we'll be back to you.
(11:42):
Just I'm not going to do it now.
Speaker 2 (11:43):
Yeah.
Speaker 1 (11:44):
So for those who know that the rails, the large
class one rails, they've since deregulation nineteen eighty, the industry's
consolidated pretty significantly. There's two players in the West, two
players in the East, and the Canadians and so on
that Tony, you know, is there an area or is
there a network that you think is better positioned for
(12:06):
the growth that's out there?
Speaker 2 (12:07):
Longer term?
Speaker 3 (12:08):
Well, you know it the first fiftory or what is
what are the goal of the current trade you know, positions?
When does the administration want I mean, certainly the Canadians
run transcontinental. They run the fastest services into the Midwest
from Asia. Maybe that won't be as important in the future.
(12:28):
The Western carriage traditionally have had the growth. There is
huge intermodal opportunities. In the East. You have lower intermotial share,
but that when trucks get tight, that's an opportunity. In addition,
the two Eastern carriers have the Southeast, and that's where
a lot of you know, if you're going to reshore
or even just in the normal course of business development
in normal times for getting any big changes. You know,
(12:49):
a lot of stuff is happening in Alabama and for
you know those so everybody has a piece of a
growth story. Depends on how the cards shakeout. And of
course both Canadian railroads also run like a tee down
into the into the Gulf area. One goes into Louisiana
and then CPKC goes through Texas all the way to Mexico.
So you know, if you restore, we're gonna we're gonna
(13:11):
renew and refresh, I hope, and not cancel us MC
A two. It's due next year, it'll probably happen this year.
You know, if we restore the North American continent as
an economic fortress and forget about fifty per state and
other things like that. Then you know, the opportunity to
move through you know, Mexico, through Texas into the Midwest
and in the southeast and linking these growth areas is
(13:31):
a great opportunity. I'm not sure it was looking good
and now everybody's sort of sitting on their hands. That's
the anxiety part that I meant.
Speaker 1 (13:39):
Right In Canadian Pacific, Kansas Southern as the most exposure
to that cross border business with Mexico, followed by Union Pacific.
Speaker 2 (13:49):
You know, you mentioned you know in the.
Speaker 1 (13:51):
East, you know, one of the one of the challenges
for the East because the truck competitive market there's a
lot shorter length of hall. Can you talk about how
length of hall comes into play when a rail is
trying to compete with with another mode.
Speaker 3 (14:03):
Well, railroads are actually almost always been really good at
the long haul part of their business. Who they're harder
when they at terminals in airline transfers. You know, the
timing and the coordination causes friction and sometimes that leads to,
if not failure, then delay. What railroads do really well
is take a loaded train and move it a long distance,
(14:24):
and so they're very competitive in double stacked. Nature of
bringing containers from LA to Chicago is the classic lane.
There are other ways that are competitive in that, but
that's one that's that's just not just imported, it's reclassified domestic.
They're double stacked. You know, they run I'm sure from
terminal to terminal. BNSF runs ninety eight percent on time.
(14:46):
Does that door to door on time? No, although they've
got got pretty qig numbers right now. So the longer
the haul, the things that railroads do well automatically are
you know, longer haul because that really also plays to
their fuel strength, their labor. You know, it's a two
man crew right now, you change it maybe ten times
suites twenty people can run three hundred trucks across the
entire West versus the truck drow. So labor, fuel emissions
(15:10):
when that matters again. You know, if you have density,
if you have weight, railroads do really good at haul
in coal because trucks, you know, you need so many
trucks to carry the same amount as a railcar. Those
are the natural advantages. I think the railroads also have
an advantage in their infrastructure, which they paid for as
opposed to the highway system, and that you would think
is a disadvantage, but that allows them to make capital
(15:32):
decisions quickly, and their infrastructure got to be rating from
the American Society of Civil Engineers in the highway consistently
gets a D. So the fact is that their infrastructure
could shape as a plus and that adds to their
long haul bit. But one thing we haven't talked about
as short lines. I follow them the Class one railroads
the six, and I followed being a saf even though
(15:52):
it's not publicly traded, that's the sun. And then there
are all these moons, and the short lines do that
first and last mile well and a great cooperation. Being
a Class one and a short line can often replicate
pretty closely, if not one hundred percent, the door to
door service a truck can do. And I want to
point out the union specific of all carriers has signed
(16:13):
two deals Eugene organ and Kansas City, Missouri to work
with you to turn over their terminal and their last
mile business to a short line to do what they
could do best. And I think that's a real that's
a real glimmer. That's a really good sign in a
very what's been so far a very difficult year.
Speaker 2 (16:30):
But are they doing that to lower their O R?
Speaker 1 (16:33):
Is this like a kind of like a shuffling of
the deck if you well, because you know, at least
as far as i'm I understand it, those sort of
movements tend to have higher R. And o R is
an operating ratio for those that don't know, an operating
ratio is the inverse of an ebit margin. So the
lower the number, the better the rails. UH really have
(16:56):
the ability to operate below sixty, which is you know,
a highly profitable industrial company. So I'm sorry about that
tangent there, but you know, is some of that do
you think because they're looking to kind of tweak their R?
Speaker 3 (17:11):
So yes, you know the operating ratio, and there's what
I call the cult of the operating ratio. BIL rights
can truly drive their cost down, so when they're not growing,
shorter term investors can demand and often get managements to
change or to or to change policy to in fear
of change, to drive cost down and cut what I
think might be as much a muscle as fat. In
(17:34):
this particular case, I think you accomplished both I mean,
as Keith Crile of CPKC would say, you know, the
o R is the outcome of the process, and if
you do things well, you know you should be able
to grow and reduce your o R or increase your margin.
So up as definitely the case of Oregon also talked
about headcount reduction because they're going to transfer, there'll be
(17:55):
somebody else's, you know, Genesion and Wyoming's employees are not theirs.
That really was a political shot across the bow at
the labor Union says that we begin to think about
the next amount of labor. That was a calculated jab
from CEO Jim Venna because fifteen people to the Mighty
Union Pacific is like the change you can find in
your couch, right. So I don't think it's OAR driven.
(18:18):
I truly think it's service driven and growth driven. There's
been other cases that CN has turned some business over
in Louisiana in a similar way a switching way to
a Watka which is the second largest trotlet holy company,
and they grew in one year their total car loads
by thirty percent, allowing creating a pre block train to
allow CN to do what they do best which is
(18:39):
go terminal the terminal over long distance, and I think
it's a win win. It may not work everywhere, it
may get resisted by labor, they may be political ramifications,
but the UP is trying it twice. And I think
they're doing it for service. They got beaten up by
the STB in the past for their first and last
mile failures under the prior leadership, and I think this is,
(19:00):
you know, a way to I mean that service should,
to quote the late great Pat Onspier of Kansaity Southern
service begets growth. Kind of an awkward phrase, but I
love Pat and so I really think that in this case,
Jim Vening in pacifically using this to see if they
can grow business that would be highway driven, they'll accept
a better margin.
Speaker 2 (19:17):
Oh yeah, of course, of course.
Speaker 1 (19:19):
You know you mentioned regulators, the Surface Transportation Board and
and and regulation. Are there any regulations in Congress or
at the STB that you're paying close attention to that
you think could be good or bad for the industry.
Speaker 3 (19:35):
So I think the new chairman of the STB, Patrick Fuchs,
is incredibly smart. He's you know, pro rail industry. That
doesn't mean he doesn't look out for shippers. I think
he's going to be fine. I don't see. I think
that we're sort of past where it past peak STB
power during the merger, a merger of any kind that's
they have full power. I think some of the rules
(19:57):
like reciprocal switching will be more market oriented. I don't
think so. I think the SEVN anyways will get out
of the way of growth. I don't think they were
really a huge impediment before we could talk about the
sort of being a rise in m and a conversation
which I think is mostly that just chatter out there.
But the scb's in fine hands and will work with
(20:17):
railroads and shippers to see more transparent, quicker solutions. The
other big regulatory agencies the Federal Railroad Administration, which regulates
safety and was a huge impediment over the prior four
years to any technological advances that already exist, such as
autonomous inspection of track or more even more complex of
(20:39):
railcars that does the job, you know, ninety percent better
than the human eye freeze that capacity. You used to
have to walk the length of the train and eyeball
the cars to see that everything was right. Imagine doing
that in the rain and the cold, and the packers
lost and all that kind of stuff that had been
all forestalled by the prior administration. The biggest win and
(21:00):
the change administration for railroads, and there are a lot
more losses, but the biggest win is a changeover in
the f RA which should allow the application of already
existing technology, which I think will be a big help,
uh in terms of you know, reliability, uh, resiliency, you know, detection, safety,
et cetera.
Speaker 1 (21:20):
Yeah, and some of these technologies that can be like
that movie The Minority Report where they find defects before
they happen, Yes, and so they can they can they
can fix them before it becomes an issue, you know,
which is uh, you know, a win win really for
the rails and for the workers because it's a safer network,
and then also for shippers because it's a it's a
(21:41):
more I guess resilient network doesn't.
