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Rail News Home Union Pacific Railroad

July 2011



Rail News: Union Pacific Railroad

Notes from the North American Rail Shippers Association's 2011 annual meeting - by Tony Hatch



— by Tony Hatch

Although worries over capacity in the intermediate future and rail service in the immediate past were prevalent during the North American Rail Shippers Association's (NARS) 2011 annual meeting (held May 25-27 in San Francisco), the pervading sense was that it's good to be a railroad these days — and that the "Renaissance" remains alive and well. At the crowded event (attendance was up some 20 percent), we heard:

• Confirmation of a near-term volume slowdown, driven by the economy, the awful weather and regional issues (such as inventories on the West Coast). Recent headlines — "Auto sales slip," "Wheat slides on Russian return," "Manufacturing down," "Economic outlook darkens" — seem to confirm this. Meanwhile, rail traffic has been modestly increasing of late, with four commodities up (grain, chemicals, metals, intermodal) and four down. It's sluggish growth, but growth nonetheless.

• The slowdown was apparent in comments shared by short-line execs, including RailAmerica's John Giles and Charles Patterson, Watco's Rick Webb and Patriot Rail's Stanley Wlotko. However, short lines neither have full pricing power nor much exposure to intermodal, export coal, the Bakken Shale and, for the most part, chemicals and export grain (the latter has only just begun to rally).

• Class Is were more sanguine — they expect to grow modestly faster than the U.S. economy, led by the aforementioned four commodities. Once thought to be fading away and moving far offshore, chemicals are a newish bright spot. A plentiful supply of cheap natural gas is leading many chemical producers to add capacity in the United States.

• Domestic intermodal will be the next cycle's star and is already gleaming (see Norfolk Southern's and J.B. Hunt's recent financials). Both Hub Group's Mark Yeager (on a panel) and NS execs (in conversations) confirmed their domestic numbers were showing no sign of any real economic slowdown — Hub's "Local East" traffic was up 26 percent in Q1! Panelists representing Hub, J.B. Hunt and Lowe's discussed the positive impact of railroad spending on mainline and terminal capacity. It's enabled Lowe's to enact a strategic shift from truckload business to intermodal — demonstrating it's the rail customers who are leading the way and helping to ensure the viability of the intermodal revolution. The keys are adequate capacity as trucking capacity gets tighter and consistent service as truckload service peaks. There was also a sense that box-car business could pick up. BNSF's Rick Margl said the railroad is "bullish on box cars."

• The focus on rail service and capacity included an admission by BNSF CEO Matt Rose that the railroad is "chasing demand up" (i.e., the recovery volume). Meanwhile, a panel of Class I COOs discussed various efforts to get current weather and manpower issues behind them. The expenditures are huge — north of $12 billion this year and rising (Union Pacific and CSX increased their Q1 plan numbers), more than 18 percent of revenue, compensating for PTC needs and direct shareholder payouts with record numbers on infrastructure and rising numbers on equipment.

• FTR Associates' Eric Starks said he expects the usual service degradation that has followed every period of high volume demand in the past. But I think this time is different, and the rails agree with me. During the past five years, or since the beginning of the recession, Class Is haven't reduced capex. Railroads also are using better planning and forecasting tools. Meanwhile, The Street is concerned about service failure potential and "over resourcing," but railroad execs know that a near-term drag on earnings per share (in training costs, say) will have a huge positive impact over the intermediate to long term.

• Although NARS is apolitical, it's hard to escape the pull of D.C., even in northern California. STB Chairman Daniel Elliott noted that while his June 22 hearing on "competition" (access) was — or could be — important, cases before the board, notably the South Mississippi Electric Power Association vs. NS "revenue adequacy constraint case" could be just as important. Finally, Adam Nordstrom of lobbying firm Chambers, Conlon & Hartwell talked up the need for a multi-year short-line tax credit. The audience's positive reaction reflected an overall sense among the many shippers in attendance: that cooperation, rather than governmental solutions, is the way to go when it comes to meeting demand. And that was refreshing.

Tony Hatch is an independent transportation analyst and consultant, and a program consultant for Progressive Railroading's RailTrends® conference. 



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