Reflections on RailTrends '23: Drama & Progress — by Tony Hatch

Having taken some time to reflect on what we think was perhaps the best RailTrends ever — sold out for the first time, too — I think the event can be summarized by perhaps five overriding themes: Collaboration, Trust, Commitment, the Great Experiment and, as always, some measures of Drama. Of these, the overriding theme was collaboration — with each other (Class Is), with partners (such as BNSF and J.B. Hunt), suppliers and, in a big way, short lines. 

1. Commitment. This will serve as the advertorial portion, so apologies. I am most impressed with (not only) the quality of speakers, but of the length of time most attendees stay to hear their peers — and the quality of the audience. In addition to the speakers, three board members from the STB, one FRA official and multiple folks from Wabtec (including their CMO and CSO – “Strategy), GATX (CMO), CN (including our friends Ms. Drysdale & Mr. Reardon), Holland, RailWorks, Trinity, R. J. Corman (on their 50th Year as exemplified superbly by CEO Ed Quinn), PWC, Oliver Wyman (of course, not to mention OW alumni called up to “The Show” by NS), and NS itself, including CSO Mike McClellan, veteran of perhaps all 19 RTs, and as new VP of First Mile/Last Mile Stefan Loeb). In addition to R.J. Corman, many short lines sent multiple folks (Anacostia, Gulf & Atlantic, RDC, Lake State, OmniTRAX). And of course there were droves of financial folks, buy and sell side, equity and private equity, in attendance. Representatives from Mexican railways and shippers, too. It was truly the town hall of North American freight railroading, a virtual “Star Wars Bar” at the Marriott Marquis. And there was a surprise guest late in the afternoon of Day 1.

2. Drama (News). We’ve come to expect it, and it often centers around the eloquent STB Chairman Marty Oberman. He didn’t disappoint this year.

New/returned Union Pacific CEO Jim Vena made a guest appearance, clipping into the back of the room to hear the chairman address the crowd. We can confirm what we long suspected: Like Rocky, Jim can take a punch. Marty just jabbed at first, praising BNSF’s growth capex and the rails overall new-found collaborative and entrepreneurial efforts (below)  But then came an uppercut: “Just saying you’re a 70 mph railroad doesn’t mean anything.” I knew who he meant. The RailTrends audience knew who he meant. Then came the haymakers — Marty worked the body (years of poor management, overspending on dividends/buybacks versus growth capex) and then the head (over-reliance on Wall Street and the Cult of the OR — hoisted by own petard! — and layoffs). Jim didn’t respond, choosing the high road. Note: He could be found, chatting amiably with the chairman during the afternoon break.

Meanwhile, The Street served as the Chairman’s Snidely Whiplash (https://en.wikipedia.org/wiki/Snidely_Whiplash) as Marty noted:

• The pushback CN got during their Investor Day concerning the railroad’s growth capex increase;

• The pushback NS received on its Q3/23 webcast, which featured a question about whether NS needed PSR expertise (both of which I wrote noted at the time, as well);

• The fact that UP received NO pushback at its own Q3/23 webcast after announcing layoffs.

All of which led to Marty’s concluding question of “Will Wall Street ever learn?” and “Do they understand the common carrier/public service obligation, dating back to the 19th century and SCOTUS Justice Peckham (who surely hadn’t conceived of the future Interstate Highway System)?”

Of course, some of what the Chairman said had merit, and all of it was entertaining, but I continue to believe that while that battle over the future of the Cult may never end (see below), a better understanding of ROIC might infuse the arguments on (even long term) capital allocation.

(On RT Day 2, Union Pacific’s newly minted president, and three-time RT presenter in three different roles Beth Whited, came to the railway’s defense. She noted that some of the furloughs announced came with re-location options — it was more a matter of spreading the assets around the network in the way that makes the most sense, she said, adding that UP is still hiring in T&E. She noted some successes in the pop-up programs, notably in the Inland Empire. One thing that concerned me in her excellent presentation was the directional guidance lower for 2024 capex, to be revealed in January, of course, and the fact that 15% or less of revenues was still the guidance.)

Then Marty dropped his bombshell: He chose our event to announce that he would not seek a second term as STB Chairman, putting him on a ~12 month clock, depending on the efficiency of the federal government. I, for one, will miss him. RailTrends will miss him. Omaha? Maybe not so much. And here I was calling the reciprocal switching rules, with the need to monitor service, the “STB Full Employment Act” and the chief architect is planning to ride off into the sunset!