Speaker 3 (21:44):
Break down, it doesn't, you know. East palscene was an anomaly,
but you know, if it brave, if you have to
do this work and change out of car that you know,
you're probably blocking crossings, you know, et cetera. There's there's
not really a loser there and the idea is not
this isn't a job reduction effort. It really should be
a win win. I think there was a very myopic
and simple minded leadership at the FRA before and I
(22:06):
think that's all going to change. And I think that's
a huge positive. You know, I think the STB will
remain a neutral body, maybe more positive bent uh. And
you know then there's trade wars and all other things.
Speaker 2 (22:20):
Yeah, so what's your view on one man cruise and
one person cruise?
Speaker 3 (22:25):
So the in the hearings this week for the new
leader of the FRA, he perroted the dot secretary saying
that you know they support the fire regulation on mandated
two bank cruise the United States. We've seen it where
it works, you know, with no man cruise in Australia.
The technology exists today. I know publicly, the appetite isn't
(22:46):
there for that. It is ironic that it's acceptable to
test autonomous cars and trucks on public land, on private
land right where people do trespass but they shouldn't. So
but getting to one man crew, the railroads dodged a bullet,
or successfully lobbied away a bullet that was going to
potentially be legislated, and that would have made it very
(23:06):
hard to break down. The number of people in a
train is usually a negotiated thing, and if you could
do man on the ground, you actually get people to
have more reliable hours. I have a friend who's a
major league umpire. When he does, you know, comes into
New York to do replay, he gets these hours and
he doesn't have to wait for the game to be over.
He's got five to nine. If you can do that
(23:28):
for the person in the pickup truck, you know. And
in the East there's so many opportunities to that because
shorter distances, many more intersections with roads. You know, that's
a disadvantage to running a train, but it's an advantage
to keeping a train fresh. I think we will get
this removed from regulation and then negotiated. It'll cost them money.
When I started railroads at five people in the locomotive,
and literally three of them did nothing. But they held
(23:50):
on to those jobs for a long time, and when
they finally got the they negotiated the right to remove
them at quite a hefty payout. You know, hundreds of
millions of dollars. Charges were taken the ROI was great,
and the stocks did really well because of that. But
you know, this isn't like they can't be just produced.
You know, we want to bring it back into the
negotiatoration room. The one complexity is that you have two
(24:12):
different unions representing the two people in the cab now,
and you know, both of them don't like each other.
And the other point I want to make is this
is not a typical Republican administration. You know that might say, well,
we're pro management. You know, it's supposed to be pro
labor because the Teamsters Union is a major ally of
the Trump administration, and the Teamsters Union represents locomotive engineers.
Speaker 1 (24:33):
Right, yeah, I know it's you know, the technology is
definitely there, but is there an operational reason to have
two people?
Speaker 3 (24:42):
The operational reason for the second person is to help
the first and to do things like go down and
walk the train if something's wrong, to look at the
defect that wasn't caught in advance. Sometimes there's some signaling
to be done by hand. There really isn't a reason
for that second person. I mean we fly airplanes with one, right,
I mean commercial plates. There isn't There really isn't a
(25:06):
reason part of the issue is that political issue. The
brakemen and the conductor conductors used to be the most
important person on a train, going back into the steam era,
they ran the train, the engineer ran the locomotive. Those
are two different unions. One is a Teamster, one is AFLCIO.
The fight is who's going to be that person. I
think the Team Serve engineers have won that fight politically,
(25:28):
but that makes it very difficult because one union would
bear the brunt of the reductions right and the other
would not. I don't see that happening at any kind
of investment cycle. I think you might get a test,
you know, a waiver to use it on certain regions,
and then we'll see that it's safe. There is no
safety reason, there's no data to support a second person
having anything. However, it's a very easy sound bite. They
(25:51):
only had one person, you know. I mean, it's right,
but only one person is on the throttle and it's
on a fixed track, right, So you know, the political
aspect is something that rails have to, you know, consider,
and the unions have been very sophisticated in their approach
to this situation. Going back to the labor round of
twenty twenty.
Speaker 1 (26:11):
You mentioned earlier you were talking a little bit about
you mentioned consolidation. Do you think there's any further consolidation
of the class ones or do you think we're done.
Speaker 3 (26:21):
Most people thought after CP won the fight for Kensity
Southern become CPKC, that that was the last merger. I
wrote that. I still think it's true. But in the
last six months, starting with the presentation at Rail Trends
by Oliver Wyman's Adrian Bailey, who said reilroads can no
longer save the way to prosperity, we're pretty close to
the end of that story. They've got to grow and
(26:42):
if they can't grow, they either shrink or they merge.
So that started people thinking, and some of the thinking was,
you know that there are there is friction at inner line.
You got to meet two schedules. You have to have
two different decisions on capital to make more capacity at
the interline. You have lots of these issues that you
could get saved days transportation at an East West hub
(27:03):
of Chicago. Mostly that there's business that's five hundred miles
on either side of the Mississippi River that no railroad
wants to start because the revenue split wouldn't you be fair,
or if it's three hundred and seven hundred, so there's business,
they forego. Most of the CEOs in the rail business
agree with that. They think railroads would be better if
you had four that is, two American railroads cross country.
(27:26):
But most of the CEOs also think that the risk
of trying to prove the STV rule, which is you
must not just maintain competition, but enhance competition, that nebulous
and ill defined rule means that shippers will come with
their you know, their knives out at any hearing and
take away I think much of the benefits. That's Tony's opinion.
(27:49):
I think a lot of the railroaders think, you know,
until the shippers want this, they're not going to get
it passed. The other thinking behind this was five of
the six railroad CEOs are not his historically tied to
their company. Historically where you never change companies, and the
head of Norfolk Southern grew up at Norfolk Southern. That
is not the case today, and there's been a little
(28:09):
growth in market capital of the railroads did extremely well
this century till about twenty nineteen, and since then it's
been you know, a tougher go for lots of external
and internal reasons. And lastly, they was thinking that this
new administration might be more forgiving. But the head of
the Department of Justices, any trust division, is very anti
(28:30):
big company, very anti consolidation, and has actually used the
phrase rail baron in her first speech. So I don't
think the you know, I think a lot of the
thinking that people had, the magical thinking that Wall Street
had and that railroad leaders had in the fall and
around the time of the inauguration, was we've got a
traditional Republican administration that's going to allow certain things to happen,
(28:52):
and we do not have that. We have you know,
they're pro some big business, but they're not pro big
tech for example. You know, they're attacking for consolidation reasons.
So I don't I think it may not happen. But
as I've always said about this, uh, if I'm wrong,
I'm not a little wrong. You know, if I'm wrong,
it's gonna be too read. It'll be big, it'll be
(29:12):
a big fight.
Speaker 1 (29:13):
We don't think there's like a natural merger between one
of the Canadians and one of the US carriers.
Speaker 3 (29:19):
So historically, when you looked at the possibility of future consolidation.
You were going to put you know, the six into two.
So right now we have a harder border in Canada,
right the fifty first state of You can't see this
out there, but I air quoted that. Right there's a
rule that CN must be headquartered in Montreal. I think
(29:39):
you'd run into National you know, National Pride ten or
fifteen years ago might have been subsumed by a business interest.
I'm not sure that's the case now. So I think
the you know, the the natural fit would be like
b n NS Union Pacific CSX. I think there are
growth potentials and some cost productions, you know, you don't
need two CFOs, et cetera, that would come out of that.
(30:00):
But when you open the books, you'd have major customers.
Some of them have never been involved before because they
had other fish to fry in d C. I'm thinking
about Walmart, you know, I'm thinking about ups. These are
these are a lot of clout, a lot of political juice,
and they have the opportunity to ask for whatever they want,
and they may say it's in their fiduciary interests to
(30:23):
demand more access and things like that. You know, I
don't think since the reals don't know what would happen,
I'm not sure they're willing to take the chance on
that for these benefits. After all, they still have a
lot of benefits right in front of them once we
get to a politically stable situation.
Speaker 1 (30:40):
And so you know, we've been talking about the long
term here for a while, so kind of like little
short term conversation or conversation about the short term. You know,
how is this all the tarrifs that's going on. How
is that impacting not only rail volume, but how is
it impacting you know, operations.
Speaker 3 (30:59):
So so far it hasn't really been impacting operations. You
have some specific issues like at CSX and or Howard
Street Tunnel, but operation and a winter that was sort
of normalist but harsher than the previous one. So comparisons
in February are tougher, but rail operations are going pretty well.
