RailTrends 2015 recap by Tony Hatch

RailTrends 2015 was another rouser. Clearly, as our 2015 Railroad Innovator Award winner Michael Ward said in his acceptance speech, the “railroad renaissance” is alive, abetted by innovation and opportunity. But just as clearly, the renaissance also is not without its trials. Here are just a few of the takeaways from RT2015:

Canadian Pacific’s proposal to Norfolk Southern. The tenor of the dialogue regarding the buyout proposal was cautious and, I believe, tended to be more supportive of evolutionary change. Surface Transportation Board Chairman Dan Elliott told us that if there’s a filing, the process could take 16-plus months.

He also said he hoped to get a resolution on the National Industrial Transportation League reciprocal switching proposal — now inevitably tied to the CP proposal — in the next six to 12 months. Railway Association of Canada’s Michael Bourque noted that CN and CP supported the sun-setting of the emergency switching rules imposed on the prairie provinces region.

Defenders of the faith. Our Washington (& Ottawa) panel featured stand-bys and new faces, including Federal Railroad Administrator Sarah Feinberg, who has shown she is a quick study. RAC’s Bourque said he’s focused on the 2016 unveiling of the review of the Canadian Transportation Act. The American Short Line and Regional Railroad Association’s Linda Bauer Darr noted the short-line segment’s contributions toward defeating the most recent call for bigger, heavier trucks — and in getting an astounding number of sponsors for the 45G tax credit extension. The Railway Supply Institute’s Tom Simpson shared rail-car market data and discussed industry concerns, including the ECP brake rule. The Association of American Railroads’ Ed Hamberger, too, talked about the truck-size-and-weight victory; he credited a list of allies (some unlikely) for achieving the PTC extension. Now, he’s turning his sights to revenue adequacy.

Rails are getting better. Our macro and analytical observers — FTR’s Larry Gross, Oliver Wyman’s Rod Case and Avondale Partners’ Don Broughton — noted railroads’ service/productivity inflection and differed on truckload capacity.

CN continues to set the standard — and not only with its reported 3Q operating ratio (OR) of 53.8. EVP and CMO JJ Ruest noted that CN’s capital plans should continue at roughly the same pace to support long-term capacity, surge capacity, service and safety efforts. JJ was also one of many presenters to discuss the “bright side of cheap natural gas,” which CN will see in western Canada and Louisiana.

Short lines still providing manifest/industrial carload exposure for Class Is — perhaps never more important, given the challenges to bulk. We heard from leaders at four top players in the field — Genesee & Wyoming CFO TJ Gallagher, Watco CEO Rick Webb, Patriot Rail President and CEO John Fenton and OmniTRAX CEO Kevin Shuba. All save the latter (no coal!) noted that their volumes have not improved, but each has employed innovative efforts to drive business to their lines, an exhausting and constant practice.

Viva Mexico! We heard from Union Pacific Railroad, Kansas City Southern and Ferromex. KCS’s new CMO Brian Hancock gave us an idea why he was chosen: He’s an outsider with terrific supply-side experience at Whirlpool, the Class I’s major Mexico customer. UP’s intermodal chief John Kaiser detailed the railroad’s equipment-providing plan and its Mexico strategy via New Mexico, and the coming market for containerized plastic pellets. Ferromex CEO Rogelio Velez discussed his railroad’s post-privatization rise, from a negative OR to below 70 percent in about five years. The key? Capex at an average of 27.5 percent of revenue, driving a 97 percent improvement in the accident rate and a 215 percent climb in volume.

The plastics are coming — and SHIELD (SHale gas Industrial Expansion Logistics Database) is here. I’ve been talking about the transport implications of the $100 billion capex/capacity buildout of the chemical (etc.) industry, and now my partners at PLG Consulting have the product and the data, as Taylor Robinson discussed — SHIELD data on the real impact of the chemical/plastics buildout on rail transport will be the subject on ongoing further research.

Michael Ward is sticking around for another three (to five?) years. What the CSX chairman and CEO has done at the railroad is remarkable, all the more so given the $1.3 billion (so far) revenue hit to the railroad’s coal base. Ward was more than honest — the “highway bill was a six-year bill funded for three,” the PTC law was “one of the dumbest things to ever come out of Congress.” He also talked innovation, particularly the strategic kind. At CSX, it’s manifested itself in asset re-purposing in central Appalachia; hub and spoke in intermodal; the Virginia Avenue tunnel and other capex projects; and the scheduling of merchandise trains and experimenting with running long trains.

Tony Hatch is an independent transportation analyst and consultant, and a program consultant for Progressive Railroading's RailTrends® conference. Email him at abh18@mindspring.com.