Stepping back in Day 1 time a bit: We kicked off RT23 with our annual President’s Panel featuring the heads of the AAR, ASLRRA and RAC. Reciprocal switching (or interswitching up North, eh) was much discussed, with the AAR’s Ian Jefferies summing up the U.S. point of view that “the STB did a good job by abandoning the 2016 proposal, which was rate, not service, focused (my so-called “wicked curve ball”). The RAC’s Marc Brazeau noted that Canada was shooting for a streamlined PTC program (ETC) by 2030; and the ASLRRA’s Chuck Baker, riding a “heater” (winning streak), noted that, as drafted, the reciprocal switching rule doesn’t include short lines (though the National Mining Association would like it to, and the Virginia Ports Authority wants to include intermodal under the regulatory purview!), and as of that day there would be $720 million in new monies for short lines over the next 5 years.

2a. Drama (News). OK, this proved to be news for me, anyway: In his answer to what I assumed was my throwaway question on passenger service being imposed on the two freight railways in Mexico, CPKC’s Keith Creel, in his as-per-usual inspiring talk, said that “passenger (rail  in Mexico) is a reality” — it was in the original concession, he and Pat Ottensmeyer (who kicked off RT23’s Day 2 talking about Mexico and nearshoring) had met with AMLO in DMX and discussed it — and that, furthermore, it was of no real concern. That they run with passenger service north of the borders just fine. That they are at the stage of conducting a study and are reviewing the “draft decree.” Was this a surprise? Later that day, CPKC issued a press release about it (“We do not expect an adverse impact on our concession” since public freight will be respected), so … and there some (premature, natch) downgrades. A couple weeks ago, more news came out from Steady-Eduardo (AMLO) stating that the rails can be electrified (?)(!) — uh oh! — and that, if the concessionaires (“BIG”, containers) (the two fright rails) decline, then he can always send in the Army or the Navy. Shades of “Duck Soup”!

3. The Great Experiment is in the early stages. Several key rail folks thought, and told me, that the experiment was achieved — that they had shifted from an over-focus on the short term (that “Cult”) to longer term managing (and incenting). But that’s just one stakeholder group. To me, the Great Experiment is all about talking that talk and then, as service improves, walking that walk (aka the Growth Pivot). But the issue isn't (just) that the management of most of the rails seem to be acting differently. They need to continue to convince the investment community that this is a wise course, and the examples that Chairman Marty brought up show that this is a long- term, unfinished project. And, like Colonel Jessup, this fight is enduring, and that walk must be walked every day.

To that end, we proudly gave our 2023 Railroad Innovator Award to Alan Shaw, president and CEO of Norfolk Southern. As noted in Progressive Railroading’s November cover story, Alan may not be the only CEO in the Great Experiment — heck, they all are to some degree (UP’s grade is Incomplete). But he was the first, almost a year ago, to lay out this new (or is it a back-to-the-future) vision at the NS Investor Day (12/6/22). On that day, in 102 slides, “OR” was mentioned …once. That was also the start of what seems like the “no furlough” movement — a recognition that the old playbook didn’t apply anymore to the modern game. At RT, Alan laid out the challenges, industry-wide and company specific (East Palestine) specific that have occurred this year, but remained unwavering in his commitment to what I (not he) call this Experiment —investing through a cycle, focusing in ROIC, investing to support the Growth Pivot, and collaborating to achieve that growth.

There were three previous Railroad Innovator Award winners in attendance (Creel, Ottensmeyer and Ed Hamberger) — and who knows how many future winners?

It is indeed hard to measure a longer-term strategy in the earliest stages, and in a stage facing a freight recession at that. Last year I wrote about RT22 being about the Growth Pivot, which we haven’t yet seen. But talking the talk, especially to and with the financial community, is a required first step. This year, with the talk of collaboration, capex and deals galore, there is the beginning of an outline of how the Great Experiment will play out. (What would be helpful would be a series of “roadmaps” so we can use the quarterly earnings calls not as an OR check but truly a snapshot of progress on the long-term strategy. Key, maybe even with a nudge from the STB standardized KPIs on service improvements etc., would be very useful in this regard.) 