We saw i think the last surge last month and
(31:19):
into this month of international intermodal as people were moving
supplies ahead of these tariffs that now are delayed. So
the key phrase and rail analysts and you know this league,
there's always like a hot phrase, and then everybody says
it and I'm only to say it now and put
air quotes on it. And it is about air that
we're seeing an air pocket coming right because nothing moved,
(31:41):
you know, And it takes two or three It takes
two weeks to a month, you know for that nothing
coming out of China to become nothing hitting La and
getting nothing getting on a train. Now we have a
ninety day you know, reprieve, which means everybody's going to
jump the shipping to try to get suppered. Back to
school of Christmas, railroads do better. They're an assembly on
They're an outdoor assembly line if you give them even flow.
(32:04):
One of the key Hunter things that Hunter Harrison, the
late creator of Precisions going to railroading. He would try
to use price to say, don't give me everything Thursday Friday.
You know, I'm gonna you get a pay dollar twenty
on the dollar for that. I'll charge you eighty cents
on Monday. Because we can make the benefits of moving
stuff all the time. You can. You know, your crews
show up and the train is there. What we may
(32:26):
be creating, I think there's more capacity than the recovery
from the pandemic. But this stop and start thing is,
you know, in a short way is a mini version
of what the pandemic caused. Everything stopped and then everybody
wanted a peloton, and the railroads did really well for
a month or two and then ran out of you know,
labor capacity, and you know, et cetera. And the ports,
(32:46):
you remember the Port of La look like they were
doing a D day, you know, a stage version, one
hundred ships offshore, et cetera. So, you know, I worry
a little bit about the operations because of this stop
and start. But what happens at the end of ninety
days If people aren't going to make major decisions, they'll
make short term decisions. I need toys, I'm gonna tell
(33:07):
I need toys in marisk boxes in the La Long Beach.
I stopped it. Now get everything you can, you know,
So it's here before the ninety days are up.
Speaker 1 (33:16):
And do you think that the industry kind of learned
their lesson from the pandemic with like you know, of
furloughing too many people and so do you think they're
they're they're they're well resourced for this.
Speaker 2 (33:26):
Surgeon demand that could be coming.
Speaker 3 (33:28):
Well, So you raise a really good point. I think
the industry rit hole because the whole supply chain industry.
I think there's more capacity at the ports. I think
there's more capacity in trailers. You know, there's obviously excess
truck capacity. So the industry as a whole is better
prepared in terms of one of the things that they did.
Railroads historically in my career, were really good at beating
(33:49):
street estimates in a known downturn. If you knew two
thousand and eight, you know, well, great financial recession. You
know it's hurt you furlow people, and you could you
have a much more flexible cost base people get credit for.
They could beat it. Everybody would cut their estimates by
fifty percent and they would be down ten or twelve
and the stocks should actually do well. I think that
(34:09):
was a very short sighted thing then, but it's extremely
short sighted now because when they did that in the past,
up through the two thousand and eight nine period, eighty
percent of the workers came back, and when they did
it in the in the pandemic, about thirty percent came back.
And remember this is a network. If you have a
shortage in Atlanta, that'll back up all the way to
(34:30):
La or vice versus. So you know, it was sort
of a rolling shortage, and then every railroad on its
own said, oh my god, we've got to get get
out there and hire people. And that's you know, a
long process of hiring, training, and putting in the field.
You saw safety numbers de spikee the wrong way because
you had inexperienced crews, not bad ones these pals was
an anomaly, but you know, a yard derailments because you
(34:53):
had new people moving cars. So I think reilvants should
learn that through a cycle. To win two quarters of
street acceptance and give it up on the back end
with unhappy customers, higher safety incident rates, et cetera, is
a poor way to do business. That being said, the
cult of the operating ratio is out there, the short
termers out there. If you don't grow, they will put
(35:14):
pressure on managements to cut costs, and that's the easiest
lever to pull. So I worry about it. We have
already had layoffs or nots furloughs at CN which had
previously basically had a no furlough you know promise not
a lot one hundred and seventy five. But you know,
if this if this uncertainty and we hit the air
(35:36):
pocket and nobody's expanding. A chemical business goes flat and
are a great export green business goes down because China's
not buying. You might see that lever pulled again. I
hope not.
Speaker 1 (35:47):
Yeah, you know, so we talked about, you know, rail trends.
A couple times we mentioned rail trends. So that's uh,
you know, if people forgot it. This is a you know,
a long podcast. We're talking for thirty five minutes now.
So Rail Trends is kind of like a conference that
happens every year in New York. What were the big
takeaways this year?
Speaker 3 (36:07):
Well, so, yeah, happens every November in New York, and
it's I'm trying to do it very differently than a
typical analyst or investor conference. We have a no CFO
rule because I don't want the message. I mean that's
been broken obviously, but basically the idea is I don't
want the message. I don't want, you know, the spin.
I want to talk to people who do try to
set it for me. And this past year, Tracy Robinson
(36:28):
a CN said it was the Woodstock of rail conferences.
I love that. That's gonna be on my my you know,
epitaph whenever that happens.
Speaker 2 (36:35):
There was a lot of mud and acid is that what?
Speaker 3 (36:37):
Yeah, and a lot of nudity. No, but I don't know.
It's very eclectic and we try to appeal to a
variety of people from investors to you know, to infrastructure guys,
to to lease in companies to railroads themselves. We're always
pleased that most of the people stay after they speak.
They don't you know, hit a couple of one on
ones go. The theme last year was really a focus
(36:58):
on growth and you know, yet we now see what's happened,
you know, to the outlook. They really was trying to
reassurance that we appreciate that we you know, getting to
a sixty one oh r with the new labor rules
that might be pretty close to what the base industry
and I'm taking NSMB and sep out. You know that's
(37:18):
close and we need to grow and I think, you know,
Jim Lenna talked about buffer and Steff one of the
best speaches I told you at Adrian at Oliver Wyman
talking about, you know, they must grow because we've done
the end. Mike Miller, who was the CEO of Genesee
and Wyoming the largest shortline Holy company. They own one
hundred and ten shortlines in North America. They're owned by Brookfield.
He said that what the railwatively need is a higher
(37:41):
sense of urgency. You know, he is a member of
rail Pulse, which is his consorting to do add visibility
to the rail car chain. Railroads don't have the visibility
that FedEx has now they interline. It's more complicated. But
he said, it's just not good enough. We need to
pick the pick up the pace. And I think there
was a really healthy optimism that we had. New management
said almost all the railroads we had restored problems that
(38:03):
existed at Norfolk Southern and the quarter flight and being
a saf and we were we had momentum, and we're
moving the right way and adding these new services like Quantum,
which was introduced at rail Trands two years ago. That's
the Bings F JB. Hunt super partnership. So we left
rail Trends with a really on on a really high note.
Then we got to the inauguration.
Speaker 2 (38:23):
Yeah, I know, I know, you don't do like my
whole cell recommendations.
Speaker 1 (38:26):
Right, yeah, you go, But is there is there like
a railroad that you think has the most growth opportunities
versus its peers.
Speaker 2 (38:34):
From from a from a volume standpoint, you know, right now.
Speaker 3 (38:37):
I would you know it would be Birchhier Hathaway's being
a SEF maybe, but you know that's not a piece
of it. But I would say, you know, railroads tend
to do it. Historically, when I could have these ratings,
they moved as a group. Now they would be leaders.
And and it's one of the reasons that people attack
intermodal because intermodial has a higher o R or worse margin,
but it could be a very strong contributor to return
(38:58):
on investment capital. The first decade of this century there
was the rail renaissances they called it, and all the
stocks out performed the market by a lot. But the
two best were Canadian National, which did it through improving
its margin under Hunter Harrison. The other one was being
a saf which did it by doubling its innermodal. So
there are multiple ways to skin a cat. And if
you believe, as I do, that intermotal will be the leader,
(39:19):
then I would say bn NS. But right now the
best performing road is the Union Pacific. If you restore
the USMCA story, then I would you know the clarity
behind the three part economic fortress that is North America.
Cpkc's got a compelling story. CN always manages to find
growth because they run themselves so well. So you know,
(39:42):
if you had me pick one, now I would pick
a Union Pacific. But you know, it's just because of
the uncertainty if you're playing defensively. The two Eastern American
carriers have the least growth exposure. But one thing I
want to point out is if you read about this,
and somebody's listening looks into this, and the Association American
Railroad says that railroads have a thirty eight percent exposure
(40:04):
to trade. That's all trade, not just China. That's a
significantly underrepresented number. It doesn't include inputs like fertilizer that
makes corn that goes to Mexico, or transodent boxes. It
doesn't include the Canadian or Mexican carriers at all, and
it doesn't include the growth plants. And all of those
Eastern carriers had growth plans to connect with CN or
(40:25):
CPKC into the Southwest and into Mexico, you know, so
their futures were going to be more trade weighted, and
you put their futures on hold, but defensively, you know,
I would look to Norfolk Southern and its restoration of
its margin under Mark George and John Orr and say
they're going to be the least impacted by whatever the
whims of Washington DC are in the short term. Their
(40:48):
volume should be least impacted in the next twelve months.
But I don't like that, you know, for me, i'd
look I'd say Union Pacific because I'm looking beyond it.
But I think they're all they all have good plants.
We just need the world to change more more and.
Speaker 1 (41:00):
More of a macros story. So is there anything like
on your radar that you're really looking at or or
kind of waiting to see the impact on that that
could impact the freight transportation markets.
Speaker 3 (41:14):
So one thing that just happened, I don't know the
full detail, is that railroads have been trying to achieve
new culture and a labor piece led by Joe Henrich
and CX and we were down there and he really
the last labor round was a normally scheduled round and
went all the way to Congress, which is part of
the way the rules often play. I've seen it before.
It got written up in the front pages like it
(41:34):
was this disaster, like workers were walking off because of
the of the working missions. It was that's complete. Well,
it was wrong, and really it was just a normal round.
It was of negotiating amount of money because we're in
a capitalist society. However, it did lead to hard feelings.
There were shortages because of the you know what happened
in the pandemic response and whatnot. And the railroads, led
(41:56):
by c Sex Joe Henrick, have made the attempt to
change that and ONEX is his big effort and going
to town halls and being a public face and sort
of saying we're one team and a lot of that.
People think of it as soft and whatnot. But the railroads,
with the exception of UP, have signed roughly forty percent
of their labor force to contracts now for the round
(42:17):
of negotiations that is really beginning now. They would last
usually three years, right, we would usually in three years
now get down to signing contracts. To the fact that
they've got forty percent of the workers done is a
very positive sign. And then CSX this week signed the teamsters,
the locomotive engineers. That's a huge breakthrough because the teamsters
were the most were calcil trips tied to the administration.
(42:39):
They didn't want any change. They don't you know, they
were the tough guys that you know, they were the
tough guy in the bar. And the fact that they
signed with CSX means that, you know, Joe Hendrix one
CSX culture change, magic beans, you know, have meaning if
you can restore I mean, as he says, and Mark
George and has said, people used to line up for
(42:59):
these jobs. Roughly, you know, I think the highest paying,
you know, blue collar union jobs doesn't require college education,
requires trading. You know, these are jobs that people lined up.
They were so sought after generations went into it, your
kids went into it, and then after the pandemic, you know,
they had to go out and advertise and you know,
(43:19):
it's sort of like truck fibers have to So we
could have seen a major labor breakthrough. I mean, I
think when we look back at this year, we're going
to say technology change because the FRA and maybe labor
breakthrough change. You know, culture change. You know, it'll always
be frictious because somebody pays somebody and somebody takes the
money and they're going to argue about how much. But
it doesn't have to be war.
Speaker 1 (43:39):
Yeah, I think to your point, I think Joe has
been transform transformational down at CSX, and it's always nice
to see on LinkedIn when he's giving an employee a
pickup truck.
Speaker 2 (43:49):
Yeah, pickup truck.
Speaker 3 (43:51):
Yeah, what fifty Although he had said when we were
on that trip together, I said there were a couple
of times when they couldn't find an employee to give
it to. That was for a technic perfect attendance. And
you know the paid sickly that they want. I mean,
if you see some of their charts that people just
can now leave without saying a lot in advance, and
things like the Alabama Auburn game they now plan around
(44:11):
it because everybody gets sick that day.
Speaker 1 (44:14):
Right, All right, Tony, we're rounding out the end of
our time here, So I really want to thank you
for your time and your insights today.
Speaker 3 (44:23):
Oh I joy talking to you anytime about anything, but
this was terrific. Thanks for having me on it.
Speaker 2 (44:28):
All right, and I want to thank you for tuning in.
If you liked the episode, please subscribe and leave a review.
Speaker 1 (44:33):
We've lined up a number of great guests for the podcast,
so please check back to hear conversations with c SPEE executives, shippers,
regulators and decision makers within the freight markets. Also, if
you want to learn more about the freight transportation markets,
please check out our work on the Bloomberg Terminal at.
Speaker 2 (44:48):
Bigo and on social media. This is Lee Glasgow signing
off and thanks for talking transports with me.
Hi everyone, this is Lee Klasgow when We're Talking Transports.
Welcome to Bloomberg Intelligence Talking Transports podcast. I'm your host,
Lee Clasgow, senior freight transportation logistics analyst at Bloomberg Intelligence,
Bloomberg's en house research arm of almost five hundred analysts
and strategists around the globe. Before diving in a little
public service announcement, your support is instrumental to keep bringing
great guests and conversations to you, our listeners, So we
(00:30):
need your support. So please, if you enjoy this podcast,
share it, like it and leave a comment. Also, if
you have any ideas for a 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 onto our episode. We're delighted to have Tony Hatch,
an analyst consultant at ABH Consulting and a fixture within
(00:51):
the North American railroad industry. Tony has been a senior
transportation analyst on Wall Street for over twenty years, starting
at Sell Brothers, proceeding to Argus Painweber, and most recently
notat West Markets. Prior to starting his independent consultancy in
nineteen ninety nine.
Speaker 2 (01:10):
Tony is known for.
Speaker 1 (01:11):
His knowledge of the intermodal area where the various modes
of free transportation converge, on which he has held several
dozen specialized conferences. Recently, Tony has been providing not only
traditional institutional transportation research, but also providing due diligence in
other services to new forms of transport investments, such as
(01:32):
private equity infrastructure hedge funds in such areas as intermodal
rail maintenance and construction rail cars and three pls. He
has a research partnership with PLG Consulting and an equity
marketing partnership with CV Securities. Along with Progressive Railroading magazine,
(01:55):
he co founded, CO presents and leads Rail Trends, the
most apprehensive rail conference every fall in New York City.
Welcome to the podcast, Tony Lee.
Speaker 3 (02:06):
I'm sorry about the length of that autobiography that that
bio there. It's I'm really happy to be here. I
appreciate what you do and I appreciate your having me
my pleasure.
Speaker 1 (02:17):
I've always enjoyed talking to you throughout the years at
various you know, investor conferences, and you know, I really
appreciate your insights because you're probably this I don't say
this is as an insult. You're probably the oldest person
doing this right now, right because you've been doing it
for so long.
Speaker 3 (02:36):
I think that's right. You know, the other people that
are senior people that we could think about there were
actually the assistance of the people that were my peers
that have lasted you know, out there and it is
you know, it's one of the things you just point
out to made me think, was we used to running
each other at these investor conferences, and given all the
craziness of the last five to seven years, they've been
(02:57):
fewer and fewer, so this is great to catch up.
They used to be annual events that a railroad would
hold and investigature maybe every other year. And at CSX
last year the last time I saw you that was
the first one and I think five So that's unfortunate.
Speaker 1 (03:11):
Absolutely, So you know, why don't you tell us what
the state of the North America railroad railroading industry is
right now?
Speaker 3 (03:20):
Quiet anxiety? You know, I don't know where we are.
You know, when you all hear this, what will be
whether the world will be on the tariff you know,
trade war story, changes all the time. But one of
the problems railroads have is that they're in a derived
demand business, meaning that as we see the world changing,
they need to wait to see what their customer is
(03:41):
going to do. There's very little they can do but
to emphasize words like agility and resilience, as they did
in their last earnings calls, and they have approved their
service significantly off the bottoms of the pandemic recovery. That's
one thing they can control. But right now in terms
of and they maintain their guidance for earnings, but are
VeryE whereas a lot of other industries pulled it. But
(04:03):
they are, you know, wondering what the immediate future will
be and the long term they're going to be fine.
But I think one of the biggest problems the roads
have faced is the beginning in about January twenty twenty,
and that's an important date to remember. The railroads were
going to do with Keith Kreele of the CP case
is called pivot to growth. They'd spent the years of
the second half of the prior decade going through PSR
(04:26):
transformation and efficiency moves, and we're really willing and wanting
to test the growth potential out of this. They've come
pretty close to the end of the pure cost cutting
story as far as generating cash flow and whatnot, and
they really needed to grow the revenue side, and they
did that, you know, in the month and a half
before the pandemic started, followed by labor shortages, labor review,
(04:50):
East Palestine, trade War one. You know, now we have
Trade War two, a freight recession that has gone on
really since the end of twenty So you're seeing relevance
trying to grow at a time when they given that
they can't do it themselves, they need their customers to grow,
at a time when their customers are showing you know,
green shoots, but no full trees worth, no forest of growth.
(05:14):
And that's unfortunate. And we've now, you know, led by
government policy, may have another year, maybe longer, in which
we say, well, you know, they would have, but because
of the trade war and all the other the fact
that we may we're looking a little better today. But
maybe the trade war's lowers demand. It certainly looks like
it's extending the trucking recession. That's not good for the rails.
(05:35):
So where they are now is uncertain, and they won't
say it. They put on a very brave front. Keith
Crele probably the most, but I'd say somewhat anxious, right.
Speaker 1 (05:46):
And so you know you mentioned agile and resiliency. Do
you really think the rails are either of those things.