4. Collaboration was the theme of essentially every RT23 presentation. BNSF & J.B. Hunt (heads of intermodal Tom Williams and Darren Field, respectively) were only the most obvious examples. The new Quantum program combined with the major investments by both parties (“BIG”, containers, etc.) is seeking a 10% growth CAGR, which would mean a restoration to the prime growth driver in freight that domestic intermodal enjoyed for most of this century. The key driver is collaborative technology, and the capex, and the goal is, as ever, consistency. The 7-11 million shipments J.B. Hunt sees as approachable means at minimum a doubling of the market. The two partners also used RT23 to announce/elaborate on their new Eagle Pass arrangement with Ferromex, which looks to be a substitute for (my words, not theirs — they might say “in addition to”) their link at Robbstown, Texas, with the new KCS portion of the CPKC. The biggest question is why does a truck stop (“Buccees”?) generate so much interest?

Keith Creel of CPKC, on the other hand, stuck to his argument on the benefits of single-line service, but agreed on the need to invest for growth, and CPKC has added a slew of collaborative efforts (CSX/Meridian, for example), as well. He conceded that the nature and share at Laredo would change (i.e., Falcon and BNSF using Ferromex), and actually applauded the huge number of new (seemingly CPKC-focused) deals, partnerships and service offerings that have rather coincidentally appeared since CPKC. And he seemed unconcerned, in a way that demonstrates that he is really unconcerned, about the new cross-border competitive patterns emerging: “10K trucks cross the border at Laredo every day — that is the opportunity.” Hear, hear!

Meanwhile, CN SVP and CSO Patrick Lortie talked about his railroad’s “back to the future” embrace of “Scheduled Railroading 2.0” led by CEO Tracy Robinson and retiring COO Ed Harris, the bifurcated succession of Harris by Whitehead & Taylor, etc. But the underlying theme was also collaboration, whether Falcon (two days faster from Toronto to Monterrey), with CSX to Philly, new Gulf services on the water with Maher, etc. Patrick noted that CN is the largest “single-line service (percentage) in the industry, but is also the most focused on partnerships.” Particularly cited in this regard were the short lines, with CN having reinstituted its Short Line Conference (and you may recall CN sent its whole strategy team to the big ASLRRA conference in New Orleans last April, the only Class I to do so). Patrick also addressed my question (and Marty’s) on the investor conference pushback on capex, noting they knew they had to be thoughtful on the spend, but that their “long-term investors seemed happy with the 15-17% ROIC targets.”

Speaking of short lines: Six presented at RT23. Ed Quinn talked about R.J. Corman’s journey from command & control to collaboration. New (as of 9/1) Genesee & Wyoming CEO Mike Miller framed his appeal to collaboration an “Ecosystem Approach,” noting his joint efforts with CSX and CPKC in Meridian, and the new CN deal in Nova Scotia (in general, he credited CN with “re-engaging”). It was a great appeal to innovate together or lose more share collectively. RDC’s Henry Posner worried a bit about the recent trend of Class Is taking back short lines (CMQ, Pan Am, MRL, etc.). Dean Piacente of OmniTRAX thought that at these multiples, for an active short line, the deals weren’t readily available, which was fine for them as OmniTRAX’s focus (and expertise) was always business development and real estate. Gulf & Atlantic’s Ryan Ratledge, on the other hand, was more optimistic about deals to be had (G&A has, in fact, recently added four small properties to its original two). 

Mexico is the focus of much of the collaborative effort, with a new carrier (CPKC) and tons of new services from Ferromex, UP, BNSF and J.B. Hunt, Genesee & Wyoming, etc. Everybody wants in — Utah is building an inland port near Salt Lake City specifically for the Utah-Mexico trade (well, we expect it isn't Modelo). 

While we were meeting in Times Square, AMLO was in San Francisco, a rare visit by that mercurial leader. The Financial Times and The Economist, those twos vigorous pro-trade publications, noted that on the one hand, Monterrey was the epicenter of the nearshoring boom (though it was severely handicapped by infrastructure). In fact, the FT earlier wrote that “in economic matters (AMLO) has failed to take advantage of the realignment prompted by U.S.-China tension and has formulated few policies to attract companies to Mexico.

We heard a lot about the opportunities (and the risks of blowing yet another chance) in Cancun at AMTI in October — and now after KKR, the brewery and the airport, we have passenger rail as a distraction. I should point out that all of the unhelpful “noise” isn’t coming only from south of the border — Buy American, the EV subsidies etc. irritate our neighbors and allies, as well. But you have to take opportunity where you find it, and old friend Pat Ottensmeyer, transitioning from KCS CEO to CPKC advisor to Brookings Institute’s Man in/on Mexico, reminded us all at RT23 how fragile the opportunity can be — he took us back to the election of 2016 and the rejection of NAFTA (only, IMHO, to be reborn as it was as USMCA) — and that the required renewal date is … July 2026! He also urged collaboration, with a good turn of phrase. (“Look at the railway maps as if you were color-blind.”)