Speaker 3 (05:53):
I think over the intermediate to long term they're incredibly
resilient and agile and flexible. If you think about the
rail in the rough century that I've followed them, I
mean in the in the thirty years now that I
actually have they you know, they they were an industrial supplier,
industrial carrier. The automobiles here were manufactured. Now they're mostly
(06:15):
assembled with containers or trucks coming with parts. That was
a big change. The movement from you know, the Michigan,
Ohio down to the south and South US in the
you know, the Dixie States for automobile production. The move,
you know, the whole globalization move of raw materials and
finished products into containers is to showed a great deal
(06:35):
of flexibility. They're pivot to most recently crewed by rail.
You know when that was, when that boomed in twenty
thirteen fourteen. You know that within a year they were
able to handle that extra capacity. They are not very
good at doing it over over a quarter or two,
or over one piece of their system and not the rest,
because you know, labor is not as flexible as all that.
But over time, you know, actually, if you think about it,
(06:58):
you know, one of the big impediments of their growth
story for the last decade plus decade and a half
has been the reduction in coal. Railroads, you know, have
lower car loads because of that and a few other things,
but they haven't fallen apart, right. You know, coal was
what started the rail industry. They were powered by coal,
they moved coal, it remained in two thousand and eight
(07:19):
the biggest and most profitable component, and now, you know,
less than twenty years later, we barely talk about it.
In the short term, like the recovery from the pandemic,
they're they're the fact that they're tied to the ground
and that their labored or tied to the region, and
that they are big, somewhat cumbersome organizations, you know, shows
that they're not in the short term. But over time,
when things become obvious, they actually can allocate their capital
(07:42):
and their resources and pivot to you know, from you know,
industrial products, which are still important to intermodal which is
the growth opportunity, So yes and no, do answer your question.
Speaker 1 (07:54):
Right, And so you know, look looking forward, where do
you see growth coming from? Since obviously it's not really
probably going to come from con over the long term
and we've seen like a bump and call this year,
but you know there's a lot of factors into that.
But you know, longer term, where is the growth going
to come for the rail industry in your opinion?
Speaker 3 (08:16):
So you know, we're in a very uncertain phase about
where where will production in North America come from? Where
where will which ports are going to win? You know,
so you couldn't ask that question at a more sort
of difficult time. But in the fullness of time, innermodal
is going to be the leader. There are there's sort
of two or three areas of growth potential for railroads.
(08:37):
One is they have yet to recapture share they lost
with their self induced labor shortage driven service problems in
twenty one and into twenty two. So for example, in
areas like paper, I mean they have a one time comeback,
they have the services come back, the share hasn't Because
if you were a shipper that had figured out how
(08:57):
to pivot the truck, if your tradition on a rail
shipper like a paper company whose plants are built on
rail spurs and have bays that are fit box cars.
If you've been able to pivot the trucks, why would
you change now when trucks are giving the product away
as you write about it. Maybe I'm exaggerating there, but
that will happen. The second thing is I think they
(09:18):
have great opportunity recapture share in domestic intermodal. They began
to They peaked and share in twenty eighteen through problems
of their own making and global problems like the pandemic
that share dropped at port share shift. They've began to
recover in the second half of last year. They're kind
of stable now as the freight percision goes, but they
(09:39):
have great opportunity to grow that business, and their service
level suggests that when truck capacity shrinks, they will grow
that business. The third place they could grow is something
they've always done, but then now they're talking about more,
which is industrial production. I mean, sorry, industrial development. I
spent a lot of time talking about it. That's always
an opportunity, and I would combine that with sort of
(10:01):
new industries battery, you know, which may be delayed by
the current political situation. But certainly there was a lot
of talk last year for the twelve months prior about
new energy opportunities to carry rail freight as well as
the power rail freight. But so, you know, industrial development
and the problem the success in c Sex is highlighted
(10:22):
that other carriers are talking about. You know, if you
see near shoring, you know, if you see reshoring, railroads
will play a big role in that. I'm not sure
right now that we're going to see major capital decisions
or supply chain decisions by enormous industrial consumer companies until
they figure out what the world is really going to be.
But you know, Mexico fits into that. Mexico is both
(10:45):
a intermotial play and an industrial development play, and the
connection of the whole NAFTA or USMCA economy, I think
is a you know, tremendous opportunity for rail and it
may be sort of on hold now, but it's not.
Speaker 1 (11:00):
Going to go away, right, you know, absolutely, And it's
harder for rails to compete because diesel prices are pretty
low and truck rates are low, so the dollar savings
really aren't that compelling. And at the end of the day,
A chuck tends to provide better service because they can
go door to door.
Speaker 2 (11:17):
For a rail, the freight needs to be touched a
couple of times.
Speaker 3 (11:20):
What I hear is you know, yeah, railroad X, I
see that you're running. You know, back to trip plane
compliance levels of ninety percent. You know, you're back to
where you are. Maybe you're better, But why would I
you know, at this point, at these prices, when they
pick it up right where I want and take it
directly where I want, why would I take a chance?
Keep me informed? You know you we'll be back to you.
(11:42):
Just I'm not going to do it now.
Speaker 2 (11:43):
Yeah.
Speaker 1 (11:44):
So for those who know that the rails, the large
class one rails, they've since deregulation nineteen eighty, the industry's
consolidated pretty significantly. There's two players in the West, two
players in the East, and the Canadians and so on
that Tony, you know, is there an area or is
there a network that you think is better positioned for
(12:06):
the growth that's out there?
Speaker 2 (12:07):
Longer term?
Speaker 3 (12:08):
Well, you know it the first fiftory or what is
what are the goal of the current trade you know, positions?
When does the administration want I mean, certainly the Canadians
run transcontinental. They run the fastest services into the Midwest
from Asia. Maybe that won't be as important in the future.
(12:28):
The Western carriage traditionally have had the growth. There is
huge intermodal opportunities. In the East. You have lower intermotial share,
but that when trucks get tight, that's an opportunity. In addition,
the two Eastern carriers have the Southeast, and that's where
a lot of you know, if you're going to reshore
or even just in the normal course of business development
in normal times for getting any big changes. You know,
(12:49):
a lot of stuff is happening in Alabama and for
you know those so everybody has a piece of a
growth story. Depends on how the cards shakeout. And of
course both Canadian railroads also run like a tee down
into the into the Gulf area. One goes into Louisiana
and then CPKC goes through Texas all the way to Mexico.
So you know, if you restore, we're gonna we're gonna
(13:11):
renew and refresh, I hope, and not cancel us MC
A two. It's due next year, it'll probably happen this year.
You know, if we restore the North American continent as
an economic fortress and forget about fifty per state and
other things like that. Then you know, the opportunity to
move through you know, Mexico, through Texas into the Midwest
and in the southeast and linking these growth areas is
(13:31):
a great opportunity. I'm not sure it was looking good
and now everybody's sort of sitting on their hands. That's
the anxiety part that I meant.
Speaker 1 (13:39):
Right In Canadian Pacific, Kansas Southern as the most exposure
to that cross border business with Mexico, followed by Union Pacific.
Speaker 2 (13:49):
You know, you mentioned you know in the.
Speaker 1 (13:51):
East, you know, one of the one of the challenges
for the East because the truck competitive market there's a
lot shorter length of hall. Can you talk about how
length of hall comes into play when a rail is
trying to compete with with another mode.
Speaker 3 (14:03):
Well, railroads are actually almost always been really good at
the long haul part of their business. Who they're harder
when they at terminals in airline transfers. You know, the
timing and the coordination causes friction and sometimes that leads to,
if not failure, then delay. What railroads do really well
is take a loaded train and move it a long distance,
(14:24):
and so they're very competitive in double stacked. Nature of
bringing containers from LA to Chicago is the classic lane.
There are other ways that are competitive in that, but
that's one that's that's just not just imported, it's reclassified domestic.
They're double stacked. You know, they run I'm sure from
terminal to terminal. BNSF runs ninety eight percent on time.
(14:46):
Does that door to door on time? No, although they've
got got pretty qig numbers right now. So the longer
the haul, the things that railroads do well automatically are
you know, longer haul because that really also plays to
their fuel strength, their labor. You know, it's a two
man crew right now, you change it maybe ten times
suites twenty people can run three hundred trucks across the
entire West versus the truck drow. So labor, fuel emissions
(15:10):
when that matters again. You know, if you have density,
if you have weight, railroads do really good at haul
in coal because trucks, you know, you need so many
trucks to carry the same amount as a railcar. Those
are the natural advantages. I think the railroads also have
an advantage in their infrastructure, which they paid for as
opposed to the highway system, and that you would think
is a disadvantage, but that allows them to make capital
(15:32):
decisions quickly, and their infrastructure got to be rating from
the American Society of Civil Engineers in the highway consistently
gets a D. So the fact is that their infrastructure
could shape as a plus and that adds to their
long haul bit. But one thing we haven't talked about
as short lines. I follow them the Class one railroads
the six, and I followed being a saf even though
(15:52):
it's not publicly traded, that's the sun. And then there
are all these moons, and the short lines do that
first and last mile well and a great cooperation. Being
a Class one and a short line can often replicate
pretty closely, if not one hundred percent, the door to
door service a truck can do. And I want to
point out the union specific of all carriers has signed
(16:13):
two deals Eugene organ and Kansas City, Missouri to work
with you to turn over their terminal and their last
mile business to a short line to do what they
could do best. And I think that's a real that's
a real glimmer. That's a really good sign in a
very what's been so far a very difficult year.
Speaker 2 (16:30):
But are they doing that to lower their O R?
Speaker 1 (16:33):
Is this like a kind of like a shuffling of
the deck if you well, because you know, at least
as far as i'm I understand it, those sort of
movements tend to have higher R. And o R is
an operating ratio for those that don't know, an operating
ratio is the inverse of an ebit margin. So the
lower the number, the better the rails. UH really have
(16:56):
the ability to operate below sixty, which is you know,
a highly profitable industrial company. So I'm sorry about that
tangent there, but you know, is some of that do
you think because they're looking to kind of tweak their R?
Speaker 3 (17:11):
So yes, you know the operating ratio, and there's what
I call the cult of the operating ratio. BIL rights
can truly drive their cost down, so when they're not growing,
shorter term investors can demand and often get managements to
change or to or to change policy to in fear
of change, to drive cost down and cut what I
think might be as much a muscle as fat. In
(17:34):
this particular case, I think you accomplished both I mean,
as Keith Crile of CPKC would say, you know, the
o R is the outcome of the process, and if
you do things well, you know you should be able
to grow and reduce your o R or increase your margin.
So up as definitely the case of Oregon also talked
about headcount reduction because they're going to transfer, there'll be
(17:55):
somebody else's, you know, Genesion and Wyoming's employees are not theirs.
That really was a political shot across the bow at
the labor Union says that we begin to think about
the next amount of labor. That was a calculated jab
from CEO Jim Venna because fifteen people to the Mighty
Union Pacific is like the change you can find in
your couch, right. So I don't think it's OAR driven.
(18:18):
I truly think it's service driven and growth driven. There's
been other cases that CN has turned some business over
in Louisiana in a similar way a switching way to
a Watka which is the second largest trotlet holy company,
and they grew in one year their total car loads
by thirty percent, allowing creating a pre block train to
allow CN to do what they do best which is
(18:39):
go terminal the terminal over long distance, and I think
it's a win win. It may not work everywhere, it
may get resisted by labor, they may be political ramifications,
but the UP is trying it twice. And I think
they're doing it for service. They got beaten up by
the STB in the past for their first and last
mile failures under the prior leadership, and I think this is,
(19:00):
you know, a way to I mean that service should,
to quote the late great Pat Onspier of Kansaity Southern
service begets growth. Kind of an awkward phrase, but I
love Pat and so I really think that in this case,
Jim Vening in pacifically using this to see if they
can grow business that would be highway driven, they'll accept
a better margin.
Speaker 2 (19:17):
Oh yeah, of course, of course.
Speaker 1 (19:19):
You know you mentioned regulators, the Surface Transportation Board and
and and regulation. Are there any regulations in Congress or
at the STB that you're paying close attention to that
you think could be good or bad for the industry.
Speaker 3 (19:35):
So I think the new chairman of the STB, Patrick Fuchs,
is incredibly smart. He's you know, pro rail industry. That
doesn't mean he doesn't look out for shippers. I think
he's going to be fine. I don't see. I think
that we're sort of past where it past peak STB
power during the merger, a merger of any kind that's
they have full power. I think some of the rules
(19:57):
like reciprocal switching will be more market oriented. I don't
think so. I think the SEVN anyways will get out
of the way of growth. I don't think they were
really a huge impediment before we could talk about the
sort of being a rise in m and a conversation
which I think is mostly that just chatter out there.
But the scb's in fine hands and will work with
(20:17):
railroads and shippers to see more transparent, quicker solutions. The
other big regulatory agencies the Federal Railroad Administration, which regulates
safety and was a huge impediment over the prior four
years to any technological advances that already exist, such as
autonomous inspection of track or more even more complex of
(20:39):
railcars that does the job, you know, ninety percent better
than the human eye freeze that capacity. You used to
have to walk the length of the train and eyeball
the cars to see that everything was right. Imagine doing
that in the rain and the cold, and the packers
lost and all that kind of stuff that had been
all forestalled by the prior administration. The biggest win and
(21:00):
the change administration for railroads, and there are a lot
more losses, but the biggest win is a changeover in
the f RA which should allow the application of already
existing technology, which I think will be a big help,
uh in terms of you know, reliability, uh, resiliency, you know, detection, safety,
et cetera.
Speaker 1 (21:20):
Yeah, and some of these technologies that can be like
that movie The Minority Report where they find defects before
they happen, Yes, and so they can they can they
can fix them before it becomes an issue, you know,
which is uh, you know, a win win really for
the rails and for the workers because it's a safer network,
and then also for shippers because it's a it's a
(21:41):
more I guess resilient network doesn't.
Speaker 3 (21:44):
Break down, it doesn't, you know. East palscene was an anomaly,
but you know, if it brave, if you have to
do this work and change out of car that you know,
you're probably blocking crossings, you know, et cetera. There's there's
not really a loser there and the idea is not
this isn't a job reduction effort. It really should be
a win win. I think there was a very myopic
and simple minded leadership at the FRA before and I
(22:06):
think that's all going to change. And I think that's
a huge positive. You know, I think the STB will
remain a neutral body, maybe more positive bent uh. And
you know then there's trade wars and all other things.
Speaker 2 (22:20):
Yeah, so what's your view on one man cruise and
one person cruise?
Speaker 3 (22:25):
So the in the hearings this week for the new
leader of the FRA, he perroted the dot secretary saying
that you know they support the fire regulation on mandated
two bank cruise the United States. We've seen it where
it works, you know, with no man cruise in Australia.
The technology exists today. I know publicly, the appetite isn't
(22:46):
there for that. It is ironic that it's acceptable to
test autonomous cars and trucks on public land, on private
land right where people do trespass but they shouldn't. So
but getting to one man crew, the railroads dodged a bullet,
or successfully lobbied away a bullet that was going to
potentially be legislated, and that would have made it very
(23:06):
hard to break down. The number of people in a
train is usually a negotiated thing, and if you could
do man on the ground, you actually get people to
have more reliable hours. I have a friend who's a
major league umpire. When he does, you know, comes into
New York to do replay, he gets these hours and
he doesn't have to wait for the game to be over.
He's got five to nine. If you can do that
(23:28):
for the person in the pickup truck, you know. And
in the East there's so many opportunities to that because
shorter distances, many more intersections with roads. You know, that's
a disadvantage to running a train, but it's an advantage
to keeping a train fresh. I think we will get
this removed from regulation and then negotiated. It'll cost them money.
When I started railroads at five people in the locomotive,
and literally three of them did nothing. But they held
(23:50):
on to those jobs for a long time, and when
they finally got the they negotiated the right to remove
them at quite a hefty payout. You know, hundreds of
millions of dollars. Charges were taken the ROI was great,
and the stocks did really well because of that. But
you know, this isn't like they can't be just produced.
You know, we want to bring it back into the
negotiatoration room. The one complexity is that you have two
(24:12):
different unions representing the two people in the cab now,
and you know, both of them don't like each other.
And the other point I want to make is this
is not a typical Republican administration. You know that might say, well,
we're pro management. You know, it's supposed to be pro
labor because the Teamsters Union is a major ally of
the Trump administration, and the Teamsters Union represents locomotive engineers.
Speaker 1 (24:33):
Right, yeah, I know it's you know, the technology is
definitely there, but is there an operational reason to have
two people?
Speaker 3 (24:42):
The operational reason for the second person is to help
the first and to do things like go down and
walk the train if something's wrong, to look at the
defect that wasn't caught in advance. Sometimes there's some signaling
to be done by hand. There really isn't a reason
for that second person. I mean we fly airplanes with one, right,
I mean commercial plates. There isn't There really isn't a
(25:06):
reason part of the issue is that political issue. The
brakemen and the conductor conductors used to be the most
important person on a train, going back into the steam era,
they ran the train, the engineer ran the locomotive. Those
are two different unions. One is a Teamster, one is AFLCIO.
The fight is who's going to be that person. I
think the Team Serve engineers have won that fight politically,
(25:28):
but that makes it very difficult because one union would
bear the brunt of the reductions right and the other
would not. I don't see that happening at any kind
of investment cycle. I think you might get a test,
you know, a waiver to use it on certain regions,
and then we'll see that it's safe. There is no
safety reason, there's no data to support a second person
having anything. However, it's a very easy sound bite. They
(25:51):
only had one person, you know. I mean, it's right,
but only one person is on the throttle and it's
on a fixed track, right, So you know, the political
aspect is something that rails have to, you know, consider,
and the unions have been very sophisticated in their approach
to this situation. Going back to the labor round of
twenty twenty.