5. Trust. One of the key questions yet to be answered is when will shippers trust rails (again, for the first time, etc.)? At what level of employment and service improvement will yield tangible share/volume results? What is the ratio (TPC at 92% = +1% volumes)? Collaboration, in that color-blind map reading way, combined with improved service and better technology (backed by strong capex) should finally, at long last, lead us to the Growth Pivot. Yes, you’ve heard optimism from me before, related to RailTrends or not. “This time it’s different” is the investor’s nightmare. 

And there were some dissenting voices, from the audience Q&A to Chairman Oberman and others. GATX’s Paul Titterton has long been a skeptic of PSR (or what I would say, echoing Alan, the “perversion” of PSR, aka the Cult of the OR) and brought that to his presentation, while highlighting GATX’s historic good sense in the rail-car market (more on that in the future). But he did offer in the half-full glass note that there were opportunities in carload, heretofore abandoned, that were stickier than intermodal.

Also to be included in the “need to verify in order to trust” category were the members or our annual Analyst Panel (aside from yours truly, Candide, of course) and CSX’s Joe Hinrichs of CSX.

Among the analysts — Larry Gross, Mr. Intermodal — actually was fairly upbeat compared to recent times we have spoken together. He sees volumes improving, aided by an actual small “peak,” with domestic private fleet container business (i.e., what the Street calls “IMC”) the best performer, and international lagging. He made the interesting point that PSR, when pushed to the nth degree, was not good for domestic intermodal (note BNSF’s never joining the PSR mob), but that it worked fine for international (large volumes and point to point). Now with the economic trends being as they are, the impact on rail volumes are clear. Larry also cited the rail pricing models as a reason more business left or hasn’t returned — though the margin/return issues are complicated. But, with retaining a target of 15% or so below truckload, and consistent service, domestic volumes could be doubled.

Loop’s Rick Paterson, the inheritor of the RT Dr Doom label from Rod Case, made his case for railroad service improvements coming from newly hired crews, management focus, yes — but really “benefitting from the absence of volume pressure.” Lately, when volume did increase (CPKC in Mexico, BNSF intermodal), the operating metrics went south. In short, the historic pattern of higher volume/declining operations hasn’t been broken — he needs proof to trust.

Finally, Joe Hinrichs put his inimitable spin on RT23 and the state of the rails today, far from where we need to be. He noted the image deterioration of the rails, the old love affair with trains to the headlines of today and said, “We did it to ourselves.” Joe sits on the board at Goodyear, whose Lawton, Oklahoma, mega-plant used to be rail-served, but they’ve metaphorically torn up the tracks. Furthermore, the “standards are too low for rails on service,” which I took to mean both “recovery” and “normal,” and he spoke from the position of industry leadership on reported op/service metrics.

Joe can be a RailTrends skeptic, noting all the positive talk at RT22 (which I noted and admitted to above), and asked “How’s it working?” And, how can that change? His answer is culture change (“OneCSX”) and:

• Improving the employee experience. (“10 years ago people lined up for our jobs”). Like Alan he described the hidden costs of hiring, retention etc. — 40% of CSX train accidents came down to 1-2 year employees making mistakes!

• Improving the customer experience — that goes without saying, and CSX is leading the industry in TPC, etc.

• Collaborating (yep) — in a marketing sense (Meridian), in technology (Hydrogen locos with CPKC), in safety after East Palestine and in response to outlandish claims that could impact the coming (?) Rail Safety Act.

• And in refusing to accept the status quo. And I would add that new, perhaps outside, leadership helps in this regard — as I think we are seeing across the industry. And that’s another point that Joe and I might not agree on!

6. Technology and more. Another theme which I didn’t expound upon was technology, which was well covered in presentations by Oliver Wyman’s Adriene Bailey on green power, as well as by Nexxiot and our Consultant’s Panel with BCG and PWC –- as well as by almost all of the founding partners of RailPulse, and significant audience presence from Wabtec, Voltify, HLC, Railspire and others. It’s a subject for an update all on its own.  

There also was the excellent Associations Panel, which provided great news on the rebirth of the great Railway Interchange and previewed the must-go year opener event (NRC in January). The panel showed the strength of new leadership (witness IANA’s Rob Cannizzaro). And capping off RT23 was Dick Kloster, who provided his annual (and detailed) rail-car outlook by car type.