Speaker 1 (26:11):
You mentioned earlier you were talking a little bit about
you mentioned consolidation. Do you think there's any further consolidation
of the class ones or do you think we're done.
Speaker 3 (26:21):
Most people thought after CP won the fight for Kensity
Southern become CPKC, that that was the last merger. I
wrote that. I still think it's true. But in the
last six months, starting with the presentation at Rail Trends
by Oliver Wyman's Adrian Bailey, who said reilroads can no
longer save the way to prosperity, we're pretty close to
the end of that story. They've got to grow and
(26:42):
if they can't grow, they either shrink or they merge.
So that started people thinking, and some of the thinking was,
you know that there are there is friction at inner line.
You got to meet two schedules. You have to have
two different decisions on capital to make more capacity at
the interline. You have lots of these issues that you
could get saved days transportation at an East West hub
(27:03):
of Chicago. Mostly that there's business that's five hundred miles
on either side of the Mississippi River that no railroad
wants to start because the revenue split wouldn't you be fair,
or if it's three hundred and seven hundred, so there's business,
they forego. Most of the CEOs in the rail business
agree with that. They think railroads would be better if
you had four that is, two American railroads cross country.
(27:26):
But most of the CEOs also think that the risk
of trying to prove the STV rule, which is you
must not just maintain competition, but enhance competition, that nebulous
and ill defined rule means that shippers will come with
their you know, their knives out at any hearing and
take away I think much of the benefits. That's Tony's opinion.
(27:49):
I think a lot of the railroaders think, you know,
until the shippers want this, they're not going to get
it passed. The other thinking behind this was five of
the six railroad CEOs are not his historically tied to
their company. Historically where you never change companies, and the
head of Norfolk Southern grew up at Norfolk Southern. That
is not the case today, and there's been a little
(28:09):
growth in market capital of the railroads did extremely well
this century till about twenty nineteen, and since then it's
been you know, a tougher go for lots of external
and internal reasons. And lastly, they was thinking that this
new administration might be more forgiving. But the head of
the Department of Justices, any trust division, is very anti
(28:30):
big company, very anti consolidation, and has actually used the
phrase rail baron in her first speech. So I don't
think the you know, I think a lot of the
thinking that people had, the magical thinking that Wall Street
had and that railroad leaders had in the fall and
around the time of the inauguration, was we've got a
traditional Republican administration that's going to allow certain things to happen,
(28:52):
and we do not have that. We have you know,
they're pro some big business, but they're not pro big
tech for example. You know, they're attacking for consolidation reasons.
So I don't I think it may not happen. But
as I've always said about this, uh, if I'm wrong,
I'm not a little wrong. You know, if I'm wrong,
it's gonna be too read. It'll be big, it'll be
(29:12):
a big fight.
Speaker 1 (29:13):
We don't think there's like a natural merger between one
of the Canadians and one of the US carriers.
Speaker 3 (29:19):
So historically, when you looked at the possibility of future consolidation.
You were going to put you know, the six into two.
So right now we have a harder border in Canada,
right the fifty first state of You can't see this
out there, but I air quoted that. Right there's a
rule that CN must be headquartered in Montreal. I think
(29:39):
you'd run into National you know, National Pride ten or
fifteen years ago might have been subsumed by a business interest.
I'm not sure that's the case now. So I think
the you know, the the natural fit would be like
b n NS Union Pacific CSX. I think there are
growth potentials and some cost productions, you know, you don't
need two CFOs, et cetera, that would come out of that.
(30:00):
But when you open the books, you'd have major customers.
Some of them have never been involved before because they
had other fish to fry in d C. I'm thinking
about Walmart, you know, I'm thinking about ups. These are
these are a lot of clout, a lot of political juice,
and they have the opportunity to ask for whatever they want,
and they may say it's in their fiduciary interests to
(30:23):
demand more access and things like that. You know, I
don't think since the reals don't know what would happen,
I'm not sure they're willing to take the chance on
that for these benefits. After all, they still have a
lot of benefits right in front of them once we
get to a politically stable situation.
Speaker 1 (30:40):
And so you know, we've been talking about the long
term here for a while, so kind of like little
short term conversation or conversation about the short term. You know,
how is this all the tarrifs that's going on. How
is that impacting not only rail volume, but how is
it impacting you know, operations.
Speaker 3 (30:59):
So so far it hasn't really been impacting operations. You
have some specific issues like at CSX and or Howard
Street Tunnel, but operation and a winter that was sort
of normalist but harsher than the previous one. So comparisons
in February are tougher, but rail operations are going pretty well.
We saw i think the last surge last month and
(31:19):
into this month of international intermodal as people were moving
supplies ahead of these tariffs that now are delayed. So
the key phrase and rail analysts and you know this league,
there's always like a hot phrase, and then everybody says
it and I'm only to say it now and put
air quotes on it. And it is about air that
we're seeing an air pocket coming right because nothing moved,
(31:41):
you know, And it takes two or three It takes
two weeks to a month, you know for that nothing
coming out of China to become nothing hitting La and
getting nothing getting on a train. Now we have a
ninety day you know, reprieve, which means everybody's going to
jump the shipping to try to get suppered. Back to
school of Christmas, railroads do better. They're an assembly on
They're an outdoor assembly line if you give them even flow.
(32:04):
One of the key Hunter things that Hunter Harrison, the
late creator of Precisions going to railroading. He would try
to use price to say, don't give me everything Thursday Friday.
You know, I'm gonna you get a pay dollar twenty
on the dollar for that. I'll charge you eighty cents
on Monday. Because we can make the benefits of moving
stuff all the time. You can. You know, your crews
show up and the train is there. What we may
(32:26):
be creating, I think there's more capacity than the recovery
from the pandemic. But this stop and start thing is,
you know, in a short way is a mini version
of what the pandemic caused. Everything stopped and then everybody
wanted a peloton, and the railroads did really well for
a month or two and then ran out of you know,
labor capacity, and you know, et cetera. And the ports,
(32:46):
you remember the Port of La look like they were
doing a D day, you know, a stage version, one
hundred ships offshore, et cetera. So, you know, I worry
a little bit about the operations because of this stop
and start. But what happens at the end of ninety
days If people aren't going to make major decisions, they'll
make short term decisions. I need toys, I'm gonna tell
(33:07):
I need toys in marisk boxes in the La Long Beach.
I stopped it. Now get everything you can, you know,
So it's here before the ninety days are up.
Speaker 1 (33:16):
And do you think that the industry kind of learned
their lesson from the pandemic with like you know, of
furloughing too many people and so do you think they're
they're they're they're well resourced for this.
Speaker 2 (33:26):
Surgeon demand that could be coming.
Speaker 3 (33:28):
Well, So you raise a really good point. I think
the industry rit hole because the whole supply chain industry.
I think there's more capacity at the ports. I think
there's more capacity in trailers. You know, there's obviously excess
truck capacity. So the industry as a whole is better
prepared in terms of one of the things that they did.
Railroads historically in my career, were really good at beating
(33:49):
street estimates in a known downturn. If you knew two
thousand and eight, you know, well, great financial recession. You
know it's hurt you furlow people, and you could you
have a much more flexible cost base people get credit for.
They could beat it. Everybody would cut their estimates by
fifty percent and they would be down ten or twelve
and the stocks should actually do well. I think that
(34:09):
was a very short sighted thing then, but it's extremely
short sighted now because when they did that in the past,
up through the two thousand and eight nine period, eighty
percent of the workers came back, and when they did
it in the in the pandemic, about thirty percent came back.
And remember this is a network. If you have a
shortage in Atlanta, that'll back up all the way to
(34:30):
La or vice versus. So you know, it was sort
of a rolling shortage, and then every railroad on its
own said, oh my god, we've got to get get
out there and hire people. And that's you know, a
long process of hiring, training, and putting in the field.
You saw safety numbers de spikee the wrong way because
you had inexperienced crews, not bad ones these pals was
an anomaly, but you know, a yard derailments because you
(34:53):
had new people moving cars. So I think reilvants should
learn that through a cycle. To win two quarters of
street acceptance and give it up on the back end
with unhappy customers, higher safety incident rates, et cetera, is
a poor way to do business. That being said, the
cult of the operating ratio is out there, the short
termers out there. If you don't grow, they will put
(35:14):
pressure on managements to cut costs, and that's the easiest
lever to pull. So I worry about it. We have
already had layoffs or nots furloughs at CN which had
previously basically had a no furlough you know promise not
a lot one hundred and seventy five. But you know,
if this if this uncertainty and we hit the air
(35:36):
pocket and nobody's expanding. A chemical business goes flat and
are a great export green business goes down because China's
not buying. You might see that lever pulled again. I
hope not.
Speaker 1 (35:47):
Yeah, you know, so we talked about, you know, rail trends.
A couple times we mentioned rail trends. So that's uh,
you know, if people forgot it. This is a you know,
a long podcast. We're talking for thirty five minutes now.
So Rail Trends is kind of like a conference that
happens every year in New York. What were the big
takeaways this year?
Speaker 3 (36:07):
Well, so, yeah, happens every November in New York, and
it's I'm trying to do it very differently than a
typical analyst or investor conference. We have a no CFO
rule because I don't want the message. I mean that's
been broken obviously, but basically the idea is I don't
want the message. I don't want, you know, the spin.
I want to talk to people who do try to
set it for me. And this past year, Tracy Robinson
(36:28):
a CN said it was the Woodstock of rail conferences.
I love that. That's gonna be on my my you know,
epitaph whenever that happens.
Speaker 2 (36:35):
There was a lot of mud and acid is that what?
Speaker 3 (36:37):
Yeah, and a lot of nudity. No, but I don't know.
It's very eclectic and we try to appeal to a
variety of people from investors to you know, to infrastructure guys,
to to lease in companies to railroads themselves. We're always
pleased that most of the people stay after they speak.
They don't you know, hit a couple of one on
ones go. The theme last year was really a focus
(36:58):
on growth and you know, yet we now see what's happened,
you know, to the outlook. They really was trying to
reassurance that we appreciate that we you know, getting to
a sixty one oh r with the new labor rules
that might be pretty close to what the base industry
and I'm taking NSMB and sep out. You know that's
(37:18):
close and we need to grow and I think, you know,
Jim Lenna talked about buffer and Steff one of the
best speaches I told you at Adrian at Oliver Wyman
talking about, you know, they must grow because we've done
the end. Mike Miller, who was the CEO of Genesee
and Wyoming the largest shortline Holy company. They own one
hundred and ten shortlines in North America. They're owned by Brookfield.
He said that what the railwatively need is a higher
(37:41):
sense of urgency. You know, he is a member of
rail Pulse, which is his consorting to do add visibility
to the rail car chain. Railroads don't have the visibility
that FedEx has now they interline. It's more complicated. But
he said, it's just not good enough. We need to
pick the pick up the pace. And I think there
was a really healthy optimism that we had. New management
said almost all the railroads we had restored problems that
(38:03):
existed at Norfolk Southern and the quarter flight and being
a saf and we were we had momentum, and we're
moving the right way and adding these new services like Quantum,
which was introduced at rail Trands two years ago. That's
the Bings F JB. Hunt super partnership. So we left
rail Trends with a really on on a really high note.
Then we got to the inauguration.
Speaker 2 (38:23):
Yeah, I know, I know, you don't do like my
whole cell recommendations.
Speaker 1 (38:26):
Right, yeah, you go, But is there is there like
a railroad that you think has the most growth opportunities
versus its peers.
Speaker 2 (38:34):
From from a from a volume standpoint, you know, right now.
Speaker 3 (38:37):
I would you know it would be Birchhier Hathaway's being
a SEF maybe, but you know that's not a piece
of it. But I would say, you know, railroads tend
to do it. Historically, when I could have these ratings,
they moved as a group. Now they would be leaders.
And and it's one of the reasons that people attack
intermodal because intermodial has a higher o R or worse margin,
but it could be a very strong contributor to return
(38:58):
on investment capital. The first decade of this century there
was the rail renaissances they called it, and all the
stocks out performed the market by a lot. But the
two best were Canadian National, which did it through improving
its margin under Hunter Harrison. The other one was being
a saf which did it by doubling its innermodal. So
there are multiple ways to skin a cat. And if
you believe, as I do, that intermotal will be the leader,
(39:19):
then I would say bn NS. But right now the
best performing road is the Union Pacific. If you restore
the USMCA story, then I would you know the clarity
behind the three part economic fortress that is North America.
Cpkc's got a compelling story. CN always manages to find
growth because they run themselves so well. So you know,
(39:42):
if you had me pick one, now I would pick
a Union Pacific. But you know, it's just because of
the uncertainty if you're playing defensively. The two Eastern American
carriers have the least growth exposure. But one thing I
want to point out is if you read about this,
and somebody's listening looks into this, and the Association American
Railroad says that railroads have a thirty eight percent exposure
(40:04):
to trade. That's all trade, not just China. That's a
significantly underrepresented number. It doesn't include inputs like fertilizer that
makes corn that goes to Mexico, or transodent boxes. It
doesn't include the Canadian or Mexican carriers at all, and
it doesn't include the growth plants. And all of those
Eastern carriers had growth plans to connect with CN or
(40:25):
CPKC into the Southwest and into Mexico, you know, so
their futures were going to be more trade weighted, and
you put their futures on hold, but defensively, you know,
I would look to Norfolk Southern and its restoration of
its margin under Mark George and John Orr and say
they're going to be the least impacted by whatever the
whims of Washington DC are in the short term. Their
(40:48):
volume should be least impacted in the next twelve months.
But I don't like that, you know, for me, i'd
look I'd say Union Pacific because I'm looking beyond it.
But I think they're all they all have good plants.
We just need the world to change more more and.
Speaker 1 (41:00):
More of a macros story. So is there anything like
on your radar that you're really looking at or or
kind of waiting to see the impact on that that
could impact the freight transportation markets.
Speaker 3 (41:14):
So one thing that just happened, I don't know the
full detail, is that railroads have been trying to achieve
new culture and a labor piece led by Joe Henrich
and CX and we were down there and he really
the last labor round was a normally scheduled round and
went all the way to Congress, which is part of
the way the rules often play. I've seen it before.
It got written up in the front pages like it
(41:34):
was this disaster, like workers were walking off because of
the of the working missions. It was that's complete. Well,
it was wrong, and really it was just a normal round.
It was of negotiating amount of money because we're in
a capitalist society. However, it did lead to hard feelings.
There were shortages because of the you know what happened
in the pandemic response and whatnot. And the railroads, led
(41:56):
by c Sex Joe Henrick, have made the attempt to
change that and ONEX is his big effort and going
to town halls and being a public face and sort
of saying we're one team and a lot of that.
People think of it as soft and whatnot. But the railroads,
with the exception of UP, have signed roughly forty percent
of their labor force to contracts now for the round
(42:17):
of negotiations that is really beginning now. They would last
usually three years, right, we would usually in three years
now get down to signing contracts. To the fact that
they've got forty percent of the workers done is a
very positive sign. And then CSX this week signed the teamsters,
the locomotive engineers. That's a huge breakthrough because the teamsters
were the most were calcil trips tied to the administration.
(42:39):
They didn't want any change. They don't you know, they
were the tough guys that you know, they were the
tough guy in the bar. And the fact that they
signed with CSX means that, you know, Joe Hendrix one
CSX culture change, magic beans, you know, have meaning if
you can restore I mean, as he says, and Mark
George and has said, people used to line up for
(42:59):
these jobs. Roughly, you know, I think the highest paying,
you know, blue collar union jobs doesn't require college education,
requires trading. You know, these are jobs that people lined up.
They were so sought after generations went into it, your
kids went into it, and then after the pandemic, you know,
they had to go out and advertise and you know,
(43:19):
it's sort of like truck fibers have to So we
could have seen a major labor breakthrough. I mean, I
think when we look back at this year, we're going
to say technology change because the FRA and maybe labor
breakthrough change. You know, culture change. You know, it'll always
be frictious because somebody pays somebody and somebody takes the
money and they're going to argue about how much. But
it doesn't have to be war.
Speaker 1 (43:39):
Yeah, I think to your point, I think Joe has
been transform transformational down at CSX, and it's always nice
to see on LinkedIn when he's giving an employee a
pickup truck.
Speaker 2 (43:49):
Yeah, pickup truck.
Speaker 3 (43:51):
Yeah, what fifty Although he had said when we were
on that trip together, I said there were a couple
of times when they couldn't find an employee to give
it to. That was for a technic perfect attendance. And
you know the paid sickly that they want. I mean,
if you see some of their charts that people just
can now leave without saying a lot in advance, and
things like the Alabama Auburn game they now plan around
(44:11):
it because everybody gets sick that day.
Speaker 1 (44:14):
Right, All right, Tony, we're rounding out the end of
our time here, So I really want to thank you
for your time and your insights today.
Speaker 3 (44:23):
Oh I joy talking to you anytime about anything, but
this was terrific. Thanks for having me on it.
Speaker 2 (44:28):
All right, and I want to thank you for tuning in.
If you liked the episode, please subscribe and leave a review.
Speaker 1 (44:33):
We've lined up a number of great guests for the podcast,
so please check back to hear conversations with c SPEE executives, shippers,
regulators and decision makers within the freight markets. Also, if
you want to learn more about the freight transportation markets,
please check out our work on the Bloomberg Terminal at.
Speaker 2 (44:48):
Bigo and on social media. This is Lee Glasgow signing
off and thanks for talking transports with me.
Host
Lee Klaskow
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